Opinion
No. 94 C 4414.
April 3, 1997
MEMORANDUM OPINION AND ORDER
Plaintiff, the United States of America (the "Government"), brings this action on behalf of the Department of Defense against Defendants HydroAire, Inc., ("HydroAire"); George Harris ("Harris"), the President and registered agent of HydroAire; and Sydney Rice ("Rice"), the project engineer for HydroAire on all government contracts, alleging that Defendants breached their contract with the Government — a contract for the supply of certain linear actuating cylinders to be used in Trident nuclear submarines — by providing the Government with goods that did not conform with the contract's specifications. The Government further alleges that Defendants committed violations of the False Claims Act, 31 U.S.C. § 3721 et seq., and engaged in common law fraud by knowingly and intentionally misrepresenting to the Government that the goods provided under the aforementioned contract were manufactured in accordance with the contract's requirements. Now before the Court are the parties' cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56. For the reasons set forth below, the Court denies both motions.
BACKGROUND
The following facts, unless otherwise noted, are undisputed by the parties. On March 14, 1988, the Government, acting through the Defense Construction Supply Center ("DCSC"), an arm of the Department of Defense, entered into Contract DLA700-88-C-1093 (the "Contract") with HydroAire. The Contract called for HydroAire to manufacture and sell to the Government 17 linear actuating cylinders, which are used to operate hydraulic drive planes on Trident nuclear submarines. The total contract price for the cylinders was $166,685.00 (or $9,805.00 per cylinder). The Contract granted the Government an option to purchase an additional 17 cylinders.
The Contract called for the cylinders to be constructed in accordance with Navy drawing number 845-4687549 Rev. D (the "Drawing"). The Drawing provided that the cylinders be "dual metal centrifugal casting[s] produced by U.S. Pipe and Foundry Company, or equal, of East Burlington, New Jersey."
A "dual metal centrifugal casting" is a concast (concentrically cast) structure that is formed by introducing molten metal to a spinning mold to form the cylinders' outer layer and then introducing a second metal of different composition to the mold while the outer layer is still hot and the mold is still turning.
In addition to specifying that the cylinders be "dual metal centrifugal casting[s] produced by U.S. Pipe and Foundry Company, or equal, of East Burlington, New Jersey", the Drawing further directed that the cylinders possess an outer shell of type 414 stainless steel that is "metallurgically bonded" to an inner core of stainless steel MIL-S0-287, Class 3, extra low carbon. After final heat treatment, the cylinders' outer shells were to be "Charpy V Notch tested in accordance with ASTM E-23," and HydroAire was to "[b]ore [the cylinders] to 13.446/13.449 Dia 125 for 4500 PSI pressure test [ing]."
After award of the Contract to HydroAire, DCSC turned over contract administration duties to the Defense Contract Management Area Office ("DCMAO") in Chicago.
On March 29, 1988, the DCMAO Quality Assurance Representative ("QAR") on the Contract issued HydroAire an authorization to ship the completed cylinders without prior Government inspection by submitting a Certificate of Conformance (or "CoC") at the time of delivery. In essence, this CoC authorization permitted HydroAire to manufacture and ship the finished cylinders to their intended destinations based upon HydroAire's certification that the cylinders conformed to the requirements of the contract. Specifically, HydroAire was required to certify that the goods furnished under the Contract were "of the quality specified and conform in all respects with the contract requirements, including specifications, drawings, . ." (Govt.12(M) Statement, Ex. 11)
The Contract incorporated by reference Federal Acquisition Regulation ("FAR") 52.246-2, which provides in pertinent part:
(j) The Government shall accept or reject supplies as promptly as practicable after delivery, unless otherwise provided in the contract. Government failure to inspect or reject the supplies shall not relieve the Contractor from responsibility, nor impose liability on the Government, for nonconforming supplies.
(k) Inspection and tests by the Government do not relieve the Contractor of responsibility for defects or other failures to meet contract requirements discovered before acceptance. Acceptance shall be conclusive, except for latent defects, fraud, gross mistake amounting to fraud, or as otherwise provided in the contract.48 C.F.R. § 52.246-2(j), (k).
On April 13, 1988, HydroAire requested a price quotation from U.S. Pipe and Foundry Company ("U.S.Pipe") — the company identified in the Contract — for "34 PCS: outer shell and inner shell made out of stainless steel material." U.S. Pipe responded with a quotation of $10,498.00 per cylinder. According to Rice, because the price quoted by U.S. Pipe was so high and because Rice had heard that U.S. Pipe was in financial trouble, HydroAire began looking for other companies to manufacture the cylinders.
According to HydroAire, at the time of the Contract award, U.S. Pipe was the only commercial supplier of dual metal centrifugally casted linear actuating cylinders.
On April 28, 1988, the United States exercised its option under the Contract to purchase 17 additional cylinders from HydroAire at a cost of $8,305.00 per cylinder.
