Philadelphia Auth. for Indus. Dev. v. United States, 114 Fed. Cl. 519 (2014)

In this action, the United States Court of Federal Claims denied the Government’s motions to dismiss and for summary judgment, holding that plaintiff had sufficiently pled and supported claims against the Government based upon misrepresentations and omissions in data supplied by the Government in a negotiated procurement.  The Court held that negligent estimate, superior knowledge, misrepresentation and mutual mistake were viable theories upon which to pursue such a claim.  It rejected the Government’s position that a claim for negligent estimate could not be maintained in the context of a negotiated procurement, and also held that the plaintiff’s expectation of a limited loss did not negate the element of reliance with respect to much larger losses attributable to undisclosed or misrepresented information.

The dispute arose in connection with the transfer of the Philadelphia Naval Base and all of its utility systems from the Navy to the Philadelphia Authority for Industrial Development (“PAID”).  In 1990, Congress passed a law requiring the Navy dispose of excess properties.  Under a process that began in the late 1990’s and extended into the early 2000’s, the Navy closed and transferred ownership of the Philadelphia Naval Base to the City of Philadelphia, but continued to maintain certain facilities at the former base as a tenant of the new owner, the.  The City appointed PAID, a municipal authority, to manage and redevelop the Naval Base, which became known as the Naval Yard.

On March 31, 1999, PAID and the Navy entered into an agreement whereby the Navy agreed to convey the real property and improvements at the Naval Yard to PAID.  On the same day, the parties entered a “Utilities Agreement”, which obligated the Navy to convey all of its utilities systems to PAID provided that the parties could negotiate rates for utility services under which PAID would supply utilities to the remaining Navy facilities.  The Utilities Agreement established a ceiling on the rate PAID could charge for utility services, stating that the Navy would pay rates “ in no event higher than the Government’s fully allocated cost [of providing such utilities] to the Government immediately prior to the transfer of service.”  The dispute in litigation pertained to the rate which was agreed to for steam services and the accuracy of the information provided by the Government as to its costs and consumption quantities prior to transfer.
In November 1999, the Navy issued a request for proposal to PAID for the procurement of the utility services contemplated by the Utilities Agreement.  While preparing its first proposal, PAID repeatedly requested access to the Navy’s historical records of prior steam production and consumption.  At that time, the Navy did not provide the requested information.  Consequently, PAID submitted a proposal with calling for essentially a pass through of variable operating costs of providing steam services and a fixed price for operating and maintenance costs.

The Navy asserted that PAID’s proposal “greatly exceed[ed the] Navy’s fully allocated costs,” thereby violating the Utilities Services Agreement.  In its response, the Navy provided PAID with “the Navy’s fully allocated costs” and a “worksheet, [which] included quantities of steam produced and consumed on a yearly basis, along with a formula for converting these numbers into costs.”  According to the Navy’s worksheet, it produced 177,000 MMBtu of steam per year and consumed 116,000 MMBtu or steam per year for a fully allocated cost of $2,666,689 annually.  After PAID noted that the Navy’s figures were estimates, and not actual figures, the Navy confirmed its estimate of steam consumption, but it increased its stated annual cost for steam to $2,789,729.  At that time, the Navy also provided a cost breakdown showing that its total per unit cost for steam was $24.05.

The Navy demanded that PAID base its pricing on a fixed price per unit of steam consumed rather than its prior pricing approach.  The Navy proposed a fixed unit rate for steam of $24 per MMBtu based upon the above representations as to its own cost and consumption figures, claiming that this was “based on the historic past performance” of the plant.  In response, PAID stated that it would accept the $24 rate “based on certain operating assumptions about the boiler plant that were provided by the Navy” and in reliance on the Navy’s representations.  The Navy rejected PAID’s request for a consumption guarantee, because it could not guarantee that future consumption would not change.  In the end, PAID still accepted the deal, although it estimated losses of roughly $100,000 per year, because its projected fixed O&M costs going forward exceeded the Navy’s representation of past fixed costs.  In contrast, PAID had no basis on which to question the Navy data concerning historic production quantities and consumption.

Beginning with the heating season of 2001-02, PAID began providing steam service to the Navy to heat its buildings.  PAID discovered there was a large negative discrepancy between the Navy’s actual consumption and what it had represented during solicitation and negotiations.  There was also a large excess discrepancy between the amount of steam that PAID had to produce to support NAVY consumption as compared with what the Navy had previously represented.  As a result, PAID was incurring “significant losses” due to a smaller allocation base for fixed costs and much greater production costs.  It sought an equitable adjustment to the contract.  When the contracting officer denied PAID’s request, PAID filed a complaint.

