76 Contract Management | July 2011

On April 18, 2007,

Multi-National Security

Transition Command—

Iraq Support Division

(MSD) issued a

solicitation for the

purchase of 126 five-ton

cargo trucks for delivery

to Bagdad, Iraq.

MSD is the organization responsible for

equipping and training the Iraqi defense

forces and police departments in prepara-

tion for the transfer of full responsibility

for the security of Iraq. The solicitation

required the trucks to be “Painted Desert”

tan and have removable troop seating in

the cargo body for at least 20 personnel

with gear. The trucks also needed to have a

“removable weather-resistant soft cover and

support structure” that would not interfere

with the use or transport of weapons.

The solicitation did not require the truck

to be fitted with guns or other weaponry.

The solicitation contained standard Federal

Acquisition Regulation (FAR) clauses for

the purchase of commercial items. A

commercial item is “[a]ny item…that is

of a type customarily used by the general

public or by nongovernmental entities

for purposes other than governmental

purposes,” including those items that

would need a minor modification to meet

government requirements. By including

these clauses, MSD had determined that

the trucks it sought met the definition of

“commercial item.”

One such FAR clause, FAR 52.212-1,

“Instructions to Offerors—Commercial Items

(Sept 2006),” included in the

solicitation, provides:

(e) Multiple offers. Offerors are encouraged

to submit multiple offers presenting alterna-

tive terms and conditions or commercial

items for satisfying the requirements of this

solicitation. Each offer submitted will be

evaluated separately.

In preparation of its offer, Free & Ben Inc.

(F&B) contacted truck dealers, including

Mitsubishi Fuso, Tata Motors, Leyland

Trucks, and Kamaz, to assess the availability

of trucks to include in its offer. F&B planned

to paint the trucks and perform all of the

necessary modifications in Bahrain before

shipping them into Iraq. Afraid that these

companies may choose to submit an offer

directly, F&B did not provide the written

specifications for the trucks, disclosing the

specifications “in a different way.”

Based on catalogs received from the dealers,

F&B determined that the Mitsubishi Fuso

five-ton Long cargo truck would best suit its

needs. Mitsubishi Fuso did not have enough

trucks in stock and told F&B that they would

have to be special ordered. Delivery straight

from Japan to Bahrain, without any adjust-

ments, would take three months.

F&B timely submitted a single offer to

provide Mitsubishi trucks, and included no

alternative trucks. Twelve additional offers

were submitted from around the globe,

including Europe and Asia. None of the

offerors, including F&B, mentioned that

their offer was contingent upon, or even re-

quired, the issuance of an “end use certifi-

cate” (EUC), which is “a written agreement

in connection with the transfer of military

equipment or technical data to the United

States that restricts the use or transfer of

that item by the United States.” Normally,

when the government determines that an

EUC is required, the solicitation will specify

a delivery date based on the receipt of the

EUC. The truck solicitation contained no

such reference, and contained nothing to

indicate that MSD would be willing to enter

an EUC or otherwise restrict its ability to

transfer the trucks to a third party.

MSD concluded that only two offers, sub-

mitted by F&B and Nour USA, were techni-

cally acceptable. Nour USA had a higher

technical score, but was also considerably

more expensive, while F&B provided a

lower price and a shorter delivery schedule.

MSD asked F&B for confirmation of its de-

livery schedule, price, and that the trucks

would include cargo beds. F&B replied

promptly, confirming a 90-day delivery

schedule, the cargo beds, and its $6.1

million price.

While confirming its bid and delivery

schedule, F&B “intensified” its “research”

on the procedures for truck delivery,

hearing about EUCs for the first time

from “somebody” and then reading “a

lot of information” on the topic. F&B also

consulted with a former employee of the

European Parliament who “knew a lot of

the legislation,” and who advised F&B of

“the necessity to get an end user certificate”

for the truck delivery. F&B did not check

with its supplier, Mitsubishi Japan, whether

it would ship its trucks to Iraq or Bahrain

without an EUC.

Because of its concerns, F&B contacted

the contracting officer about the require-

ment for an EUC, and understood that the

contracting officer represented that the

Refusing to Provide Assurance of Performance Can be the Same as Failing to PerformBy jACk hoRAn And kevin BARnett

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77Contract Management | July 2011

EUC “would be taken care of.” F&B did not

confirm or memorialize the call in a letter or

other document.

On June 23, 2007, MSD awarded F&B a $6.1

million firm-fixed-price contract for 126

five-ton cargo trucks meeting the contract

specifications. The contract required

delivery to Iraq no later than 90 days after

award, with partial delivery authorized.

The government did not modify the con-

tract terms to include an EUC, or otherwise

address an EUC requirement. The contract

also included FAR 52.212-4, “Contract

Terms and Conditions—Commercial Items

(Sept 2005),” which authorizes the govern-

ment to terminate the contract if the con-

tractor “fails to provide the government,

upon request, with adequate assurance of

future performance.”

F&B executed the contract, and on the same day entered into a subcontract with Daylight Engineering, Ltd., a Nigerian firm, to provide the necessary truck modifica-tions. F&B also contacted Mitsubishi Japan for the first time to coordinate the delivery of the trucks. Based on F&B’s description of its need for “a military truck,” Mitsubishi Japan concluded that an EUC would be required. Mitsubishi Japan apparently did not review the written contract specifica-tions or consult with the Japanese Ministry of Economy, Trade, and Industry or other appropriate export authority prior to inform-ing F&B that an EUC was required.

On July 2, 2007, F&B requested that MSD issue a signed EUC. MSD refused to issue an EUC, informing F&B that the procurement did not require an EUC, and the process for issuing an EUC was very lengthy. On July 6, 2007, F&B informed MSD that it either had

to issue an EUC or accept alternative trucks. MSD responded that it would not issue an EUC or accept alternative trucks, and requested that F&B confirm that it would deliver the required trucks. F&B continued in its attempts to convince MSD to accept an alternative vehicle or issue an EUC and did not confirm delivery.

