The U.S. Court of Federal Claims recently issued a decision that addresses the ever-perplexing question of how to manage risk in a contract with the Government. The DMS Imaging, Inc. v. United States case turned on the inclusion of a risk of loss provision in a lease form for medical equipment. After the equipment was damaged, the Government cited both a failure to agree to the lease terms as well as a purported lack of authority—and refused to pay. The case emphasizes the importance of ensuring express agreement with the Government on risk and loss-related clauses, which are a critical aspect of commercial contracts.
DMS Imaging concerned a lease for a mobile MRI unit for a Department of Veterans Affairs (VA) facility in Puerto Rico. Less than two months after the unit was delivered to and accepted by the VA, the equipment caught fire was rendered inoperable. The contractor asserted that the VA was liable for the damage and unpaid rent under a risk of loss clause in a “lease agreement.”
The underlying contract was implemented through the standard form for commercial item contracts (SF 1449). The lease agreement was attached to the contract and listed as the “Asset Lease Agreement” in the contract’s table of contents. The lease agreement included a “severability” provision, pursuant to which any provisions that were deemed unenforceable would be treated as severed from the agreement and not affect the remaining terms and conditions.
The Government argued that the lease agreement was not enforceable because it was not signed by the parties and a signature was a condition precedent to enforceability. The agreement included an “availability” clause, which stated that the mobile unit was “subject to availability” and that the rental agreement is not enforceable until system availability is confirmed and the agreement is signed by the lessor and lessee.
The Government further argued that the risk of loss provision was inconsistent with certain standard FAR clauses regarding insurance coverage and that the lease agreement, as a whole, was invalid because it included an Indemnification clause, which violated the Anti-Deficiency Act by imposing an unbounded liability. Citing the Indemnification clause, the Government argued that the contracting officer lacked authority to agree to the lease agreement.
The CFC held that the Government was liable under the contract’s risk of loss clause. The CFC read the contract as a whole and found that the lease agreement was part of it. Relying on the severability clause, the CFC reasoned that the indemnification provision did not adversely affect the risk of loss clause on which the contractor relied. The risk of loss did not subject the Government to an unlimited liability, which might run afoul of the Anti-Deficiency Act. Instead, it limited liability to the value of the MRI mobile unit and unpaid rent payments.
Use of standard forms and clauses, including a risk of loss provision, is typical with commercial items but can prove tricky when dealing with the Government. DMS may have been better served by getting the contracting officer to acknowledge the terms specifically, but the CFC held that the parties’ reliance on various terms in the lease agreement was sufficient to show they intended to be bound. The decision emphasizes the importance of severability clauses, particularly when commercial terms include an indemnification provision (as they often do). FAR 12.216 and 52.212-4(u) also now address this point, particularly for End User License Agreements and Terms of Service.