In his attempt to find a substitute manufacturer, Rice contacted the Techni-Cast Corporation ("Techni-Cast") of South Gates, California. At the time, Techni-Cast did not have either the capability or the equipment to perform dual metal centrifugal casting in the production of metal cylinders. Yet, unwilling to pay U.S. Pipe's high price and unable to find another manufacturer with the "particular expertise" to perform dual metal centrifugal casting, Rice hired Techni-Cast to produce 70 steel tubes — 35 tubes meeting the material and dimensional requirements for the cylinders' outer layers and 35 tubes meeting the material and dimensional requirements for the cylinders' inner cores — from which HydroAire would construct the contracted-for cylinders using an "interference fit" process.
In the "interference fit" process devised and used by Rice, a smaller, inner-layer tube of stainless steel MIL-S0-287, Class 3, extra low carbon is inserted into a larger, outer-layer tube of 414 stainless steel that has been expanded through heating. The outer-layer tube is then cooled, causing it to contract around and on to the inner-layer tube, producing what appears to be a single-piece cylinder. Rice did not specifically notify the Government of his intent to use the "interference fit" process, as he allegedly believed that (1) the interference fit process was "equal" to the dual metal centrifugal casting process identified in the Contract, and (2) the Contract explicitly permitted HydroAire to use either the dual metal casting process or its equal, so long as the cylinders produced met the Contract's specifications.
Harold Jaffke ("Jaffke"), Techni-Cast's Sales Engineer, advised Rice that Techni-Cast could and would make the tubes as Rice requested. On May 19, 1988, a final purchase order was sent by HydroAire to Techni-Cast. The total contract price for the 35 tube sets was $78,855.00 — $278,077.00 less than the price quoted by U.S. Pipe for raw dual metal centrifugally cast cylinders.
According to the Government, Jaffke inquired whether the tubes were to be used by HydroAire to construct hydraulic accumulators and expressed to Rice his concerns as to the acceptability of cylinders not manufactured using the dual metal centrifugal casting method. Rice is alleged to have responded by telling Jaffke that the tubes were going to be used to make hydraulic accumulators and that "he had friends in the Navy who said it was OK." (Govt.12(M) Statement, ¶ 54) HydroAire denies that this statement was made by Rice.
Also on May 19, 1988, HydroAire issued a purchase order to Weld Systems, Inc. ("Weld Systems") to complete the machine work on the cylinders for a total price of $111,190.20.
On or about July 21, 1988, HydroAire submitted its first request for a progress payment on the Contract, seeking a payment of $138,856.00 from the Government. On July 26, 1988, a United States Treasury check was issued to HydroAire in that amount.
Techni-Cast manufactured the 35 tube sets and, on August 2, 1988, shipped the tube sets from its facility in California to Weld Systems in Mundelein, Illinois. Per Rice's instructions, Weld Systems assembled the cylinders using the interference fit process previously described.
On November 28, 1988, HydroAire, through Rice, issued a purchase order to Weld Systems to "[m]ake necessary weld repairs to cylinders as required." In response, Weld Systems apparently welded the cylinders together at the perimeter of each end.
On December 8, 1988, HydroAire prepared a form DD-250, "Material Inspection and Receiving Report," which provided that the cylinder identified in the report conformed to the Contract and were ready for shipping. Based upon HydroAire's CoC, the QAR signed the acceptance portion of the DD-250 and authorized shipment of one cylinder to the Trident Refit Facility in Bremerton, Washington; on or about December 16, 1988, one cylinder was shipped to Bremerton.
On or about December 20, 1988, HydroAire requested a second progress payment on the Contract in the amount of $74,304.00.
On December 27, 1988, the Trident Refit Facility in Bremerton, Washington, issued a Quality Deficiency Report ("QDR") complaining that the one cylinder it received did not have the proper plating on the interior diameter, which was plated with nickel instead of the required chrome.
On December 29, 1988, a United States Treasury check in the amount of $74,304.00 was issued to HydroAire.
On December 31, 1988, HydroAire prepared a second form DD-250, which provided that the cylinders identified in the report conformed to the subject contract and were ready for shipping. Based upon HydroAire's CoC, the QAR signed the acceptance portion of the DD-250 and authorized shipment of 30 cylinders to the Defense Depot in Ogden, Utah. On or about December 16, 1988, HydroAire did, in fact, ship 30 cylinders to Ogden.
On December 31, 1988, HydroAire prepared a third form DD-250, which provided that the cylinders identified in the report conformed to the subject contract and were ready for shipping. Based upon HydroAire's CoC, the QAR signed the acceptance portion of the DD-250 and authorized shipment of three additional cylinders to the Trident Refit Facility in Bremerton, Washington; on or about January 7, 1989, three cylinders were shipped by HydroAire to Bremerton.
The acceptance provision signed by the QAR on each and every Form DD-250 submitted by HydroAire provides as follows:
ACCEPTANCE of listed items has been made by me or under my supervision and they conform to contract except as noted herein or on supporting documents. On each of these forms, the QAR noted that acceptance was made pursuant to a Certificate of Conformance.
On January 12, 1989, a third United States Treasury check was issued to HydroAire in the amount of $54,146.75.
Concurrently, the Defense Depot in Ogden, Utah, discovered that the inner surface of the 30 cylinders it received were plated with nickel instead of chrome as required by the Contract. Thus, on or about January 20, 1989, HydroAire recalled and properly re-plated the 30 cylinders.
