Johnson v. All-State Construction, Inc.

The United States Navy (plaintiff) entered into a fixed-price contract with All-State Construction, Inc. (All-State) (defendant) to construct a hazardous waste storage facility. On October 4, 1996, the Navy issued a show-cause notice to All-State stating that, because All-State had failed to make adequate progress toward timely contract completion, the Navy was considering issuing a default termination and seeking approximately $180,000 in liquidated damages. On October 9, All-State submitted an approximately $120,000 progress-payment invoice for work already performed. The Navy invoked its setoff right and refused to pay All-State’s invoice because All-State owed the Navy more in liquidated damages for default termination than the Navy owed All-State for the invoice. The Navy subsequently terminated All-State’s contract for default. All-State appealed the default termination to the Armed Services Board of Contract Appeals (Board), arguing that (1) the Federal Acquisition Regulations’ (FAR) Retainage Clause, which was incorporated into All-State’s contract, limited the Navy’s setoff right to 10 percent of the progress-payment invoice amount; and (2) a setoff for liquidated damages cannot occur before the Navy issues a default termination. The Navy countered, arguing that (a) the Navy was permitted to withhold progress-payments if default termination was imminent; and (b) the common-law setoff right, embodied in the contract’s Set-Off Clause, allowed the Navy to withhold progress-payments without limitation to satisfy All-State’s debts. The Board granted All-State summary judgment, holding that the Navy breached the contract by withholding the entire progress-payment rather than just 10 percent. The Navy appealed.