Reliable Contracting Group v. DVA , 779 F.3d 1329 ( 2015 )

United States Court of Appeals
for the Federal Circuit
______________________
RELIABLE CONTRACTING GROUP, LLC,
Appellant
v.
DEPARTMENT OF VETERANS AFFAIRS,
Appellee
______________________
2014-1326
______________________
Appeal from the Civilian Board of Contract Appeals in
No. 3048, Administrative Judge Anthony S. Borwick,
Administrative Judge Patricia J. Sheridan, Administra-
tive Judge Stephen M. Daniels.
______________________
Decided: March 6, 2015
______________________
REGINALD ASHTON WILLIAMSON, Kilpatrick Townsend
& Stockton LLP, Atlanta, GA, argued for appellant. Also
represented by WILLIAM E. DORRIS; THURSTON
HOLDERNESS WEBB, Winston-Salem, NC.
WILLIAM JAMES GRIMALDI, Commercial Litigation
Branch, Civil Division, United States Department of
Justice, Washington, DC, argued for appellee. Also
2 RELIABLE CONTRACTING GROUP v. DVA
represented by STUART F. DELERY, ROBERT E. KIRSCHMAN,
JR., KIRK T. MANHARDT.
______________________
Before NEWMAN, CLEVENGER, and DYK, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Dissent-
ing opinion filed by Circuit Judge NEWMAN.
DYK, Circuit Judge.
Reliable Contracting Group, LLC (“Reliable”) appeals
from a decision by the Civilian Board of Contract Appeals
(“Board”). The Board denied Reliable’s claim for an
equitable adjustment of a Department of Veterans Affairs
(“VA”) contract which required the installation of three
backup generators for a VA medical center. Reliable
contends that the VA improperly rejected the generators
on the ground that they were not “new” as required by the
contract. Because we hold that the Board erred in its
interpretation of the contract, we vacate the Board’s
decision and remand for further proceedings.
BACKGROUND
On February 10, 2003, the VA awarded a contract to
Echo Construction Company (“Echo”) for the design and
construction of electrical improvements at a VA medical
center. On March 31, 2003, Echo, the VA, and Reliable
entered into a novation agreement, effectively replacing
Echo with Reliable.
The contract required that three backup generators be
installed. Section 1.47 of the contract, entitled
“MATERIAL AND WORKMANSHIP,” required that “[a]ll
equipment, material, and articles incorporated into the
work covered by this contract shall be new and of the
most suitable grade for the purpose intended, unless
otherwise specifically provided in this contract.” J.A. 79.
RELIABLE CONTRACTING GROUP v. DVA 3
That section did not define “new.” Separately, § 1.79
incorporated Federal Acquisition Regulation (“FAR”)
52.211-5 by reference. FAR 52.211-5 contained a separate
requirement that supplies called for by the contract be
“new, reconditioned, or remanufactured,” and it defined
“new” to require that the supplies be “composed of previ-
ously unused components.” See 48 C.F.R. § 52.211-5.
Reliable sub-contracted the procurement of the elec-
trical generators to Fisk Electric Company (“Fisk”), which
in turn contracted with DTE Energy Technologies, Inc.
(“DTE”) to provide the generators. On June 26 and 27 of
2004, DTE delivered two Cummins Power Generation
(“Cummins”) generators to the construction site. Upon
delivery, the VA’s senior resident engineer, Leonard
Romano, inspected the two generators and determined
that they were, in his view, not “new.” He wrote to Relia-
ble, stating:
I am concerned that [the two generators that were
delivered] are not “new” as required by [§ 1.47(a)].
They show a lot of wear and tear including field
burns to enlarge mounting holes. Are they new
and will you certify them as such? I cannot pay
you for these as planned in this month’s payment
without that certification.
J.A. 2.
