When two companies negotiate a subcontract in support of a federal government prime contract ("federal subcontract"), they may include provisions capping their liability to each other at specific amounts. In structuring such caps, they should ensure that the caps do not conflict with any Changes clause that allows the subcontractor to recover for government- or prime-caused changes. A recent decision from the U.S. District Court for the Western District of Virginia, BAE Sys. Ordnance Sys., Inc., v. Fluor Fed. Sols., LLC, No. 7:20-CV-587, 2024 WL 382444 (W.D. Va. Jan. 31, 2024), held that under the language of the subcontract at issue, the cap did not apply to prime-directed changes and, moreover, was "null and void under Virginia Code § 11-4.1:1," which prohibits a subcontractor from waiving its "right to assert claims for demonstrated additional costs in a contract[.]" Federal contractors and subcontractors alike should double-check whether such liability caps in their agreements apply to their disputes and are enforceable.
What Was the Case About?
BAE Systems Ordnance Systems, Inc. (BAE), the prime contractor, sued Fluor Federal Solutions, LLC (Fluor), the subcontractor, alleging breach of a subcontract for the design and construction of a nitrocellulose production facility for the U.S. Army. See BAE, 2024 WL 382444, at *1. Fluor then counterclaimed, alleging breach and (in the alternative) quantum meruit or unjust enrichment. Id.
Specifically, BAE alleged that Fluor had caused delays in the project for which BAE had to compensate the Army. Fluor's counterclaim mostly concerned changes to the subcontract's work that BAE had allegedly directed, but for which it provided no equitable adjustment under the subcontract's changes clause. See id. at *3.
The parties sought judgment from the Court regarding how three clauses in the subcontract limiting damages applied to Fluor's counterclaims.
What Did the Subcontract's Liability Cap Say?
Two of the three "Limitation of Damages" clauses in the subcontract (Sections 2.21 and 36) stated in relevant part:
Except as otherwise provided in this Subcontract, damages and remedies that may be recovered by either Party shall be limited as follows: For all claims, regardless of the basis on which the claim is made, the applicable party's liability for damages arising under or related to this Subcontract shall be limited to $30M, $30M being defined as the value including all changes and the maximum liability for damages.
Id. at *5 (emphasis added). A third limitation of damages clause (Section 46) was identical, except that it did not include the words "$30M being defined as the value including all changes and the maximum liability for damages." Id. at *6.
Why Did the Parties Interpret the $30 Million Liability Cap Differently?
BAE took the position that the $30 million damages cap was "unambiguous" and applied to Fluor's counterclaims for unpaid changes, noting that two of the clauses even specified that the $30 million cap amount included "all changes." Id. at *4.
Fluor argued that the cap did not limit its counterclaim for two reasons. First, Fluor argued that "the absence of the specific language 'including all changes' in § 46 renders the Subcontract ambiguous, and that inclusion of the phrase '[e]xcept as otherwise provided in this Subcontract' in the [Limitation of Damages clauses] allows recovery for increased costs under the changes clause in excess of $30 million." Id. Second, Fluor argued that the liability caps "violate Virginia Code § 11-4.1:1 because they improperly diminish its right to recover demonstrated additional costs on the project and are therefore null and void." Id.
How Did the Court Rule the First Time?
In March 2022, the Court initially agreed with BAE and held that Fluor's counterclaim for changes (which sought $183 million in damages) was capped at $30 million. See BAE Sys. Ordnance Sys., Inc. v. Fluor Fed. Sols., LLC, No. 7:20-CV-587, 2022 WL 969773, at *11 (W.D. Va. Mar. 30, 2022). The Court reasoned that Sections 2.21 and 36 (which stated that the liability cap included changes) "[s]pecifically refer[] to both BAE and Fluor" and to "subcontractors working at the" Army facility, whereas Section 46 (which did not reference changes) was "comprised of form terms and conditions." Id. The Court therefore relied on the "canon of contract construction" that a "specific provision of a contract governs over one that is more general in nature" in holding that the definition of "$30M" from Sections 2.21 and 36 applied. Id. at *12. The Court relied on a second interpretive canon as well—that "contract language will not be treated as meaningless where it can be given reasonable meaning"—and so refused to "excise" the words "including all changes" from Sections 2.21 and 36. Id. at *13.
The Court also found Virginia Code § 11-4.1:1 inapplicable. While that law renders "null and void" a "provision that waives or diminishes a subcontractor's … right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials," the Court found that Fluor had already begun work on the project "before executing the subcontract." See id. at *13.
But in December 2022, the Court reconsidered and vacated these rulings. See BAE Sys. Ordnance Sys., Inc. v. Fluor Fed. Sols., LLC, No. 7:20-CV-587, 2022 WL 21810167 (W.D. Va. Dec. 9, 2022). Fluor had "present[ed] evidence to suggest that Fluor and BAE specifically negotiated the language in § 46" such that it was not "a form term and condition" as the Court had previously concluded. Id. at *2. The Court thus needed "further factual development" on the limitation of damages provisions before interpreting them. Id. at *3.
How Did the Court Rule the Second Time?
On January 31, 2024, after additional briefing and a change in the assigned judge, the Court issued its decision interpreting the liability caps and Virginia Code provision. This time, the Court sided with Fluor and held that the $30 million limit did not apply to the changes clause, the foundation of Fluor's counterclaim. See BAE, 2024 WL 382444, at *5. This was despite the fact that the Court interpreted the same three contract clauses (Sections 2.21, 36, and 46) and relied on the same two canons of construction (specific-governs-the-general and refusal-to-render-meaningless) as in March 2022. See id.
Now, the Court reasoned that "all [the Limitation of Damages] provisions are limited by the phrase '[e]xcept as otherwise provided in this Subcontract,'" which "necessarily implies that there are exceptions to this general provision provided elsewhere in the Subcontract." Id. The Court concluded that the changes clause—which states that "there shall be an equitable adjustment"—was one such exception. See id. at *5-*6 (emphasis in original). Furthermore, "the changes themselves are not damages, rather, as the Subcontract makes clear, they are an equitable adjustment made by modifying the Subcontract." Id. at *6.
Finally, the Court held that Virginia Code § 11-4.1:1 rendered the liability caps null and void anyway. This time, the Court concluded that the law applied because any work that Fluor had performed prior to the subcontract was pursuant to an undefinitized contract action, which was separate and apart from the subcontract. See id. at *6-*7.
What Are the Takeaways?
Venable's Government Contracts Practice Group has previously written about how important it is for contractors and subcontractors to be thoughtful when crafting choice of law provisions. This case illustrates another reason why—one state's law may void contract clauses (such as liability caps) that may be permitted in other jurisdictions.
The case also highlights the importance of ensuring consistency between subcontract clauses addressing the same subject matter. Even seemingly small differences in wording can lead to significantly divergent interpretations later.
Finally, contractors and subcontractors should always remember that the canons of contract construction, which may ultimately determine their rights, can be indeterminate. Contracting parties and even courts can and do reach different, good faith interpretations of contracts, even when applying the same canons of construction to the same terms. The best defense to this indeterminacy is to invest in detailed subcontract drafting and review, including with experienced counsel where necessary.