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Board Sustains Postal Contractor's Claim, Invalidates "Coercive" Modification

Can a contractor who signs a modification that reduces the contract price later recover the original contract price?   Yes, if the Postal Service acted coercively, or violated the duty of good faith and fair dealing. The Postal Service Board of Contract Appeals (PSBCA) recently upheld exactly this type of claim by striking down a coercive modification. The decision contains some of strongest language we have seen from the PSBCA concerning the improper treatment of a postal contractor.

The case involved a lease of a postal facility. The landlord - let's call him the "contractor" - sought to renovate a building in which he had been leasing space to the Postal Service. The contractor met with the Postal Service to negotiate a new lease for the planned renovations and improved space. The parties reached agreement and signed a new 10-year lease.

But when it came time for the Postal Service to approve the design, the Postal Service balked. Now, instead of paying $46,800 in rent, the Postal Service wanted to pay only $37,360, because the usable space was smaller than a previous estimate. The Postal Service also refused to pay for most of the improvement costs, even though it was contractually obligated to do so. The contractor strenuously objected, but the Postal Service said, "take it or leave it." Without USPS's approval the contractor could not proceed with the already delayed project, so the contractor signed the modification.

After the building was renovated, the contractor submitted a claim seeking the payment at the original rental price and all of the construction costs that USPS had been responsible for under the original agreement. The contracting officer denied the claim and the contractor appealed to the PSBCA.

In a no-holds-barred decision, the PSBCA found that the Postal Service had placed the contractor in a "desperate" situation. The contractor had "no reasonable economic choice under the circumstances" but to sign the modification. Although the useable space was smaller than a previous estimate, the Postal Service should have known this and the lease did not allow rent reductions on this basis. While the lease agreement did give USPS the right to approve the design, the Postal Service could not exercise that right for an improper purpose. By threatening to withhold its design approval unless the contractor agreed to givebacks, the Postal Service acted wrongfully and breached the covenant of good faith and fair dealing that exists in every postal contract. The Board thus invalidated the modification and sustained all of the contractor's claims. Geroge P. Gurdak, PSBCA No. 5049, October 12, 2005

This decision confirms that the Postal Service must deal fairly with its contractors and cannot exercise contract clauses for an improper purpose. Neither can the Postal Service renege on its agreements, even if it does manage to coerce a contractor into signing such a modification. With contracting officers facing continued pressure to reduce costs any way they can, we can expect to see similar heavy-handed attempts to force postal contractors to relinquish the "fruits of the bargain." Fortunately, this decision will help contractors fight back.

As always, should you have any questions about your postal contracts, please do not hesitate to call us.

David Hendel and Stephen Hurlbut
Phone: (703) 790-8750