This letter initiated a flurry of letters between Roma-
no, Reliable, Fisk, and DTE, with Fisk and Reliable
initially expressing agreement that the generators did not
meet the contract specification. For example, on June 28,
Fisk wrote to DTE, stating: “[m]y foreman noted that the
units were in ‘BAD CONDITION’ and proceeded to install
the units.” J.A. 102. Similarly, on June 29, Reliable
wrote to Fisk, stating: “[a]s we discussed with you, the
equipment on site is clearly unacceptable by anyone’s
4 RELIABLE CONTRACTING GROUP v. DVA
standards . . . .” J.A. 109. On that same day, Reliable
wrote to Romano, stating:
Representatives of Fisk have assured us that they
were as surprised as anyone at the condition of
the equipment delivered to the site. We have been
working closely with Fisk personnel to investigate
the matter and per our conversation have directed
them to remove the nonconforming generators
from the project site.
J.A. 303. Both Fisk and Reliable personnel continued to
investigate the matter, and Romano continued to assert
his belief that the generators were not conforming.
After investigation, Reliable and Fisk came to the
conclusion that the generators, which were manufactured
in 2000, had been previously purchased by others but
never used. Reliable presented this information to Roma-
no on July 9, but Romano nonetheless rejected the gener-
ators, asserting that “[p]revious ownership makes them
used.” J.A. 6. Subsequently, Fisk obtained different
generators, which were accepted by the VA and installed.
On April 3, 2007, Reliable submitted a claim to the
VA, alleging that the VA had violated the contract and
seeking roughly $1,100,000 for additional costs incurred
as a result of the VA’s rejection of the three original
generators. The VA failed to timely respond, so Reliable
appealed to the Board. On November 27, 2013, the Board
denied Reliable’s claim, finding that the generators were
not “new” because they were not capable of being factory
tested. Reliable appealed to this court.
We have jurisdiction pursuant to 41 U.S.C.
§ 7107(a)(1)(A).
RELIABLE CONTRACTING GROUP v. DVA 5
DISCUSSION
We review questions of law, including interpretations
of contracts, de novo. Rockies Express Pipeline LLC v.
Salazar, 730 F.3d 1330, 1335–36 (Fed. Cir. 2013). We
review factual questions for substantial evidence. Id. at
1335.
The parties’ dispute centers around the contract’s
requirement that the generators be “new.” The Board
held, and the VA presently argues, that “new” requires
that each generator be “capable of being tested at the
factory.” J.A. 8. This definition comes from the language
of § 1.79, which incorporates FAR 52.211-5’s requirement
that the generators’ supplies “meet contract require-
ments” to be considered “new,” 48 C.F.R. § 52.211-5, and
§ 16208, which requires that the generators be capable of
factory testing. 1 Because the generators left the factory
in 2000, the Board reasoned, they were incapable of being
factory tested in 2004 and therefore not “new.” On the
1 Section 16208.1.3(E) provides, in relevant part:
Factory Test: The government shall have the op-
tion of witnessing the following tests at the facto-
ry. . . .
1. Load Test: Shall include six hours of continu-
ous operation; four hours while the set is deliv-
ering 100 percent of the specified KW and two
hours while delivering 110 percent of the speci-
fied KW. . . .
2. Quick Start Test: Record time required for the
engine generator set to develop specified volt-
age, frequency and KW load from a standstill
condition.
J.A. 301–02.
6 RELIABLE CONTRACTING GROUP v. DVA
other hand, Reliable argues that the contract is clear on
its face because § 1.79 provides an express definition of
“new”: “new” means comprised of unused parts. Accord-
ing to Reliable, because the generators had never been
used, they were “new” even though previously owned and
damaged by improper storage. We reject both interpreta-
tions.
We reject the VA’s and the Board’s interpretation for
two reasons. First, the VA never contemporaneously
argued that the generators were non-conforming because
they were incapable of being factory tested. Generally,
evidence of contemporaneous beliefs about the contract is
particularly probative of the meaning of a contract. See
Blinderman Constr. Co. v. United States, 695 F.2d 552,
558 (Fed. Cir. 1982) (“It is a familiar principle of contract
law that the parties’ contemporaneous construction of an
agreement, before it has become the subject of a dispute,
is entitled to great weight in its interpretation.”); Max
Drill, Inc. v. United States, 427 F.2d 1233, 1240 (Ct. Cl.