Among other things, during discovery, PAID learned that “despite the Navy’s representations during contract negotiations, [the Navy] actually produced 235,035 MMBtu during the winter of 1999-2000 and that it consumed 95,464 MMBtu.”  Plant operating data and consumption records for other years, as well, showed significant variances from the quantities represented by the Navy.  But, the Navy did not use these figures when it provided representations of the fully allocated historic costs to PAID, which greatly affected the accuracy of the representation of the Navy’s cost per unit of steam consumed in the period prior to transfer.  PAID’s amended complaint included six counts, including : negligent/reckless preparation of estimate (Count I), misrepresentation of historical steam production and consumption (Count II), superior knowledge (Count IV), and  mutual mistake (Count V) The Navy moved to dismiss Counts IV and V for failure to state a claim and moved for summary judgment on Counts I, II, III and IV.  The Court denied the Navy’s motions as to the above counts.

The Court first considered the Navy’s motion to dismiss Counts IV and V of the amended complaint.  In Count IV, PAID alleged that “plaintiff undertook to perform pursuant to the contract despite defendant’s superior knowledge of the history of the operation of the steam plant that it withheld from the plaintiff.”  The doctrine of superior knowledge is generally applied in situations where “1) a contractor undertakes to perform without vital knowledge of a fact that  affects performance costs or duration, 2) the government was aware the contractor had no knowledge of and had no reason to obtain such information, 3) any contract specification supplied misled the contractor or did not put it on notice to inquire, and 4) the government failed to provide the relevant information.”

In support of its superior knowledge claim, PAID averred that it did not receive accurate steam consumption and production figures from the Navy during contract negotiations, but it did receive accurate figures after it initiated litigation, which showed that the Navy had the information.  PAID further averred that it entered into and performed under the contract in reliance on the Navy’s representations, and at the time of contracting, the Navy knew that PAID was relying on the Navy’s representations.  Ultimately, PAID’s  actual costs of performance were greater than what should have been expected based on the Navy’s representations.  The Court concluded that these averments stated a claim for superior knowledge.”

In Count V, PAID asserted a claim for mutual mistake.  To support such a claim, a plaintiff must show that “1) the parties to a contract were mistaken in their belief regarding a fact, 2) the mistaken belief constituted a basic assumption underlying the contract, 3) the mistake had a material effect on the bargain, and 4) the contract did not put the risk of the mistake on the party seeking reformation.”  The Navy argued that there was no mutual mistake because “any alleged mistake did not go to a basic assumption of the contract.  The Court disagreed, noting that PAID made it clear to the Navy that the deal was “based on certain operating assumptions about the boiler plant that were provided by the Navy.”  Similarly, the Navy had stated that the $24 rate was “based on historical past performance with this plant.”  Thus, the Court concluded that the correspondence suggested that both parties made a basic assumption as to historical operating conditions, and the Court denied the Navy’s request to dismiss Count V.

With respect to Counts I (negligent/reckless estimate), II (misrepresentation) and IV (superior knowledge), the Court concluded that genuine issues of material fact existed that prevented the Court from granting the Navy’s motion for summary judgment.  As the Court observed, all three counts turned on whether the Navy “provided negligent estimates or made material misrepresentations concerning the cost of and consumption of steam by the Navy.”

The Court found  that the Navy, the only source of this information, provided inaccurate steam production and consumption estimates to PAID in both the solicitation materials and in Exhibit B to the parties’ contract.  For the most part, the Government  did not challenge these facts.  Rather, the Government argued that PAID “knowingly and willingly assumed the risk that the steam plant would sustain losses … at a rate of $24 per MMBtu.”  The Government asserted that since PAID expected to lose money, it could not assert a claim against the Government for those losses.  Again, the Court disagreed.  The Court noted that PAID had presented evidence to show that it expected to lose a finite amount of money – something in the range of $100,000 annually.  According to the Court, that did not mean that PAID accepted the risk that it would lose almost $800,000 per year.

Furthermore, since PAID’s expectations about the contract were based on information provided by the Navy, the Court concluded that there were genuine issues of material fact concerning the extent of PAID’s reliance on the Navy’s estimates.  And while estimated quantities in a requirements contract are not guarantees, “if a contractor can demonstrate that an estimate made by the defendant was inadequately or negligently prepared … it may constitute a misrepresentation.”  Indeed, in the context a bidding invitation, “an estimate … must be the product of such relevant underlying information as is available to the author of the invitation.”   Thus, the Court found there were genuine issues of material fact as to the extent of PAID’s reliance, its assumption of risk, and the extent of the Navy’s negligence that precluded a grant to the Government of summary judgment.

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