On January 23, 1989, apparently in anticipation of a second Government contract for linear actuating cylinders, HydroAire issued a purchase order to Techni-Cast for four dual metal centrifugally cast cylinders. Techni-Cast had developed the ability to produce large-scale dual metal centrifugal castings in November 1988, and HydroAire's order was Techni-Cast's first for cylinders manufactured using the newly acquired process.
On January 24, 1989, a fourth United States Treasury check was issued to HydroAire in the amount of $9,755.97; and on February 8, 1989, a fifth United States Treasury check — this one in the amount of $40,356.92 — was issued to HydroAire.
On February 22, 1989, the Trident Refit Facility in Bremerton, Washington, issued a Quality Deficiency Report ("QDR") advising that the inner cores of four of the subject cylinders were not metallurgically bonded to their outer shells. The Government discovered the purported lack of metallurgical bonding through ultrasonic testing; such testing was not required by or specifically mentioned in the Contract.
On February 23, 1989, based on the final delivery of goods under the Contract, a sixth and final United States Treasury check was issued to HydroAire in the amount of $4,017.00. In total, the United States paid HydroAire $311,426.64 under the Contract.
On February 27, 1989, the QAR requested the assistance of a Government Quality Assurance Engineer, Arthur Schmidt ("Schmidt"), to verify that the 30 cylinders back in HydroAire's possession were, in fact, metallurgically bonded in accordance with the Contract specifications. In his February 27 report to the QAR, Schmidt stated: "The bond of inner cylinder to outer cylinder looks very sound. Ref. Sample Mr. S. Rice had and samples at plating facility. Recommend acceptance to Contracting Officer." (HydroAire 12(M) Statement, Ex. 15) The Government denies that Schmidt performed an inspection of the cylinders at this time; instead, the Government maintains that Schmidt's recommendation was based on the representations of Rice.
On March 9, 1989, after re-plating the 30 incorrectly plated cylinders, HydroAire reshipped those cylinders to the Defense Supply Depot in Ogden, Utah.
On March 21, 1989, the Trident Refit Facility in Bremerton, Washington, issued a Quality Deficiency Report advising that the inner core of a fifth subject cylinder was not metallurgically bonded to the cylinder's outer shell; and on March 24, 1989, that same facility issued a QDR advising that the inner cores of eight more subject cylinders were not metallurgically bonded to their outer shells.
Pursuant to HydroAire's purchase order dated January 23, 1989, between February 28 and March 23, 1989, Techni-Cast delivered four rough-machined dual metal centrifugally cast cylinders to HydroAire.
Pursuant to the QDR dated March 21, 1989, on March 27, 1989, DCMAO engineer Arthur Schmidt accompanied Rice to Weld Systems to conduct ultrasonic testing on four linear actuating cylinders. Rice conducted the tests to detect the presence of a metallurgical bond. The four cylinders that Rice showed to Schmidt were in a rough casting stage, and their surfaces were not yet machine-finished; apparently, these four cylinders were the cylinders obtained from Techni-Cast pursuant to the January 23, 1989 purchase order and were produced using the dual metal centrifugal casting process.
The Government maintains that although the four cylinders shown to Schmidt were not manufactured by the interference fit process, HydroAire, through Rice, represented these cylinders to be identical to the ones provided under the Contract. HydroAire denies that any such representation was made; instead, HydroAire insists that Rice merely showed Schmidt how ultrasonic testing was conducted, that Rice did not conduct the test to verify or prove that any metallurgical bond existed in the Contract cylinders, and that Rice did not indicate the origin of the tested cylinders.
Based upon the results of the ultrasonic tests and the representations of Rice, Schmidt recommended to DCSC that it accept all of the cylinders delivered under the Contract.
On or about April 4, 1989, the Government purchased six replacement cylinders from Garveys' Model Shop Inc. ("Garveys"). On or about April 25, 1989, another two cylinders were purchased by the Government from Garveys. The Government paid Garveys $16,897.00 for each of these replacement cylinders.
On April 9, 1989, HydroAire had a cylinder ultrasonically and x-ray tested by an independent company in Rosemont, Illinois. According to the Government, HydroAire again represented that this cylinder was identical to those provided the Government under the Contract.
On October 2, 1989, the Government issued a Category 1 QDR based upon the deficiencies purportedly discovered on February 22, 1989; and three of the cylinders were returned by the Government to HydroAire's plant.
On October 6, 1989, the Government QAR sent a letter to Rice advising HydroAire of the October 2 deficiency report and requesting that HydroAire inform the Government of any investigation findings as to the cause of the cylinders' deficiencies, HydroAire's intended actions to correct the cause/s of the deficiencies, and HydroAire's position with respect to repair and/or replacement of the defective cylinders already manufactured under the Contract.
Rice responded to the Government's request by letter dated October 10, 1989. In this letter, Rice claimed that HydroAire had tested the cylinders delivered under the Contract and had proved that those cylinders were, in fact, metallurgically bonded. Rice supported his statement with the results of the March 27, 1989 ultrasonic testing and the April 3, 1989 ultrasonic and x-ray testing.
