Federal Contract Law: How an old contract came back to bite du Pont

Joseph J. Petrillo

Resolving disputes through litigation is a notoriously slow process. Even so, I was taken aback recently by a federal court ruling. The Court of Federal Claims had resolved questions arising under a contract dating back more than a half century, to World War II.

The decision is E.I. du Pont de Nemours & Co., Inc. vs. U.S. (No. 99-101C, Nov. 13, 2002). It concerned a 1940 contract for the construction and operation of an ordnance plant in Morgantown, W.Va. The contract had an indemnity provision that while extremely broad was apparently not unusual at the time. The government promised to reimburse the contractor and hold it harmless from any loss, expense or damage arising from contract performance. The indemnity included losses from death, bodily injury and property damage.

The promise to make up the contractor's losses wasn't mere government generosity. Operating a munitions plant is an obviously hazardous activity, with more than the usual built-in potential for catastrophic losses. Without protection like the indemnity clause, a private concern might well pass on such a contract.

Apparently, things went well at the plant under du Pont's management, and the contract was terminated in 1946. It was only a faint memory in 1984, when du Pont again heard from the government about the Morgantown plant. This time, however, the government meant the Environmental Protection Agency. The agency was seeking funds to clean up toxic waste at the site.

To du Pont's credit, someone there was able to put his hands on the old contract. The contractor notified EPA that the government was liable for the clean-up costs, under the indemnity clause. The government, not surprisingly, disagreed, so the parties ended up in court, where du Pont lost.

The contractor's problem was that the old indemnity clause was too good. It purported to commit the United States for an unlimited sum of money. Such an open-ended promise ran afoul of the Anti-Deficiency Act. Du Pont argued that the indemnity was authorized by the First War Powers Act, and that the attorney general had approved such indemnities. However, the delegation of the act's powers didn't authorize agencies to exceed appropriated funds. As for the attorney general's opinion, it could not bind the court, and anyhow the comptroller general disagreed. On matters of appropriation law, he usually prevails.

This decision is not simply an historical curiosity; its lessons are important today. In the post-9-11 environment, more and more contracts involve the hazards of terrorism, unconventional threats and dicey locations. Sometimes, there is a sense of urgency, and contracts are negotiated and awarded very quickly.

Adding to the challenge is that some agencies, like the Transportation Security Administration, have full or partial dispensation from the usual contracting laws and regulations. The fact is, every federal agency has lots more latitude when contracting for commercial items. Some lawyers who become involved in these new contexts may be unfamiliar with the special requirements of contracting with the sovereign.

The decision teaches us that hasty and unorthodox contracts may result in unpleasant surprises, even years later. A modest investment of careful thought up front can pay large dividends later on.

Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

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