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U.S. Substantive Law Applied to Foreign Office Lease

A lease provision stating the agreement was to be construed under a foreign country's laws was narrowly interpreted by the Civilian Board of Contract Appeals because the parties agreed to be governed by the dispute procedures in the Contract Disputes Act and conflict of law principles dictated the application of United States substantive law. The contractor alleged the government breached a lease of office space in a building occupied by diplomatic personnel in Panama. According to the contractor, the government failed to restore the premises as required by the lease and the government was a holdover tenant for its failure to give timely notice of its intent to vacate certain floors. The parties disagreed on which law to apply to their dispute. The lease stated it was to be "interpreted and construed" in accordance with the laws of the country where the office building was located, but disputes under the lease were to be resolved pursuant to the CDA. The contractor argued the provision should be given a narrow construction, and that U.S. substantive law should apply to the consequences of that construction. In such a case, the Panamanian statute of limitations would not apply to portions of the failure to give notice claim, and the 90-day CDA filing deadline, which was met, would apply. The government countered that Panamanian substantive law should govern the result and the statute of limitations is considered substantive under the Panamanian legal system.
Significant Relationship
Generally, a tribunal will apply foreign law where the contract provides that a specific country's law governs the transaction. The lease, however, failed to include language that would have unmistakably specified Panamanian law as governing the rights and liabilities of the parties. Accordingly, the board adopted a narrow view of the "interpret and construe" clause. In determining which substantive law to apply, the board then applied the significant relationship test as articulated in the Restatement (2d) of Conflict of Laws. The significant relationship test requires an examination of the place of contracting; the place the parties negotiated the contract; the place of performance; the location of the contract's subject matter; and the domicile, nationality, place of incorporation, and place of business of the parties. Here, although the lease was made by a Panamanian national for a facility within Panama, the parties negotiated the lease in the U.S. and the initial steps taken toward the lease occurred in Washington D.C., where the contractor's president and the CO negotiated a settlement agreement of a prior lease. Also, much of the lease administration occurred through the government's headquarters in the U.S. Moreover, the parties explicitly referenced the CDA as the vehicle for resolving disputes. (Inversa, S.A. v. Dept. of State, CBCA, ¶92,358)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

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