On November 14, 1989, the Government QAR completed a "Material Deficiency Investigation Report," in which he explained that, "The Contractor will take no position regarding repair or replacement of these units since the contract/drawing does not require ultrasonic testing of the subject units." The QAR further noted: "This report constitutes a closing action." (HydroAire 12(M) Statement, Ex. 22) In May 1990, the three cylinders previously returned to HydroAire's plant were again sent to the Government, and destructive testing was performed on those cylinders at the Naval Weapons Station in Seal Beach, California. Destructive testing was not required by or specifically mentioned in the Contract.
On or about September 4, 1990, the Government referred the matter to its Defense Criminal Investigative Service ("DCIS") for an investigation of HydroAire's alleged intentional delivery of nonconforming goods under the Contract.
On or about December 12, 1991, the Government interviewed independent expert Lyle Jacobs ("Jacobs"), President of Taussig Associates, Inc. Jacobs was asked to review the Drawing and was asked to interpret the phrase "metallurgical bonding." Jacobs advised the Government that the term "metallurgical bonding" is very general and can have several meanings. Jacobs further informed the Government that the Contract does not explain whether the bond is required to be present on the entire length of the cylinder or just on the ends of the cylinders; and Jacobs told the Government that the bond created in the cylinders through the interference fit process is, in fact, one type of metallurgical bonding.
According to the Government, it first discovered that the cylinders were produced by HydroAire using the interference fit process, rather than the dual metal centrifugal casting process, during an April 28, 1992 interview with Jaffke and Kurt Weismeyer, former owner of Weld Systems. HydroAire disputes this fact, asserting that the Government was on notice of HydroAire's manufacturing method prior to the QAR's acceptance of the cylinders. Specifically, HydroAire maintains that the Government's Industrial Specialist performed an on-site visit to HydroAire on September 6, 1988, "to determine the physical completion of material and labor of the subject contract in support of Progress Payment Number One (1)." (HydroAire Resp. to Govt. 12(M) Statement, Ex. 8) In his report, the Government representative states as follows:
At the time of the plant visit, all material had been received, and logged in as inventory. The castings, cylinders, and cylinder heads were produced by Technicast, and after accepted by HydroAire, were shipped to Weld System for rough machining. . . .
The weighted values . . . were established after reviewing drawings, priced Bill of Material, vendor quotations, and HydroAire's original proposal. Quantities required and item descriptions were found correct and acceptable.
From this, HydroAire asserts that the Government was well-aware prior to making any payments on the Contract that Techni-Cast, and not U.S. Pipe — the only known manufacturer of dual metal centrifugally casted cylinders at the time of contracting —, was manufacturing the raw cylinders for HydroAire.
On July 20, 1994, the Government filed its Complaint in the present action, in which the Government asserted (1) that Defendants "knowingly made, used or caused to be made or used, false statements or actions" in violation of the False Claims Act ("FCA") (Count I); (2) that HydroAire "breached its contract" with the Government (Count II); (3) that Defendants "made, or caused to be made, false statements of material fact" upon which the Government justifiably relied to its detriment (Count III); (4) that Defendants was "unjustly enriched" to the extent of the Government's payments to HydroAire under the Contract because HydroAire provided the Government with "non-conforming goods" (Count IV); and (5) that the Government would not have inspected, accepted and paid for the cylinders supplied by HydroAire had the Government known of HydroAire's "intent to provide goods that failed to conform" to the Contract (Count V). On February 14, 1995, this Court dismissed the Government's Counts IV and V pursuant to Fed.R.Civ.P. 9(b) and 12(b).
Prior to filing the instant suit, the Government neither formally notified HydroAire that it was rejecting and/or revoking its acceptance of the tendered cylinders nor officially requested from HydroAire a refund of some or all of the monies paid by the Government for the cylinders. The Government retains possession of all 34 of the cylinders manufactured by HydroAire under the Contract; one of these cylinders is missing and 27 remain in their original shipping crates.
DISCUSSION
A. Standards for Summary Judgment
Summary judgment is appropriate where the pleadings, answers to interrogatories, admissions, affidavits, and other materials show that there is "no genuine issue as to any material fact," and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Only genuine disputes over "material facts" can prevent a grant of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Material facts" are those that might affect the outcome of the suit under governing law. Id. A "genuine issue" exists if there is "sufficient evidence favoring the non-moving party for a jury to return a verdict for that party." Id. at 249. When considering a motion for summary judgment, the Court must view the facts, and all the inferences drawn from those facts, in the light most favorable to the non-moving party. Griffin v. Thomas, 929 F.2d 1210, 1212 (7th Cir. 1991); Roman v. U.S. Postal Service, 821 F.2d 382, 385 (7th Cir. 1987).
B. Breach of Contract
In Count II of its Complaint, the Government asserts that HydroAire breached the Contract by failing to provide cylinders manufactured according to the contract specifications. In order to assess the potential validity of the Government's contract claim, it is first necessary to identify the nature and extent of the Government's right to assert an action for breach of contract in light of its acceptance of the allegedly non-conforming goods.
As previously indicated, on March 29, 1988, the Government's QAR on the Contract issued HydroAire an authorization to ship the completed cylinders without prior Government inspection by submitting a Certificate of Conformance at the time of delivery. Pursuant to this authorization, HydroAire prepared three Forms DD-250, each of which provided that the cylinders identified conformed to the Contract and were ready for shipping. Based upon these CoC's, the QAR expressly accepted all 34 of the cylinders manufactured by HydroAire under the Contract and specifically authorized HydroAire to ship those 34 cylinders to various Government-identified locations.
