1. Case name and citation: In re Boston shipyard Corp. , Debtor Appeal of Boston Shipyard Corp. , No. 89-1144 United States court of Appeals, first Circuit. 886 F. 2d 451 Heard June 7, 1989. Decided September 1989 Before CAMPBELL, Chief Judge Reinhardt and Toruella circuit Judges. Its alleged that the ruling in this case was not fair by the fact that the district court that confirmed the bankruptcy of Boston Shipyard Corporation, BSC in favor of the appellee , the US Military Sealift Command, MSC. 2. Key Facts:
BSC entered into agreement with MSC to revamp and repair the USNS Mississinewa (a water vessel) at a final pay of $ 4,997,925. Having been not fully aware, it turned out that the contract required much more in expenses than it was originally estimated. On realizing change in the contract specifications; it filed a change authorization order so that the work could be done with the permission of their client MSC. The orders however accumulated at the MSC’s table such that their delayed resolution resulted to a wide financial implication towards BSC.
Till August 1985, BSC’s financial condition had worsened a situation that required the contract partner, MSC to make payments. Failure of MSC to pay BSC led to termination of the contract. The pulling out of the contract by BSC Company was based on the fact that the latter company had been declared bankrupt. It’s reported that on October 17th due to failure of MSC to compensate BSC, and was terminated by the government (West’s Federal Reporter, 1990). 3. Legal issues presented before Court:
Among the legal issues presented before the court were several factors. That one, BSC as a company pulled out of a contract it had entered into with the US Military Sealift Command, “MSC”. The second issue was the fact that the latter, (MSC) had declined to make payments to the contractual partner, (Boston Shipyard Corporation, BSC), to cater for the extra expenses that were not budgeted for by the company. The US Military Sealift Command, MSC was “supposed” to cater for these cost overruns in order for BSC to provide its services.
4. Holding of the court: The US government, on February 25th 1986, through the US Bankruptcy Court, filed a proof of claim of $ 9. 2 million in Reprocurement costs. On the other hand, BSC, objecting to the Proof of Claim, filed a counter Proof of Claim, which was meant to convert the terminated contract into one that could benefit the government. Six months down the line, the bankruptcy court on making first hearing, it passed a judgement that favoured the government on the basis that BSC had without excuse withdrawn from the contract.
This was further accepted to at the district court, a decision that BSC appeals to. 5. Reasoning (rationale): That a cardinal change is created or comes to exist in a contract when the contractor finds that he or she is required to execute tasks that are materially different from those that were originally bargained for at the start. Such changes are not subject to rectification, and so the judging on this, the government was in breach (West’s Federal Reporter, 1990).
Basing on the fact that this contract was a “call and inspect” type, which implied that the vessels had to be opened first and scrutinized before establishing the whole cost to be involved in the contract. BSC may not be justified to abandon or pull out of the contract basing on the change orders written to MSC. Delay in the kick off of a contract is expected in any contractual agreement (Magoba Construction Company vs. United States).
Talking of the incapability of BSC to deliver its services due to financial incapacity, one may argue that a contractor’s default may be pardoned if the causes seem to be beyond his control (ruling of Southeastern Airways Corporation vs. United States). However, it’s generally understood that as a contractor who makes and accepts bids from the government or any other individual, he should be having enough funds to support the contract. This is subject to change.
Justification of the contractors default may be carried out only if the experienced financial problems were caused by factors beyond the company’s control or by the company itself (ruling of the case of National Eastern Corporation vs. United States). BSC also argues that the government’s delay to pay it some amount of money resulted to it being unable to respond to a contract worth $ 6. 5 million. This is not true. Evidence has, right from the beginning that BSC had a thin financial base before the contract was initiated (West’s Federal Reporter, 1990)
At the same time, no blame was to be put on MSC for having caused any delay or disruption. Hence, conclusively, BSC’s financial incapacitation deterred the take-off of the contract. A different decision on this would make government contracts quite unworkable, and hence contractors would demand refund, and or financial consideration for any cost overruns. References: West’s Federal Reporter (1990): Cases argued and determined in the United States courts of appeals and Temporary Emergency Court of Appeals, University of California, p. 452