Government Contracting Database
Mutual Mistake of Fact – Reformation
Prior to the enactment of the Contract Disputes Act of 1978, the Boards of Contract Appeals uniformly held that reformation of a contract was beyond their jurisdiction and appeals seeking such relief were dismissed. Riha Construction Co., ASBCA No. 21441, 77-1 BCA 12,324; William Golango Construction Corporation, ASBCA No. 22423, 78-2 BCA, 13,308; National Line Co., Inc., ASBCA No. 18739, 75-2 BCA 11,400. In addition, there was a large body of case law which held that a contractor was not entitled to an adjustment in a fixed price contract for unforeseen difficulties or unexpected losses in the absence of contract clauses shifting the risk. See Short Bros., PLC v. United States, 65 Fed. Cl. 695, 775 (2005) (quoting Sperry Rand Corp. v. United States, 201 Ct.Cl. 169 (1973)). The contractor is expected to set a bid price which weighed certain risk contingencies, including currency fluctuation and inflation. Mai-To-Nghiem d/b/a Hang T.S.C.V.N., ASBCA No. 16813, 73-1 BCA 9923, aff’d on Reconsideration, 73-2 BCA 10,347; Truong Giang (Pham Hung Anh), ASBCA No. 15301, 71-2 BCA 9150.
The United States Court of Claims (now The United States Court of Federal Claims), however, had held that where a mutual mistake of fact by contracting parties had been shown to exist, the court, in the exercise of its equitable powers, could reform the contract. In fact, the court held that where there had been a mutual mistake of fact causing the terms of a written contract to depart from the parties’ actual understanding, the court would grant reformation. See e.g. Higgs v. United States, 546 F.2d 373, 376 (Ct. Cl. 1976) (citing Sateluffe Storage & Warehouse Co. v. United States, 112 F.Supp. 590, 125 Ct.Cl. 297 (1953)). The Court of Claims has granted reformation of contracts based on mutual mistake in numerous cases.
In National Presto Indus., Inc. v. United States, 338 F.2d 99, 167 Ct.Cl. 749 (1964), cert. denied, 380 U.S. 962 85 S.Ct. 1105, 14 L.Ed.2d 153 (1965), the United States Court of Claims prescribed four tests to be satisfied before a contract could be reformed because of a mutual mistake of fact. These tests were as follows:
- There must actually be a mutual mistake of fact by both parties.
- It must be shown that the contract, properly construed, allocates the specific risk to neither party.
- The party from whom relief is sought must have received a benefit from the extra work or expense of the other party.
- The party from whom relief is sought must be shown to have been willing, if it had known the true facts from the beginning, to bear a substantial part of the additional expenses.
Under the Contract Disputes Act of 1978, Public Law 95-563, the Boards of Contract Appeals are authorized to grant any relief that is available to a litigant asserting a contract claim in the U.S. Court of Claims. 41 U.S.C. 607(d), as amended. As explained above the Claims Court (and its predecessor the Court of Claims), has the jurisdiction to grant relief in the form of reformation. National Line Co., Inc., supra. Therefore, the Boards of Contract Appeals, and Contracting Officers also now have that authority. A contract may be reformed by the Contracting Officer pursuant to the Contract Disputes Act if it is determined that the contractor would be entitled to such a remedy under the law of federal contracts.
Despite the fact that the boards have the authority to reform a contract, they have been extremely hesitant to exercise that authority. In matters involving a claim of unforeseeable price increases the boards, and the courts have frequently held that a contractor in a fixed-price contract assumes the risk of unexpected costs in the absence of a clause shifting such risk to the government. ITT Arctic Services, Inc. v. United States, 207 Ct.Cl. 743 (1975). Since contractors, under the theory, were required to weigh certain “risk contingencies” in their bids, the risk of the increased cost of materials was to be included in such contingencies. Sea-Land Service, Inc. v. United States, 213 Ct.Cl. 555, 553 F.2d 651 (1977); California Bus Lines, Inc. d/b/a Maya Transit Co., ASBCA No. 22260, 78-1 BCA 12,937; McGrail Equipment Co., ASBCA No. 20555, 76-1 BCA 11,723.
Updated: July 2, 2018