The Government's acceptance of the cylinders based upon HydroAire's CoCs limits the Government's rights to those afforded by the "Inspection of Supplies — Fixed Price" provision, 48 C.F.R. § 52.546-2, expressly incorporated by reference into the Contract. See Appeal of Peters Machine Co., ASBCA No. 21857, 79-1 BCA ¶ 13,649 (1978). Subsections (k) and (1) of this provision provide as follows:
(k) Inspections and test by the Government do not relieve the Contractor of responsibility for defects or other failures to meet contract requirements discovered before acceptance. Acceptance shall be conclusive, except for latent defects, fraud, gross mistakes amounting to fraud, or as otherwise provided in the contract.
(l) If acceptance is not conclusive for any of the reasons in paragraph (k) hereof, the Government, in addition to any other rights and remedies provided by law, or under other provisions of this contract, shall have the right to require the Contractor (1) at no increase in contract price, to correct or replace the defective or nonconforming supplies at the original point of delivery . . ., or (2) within a reasonable time after receipt by the Contractor of notice of defects or nonconformance, to repay such portion of the contract as is equitable under the circumstances if the Contracting Officer elects not to require correction or replacement.48 C.F.R. § 52.246-2(k), (l) (emphasis added).
Thus, in order to prevail on its breach of contract claim, the Government must prove (1) that the cylinders are defective (i.e. that the cylinders fail to conform to the Contract's specifications); (2) that the asserted defects were "latent defects" and/or that the Government's acceptance of the defective cylinders was induced by "fraud" or "gross mistake amounting to fraud"; and (3) that the Government properly revoked its acceptance of the cylinders and/or requested a refund of the purchase price (or some portion thereof) from HydroAire within a reasonable time of discovering the defects and/or fraud. See Appeal of Ordinance Parts Engineering Co., ASBCA No. 40293, 90-3 BCA ¶ 23,141 (1990); Appeal of Utley-James, Inc., GSBCA No. 6831, 88-1 BCA ¶ 20,518 (1987); Appeals of Tranco Indus., Inc., ASBCA No. 26305, 83-1 BCA ¶ 16,414 (1983).
1. The Cylinders' Alleged Defects
The Government maintains that the cylinders are defective for two reasons: (1) the cylinders' outer and inner layers are not "metallurgically bonded," and (2) the cylinders are not "dual metal centrifugal castings."
a. Absence of Metallurgical Bonding
Paragraph 3B of the Drawing specifies that the cylinders to be produced by HydroAire are to have an "[o]uter shell metallurgically bonded to an inner core of stainless steel MIL-S-867, Class 3, extra low carbon." The Government, in its motion for summary judgement, argues that its ultrasonic and destructive testing of the subject cylinders conclusively reveals that the cylinders' outer and inner layers are not actually "metallurgically bonded" to one another; HydroAire, in its motion for summary judgement, maintains that the unchallenged testimony of Jacobs and other experts proves that the bond created by HydroAire's interference fit process is, in fact, one type of "metallurgical bond," such that the cylinders conform to the Drawing's metallurgical bonding requirement. If nothing else, the parties' diametrically opposed positions demonstrate that genuine issues exist as to the following material facts: (1) the intended (and/or generally accepted) meaning of the term "metallurgically bonded" as used in the Contract; and (2) the presence or absence, in fact, of a metallurgical bond between the cylinders' outer layers and inner cores.
Although HydroAire contends that, even if the cylinders lack the metallurgical bond required by the Drawing, this defect cannot properly serve as a basis for the Government's rejection of the cylinders because the defect was discovered by the Government only through tests not required by the Contract, HydroAire's contention fails as a matter of law. It is well-settled that the Government may use tests other than those specified in the subject contract in order to ascertain compliance with the contract's requirements so long as a more stringent performance standard is not imposed on the contractor, and the test/s used reasonably and accurately demonstrate compliance or noncompliance. Appeal of Professional Printing of Kansas, Inc., GPOBCA No. 02-93 (1995); Appeal of Circle Constr. Group, ASBCA No. 38844, 90-3 BCA ¶ 22,999; Appeal of Solar Laboratories, Inc., ASBCA No. 19269, 74-2 BCA ¶ 10,897; Appeal of Gibbs Shipyard, Inc., ASBCA No. 9809, 67-2 BCA ¶ 6499. As explained by the Armed Services Board of Contract Appeals when condoning the use of extra-contractual tests for contract compliance in Appeal of National Radio Co., Inc., ASBCA No. 14707, 72-2 BCA ¶ 9,486 (1972):
While it is true that the results of the tests conducted by the [contractor] and witnessed by Government personnel, who thereafter released the First Article for shipment, established prima facie that the items complied with contract requirements, it does not follow that the Government is restricted solely to the performance of the tests prescribed in the contract. It may apply its own tests in ascertaining compliance with the contract requirements, and even though the tests are not called out in the contract, these have, nevertheless, been accepted as a proper basis for the rejection of a product.
