minimum guarantee on IDIQ option periods

I have recently noticed that some agencies are awarding IDIQ contracts with expressed intent of obligating the minimum quantity guarantee required by FAR 16.501-2( B )(3) in the base period only, with no 'guarantee minimum' included in any option periods. According to FAR 16.504(a)(2), '"To ensure that the contract is binding, the minimum quantity must be more than a nominal quantity, but it should not exceed the amount that the Government is fairly certain to order." 16.501-1 Definitions. ?Task-order contract? means a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for the issuance of orders for the performance of tasks during the period of the contract. I've been told by Contracting Officers that the minimum quantity guarantee obligated in the base year is intended to cover the entire 'contract period' which makes the assumption that all option periods will be exercised. In my opinion, that asssumption treats the contract as a multiyear contract as opposed to a multiple year contract. I was always taught that option periods served as their own stand-alone contract period. So I'm wondering how an option period can be binding on the government if there is no guaranteed minimum quantity?

Also, in exercising option periods without a minimum quantity guarantee, it would appear that Contracting Officers can basically waive FAR 17.207?'s requirements for determining funds are available (since there is no obligation of minimum guarantee on the option period) under item (1), right?

Likewise, can Contracting Officers make any determination under item (2) that 'the requirement covered by this option fulfills an existing Government need' when there is no "minimum quantity" in the option period that the "Government is fairly certain to order?" Isn't the minimum quantity guarantee intended to address the bona fide need rule for each option period under appropriations law?

The contract is the contract, and the POP is the POP, and the base order covers the POP regardless of what it ends up being, i.e., whether options are exercised or not.

Besides, if there is no minimum quantity, what reason would the government have to exercise an option?

RIPIDIQL

You don't need a minimum for each option under an IDIQ contract. The minimum furnishes consideration adequate for the entire contract. See the decision of the U.S. Court of Appeals for the Federal Circuit in Varilease Technology Group, Inc. v. U.S.,. 289 F.3d 795, 798 (2002):

The FAR requires that an ID/IQ contract state minimum and maximum quantities to be ordered by the government; it also permits the contract to include option periods:

A solicitation and contract for an indefinite quantity must-

(i) Specify the period of the contract, including the number of options and the period for which the Government may extend the contract under each option;

(ii) Specify the total minimum and maximum quantity of supplies or services the Government will acquire under the contract; ...

48 C.F.R. ? 16.504(4)(i)-(ii); see also 48 C.F.R. ? 17.202((2) (permitting ID/IQ contracts with options).

Minimum quantities are not required to be associated with each option period. On the contrary, according to [FAR 16.504(4)(ii)], the ?minimum ... quantity ... under the contract? must be specified; according to subsection (i), any option periods are part of the contract itself..,

While not binding on us, the Armed Services Board of Contract Appeals has reached the same conclusion that an option period in an ID/IQ contract does not require a separate minimum quantity. In In re Five Star Elec., Inc., No. 44984, 1996 WL 391458, 1996 ASBCA LEXIS 135 (July 10, 1996), the Board granted summary judgment in favor of the government, rejecting the same argument Varilease now makes:

We also see no basis for appellant's contention that, ?by exercising the options, the Air Force became obligated to order at least a minimum amount of work during the option period.? The only minimum quantity requirement specified in the contract is that [covering the initial period of the contract]; there are no minimum quantities specified for any of the option periods. This consideration differentiates the cases that appellant relies upon, where there were minimum requirements for the option periods.

Id. at *9-10. We agree with the Board's analysis.

That is Contract Law 101.

RIPIDIQL

You don't need a minimum for each option under an IDIQ contract. The minimum furnishes consideration adequate for the entire contract. See the decision of the U.S. Court of Appeals for the Federal Circuit in Varilease Technology Group, Inc. v. U.S.,. 289 F.3d 795, 798 (2002):

That is Contract Law 101.

Right. There is no legal minimum requirement for an option, only the base order. I believe I covered this when I said "the base order covers the POP regardless of what it ends up being, i.e., whether options are exercised or not." However, there is no reason to exercise an option in an IDIQ unless you are going to increase the quantity by some amount. That is what I meant by 'minimum'.

