Justice Gorsuch Weighs In on Contracts

By Herb Fenster and Andrew Guy

Photo: iStock

When presented with ambiguous terms in a government contract, courts have debated the best way to interpret those terms. Supreme Court Justice Neil Gorsuch recently hinted at where he stands on the issue.

Some courts — most importantly those tasked with deciding cases involving government procurement contracts — resolve ambiguities in a manner that generally favors government contractors. Yet other courts defer to the government when these disputes arise. In a statement this October regarding Scenic America, Inc. v. Dept. of Transportation, Gorsuch suggested that these latter courts are interpreting contracts incorrectly.

The Federal Circuit, which directs the manner that procurement contracts are interpreted at the boards of contract appeals and the Court of Federal Claims, has long held that commercial contracting principles apply to the interpretation of government contracts.

In particular, the Federal Circuit applies the rule of “contra proferentem,” which means that ambiguities in a government contract are resolved against the government. If a phrase in a contract can be equally understood to have two different meanings, the court will generally choose the meaning that is advocated by the government contractor.

The Federal Circuit employs the doctrine on the grounds that the government is the drafter of the contract. As the Court of Claims — the Federal Circuit’s predecessor — explained in the seminal 1963 case WPC Enterprises Inc. v. United States: “The government, as the author, has to shoulder the major task of seeing that within the zone of reasonableness the words of the agreement communicate the proper notion, as well as the main risk of a failure to carry that responsibility.” If the government is writing the contract, then the government can make sure that the terms of the contract are clear.

Indeed, the Federal Circuit frequently declines to provide the government disproportionately favorable treatment when resolving contractual disputes. In Helene Curtis Industries, Inc. v. United States, for example, the Court of Claims held that “the Government — where the balance of knowledge is so clearly on its side — can no more betray a contractor into a ruinous course of action by silence than by the written or spoken word.” And the Federal Circuit holds that the government is obligated to honor contracts even after the governing regulations change.

In contrast to the Federal Circuit’s approach, however, some courts have opted to defer to the government’s interpretations under an administrative doctrine known as “Chevron deference,” named after the Supreme Court’s decision in Chevron U. S. A. v. NRDC. Chevron held that as long as an agency presents a “reasonable” interpretation of a federal law, a court will typically side with the agency’s interpretation of that law.

The Chevron line of cases are based on a few underlying notions, not least that Congress intended to give some interpretative authority to agencies and that agencies have more expertise than courts in a statute’s subject matter.

In cases such as Auer v. Robbins, the Supreme Court has extended the Chevron doctrine to agencies’ interpretations of their own regulations. If a regulation is ambiguous, and the government presents a reasonable reading of that regulation, courts will accept that reading. However, the Supreme Court has never considered the applicability of Chevron to agencies’ interpretation of government contracts.

The D.C. Circuit currently does apply Chevron deference to the interpretation of government contracts. That court held in cases like Cajun Electric Power Coop., Inc. v. FERC, that a contract entered into by an agency “takes on a public interest gloss” and therefore merits Chevron deference.

As the court explained: “The agency to which Congress entrusted the protection and discharge of the public interest is entitled to just as much benefit of the doubt in interpreting such an agreement as it would in interpreting its own orders, its regulations or its authorizing statute.”

However, other courts have taken the same view as the Federal Circuit and applied traditional contracting principles. For example, in the Meadow Green-Wildcat Corp. v. Hathaway decision for the First Circuit, then-Chief Judge Stephen Breyer concluded that the intuitions that informed Chevron deference do not apply when interpreting government contracts.

On Oct. 16, in a statement joined by Chief Justice John Roberts and Justice Samuel Alito, Gorsuch signaled agreement with the Federal Circuit’s method of interpreting government contracts.

Gorsuch — who has previously expressed skepticism of the propriety and scope of Chevron deference more generally — declared that “whatever one thinks of that practice in statutory interpretation cases, it seems quite another thing to suggest that the doctrine (or something like it) should displace the traditional rules of contract interpretation too.”

His statement noted that “contracts usually represent compromises between two or more parties.” It then questioned whether courts should “suppose that one side to a compromise always has more insight into its meaning.”

Although the case before the Court included several fact-based questions which made it impossible for the Court to reach the legal question raised by Gorsuch, the statement signaled that at least three justices found that “the issues lying at its core are surely worthy of consideration.”

Government contractors should be aware that the Federal Circuit continues to hold that general contracting principles apply when interpreting government contracts. That method of interpretation also applies to disputes involving procurement contracts.

At the same time, other federal courts — in particular, the D.C. Circuit — defer to administrative agencies in the event of an ambiguity in a contract.

Fortunately, the Supreme Court may soon bring more clarity and guidance to the interpretation of government contracts.

Herb Fenster is senior of counsel, and Andrew Guy is an associate at Covington & Burling LLP.

Topics: Defense Contracting, Government Contracting Insights

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