Thus, because the ultrasonic and destructive tests performed by the Government on the cylinders did not result in the imposition of a more stringent performance standard on HydroAire — the Contract already expressly required that the cylinders possess a metallurgical bond —, the Government was free to use those tests to assure that the cylinders actually conformed to the contract specifications.
HydroAire also argues that it cannot be held liable for a failure to satisfy the metallurgical bonding requirement because the Drawing's metallurgical bonding specification is deficient for failing to provide definite acceptance criteria. HydroAire's argument does not warrant a grant of summary judgment for two reasons: (1) the Government adamantly disputes that the metallurgical bonding specification is deficient, thereby creating a genuine issue of material fact as to this point; and (2) triable issues of fact remain as to whether the cylinders manufactured by HydroAire conform to the Contract's metallurgical bonding requirement under any definition of "metallurgical bonding."
b. Failure to use the "dual metal centrifugal casting" manufacturing process
Paragraph 3 of the Drawing provides that the contracted-for cylinders be "dual metal centrifugal casting[s] as produced by U.S. Pipe and Foundry Co., or equal, of East Burlington, New Jersey." In its motion for summary judgement, the Government asserts that this provision clearly requires the cylinders to be dual metal centrifugal castings and that the "or equal" clause merely permitted HydroAire to engage a foundry other than U.S. Pipe to produce comparable castings; because the cylinders actually provided by HydroAire under the Contract were manufactured using the "interference fit" process, rather than the required dual metal centrifugal casting process, the Government argues, the subject cylinders are defective. In its motion for summary judgment, HydroAire contends that the Contract's "or equal" clause modifies the entire preceding phrase, such that the Contract (as governed by the FAR concerning "brand name or equal" product descriptions, 48 C.F.R. § 10.004) expressly permitted HydroAire to use either the dual metal centrifugal casting process or its "equal" to produce cylinders otherwise conforming to the Contract's specifications.
As with the metallurgical bonding requirement, the parties' contradicting positions as to the propriety of HydroAire's use of the interference fit process evidence the existence of genuine issues of material fact for trial. Specifically, the parties' vastly different (but reasonable) interpretations of the Drawing's "or equal" clause demonstrate that Paragraph 3 of the Drawing is ambiguous and that the "or equal" clause's meaning must be determined by a trier of fact with reference to extrinsic evidence concerning (1) the parties' intentions when the contract was negotiated and executed; (2) trade meaning, usage and custom; and (3) the existence at the time of contracting of other manufacturers capable of producing dual metal centrifugal castings. See M.A. Mortenson Co. v. United States, 29 Fed.Cl. 82, 96-97 (1993); Appeal of Eslin Co., AGBCA No. 90-222-1, 93-1 BCA ¶ 25,321 (1992). Further, even if HydroAire is correct that the Contract permitted HydroAire to use a process "equal" to the dual metal centrifugal casting process, there remains a genuine factual dispute as to whether the interference fit production method employed by HydroAire is, in fact, such an equal process. See Appeal of North American Constr. Corp., ASBCA No. 47941, 96-2 BCA ¶ 28,496 (1996) ("The contractor bears the burden of proving that its substitute is equal in quality and performance to the item specified in the contract.")
2. The Cylinders' Alleged Defects Were "Latent Defects" and/or The Government's Acceptance of the Cylinders Arguably was Premised on HydroAire's Fraud
Assuming that the subject cylinders are, in fact, defective for failing to comply with the Contract's metallurgical bonding and/or dual metal centrifugal casting requirements, the Government would be entitled to revoke its acceptance of the cylinders (or to request other relief from HydroAire) pursuant to the Contract's "Inspection of Supplies" provision because (1) the cylinders' defects were "latent" and (2) the Government's acceptance of the cylinders' arguably was induced by HydroAire's fraud.
Initially, the cylinders' alleged defects — the absence of a metallurgical bond and the use of the interference fit production method — are, if anything, "latent defects" within the meaning of 48 C.F.R. § 52.246-2(k) because they could not have been discovered by the Government through observation or inspection made with ordinary care at the time of acceptance. See Mortenson, 29 Fed.Cl. at 101; Kaminer Constr. Corp. v. United States, 203 Ct.Cl. 182, 488 F.2d 980, 984 (Cl.Ct. 1973). As previously noted, it is undisputed that neither a visual inspection nor the tests required by the Contract would (or did) reveal (1) the absence of a metallurgical bond between the cylinders' inner and outer layers or (2) the use of the interference fit process to manufacture the cylinders. Indeed, it was not until it had the cylinders ultrasonically tested that the Government actually became aware of the lack of a metallurgical bond (as the Government understood that term) at the interior boundary between the cylinders' inner cores and outer shells; and, according to the Government, it was not until April 22, 1992, more than two years after initial acceptance of the cylinders, that the Government became aware that the cylinders were not dual metal centrifugal castings.
As formerly mentioned, HydroAire disputes this fact, asserting, instead, that the Government had actual notice (or, at least, inquiry notice) of HydroAire's use of the interference fit process in September 1988, when the Government's QAR conducted an on-site inspection of HydroAire's facility and was specifically informed that HydroAire had contracted with Techni-Cast, rather than U.S. Pipe, for the manufacture of the raw cylinders.