1970) (en banc) (per curiam) (expressly adopting Commis-
sioner Stone’s view that “[t]he interpretation of a contract
by the parties to it before the contract becomes the subject
of controversy is deemed by the courts to be of great, if not
controlling[,] weight”). Second, the contract required that
the generators be capable of a “factory test” but did not
expressly require testing be done at the factory at the
time the generators were manufactured, nor did it require
that testing be done at the factory if the government did
not request it. Here, the Board found that that the gen-
erators were subsequently tested by Cummins factory-
certified technicians, and the VA declined to observe the
testing. There is no showing the generators were incapa-
ble of being tested at the factory if actual testing at the
factory had been requested by the government—which it
had not in fact requested.
RELIABLE CONTRACTING GROUP v. DVA 7
On the other hand, we reject Reliable’s interpretation
because it is incomplete. While we agree that generators
that had been used would not comply with the contract, 2
we think that the mere fact that the generators were not
used does not make them “new.” Reliable, aided by the
July 8, 2013, affidavit of Fisk’s Executive Vice President
James Muhl, argues that the generators were “new”
because they were not used, and in the industry, “genera-
tors are not ‘used’ until the generators are commissioned[,
at which point] the manufacturer pushes out the new
equipment warranty and the unit is put into ‘service.’”
J.A. 234. While Muhl’s affidavit speaks to the industry
definition of “used,” he does not provide an industry
definition of “new,” 3 and dictionaries do not define “new”
as simply being the opposite of “used.” 4 Reliable relies on
§ 1.79, which incorporated FAR 52.211-5 and defines
“new” to mean “composed of previously unused compo-
nents.” 48 C.F.R. § 52.211-5(a). But, by its own terms,
that definition is expressly limited to FAR 52.211-5 itself. 5
2 There is no contention here that the generators
were used. The run times demonstrated only that the
generators had been tested.
3 Muhl’s statement that, “[i]f the unit has not be[en]
‘used’, then the unit is ‘new,’” was his conclusion with
respect to these “particular generator[s],” not a general
statement about industry practice. See J.A. 234.
4 If anything, the opposite of “new” tends to be
“old,” not “used.” See, e.g., Random House Webster’s
Unabridged Dictionary 1293 (2d ed. 1999) (“New, fresh,
novel describe something that is not old.”); see also Web-
ster’s Third New International Dictionary 1522 (2002).
5 FAR 52.211-5, incorporated by reference into
§ 1.79, provides in relevant part:
8 RELIABLE CONTRACTING GROUP v. DVA
As noted above, there are two separate “new” re-
quirements, one found in § 1.47 and one found in § 1.79.
Section 1.79’s “new” requirement focuses on the quality of
the components in the generator—the components must
be unused. Section 1.47 sets forth a different require-
ment. Under § 1.47, the generator itself must be “new.”
And, in that section, “new” is undefined. Reading the
contract in this manner—that § 1.47 and § 1.79 set forth
separate and distinct “new” requirements—is reinforced
by the rule of construction disfavoring surplusage and
redundancy. See Mass. Bay Transp. Auth. v. United
States, 129 F.3d 1226, 1231 (Fed. Cir. 1997) (“It is a
fundamental rule of contract interpretation that the
provisions are viewed in the way that gives meaning to all
parts of the contract, and that avoids conflict, redundan-
cy, and surplusage among the contract provisions.”).
Reliable’s interpretation is incomplete because the “new”
requirement under § 1.47 focuses on the generator as a
whole, not the component parts. While the parties agree
that “new” requires no prior use, there is no justification
for treating a generator as new solely because it has not
been used.
