The Analysis
The case study herein is with regards to the case of Re Boston Shipyard Corp. No. 89-1144 as determined by the Court of Appeal. The case involved a contract between Boston Shipyard Corporation (BSC) and the United States Military Sealift Command (MSC) wherein BSC, notwithstanding the bankruptcy proceedings against it, was tasked to overhaul MSC’s vessel.
The nature of the contract was such that it provided for means of renegotiating the terms of operation. However, it was argued in court that many proposed changes by BSC were often not resolved in time; unlike MSC’s changes that were seemingly negotiated in circumstances that appeared to lack equal bargaining powers between the parties.
Further, MSC delayed in making payments for work done. BSC’s claim to have MSC compelled to make the payments did not however succeed. As events had it, the contract was finally terminated.
In the Court of Appeal’s determination, and from the facts of the case, it is notable that such matters as a renegotiation of contracts, change clauses, the role of the government (MSC) in BSC’s financial constraints and the rigidity/toughness displayed by MSC in the dispute arise.
The discussion below shall entail an overview analysis of the above-noted matters/issues in view of the Re Boston Shipyard Corp. case.
Goldberg and Erickson (1987) argue that contracts are in most cases transacted within complex frameworks, particularly where the performance of the contracts is expected to take extended periods, and as in the case of BSC, the complete nature of the work is to be determined with time. As a result, there exists ‘Open and Inspect’ contracts which provide means for further changes, negotiations and adjustment of terms to fit the prevailing economic and environmental circumstances or to accommodate other upcoming developments. The BSC-MSC contract is of this similar nature and thus the numerous change orders made to it.
Be that as it may, the position of the common law of contracts appears to be somewhat different on this issue. Professor Rodhe (1953) notes that the law of contracts has many fundamental principles and among them the ‘pacta sunt servanda’ which is a common law principle that means “an agreement must be kept.”
Therefore, under common law, a miscalculation of the future cannot warrant a party to a basic contract to seek to alter the terms of a contract to fit the prevailing conditions regardless of the gravity of the miscalculation. In this respect, therefore, had the contract between BSC and MSC been a basic or private contract, BSC may have successfully fronted an argument the original contract as made was executed upon a consensus ad idem and, therefore, should be honored the way it was without any alterations not authorized by the parties.
Effectiveness of a ‘Change Clause’ in a Contract
As noted above by Goldberg and Erickson, economic inconsistencies may necessitate adjustments of contractual obligations between parties to a contract. However it is imperative to remain alive to the fact that the law of contracts, and courts alike, have time and again insisted that parties are bound by the terms and clauses of the contracts they have of their free will executed (Lando and Beale, 2000).
By incorporating in the contract a ‘change clause’ which provides for means of making an adjustment to the contract terms whenever the need arises, the parties themselves give recognition to a possibility that such a situation may arise. Therefore, the presence of the change clause will prove to be effective and efficient but only if it clearly lays down the mechanism for effecting the changes and also specifying the particular circumstances that may necessitate the changes without making any cardinal change to the contract.
However, for this case at hand, it is my considered view that the tie between the change clause and the government getting what it wants is that the changes adopted appear to be onerous to BSC, and, the burden of performing the contract have extraneously increased under the circumstances because there appear to be no equal bargaining powers between the parties.
The prevailing financial atmosphere in BSC is obviously causing much restraint in its operations; hence the attempt to demand immediate reimbursement for cost overruns from MSC. However, the court is inclined towards the argument that by having a dispute resolution clause in the contract, the parties ought to give a chance to the mechanisms laid out therein for resolving any arising misunderstandings.
Le Hoai et al (2008) states that cost overruns are a direct consequence of, inter alia, factors such as changing orders which complicate further operations, unforeseen increases in the cost of materials and labor costs and inaccurate quantity estimates during takeoff. These eventually lead to untold delays in completion of projects.
Le Hoai et al (2008) further argue that project managers should ensure availability of adequate financial resources, allocation of adequate time and funds at the project design phase, and further, select reliable contractors and competent consultants to carry out the work.
As a matter of fact, delays may be caused by both the client and the contractor. Client related causes include financial constraints on the client and slow payment for work already completed. Saeed (2009) acknowledges this fact by stating that a contractor may be subject to financial constraints by such delays in payment which may result in some sort of a cash flow crisis.