In addition, it is possible (although by no means necessary) for a reasonable fact-finder to conclude that the Government's initial and continued acceptance of the 34 cylinders was premised upon HydroAire's fraudulent misrepresentations as to the cylinders' conformance with the Contract specifications. In light of the documents and other evidence presented by the parties, there exist numerous questions concerning (1) HydroAire's, Rice's and/or Harris's knowledge and understanding of the Contract's requirements; (2) the genuineness of Defendants' representations of contract conformance in the forms DD-250 and the post-February 22, 1989 correspondence with Government representatives; and (3) the reasonableness of the Government's reliance on Defendants' representations. Should the fact-finder resolve these questions in the Government's favor, the Government would be justified in revoking its acceptance of the cylinders and/or in seeking other appropriate relief from HydroAire; however, should the trier of fact resolve these questions in favor of HydroAire, the Government would be unable to revoke its acceptance on the basis of fraud. Thus, summary judgement is unwarranted, as genuine issues of material fact remain for resolution at trial.
3. The Propriety of the Government's Revocation of Acceptance and/or Notice of Breach
Significantly, even if the Court were able to conclude that a "latent defect" and/or "fraud" is present, summary judgment would be inappropriate, as a significant question exists as to whether the Government revoked its acceptance of the cylinders and/or requested appropriate relief from HydroAire (if at all) within a reasonable time after the Government's discovery of the defect or fraud.
It is axiomatic that a buyer is required to pay the contract price for any goods accepted under a contract. See U.C.C. § 2-607(1). As previously mentioned, however, in this case, Subsection (k) of the Contract's "Inspection of Supplies" clause entitles the buyer — the Government — to revoke its acceptance and to recover any monies paid under the Contract if "latent defects, fraud, [or] gross mistakes amounting to fraud" are found. 48 C.F.R. § 52.246-2(k). Yet, revocation of acceptance is not automatic under the "Inspection of Supplies" clause, and the Government's power to revoke is not unlimited. Instead, "[r]evocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it." U.C.C. § 2-608(2); see also Appeal of Ball-Healy, ENGBCA No. 5892, 96-2 BCA ¶ 28,580 (1996); Appeal of Ordinance Parts Engineering Co., ASBCA No. 40293, 90-3 BCA at ¶ 23,141; Appeal of Utley-James, Inc., GSBCA No. 6831, 88-1 BCA at ¶ 20,518; Appeals of Tranco Indus., Inc., ASB CA No. 26305, 83-1 BCA at ¶ 16,414 (1983). Further, the Government generally cannot revoke its acceptance and seek return of the full contract price without returning the rejected goods: "Although the return of goods following a revocation of acceptance is not always a prerequisite to successful revocation, in most instances that goods should be returned." ABM/Ansley Business Materials v. General Services Admin., GSBCA No. 9367, 93-1 BCA ¶ 25,246 (1992); see also Ran-Paige Co., Inc. v. United States, 35 Fed.Cl. 117, 123 (1996); Spansome Corp. v. United States, 32 Fed.Cl. 626, 635 (1995); Appeal of the Wilton Corp., VABCA No. 2170, VABCA NO. 2171 (1985).
A buyer whose revocation of acceptance is deemed unsuccessful by its failure to return nonconforming goods — a situation that generally arises where the buyer actually uses the nonconforming supplies and/or where the buyer's retention of the nonconforming items prevents the seller from curing or from minimizing its loss — typically may not recover the full contract price for the goods; instead, it is only entitled to the difference between the value of the goods as contracted for and the value of the goods actually provided. See U.C.C. § 2-714; Ran-Paige, 35 Fed.Cl. at 123; ABM/Ansley, GSBCA No. 9367, 93-1 BCA at ¶ 25, 246.
The Government's right to demand replacement of nonconforming goods and/or to require a partial refund of the contract price under Subsection (1) of the Contract's "Inspection of Supplies" clause is similarly restricted. "[T]he buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy. . . ." U.C.C. § 2-607(3)(a); see also Appeal of Lionsgate Corp., ENGB CA No. 5809, 92-2 BCA ¶ 24,983 (1992); E.R. Smith Constr. Co., DCTCAB Nos. 1077, 1105, 80-1 BCA ¶ 14,386 (1980); Clow Corp. v. Metro Pipeline Co., Inc., 442 F. Supp. 583, 587 (N.D.Ga. 1977).
With respect to this notification requirement, "draftsman comment" (4) to U.C.C. § 2-607(3)(a) states:
The content of the notification need merely be sufficient to let the seller know that the transaction is still troublesome, and must be watched. There is no reason to require that the notification which saves the buyer's rights under this section must include a clear statement of all the objections that will be relied on by the buyer, as under the section covering statements of defects upon rejection (Section 2-605). Nor is there reason for requiring the notification to be a claim for damages or of any threatened litigation or other resort to remedy. The notification which saves the buyer's rights under this Article need only be such as informs the seller that the transaction is claimed to involve a breach, and thus opens the way for normal settlement through negotiation.
