Takeaways

To obtain relief pursuant to the mutual mistake of fact theory, contractors must demonstrate that both parties believed a mistaken fact to be true.
The contractor must further show that—no matter the size or scope—the mistake had a “material” adverse impact on the parties’ bargain.
When neither party has assumed the risk of a latent mistake of fact, the Board will allocate the risk to the more culpable party.

On August 1, 2019, the Armed Services Board of Contract Appeals (ASBCA) held that the Air Force should bear the costs associated with a mutual mistake of fact in a contract between DynCorp International LLC (DynCorp) and the Air Force. This result suggests that the theory of mutual mistake of fact remains a viable one for contractors to consider and pursue.

The contract at issue required the contractor to perform Contractor Operated and Maintained Base Supply (COMBS) Services at various Naval Air Stations. To establish a Cost Per Flight Hour (CPFH) rate at each base, the Air Force instructed offerors to rely on historical data contained in “Usage Reports.” An incumbent subcontractor had generated this data for the Air Force. The Usage Reports did not contain any disclaimer as to their accuracy. Further, the Request for Proposal (RFP) did not allocate the risk of inaccuracy to the offerors.

During performance, the contractor noticed it had experienced significant cost growth. Upon investigation, the contractor discovered that one of the Usage Reports had significant errors. The contractor had no means to uncover those errors during proposal preparation. While the Board did not determine the cause of the error, testimony relied upon by the Board suggested that the incumbent subcontractor had made an error exporting data from two Navy locations. 

The Board held that a mutual mistake occurs if: (1) the parties were mistaken in their belief regarding a fact; (2) the mistaken belief constituted a basic assumption underlying the contract; (3) the mistake had a material effect upon the bargain; and (4) the contract did not put the risk of mistake up on the contractor. The Board found that the contractor established each element, thereby entitling the contractor to reformation.

Regarding the first element, the Board focused on testimony from the Government’s COMBS Program Manager; the contractor’s Director of Supply Chain; and a key representative from the subcontractor who generated the Usage Reports. Each such individual testified credibly and consistently that the Usage Reports had errors.  

For the second element, the Board relied on the fact that “DynCorp’s proposal expressly stated that its pricing is based on [usage] data provided in the Bidder’s Library and that DynCorp assumed the data provided is … correct.” The Board further noted RFP language establishing that the Air Force considered the usage data necessary for the offerors’ CPFH calculations.

On the third element, the Board clarified that a mutual mistake has material effect only “if the resulting imbalance in the agreed exchange is so severe that the contractor cannot fairly be required to carry it out.” The Board found that the usage data errors concerned cost-intensive proposal elements, and, therefore, were a substantial factor in the miscalculation of CPFH.

With respect to the final element, the Board found the contractor did not assume any risk of inaccuracy in the Usage Reports. Of note, the Board highlighted that the Government did not expressly allocate any risk of errors in its solicitation documents. Further, the contractor stated in its proposal that it had and would rely on the accuracy of the data. The Board found that in situations like this—where neither party knew (or should have known) of a latent error—the fair solution is to allocate that risk to the “relatively more culpable party best placed to mitigate the risk.” Here, the Board found the more culpable party to be the Air Force.

This case offers some helpful takeaways. First, even though the last few years have provided few (if any) sustained claims premised on mutual mistake, DynCorp suggests that the theory is not dead. Contractors must, however, carefully establish the elements to prevail. The mistake must be one of fact, and it seemingly has to be “unknowable” at the time of contract formation. The mistake must be material, which we interpret to mean one that causes a significant error in proposal pricing. Finally, the facts need to show that the parties did not allocate responsibility for that significant error to the contractor. We also note that the contractor discovered this error through proactivity—a forensic investigation into the reasons for its cost growth. Contractors should consider having similar investigations of program cost as a regular internal control.