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“Zone of Reasonableness” Test Prerequisite Addressed by the Federal Circuit

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The so-called “zone of reasonableness” standard has been long applied by federal courts and boards of contract appeals in evaluating contract interpretation when the contract is deemed ambiguous – meaning that it is susceptible to more than one reasonable interpretation. Ambiguity does not exist merely because the parties differ in their respective interpretations of the contract; rather, the parties’ interpretation must be reasonable, with that “zone” being referred to as the zone of reasonableness.

Recently, in U.S. Army Corps of Engineers v. John C. Grimberg Co., Inc., Case No. 2019-1608, decided June 9, 2020, the Federal Circuit overturned the Armed Services Board of Contract Appeals decision that a contractor was entitled to an equitable adjustment for what the Board had held was a Type I Differing Site Condition. The Board had found that the contractor had met the standard for a Type I DSC because the contractor had encountered quantities (of incompetent rock unfit for the deep foundation system) that “greatly exceeded the quantity reasonably foreseeable based on a fair reading of the contractual indications.” In so finding, the Board had explained in its decision that the contractor’s reliance on certain borings was “more reasonable” than the government’s position regarding the borings the government argued the contractor should have relied upon.

The Board decision further expanded upon that by expressing the Board’s opinion that neither the contractor’s nor the government’s estimates was a reasonable estimate and so applied what is referred to as a “jury verdict” analysis in developing what the Board determined, from an equitable viewpoint, was reasonably indicated by the contract documents. Further explaining its decision, the Board stated that “[a]n ‘all or nothing’ resolution of this case would have been overly legalistic and unjust.”

The Corps appealed the Board’s decision, arguing that, contrary to that latter statement, the Board was required to address the issue on an “all or nothing basis, and that, accordingly, the Board erred in permitting equitable adjustment in any amount because, foundationally, the Board had repeatedly stated in its determination that the contractor’s interpretation of the contract was unreasonable and, moreover, the contractor failed to even address the governing legal standard in its briefing. The Federal Circuit agreed with the Corps, holding that the contractor’s “failure to contend with the required legal test is fatal to its claim.”

Expanding upon that, the Federal Circuit reiterated its precedent that, to receive equitable adjustments, a contractor must prove reasonable reliance on its interpretation of the contract. Because the Board had found in Grimberg that the contractor had not proven it reasonably relied on its interpretation of the contract, the Federal Circuit was “left with the inescapable conclusion that [the contractor, Grimberg] has failed to prove its entitlement to an adjustment” and, accordingly, the Board erred as a matter of law.

Addressing specifically, the argument that the government’s interpretation was “less reasonable than the contractors,” the Federal Circuit noted that despite the moniker of “equitable adjustment” the case law simply did not permit the Board or Federal Circuit to balance the government’s reasonableness against that of the contractor and that the sole focus was required to be whether the contractor’s interpretation was reasonable; noting that focus “serves the purpose of incentivizing contractors to carefully and reasonably interpret contract documents.” As such, the Federal Circuit held that the contractor, Grimberg, alone must bear the risk of bidding on a contract without reasonably interpreting what that contract disclosed.

For more information about this subject or regarding construction and government contracts matters otherwise, please contact the author or any other member of Vandeventer Black Construction and Government Contracts Practice Group.

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