Because “new,” as used in § 1.47, is not defined by the
contract and there is no single plain meaning of the word
(a) Definitions. As used in this clause—
New means composed of previously unused compo-
nents, whether manufactured from virgin material,
recovered material in the form of raw material, or ma-
terials and by-products generated from, and reused
within, an original manufacturing process . . . .
...
48 C.F.R. § 52.211-5 (emphasis added).
RELIABLE CONTRACTING GROUP v. DVA 9
“new,” it is ambiguous. It is therefore appropriate to look
both to the dictionary definitions of “new” and to industry
definitions, standards, and practices. See C.A. Acquisition
Newco, LLC v. DHL Express (USA), Inc., 696 F.3d 109,
113–14 (Fed. Cir. 2012) (noting that the trial court
“should also consider any relevant industry practices”
when resolving ambiguous terms in a contract and look-
ing to dictionary definitions to resolve ambiguities); Hunt
Constr. Grp. v. United States, 281 F.3d 1369, 1373 (Fed.
Cir. 2002) (industry meaning can be used as an interpre-
tative aid in understanding terms in a contract); see also
Nat’l Union Fire Ins. Co. v. Lumbermens Mut. Cas. Co.,
385 F.3d 47, 55 (1st Cir. 2004) (vacating a district court
decision interpreting a contract and remanding for fur-
ther consideration in light of industry practices).
One possible meaning is the one initially put forth by
Romano but subsequently dropped, i.e., that “new” means
not previously owned by another. This definition was
disputed by Muhl’s affidavit. In it, he described that, “[i]n
the electrical contracting and construction business,
simply being owned and kept in storage by an intermedi-
ary does not make a generator ‘used’ . . . .” J.A. 238. The
record evidence shows that generators are not-
uncommonly sold through various intermediaries, and, as
here, are still entitled to a manufacturer’s warranty. In
such circumstances, an interpretation that “new” requires
that the generators not be previously owned is incorrect.
Indeed, the VA no longer argues that this is the meaning
of “new” in this context.
“New” could require that the generators be recently
manufactured. This has some support in the dictionaries.
See Black’s Law Dictionary 1204 (10th ed. 2014) (“recently
come into being ”); Webster’s Third New International
Dictionary 1522 (2002) (“having existed or having been
10 RELIABLE CONTRACTING GROUP v. DVA
made but a short time; having originated or occurred
lately”). We do not think that this is what the parties
intended when they required that the generators be
“new.” Neither party argues for this meaning, and no
evidence was put forth with respect to the average life
expectancy of a backup generator, the speed at which
generator technology is improving, or the like. Recent
manufacture is not a requirement.
“New” could require a fresh condition. Dictionary
definitions support this interpretation. See Webster’s
Third New International Dictionary 1522 (2002) (defining
“new” to mean: “usu[ally] of superior quality;”
“[f]reshness;” “[f]resh in this connection applies to what is
new and still retaining a first liveliness, energy, virginal
quality, and so on”). We think this definition is appropri-
ate for purposes of § 1.47. There is no testimony as to
how, in the industry, a generator can be “new” if it has
been severely damaged. It defies logic to conclude that
the parties intended to treat seriously damaged genera-
tors as “new.”
In interpreting “new” to require the generators be
“fresh,” we do not mean that the generators were required
to be entirely free of cosmetic defects. It is entirely fore-
seeable that slight, superficial damage might occur during
shipment or storage, and there is no evidence put forth by
either party that the contract intended to define “new” to
exclude damage such as paint scratches or light and
easily fixable rusting. See, e.g., Groban v. S.S. Pegu, 331
F. Supp. 883, 887, 890–91 (S.D.N.Y. 1971) (explaining
that tractors exposed to heavy tropical rains during
shipment, which resulted in surface damage to the trac-
tors, were still “new”). In our view, “new” requires that
the generators must not be used and also must be free of
significant damage, i.e., damage that is not cosmetic.