MSD issued a show cause notice on July 12, 2007, which gave F&B 10 days to provide written evidence that it would be able to perform in accordance with the contract. F&B again continued to argue an EUC was required, blamed the MSD for any delay, and did not assure MSD that it could (or would) perform. On July 25, 2007, MSD terminated the contract for cause. F&B appealed the termination decision to the Armed Services Board of Contract Appeals (ASBCA). The case is noted as Free & Ben, Inc., ASBCA No. 56129 (March 22, 2011).

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MSD argued that its termination was proper because F&B had failed to perform and had anticipatorily breached the contract by failing to give assurances that it would perform. Rely-ing on a number of legal theories, F&B argued that MSD improperly terminated the contract. F&B’s primary contention was that it needed an EUC to deliver the trucks required under the contract so MSD should have issued an EUC or accepted alternative trucks.

The ASBCA rejected F&B’s primary con-tention (and as a result, all of its legal theories), finding that MSD did not have to provide an EUC because the trucks were not equipped to mount or carry weapons. In addition, the MSD was not required to disclose in the solicitation the possibility that an exporting country may require an EUC. The directives outlining the military’s policy on issuing EUCs did not, as F&B claimed, put MSD on notice that one might be required. Rather, the need for an EUC could readily be determined by routine research, and F&B was in the best position to determine if the country of its supplier

might require an EUC because it knew the location of its supplier.

The ASBCA then considered whether F&B repudiated the contract. An anticipatory re-pudiation occurs when a party to a contract indicates in clear terms that it will not fulfill the terms. Anticipatory repudiation can oc-cur when a contractor refuses to perform in the future without a change to the current contract, such as in DK’s Precision Machining & Mfg. (ASBCA 39616, 90-2 BCA ¶ 22,830). The Board found that F&B’s response to the show cause letter constituted “a positive, definite, unconditional, and unequivocal expression of intent that unless the govern-ment signed an EUC or accepted a different truck, F&B would not [perform].” Thus, F&B’s response repudiated the contract, justifying the termination for cause.

After determining that the termination was proper, the ASBCA considered F&B’s excuses for failing to perform, concluding that F&B’s failure to perform was almost entirely its own making. Initially, F&B failed to properly

research the product it was providing to determine if an EUC would be needed. When it finally researched the need for an EUC, F&B asked the wrong question—incor-rectly characterizing the truck as “a military truck” without providing the written specifications—when it made its inquiries to the manufacturer. F&B provided no proof, at any point, that Japan required an EUC to export the trucks in question.

The ASBCA also rejected F&B’s claim that MSD promised to “take care of” the EUC in a telephone conversation prior to award. The Board reasoned that MSD likely made no such promise because an EUC would delay delivery of the trucks and restrict MSD’s ability to transfer the trucks to the Iraqis. The Board also noted that the alleged promise “was too important an event not to have been confirmed in writing at the time or brought up [by F&B] when the possibility of termination loomed.”

Finally, the Board found no breach of the duty to cooperate in MSD’s rejection of

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81Contract Management | July 2011

F&B’s offer of alternative trucks. F&B had the opportunity to submit an alternative bid prior to the contract award but chose not to. The government does not act in bad faith by demanding strict compliance with the terms of the contract.

The Free & Ben decision demonstrates the value of good contract management from bid submission through performance. Initially, F&B apparently did not analyze the regulatory issues that could arise from its intended source of supply, either prior to submitting its offer or when given a second chance, prior to confirming its offer. Instead, F&B waited until after it had confirmed its bid to contact its supplier to assess the regulatory requirements for shipping the trucks it intended to supply. Identification of the potential EUC requirement prior to bid submission would have permitted F&B to consider MSD’s position on the EUC in discussions with its potential suppliers, deciding its source of supply, and determin-ing whether to submit a bid at all. MSD would likely have had time to obtain a well-researched, and perhaps definitive, answer on whether an EUC was required for trucks meeting the solicitation requirements.

When F&B finally identified the potential requirement for an EUC (a requirement that would materially affect its performance), it did not respond well. Even if MSD did promise to “take care of” the EUC, F&B failed completely to protect itself with the promise. It signed a contract that did not include the promise or otherwise address the EUC, and failed to even memorialize the promise in a letter to MSD. In addition, F&B did not consult an expert capable of providing a correct analysis of the EUC requirement, or properly inform the parties it did consult. F&B characterized the trucks as “military trucks” without revealing the actual specifications and modifications. Lacking a correct answer, F&B attempted to obtain an unnecessary EUC (or an equally unnecessary modification), while it should have been performing the contract.

Finally, F&B’s response to a show cause letter—the biggest and brightest warning flag a contract manager can receive—ef-fectively guaranteed a termination for cause. Upon receipt of a show cause letter, F&B should have done everything possible to determine whether it could perform, and if not, the soundness of its grounds for failing to perform. At the very least, F&B should

have obtained well-informed, expert advice on the need for an EUC. Even at this late date, F&B could have requested a revised delivery schedule if it discovered that the EUC was not actually required. Instead, F&B repeated its al-ready rejected arguments, leaving MSD little choice but to terminate the contract. CM

About the Authors

JACK HORAN, J.D., is the general counsel for

NCMA. He also practices in the Government

Contracts and White Collar Crime practice

groups at McKenna, Long & Aldridge, LLP.

KEVIN T. BARNETT is an associate in

McKenna, Long & Aldrige’s Government

Contracts practice group.

Send comments about this article to cm@ncmahq.org.

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