K2 Solutions, Inc.
ASBCA No. 60907
| A.S.B.C.A. | Jul 13, 2017Background
- The Navy awarded K2 Solutions a contract (base year + two option years) to provide IED detector dogs and related services. Option Year 1 would begin 29 Sept 2012.
- K2 alleges the government failed to order full deliveries in the base year and then issued unilateral Modification No. P00010 (Mod. 10) on 31 July 2012 purportedly to exercise Option Year 1 while reducing quantities, changing CLIN terms, and adding SubCLINs for reduced amounts.
- K2 continued performance but alleges the government paid only 63% of the originally awarded option-year amount and only 86% of the Mod. 10 reduced amount.
- K2 submitted a certified claim in April 2016; the contracting officer denied it and K2 appealed to the ASBCA. The complaint asserts multiple counts including breach of contract and breach of the duty of good faith and fair dealing (counts 1–6).
- The government moved to dismiss counts 2, 3, and 6 for failure to state a claim. The Board accepted the complaint facts as true for the motion-to-dismiss analysis.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether K2 plausibly alleges that the government's exercise of Option Year 1 violated the contract by reducing scope (Counts 2 & 3) | Mod. 10 effectively exercised the option and then immediately deleted portions of work; alternatively Mod. 10 constituted an exercise followed by a unilateral modification | The purported exercise was conditional/altered terms and therefore ineffective; an option exercise must be unconditional and exactly accord with option terms | Dismissed. Because Mod. 10 altered the option terms, the attempted exercise was ineffective, so there was no valid option exercise to have violated the contract (Counts 2 & 3 fail) |
| Whether a single document can both validly exercise an option and modify it | Mod. 10 first exercised the option and then immediately modified the contract (so counts alleging improper option exercise remain viable) | A document cannot both exercise and modify an option: any modification is a rejection of the option; acceptance principles require unconditional, exact notice | Rejected. The Board held a single document cannot both exercise and alter the option; any alteration renders the purported exercise ineffective |
| Whether K2 states a claim for breach of the implied duty of good faith and fair dealing regarding Option Year 1 (Count 6) | Government acted in bad faith by using Mod. 10 (or by subsequent conduct) to reduce scope and frustrate K2's expectations; alternatively, Mod. 10 became a new offer accepted by performance and then was breached | Government argues count 6 improperly alleges breach of an option's implied duty prior to any valid exercise | Denied as to dismissal. Count 6 survives: K2 plausibly pleads a duty-breach (bait-and-switch) claim arising from the contract or from Mod. 10 as an effective new agreement accepted by performance; the complaint does not allege breach of an option before an effective exercise |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard; factual allegations must state a plausible claim)
- Metcalf Constr. Co. v. United States, 742 F.3d 984 (Fed. Cir. 2014) (every contract includes an implied duty of good faith and fair dealing; duty not to frustrate reasonable expectations)
- DeMarco Durzo Dev. Co. v. United States, 69 Fed. Cl. 262 (2005) (performance can operate as acceptance of a counteroffer/new agreement)
- TigerSwan, Inc. v. United States, 110 Fed. Cl. 336 (2013) (distinguishable; did not address validity of option exercise and concerned a separate post-agreement termination)