RELIABLE CONTRACTING GROUP v. DVA 11
The record evidence before us is conflicting with re-
spect to the extent of the damage, and there was no
express finding by the Board on the issue.
While, as noted above, there are unequivocal admis-
sions by Reliable that the generators were significantly
damaged and not in conformity with the contract, these
statements are not binding judicial admissions. Although
this circuit has had limited opportunities to address the
doctrine, it is clear from other circuits that judicial admis-
sions, which “have the effect of withdrawing a fact from
issue and dispensing wholly with the need for proof of the
fact,” are limited to formal admissions made in, for exam-
ple, a complaint, answer, or pretrial order. See Am. Title
Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir.
1988) (quoting Dery v. Gen. Motors Corp. (In re Fordson
Eng’g Corp.), 25 B.R. 506, 509 (Bankr. E.D. Mich. 1982)).
Although not formal judicial admissions and therefore
not binding, contemporaneous admissions by Reliable are
nonetheless probative evidence that the generators did
not comply with the contract. See 3M Co. v. Mohan, 482
F. App’x 574, 579 (Fed. Cir. 2012) (citing a party’s apolo-
gies to customers for causing confusion as support for the
factual finding that the party did cause confusion); Sutton
v. Calhoun, 593 F.2d 127, 128 (10th Cir. 1979) (affirming
the trial court’s submission to the jury of the question of
how much probative weight should be assigned to an
admission of mistake by a doctor in a case alleging negli-
gence on the part of the doctor); Becton v. Starbucks
Corp., No. 2:05-CV-1143, 2007 WL 2688128, at *3 (S.D.
Ohio Sept. 6, 2007) (admitting a contemporaneous state-
ment by a Starbucks manager apologizing for an improp-
erly secured lid because it was probative of whether the
lid was properly secured). It is also significant that
Reliable was unwilling at the time of delivery to certify
12 RELIABLE CONTRACTING GROUP v. DVA
that the generators were “new” or to characterize them as
new.
On the other hand, Muhl, in his July 9, 2013, affida-
vit, concluded that the damage to the generators was
entirely cosmetic. He asserted that the damage to the
generators was superficial, consisting of rust, scraped
paint, disconnected hoses, and dust, dirt, and grime.
According to him, the damage was easily remedied with a
“buff and puff” and did not affect the quality of the gener-
ators.
There was thus conflicting evidence as to the extent of
the damage. There were admissions that the damage to
the generators was substantial, but the affidavit from
Muhl asserts it was not. In light of the conflicting evi-
dence and lack of fact-finding by the Board on this issue,
we remand for the Board to determine whether the dam-
age to the generators during the four-year period between
the original manufacture and the date of delivery to the
VA site was significant enough to render the generators
not “new.”
Because our interpretation of “new” includes an anal-
ysis of the extent of the damage and whether it can be
fully and easily cured, there is no need to address Relia-
ble’s economic waste theory, as that doctrine substantially
overlaps with whether the generators at issue are “new”
under the contract. See Granite Constr. Co. v. United
States, 962 F.2d 998, 1007–08 (Fed. Cir. 1992) (explaining
that rejecting performance of a contract in which the
performance is entirely adequate for the purpose of the
project is economic waste).
VACATED AND REMANDED
COSTS
Costs to neither party.
United States Court of Appeals
for the Federal Circuit
______________________
RELIABLE CONTRACTING GROUP, LLC,
Appellant
v.
DEPARTMENT OF VETERANS AFFAIRS,
Appellee
______________________
2014-1326
______________________
Appeal from the Civilian Board of Contract Appeals in
No. 3048, Administrative Judge Anthony S. Borwick,
Administrative Judge Patricia J. Sheridan, Administra-
tive Judge Stephen M. Daniels.
______________________
NEWMAN, Circuit Judge, dissenting.
