February 25, 2011
Equitable Estoppel in the Federal Circuit
On February 4th, the Federal Circuit Court of Appeals filed its opinion in Mabus v. General Dynamics C4 Systems, Inc. The case involved a dispute that arose after General Dynamics took over from Motorola a losing contract to provide digital modular radios to the U.S. Navy. The contract called for the Navy to order a minimum number of radios annually. After it reached the minimum, the Navy could order additional radios at a discount price. In short, the more radios General Dynamics provided, the more money it lost on the contract. It sought a way out. General Dynamics believed that it found the way out in the original contract's ordering clause, which provided that: "Orders may be issued orally, by facsimile, or by electronic commerce methods only if authorized in the schedule.” The relevant schedule did not allow for electronic orders. On that basis, General Dynamics challenged the propriety of eleven orders that the Navy had issued by e-mail. The Armed Services Board of Contract Appeals (the Board) sided with General Dynamics, finding that the orders were invalid.
The Navy appealed. The divided Federal Circuit found that General Dynamics was equitably estopped from refusing to fill the orders. The reversal hinged on two different tests for estoppel. The Federal Circuit's Majority opinion relied on the following test:
(1) misleading conduct, which may include not only statements and actions but silence and inac-tion, leading another to reasonably infer that rights will not be asserted against it; (2) reliance upon this conduct; and (3) due to this reliance, material prejudice if the delayed assertion of such rights is permitted.
The Board had elied on this one:
“(1) [General Dynamics] knew the facts; (2) it intended that its conduct be acted upon or acted such that the Navy had a right to believe it was so intended; (3) the Navy was ignorant of the true facts; and (4) the Navy relied upon appellant’s conduct to its injury,”
The Board ruled for General Dynamics because it found that the Navy could not satisfy the first and third parts of this test. General Dynamics did not know that e-mail delivery was prohibited and the Navy knew or should have known the content of its own contracts.
General Dynamics conceded that the Board had applied an improper standard but insisted that the error was harmless. Unfortunately for General Dynamics, its previous conduct was crucial, as it had filled prior e-mail orders, thus inducing reliance, and effectively putting all questions of knowledge out of bounds. General Dynamics was thus estopped from refusing to fill the orders, and the doctrine of equitable estoppel trumped General Dynamics' alternative argument that a party must exercise an option in exact accordance with its terms.
Judge Newman filed a vigorous dissent in support of the Board's disposition of the case.
[Katherine Freeman & JT]
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