The FAR explains that the Government must accept or reject work as “promptly as practicable after delivery.”  FAR 52.246-2(j).  But what if the contractor knows its work is not compliant, but has asked the agency for a deviation from the contract’s terms?  A recent decision from the ASBCA provides guidance on this tough but not uncommon issue.

In Standbuy Distributors, Inc., ASBCA No. 62721, __ BCA __ (July 12, 2021), the ASBCA found that the Defense Logistics Agency (“DLA”) waited too long to reject non-conforming supplies, even though it had told the contractor before shipment that the supplies were non-conforming.  The agency delayed rejecting the goods because it was considering whether to accept a deviation.  But it did not act fast enough to make a final decision.

The ASBCA’s opinion provides helpful guidance for contractors, particularly those involved in negotiations about whether the Government should accept products that depart from contract specifications.

Background from Standbuy Distributors

According to the ASBCA decision, DLA ordered laser range finders from Standbuy Distributors, Inc. (“SDI”), citing Part Number 202720.  A month later, on November 5, 2018, SDI provided documents to DLA indicating that it would provide laser range finders under Part Number 202421.  Moreover, at some point DLA came to understand that SDI was requesting a “modification” of the order to allow delivery of its suggested part number.  DLA then canceled the order, but subsequently reinstated it and told SDI that the agency was “willing to take another look” at whether Part Number 202421 could meet its requirements.  However, the reinstated order again identified Part Number 202720.

On December 18, 2018, SDI shipped DLA a set of laser range finders under Part Number 202421, i.e., the non-conforming number, in item boxes that were not labeled.  DLA received the shipment on December 21, 2018 and paid for it that same day.

Meanwhile, DLA had asked the U.S. Navy for its opinion about the technical acceptability of SDI’s proposed part number.  DLA later explained that it was making a “good faith” attempt to cooperate with SDI and to determine whether its suggested part number could work.  On August 19, 2019, the Navy concluded that Part Number 202421 was not technically acceptable, and recommended that DLA acquire Part Number 202720.  Thus, DLA told SDI on October 23, 2019 — roughly ten months after shipment — that the goods were unacceptable.  On January 24, 2020, the contracting officer formally revoked acceptance of the laser range finders.

The ASBCA Finds for the Contractor

On appeal, the ASBCA reversed the DLA contracting officer’s decision, concluding that DLA could not lawfully revoke acceptance, even though DLA had told the contractor that the goods were non-conforming before shipment.  The ASBCA explained that “revocation of acceptance must be done within a reasonable time after the reason for the revocation is discovered, or could have been discovered with ordinary diligence.”  Under that standard, the ASBCA found that DLA had waited too long.  DLA had reason to know by November 5, 2018 that SDI intended to ship the non-conforming part number; had actually received the goods by December 18, 2018; but waited until January 24, 2020 to issue a notice of rejection.  In other words, the roughly one-year delay was not a reasonable time.

Further, the ASBCA did not agree with DLA’s defense that it delayed rejecting the goods because it was “making a good faith attempt to accommodate [SDI’s] request for a modification” of the contract.  The ASBCA did not expressly say so, but its decision could have turned on the fact that the agency had held on to the goods while thinking about whether to reject them.

Even though the ASBCA noted that the items were shipped in boxes without labels, its decision did not discuss the possibility of a latent defect (one that could not be discovered by reasonable diligence), which could have extended the timeline for the agency to reject the goods.  Agencies have raised latent defects as a basis for delay, while they consider whether to accept non-conforming goods.  See Lee Lewis Constr., Inc. v. United States, 54 Fed. Cl. 88, 93 (2002).  The contractor may have avoided a latent defect defense by disclosing the non-conformity before shipment.

In sum, the ASBCA’s decision provides several lessons for contractors:

• Once the agency has possession of the goods, it has a relatively limited timeline to reject them, even if the contractor and the agency both know the goods are non-conforming. This may be especially helpful to contractors who are negotiating deviations for non-conformances.
• Disclosing non-conformances to the customer may help to avoid allegations of latent defects that can provide a basis for revoking acceptance.
• A year is likely too long for an agency to wait to reject goods, even if the agency has a good explanation for its delay.