The Department of Veterans Affairs (“VA”) and Relia-
ble Contracting Group (“Reliable”) entered into a contract
for construction of a veterans’ medical center in Miami,
Florida. The contract included the provision and installa-
tion of three new backup electrical generators.
The prime contractor Reliable, through a subcontrac-
tor and supplier, provided previously owned, rusted,
grime-encrusted, four-year-old generators with mounting
holes and field burns. The VA on-site engineer observed
their condition and objected to their installation. Reliable
agreed, and wrote that the generators were “nonconform-
ing” and “clearly unacceptable by anyone’s standards,”
2 RELIABLE CONTRACTING GROUP v. DVA
and chastised the subcontractor. The subcontractor
described the generators as in “bad condition” and chas-
tised the supplier.
Reliable refused to certify the generators as “new” and
the VA refused to accept them. Reliable instructed the
subcontractor to remove the generators and provide
“conforming equipment.” The claim here is $1.1 million
for the cost of providing the replacement generators. The
contracting officer, affirmed by the Civilian Board of
Contract Appeals, denied the claim, stating that the
generators were not new and that no additional compen-
sation was warranted.
My colleagues on this panel now fault the VA for re-
jecting the generators without ascertaining whether they
might be cleaned up and refurbished. On this reasoning,
my colleagues remand to the Board with instructions to
determine whether the damage to the generators during
the four-year period in which they were improperly stored
was “significant enough” to render the generators not
new. Maj. op. at 12.
I respectfully dissent.
DISCUSSION
The Board’s findings of fact are final unless they are
“fraudulent, or arbitrary, or capricious, or so grossly
erroneous as to necessarily imply bad faith, or if such
decision is not supported by substantial evidence.” 41
U.S.C. § 609(b) (1982).
No error has been shown in the Board’s determination
that the generators were not new and that an adjustment
was not warranted. The Board noted Reliable’s state-
ments that the generators were “nonconforming” and
“clearly unacceptable by anyone’s standards.” The con-
tract is explicit as to the requirement for new generators.
Section 1.47 of the contract states:
RELIABLE CONTRACTING GROUP v. DVA 3
(a) all equipment, material, and articles incorpo-
rated into the work covered by this contract
shall be new and of the utmost suitable grade
for the purpose intended, unless otherwise
specifically provided in this contract.
The Board observed that neither Reliable nor its subcon-
tractor characterized the generators as new, and that
both refused to so certify.
My colleagues on this panel hold that “new” includes
previously owned generators if they are in “fresh condi-
tion,” unused, and free of “significant damage.” Maj. op.
at 10. Whatever may be the applicability of such a stand-
ard to other facts, these generators showed more than
“slight, superficial damage.” Id. The absence of “fresh-
ness” of these begrimed, four-year-old, “inadequately
stored,” previously owned generators was not plausibly
disputed. No error in fact or law has been shown in the
Board’s determination that these generators were not
new, on any reasonable standard of newness.
Indeed, the panel majority refers to the “unequivocal
admissions by Reliable that the generators were signifi-
cantly damaged and not in conformity with the contract.”
Id. at 11. However, the majority relieves the contractor of
these admissions because they were not “binding judicial
admissions” in formal court documents, but were made
only in contemporaneous written records. Id. No basis
has been shown for excluding this evidence.
The panel majority further errs in ruling that the cor-
rect interpretation of “new” in government contracts or
under the FAR includes previously owned and damaged
equipment if the damage “can be fully and easily cured.”
Id. at 12. Old and damaged equipment does not become
new if the damage can be cured. There was no obligation,
in law or equity, for the VA to determine whether these
admittedly “nonconforming” generators could be cleaned
4 RELIABLE CONTRACTING GROUP v. DVA
up and refurbished. The additional costs of contract
compliance are not the obligation of the agency.
The Board’s denial of the requested adjustment is cor-
rect, and is well supported in fact and law. There is no
reasonable basis for further proceedings on this claim.
From my colleagues’ contrary ruling, I respectfully dis-
sent.