There’s “new.” And there’s “new to you.” And there’s “refurbished new.” And there’s “open box special new.” And there’s “floor display model new.” But when it comes to contract specifications requiring “new” equipment, one court looked to a dictionary to define it as “never used before” and “free of significant damage.”
In a recent case, Reliable Contracting Group, LLC v. Department of Veterans Affairs, 779 F.3d 1329 (Fed. Cir. 2015), the Government entered an agreement with the Contractor to install three back-up generators. The contract specifications required new equipment:
All equipment, material, and articles incorporated into the work covered by this contract shall be new and of the most suitable grade for the purpose intended, unless otherwise specifically provided in this contract.
A dispute arose over the nature of the equipment supplied because the contract did not define the word, “new.” Furthermore, Federal Acquisition Regulation 52.211-5, which was incorporated into the contract, requires that supplies “new, reconditioned, or remanufactured,” and it defined “new” to include that the supplies be “composed of previously unused components.”
The generators that were delivered to the site by the Contractor’s supplier were in terrible condition, showing a lot of wear and tear. Investigation revealed that the generators were manufactured in 2000, purchased by others, but never actually used before they were delivered to the Governments site in 2004. The Government ultimately rejected the initial equipment, but later approved different generators that were installed. The Contractor submitted a claim for $1.1 million for additional costs incurred as a result of the Government’s wrongful rejection of the initial generators.
One “New ” Definition. In support of its claim of wrongful rejection by the Government, the Contractor argued that that the original generators were “new” because they had never been used, even though they were previously owned and damaged by improper storage.
Another “New” Definition. The Goverment argued that to be considered “new” the equipment must be “capable of being tested at the factory.” Because the generators left the factory in 2000, they were incapable of being factory tested in 2004 and therefore not “new.” This was an interesting argument because factory testing was optional in the contract and the Government never requested it.
Yet Another “New” Definition. A divided panel of the U.S Court of Appeals for the Federal Tenth Circuit rejected both definitions of “new” and instead determined there was an ambiguity. Accordingly, the Court looked to the dictionary definitions of “new” and to industry definitions, standards, and practices:
One possible meaning is . . . that “new” means not previously owned by another. . . .“New” could require that the generators be recently manufactured. . . . “New” could require a fresh condition. . . . We think this definition is appropriate for purposes of § 1.47. There is no testimony as to how, in the industry, a generator can be “new” if it has been severely damaged. It defies logic to conclude that the parties intended to treat seriously damaged generators as “new.”
The Holding. The Court held that new does not require that the equipment be entirely free of cosmetic defects. Rather, “new” requires that the generators must not be used and also must be free of significant damage, i.e., damage that is not cosmetic. Based upon the definitions adopted by the Court, the case was remanded to the board to determine whether damage to the original generators was significant enough to render them “not new.”
So What? The Contractor in this case was in a difficult spot. Where the original generators were in terrible condition by accounts of all observers, the Contractor ultimately forced its supplier to provide new ones and try to recover its losses at a later time. The decision demonstrates how courts deal with contract ambiguities and often attach meanings to contract terms that may not have been anticipated by the parties.