Essential Need Letter Was Not Incorporated by Reference   


The Court of Federal Claims correctly concluded a contract did not incorporate a side letter by reference, according to the Court of Appeals for the Federal Circuit, because the reference was not explicit and the incorporation was unclear. Before the government issued a software delivery order, a government employee signed a Letter of Essential Need, which stated the software was essential to the operation of, and integral to, a government computer system. The order incorporated the terms and conditions of a lease agreement, which stated the government "provided required information relative to the essential use of the software ... which includes ... a description of the currently identified applications to be supported and planned life-cycle operations" as inducement for the contractor entering into the lease. After testing, the government declined to renew the lease for the final renewal term because the software did not function as expected and was incompatible with the government's systems. The contractor claimed the non-renewal of the lease was a breach of contract, contending the letter was incorporated by reference into the parties' contract and that the government breached its warranty that the software was essential to the government's computer systems and was not acquired on a test or research and development basis. The CFC granted the government's motion for summary judgment, finding the parties' contract did not incorporate the letter by reference, as a matter of law, and even if the letter was part of the contract, the government agreed only that there was the potential for the software to work (51 CCF 78,801).
No Explicit Reference

The CFC's decision was affirmed. Noting its case law on incorporation by reference was "somewhat sparse," the Court of Appeals explained "the language used in a contract to incorporate extrinsic material by reference must explicitly, or at least precisely, identify the written material being incorporated and must clearly communicate that the purpose of the reference is to incorporate the referenced material into the contract." It was undisputed the delivery order effectively incorporated by reference the terms and conditions of the lease agreement. However, the terms and conditions did not refer to the letter "explicitly, as by title or date, or otherwise in any similarly clear, precise manner." Further, even if the reference was sufficiently explicit, the terms and conditions did not clearly incorporate the letter. Rather, the language stated only that the government provided the "required information" as inducement for the contractor entering into the lease. Given the lack of explicit language regarding the "required information," the parties could not have intended to incorporate this information by reference. Finally, the terms and conditions, which postdated the letter, contained an integration clause stating the terms and conditions constituted the entire agreement between the parties. (Northrop Grumman Information Technology, Inc. v. U.S., CA-FC, 52 CCF 78,976)

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