(Editor’s Note.  Most of us, in one form or another, seek “side agreements” in exchange for not exercising certain contractual rights (e.g. claims).  The following case provides an interesting example of what can happen if the side agreement is not honored.)

In its contract with the Defense Logistics Agency to produce food rations the government frequently disputed billing amounts where the contractor submitted a $3.4 million “draft” claim for additional costs related to delayed payments and other acts.  In a separate letter the contractor offered to wave the claim in exchange for (1) contract concessions (2) a guaranteed loan to finance future contract performance and (3) assistance in obtaining a follow-on contract and other contracts.  Government representatives verbally agreed to the terms and sent the letter to the DLA for approval.

Soon after the contractor signed a contract modification believing the DLA agreed to the letter terms.  The next day the DLA rejected the letter stating the contract mod stood on its own and the government neither provided financing nor assisted with further awards.  Five months later the parties executed another mod extending delivery schedules due to a government caused delay.  The contractor signed the new mod and agreed to waiving all claims because the delay had caused it considerable financial damage.

In a second claim for damages the contractor argued the release it signed on the second mod did not bar a claim because (1) the government breached the “side agreement” outlined in the earlier letter and (2) the second mod was signed under duress (i.e. when one party creates circumstances that forces another party to involuntarily accept contract terms).  The Appeals Board ruled for the contractor finding (1) the contractor would not have signed the first mod had it known of the government’s denial of the “side agreement” (2) the government breached the “side agreement” by not providing financing and assistance and hence was not entitled to enforcement of the release and (3) duress had occurred because the government had improperly withheld payments until the mod was executed, making the second mod unenforceable (Freedom NY Inc., ASBCA 43965).

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