Supreme Court rules agencies need not protect contractors

The Supreme Court rarely hears a government contract case, but when it does, the ruling
always makes waves.


The high court recently decided the case of Hercules Inc. v. United States, a
controversy with its roots in the Vietnam War.


Hercules Inc. and Wm. T. Thompson Co. made Agent Orange defoliant during the Vietnam
War. Hercules wanted all the business, but the Defense Department also wanted to hire
Thompson. Thompson only took the contract after DOD threatened to draft the company's
services under the Defense Production Act.


DOD's specifications prescribed the formula for Agent Orange, as well as detailed how
to manufacture and package the defoliant. The chemical was sealed in drums marked with
three-inch orange bands and no further identification. There were no labels warning users
that the contents included the toxic chemical dioxin.


Veterans claiming that they had become ill because of exposure to Agent Orange sued
both companies. They incurred costs defending or settling the numerous suits. Hercules and
Thompson both sued the government in Federal Claims Court to recover their expenses.


According to longstanding legal principles, when the government imposes detailed design
specifications on a contractor, it provides a warranty to the vendor. The companies tried
to collect under this warranty provision and alternatively argued that there was an
implied agreement to indemnify the contractors from such damages.


The Claims Court dismissed the suits without holding a trial. On appeal, the Federal
Circuit Court affirmed the earlier court's action. The companies then appealed to the
Supreme Court.


The Supreme Court held that the government only warrants that its specifications will
not frustrate performance or make contract fulfillment impossible. The warranties do not
include government liability for third-party claims against the contractor, the high court
concluded.


The court also rejected the concept of implied indemnity for such claims. It was
concerned by the unbounded scope of such an indemnity definition and the questions it
would raise regarding contracting authority and the adequacy of appropriations.


Justice Stephen Breyer wrote a spirited but futile dissent. He found a dual unfairness
in the result. First, the contractors had no means to insure against the unknowable risks
they unwittingly assumed or to price their products accordingly.


Second, Breyer noted, the initial ruling denied the contractors the opportunity to
present their case at trial. Because they alleged that there was an implied-in-fact
contract, Breyer concluded that a full airing of the facts would have facilitated a more
informed decision. But the court's majority held that no legal indemnity contract could
exist in these circumstances.


Given that opportunities for liability abound, a contractor performing in a new and
unproved area might want to consider asking for indemnification under Public Law 85-804,
which authorizes : "extraordinary contractual actions." In a competitive
contracting environment, however, there is little prospect that one would be granted.



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