Whether a buyer adequately has notified the seller of the buyer's revocation of acceptance or claim of breach, and whether the buyer's notice to seller is made within a reasonable time after discovery of the alleged breach, typically are questions of fact to be resolved by a jury. Only where the subject notice's deficiencies and/or the delays in giving the subject notice are "of such magnitude that reasonable minds should not differ regarding their effect," can questions concerning the effectiveness of notice be resolved by the Court short of trial. Ball-Healy, ENGBCA No. 5892, 96-2 BCA at ¶ 28,580.
In the present matter, genuine factual disputes remain as to the following: (1) whether the Government ever actually revoked its acceptance of the cylinders and/or unequivocally notified HydroAire of the Government's claim of breach such that the Government may now seek recovery of any damages or any refund of the purchase price from HydroAire; (2) whether the Government's revocation of acceptance and/or notice of breach, if given, was given within a "reasonable time" of the Government's discovery of the cylinders' defects; (3) whether HydroAire's assurances of contract conformance (fraudulent or otherwise) justified (and now excuse) any failure by the Government to give the required timely notice of breach or revocation of acceptance; (4) whether the Government's retention of the cylinders for more than four years after the Government unequivocally was informed that HydroAire would not repair or replace the cylinders (and, indeed, more than four years after the Government's QAR issued its November 14, 1989, closing investigatory report) precludes the Government from recovering the full contract price of the cylinders; and (5) whether the Government deprived HydroAire of a meaningful opportunity to "cure" the cylinders' alleged defects prior to the Government's acquisition of replacement cylinders such that the Government is now prohibited from recouping its replacement costs from HydroAire. Given the existence of these genuine issues of material fact, summary judgment cannot properly be granted either to HydroAire or to the Government.
4. The Existence (or Absence) of Damages
Finally, in its motion for summary judgment, HydroAire asserts that because the replacement cylinders procured by the Government from Garveys — cylinders purportedly manufactured using the dual metal centrifugal casting process and possessing the required metallurgical bond between inner core and outer shell — failed during hydrostatic testing, the Government cannot prove that it suffered any damages as a result of HydroAire's alleged breach of the Contract; the cylinders would have been useless for their intended purposes whether HydroAire conformed to the Contract's requirements or not. The Government responds to this assertion (1) by pointing out that HydroAire offers no evidence to suggest that the Contract's specifications are inherently deficient or that cylinders manufactured in accordance with those specifications were (and are) guaranteed to fail; (2) by correctly noting that even if the Contract's specifications were defective, HydroAire cannot rely on those defects for its defense, as it did not comply with the specifications (or even attempt to do so), Johnson Constr. v. United States, 854 F.2d 467, 470 (Fed. Cir. 1988); and (3) by highlighting the fact that had HydroAire complied with the Contract's specifications in the first instance, the Government would not have incurred the costs of obtaining the replacement cylinders that failed under hydrostatic testing. Because numerous questions remain as to the adequacy of the Contract's specifications, the value of the cylinders actually supplied by HydroAire, and the "sincerity" of HydroAire's attempts to construct the subject cylinders in conformance with the Drawing's requirements, summary judgment is similarly inappropriate with respect to the issue of damages.
C. False Claims Act
In its present motion, the Government asserts that it is entitled to summary judgement with respect to its claims against HydroAire and/or Harris under the False Claims Act. To establish a violation of the False Claims Act, the Government must prove the following:
1. that HydroAire and/or Harris presented, or caused another person to present, a claim for payment or approval to the United States;
2. that the claim presented was false or fraudulent;
3. that HydroAire and/or Harris knew that the claim to be false; and
4. that the United States suffered damages as a result of the false and fraudulent claim.See Brooks v. U.S., 64 F.3d 251, 255 (1995); United States v. ex rel. Fahner v. Alaska, 591 F. Supp. 794, 798 (N.D.Ill. 1984).
For proposes of the False Claims Act, a person is deemed to act with "knowledge" where:
1. the person has actual knowledge of the information's falsity;
2. the person acts with deliberate ignorance of the truth; or
3. the person acts with reckless disregard for the truth or falsity of the information.
Proof of specific intent is not required under the False Claims Act. 31 U.S.C. § 3729(b).
Here, numerous questions exist with respect to the truth or falsity of HydroAire's representations in the three forms DD-250 and the two requests for progress payments cited by the Government and with respect to Rice's and/or Harris's knowledge of the truth or falsity those representations. As previously indicated, the parties have presented ample evidence from which a reasonable fact-finder could conclude either that (1) Rice and/or Harris knew the subject cylinders to lack a metallurgical bond and knew the use of the interference fit process to be counter to the Contract's specifications, yet submitted the forms DD-250 and progress payment requests despite this knowledge, or (2) Rice and/or Harris reasonably and genuinely believed that the subject cylinders conformed to the Contract's manufacturing and performance specifications and, consequently, made truthful representations to that effect in the various forms submitted by HydroAire to the Government. The Court thus declines to grant summary judgment to either party with respect to the Government's claim under the False Claims Act.
In light of the Government's allegations that Harris acted with "reckless disregard for the truth of HydroAire's certifications of the quality of goods it delivered" by failing to supervise HydroAire's government products division and by refusing to monitor the actions of division personnel who purportedly reported directly to him, the Court concludes that a reasonable jury could find that Harris acted in violation of the False Claims Act. See Abdelkhalik v. United States, 1996 WL 41234 (N.D.Ill. Jan.30, 1996).