The Government/MSC’s Role in BSC’s Inability to Perform the Contract
Therefore, for the case of BSC, the government had a duty to make payments at the time they came due and in amounts proportionate to the quantity and quality of work done. This, therefore, is a confirmation that the government, knowing the financial position of BSC and yet delaying to make the necessary payments, it had a direct role in BSC’s inability to perform the contract because the financial predicaments of BSC were further aggravated.
Klass (2004) explains that the doctrine o “efficient breach” serves to magnify the remedy of restitution. This doctrine proposes that the design of the remedy of restitution gives the parties to a contract the option to choose between performing the contract and paying damages for any nonperformance/breaches. Therefore, the doctrine of “efficient breach” seeks to protect three interests, namely: the restitution interest, the reliance interest and the expectation interest.
This doctrine introduces the latter two interests. The reliance interest is protected by compensating the party not at fault by putting him in the best position he should have been had the party at fault not entered the contract. The expectation interest, on the other hand, tends to maximize on what has been termed “social welfare” by putting the party not at fault in the position he would have but for the breach.
However, for the contract between BSC and MSC, there appears to be toughness and rigidity in that there seems to be no adoption of the efficient breach doctrine as illustrated above. Moszoro (2015) defines “contract rigidity” as the bureaucratic design of contracts by adding clauses/provisions that entail unbending enforcement mechanisms and penalties for any breach.
Laffont and Tirole (1993) argue that such rigidity serves to minimize the risk of opportunistic 3rd parties endearing to derive benefits from the contracts. Spiller (2008) claims that this toughness/rigidness operates to increase the costs of operations which are then externalized to the general public.
In essence, therefore, the rigidity/ toughness of the government in such public contracts is to block any conceivable challenges by opportunistic 3rd parties after deriving benefit from such contracts.
Conclusion
The analysis above has illustrated the possibility to have contracts that leave room for future negotiations, especially if the subject matter involved is of a complex nature. However, this is not the position under common law which does not recognize any further modifications of contract terms once the contract has been executed.
To circumvent this common law position, it is necessary to include a change clause in the contract to enable efficient changes whenever the need arises because then, the parties will simply be acting within the terms of the contract.
As discussed, the rigidity/toughness in of the government in the enforcement of contracts has been explained to be as a result of bureaucratic procedures necessary to bar opportunists from deriving rights from the contracts. However, with this rigidness comes increased costs with are cushioned by the public.
Finally, for the Re Boston Shipyard Corp. case, the government definitely had a hand in BSC’s strained ability to perform the contract due to the cash flow crisis caused by the delayed payments.
References
Goldberg, V. P., & Erickson, J. R. (1987). Quantity and price adjustment in long-term contracts: A case study of petroleum coke. The Journal of Law & Economics, 30(2), 369-398.
Rodhe, K. (1959). Adjustment of contracts on account of changed conditions. Almqvist & Wiksell.
Lando,O., & Beale, H. G. (2000). The principles of European contract law. Kluwer Law International.
Schwartz, A., & Markovitz, D. (2010). The myth of efficient breach. Faculty And Affiliate Scholarship Series, 93.
Klass, G. (2013). Efficient breach is dead; long live efficient breach. Georgetown Law Faculty Publications and Other Works.
Moszoro, M., Spiller, P. T., & Stolorz, S. (2015). Rigidity of public contracts (No. w21186). National Bureau of Economic Research.
Spiller, P. T. (2008). An institutional theory of public contracts: Regulatory implications (No. w14152). National Bureau of Economic Research.
Laffont, J. J., & Tirole, J. (1993). A theory of incentives in procurement and regulation. MIT press.
Le-Hoai, L., Dai Lee, Y., & Lee, J. Y. (2008). Delay and cost overruns in Vietnam large construction projects: A comparison with other selected countries. KSCE journal of civil engineering, 12(6), 367-377.
Saeed, S. A. A. (2009). Delay to Projects-Cause, Effect and Measures to Reduce/Eliminate Delay by Mitigation/Acceleration (Doctoral dissertation, British University in Dubai).
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