General Builders Supply Co., Inc. (GBC), the defendant, signed a contractual agreement in 1964 with the U.S. Government to furnish 7,500 refrigerators to the General Services Administration, for use overseas. General Builders then is sublicensed to buy these items from the Gibson Refrigerator Corporation of the Hupp Corporation, in what is now known as the H refrigerator program. The Government was reimbursed for the cost of these purchases. This was the first step toward a system where surplus manufacturing capacity could be shared.
On appeal, the District of Columbia Circuit Court held that GBC did not violate the contractual duties owed to the Government by contracting to supply “freely available” parts and services in an equitably adjusted quantity as part of an overall contractual obligation. The Court found that the term “commission” or “equitable adjustment” was ambiguous and therefore implied that there was a performance relationship between the parties to the contract. If such an implied relationship existed, the Court impliedly waived its power to regulate under the provisions of the Act. The Court thus implicitly found that the General Builders’ Fund is not itself entitled to recovery under the Act.
In United States v. Morrison, the United States Supreme Court reaffirmed that GBC cannot be held to have waived its rights to equitable adjustment. This ruling in United States v. Morrison provides the strongest justification for restricting review of federal procurement agreements. According to the decision of the Court, even if there was an implied contractual relationship between GBC and the United States, the agreement itself did not waive any rights to equitable adjustment. Therefore, once the United States has entered into a procurement agreement, it is not possible for the federal government to change conditions that result from that contract once the contract is established.
The Court’s holding in United States v. Morrison also left the door wide open to future interpretation of the contractual language of the Act. Because of its holding in United States v. Morrison, a federal court is not authorized to review the construction of a contract once the construction is underway. If the contractor were to be found to have waived any rights to an equitable adjustment when the contract is initially signed, then the contractor would not be permitted to make any attempt to rectify that condition later. Thus, even if there are express contractual obligations associated with a contract under the Act, those obligations can still be waived by a future construction decision that violate the Act.
Because of the holding in United States v. Morrison, contractors will no longer be restricted by a mandatory three-year recission period after the date the construction contract is awarded. Instead, these laws will impose a much more complex time frame in which the mandatory rescission period must occur. In addition, the regulations will specify that, if the contractor has made “reasonable efforts” to correct the problems that contributed to the notice of default, then the contract can be reinstated. This new construction requirement creates what is referred to as the ‘equitable adjustment’ clause. The reasonable efforts clause requires that the contractor make ‘equitable adjustments’ (meaning the required changes to make the home in compliance with the Act) prior to reinstatement.
The statutory construction on which the Act is based, and the statutory construction on which the Act’s application is based, require that ‘a default must be terminated’ for a breach of the contract to have occurred. However, the Court has repeatedly held that this requirement does not mean that a contract can be reinstated based solely on a showing of ‘willful misconduct’. Indeed, the legislative history of the Act indicates that Congress was aware of the difficulties involved in reinstating home construction contracts and specifically sought to avoid the use of the phrase ‘willful misconduct’ because that phrase could provide a slippery slope for litigants seeking to reinstate a defective contract. As such, even if the contractor has acted in good faith, the contractor must still be held liable under the Act.