However, there is no reason to exercise an option in an IDIQ unless you are going to increase the quantity by some amount. That is what I meant by 'minimum'.

I don't understand that. You might exercise an option under an IDIQ contract because you want a contract in place in case you need something, even if you don't know that you will need something. What quantity would you increase?

I don't understand that. You might exercise an option under an IDIQ contract because you want a contract in place in case you need something, even if you don't know that you will need something. What quantity would you increase?

Time.

deloftin:

Do you understand why you don't need a minimum quantity for each option?

There is no reason to exercise an option in an IDIQ unless you are going to increase the quantity by some amount.

Why would you need to increase in order to exercise? Time?

RIPIDIQL

You don't need a minimum for each option under an IDIQ contract. The minimum furnishes consideration adequate for the entire contract. See the decision of the U.S. Court of Appeals for the Federal Circuit in Varilease Technology Group, Inc. v. U.S.,. 289 F.3d 795, 798 (2002):

That is Contract Law 101.

In this regard, Vern has pointed out many times before that there is no need to have options in IDIQ contracts. Instead of having a base period of one year and four option years, all you need is an ordering period of five years.

In this regard, Vern has pointed out many times before that there is no need to have options in IDIQ contracts. Instead of having a base period of one year and four option years, all you need is an ordering period of five years.

Some possible reasons for including option years could include:

Market conditions change, thus affecting the need for long term ordering capability. It is probably easier not to exercise options than it is to terminate for convenience before the end of a multi-year contract.

The Government can decide not to exercise options for certain firms. This is especially important when fair opportunity requirements on a MATOC would otherwise compel allowing a marginal firm to continue competing, wouldn't it?

The Government uses the rules and evaluation tools in FAR 17.2 to decide whether or not to use and to exercise options, rather than simply contract with firm(s) for a long term.

If the IDIQ is for construction, a long term contract might affect or tie up a firm's bonding capacity even with few or no orders during the period.

VARILEASE is an interesting case, but it has one major flaw i.e., the court in VARILEASE failed to take into account that both at common law and under the Federal case law, a contract obligation can’t be supported by past consideration as recognized by the Court of Federal Claims:

"As a fundamental proposition, "a contract must be supported by sufficient and valuable consideration ... [and] past consideration is no consideration." United States Court of Federal Claims, Nick WOLL, Plaintiff, v. The UNITED STATES, Defendant. No. 98-564C. Dec. 8, 1999.

I fully understand my analysis of the Varilease decision is not widely embraced, if at all, by the DoD legal community. Nevertheless, the court's decision failed to recognize and address the established black letter law in federal government contracting, that is, "past consideration is not good consideration." In that respect, an academic and scholarly review of the court's decision, in my opinion, must conclude the decision is flawed due to its failure to join and resolve all issues relevant to the inquiry the court undertook. In this regard, at the time of initial award of any IDIQ contract with optional ordering periods, the space occupied by a future optional ordering period contains no contractual obligation to acquire any product or service. That contractual obligation only arises at the time the optional ordering period is exercised which purchase of supplies or service cannot "go looking" in the past for its consideration in the base year. The consideration for the supply/service purchase obligation intended to arise at option exercise must be concurrent with the creation of this new contract obligation.

Woll v. U.S., 45 Fed. Cl. 475 (1999) is not apposite.

The Federal Circuit's decision in Varilease v. U.S., 289 F.3d 795 (2002), is good law and well-established. An option to extend a contract's period is not a new and separate contract. It is a continuation of an existing contract. Therefore, no new consideration is required, and there is no issue of reliance upon past consideration.

The U.S. Claims Court addressed the issue of whether options are new contracts or continuations of existing contracts in its reconsideration of International Investments, Inc. v. U.S., 19 Cl. Ct. 715 (1990). See 21 Cl. Ct. 79 (1990), in which it held that it had erred in considering an option to extend a contract to be a new contract:

The question presented is whether the government's exercise of options to renew a contract after the effective date of the Prompt Payment Act, 31 U.S.C. Secs. 3901 - 3906 (1988) (PPA), are subject to the PPA's penalty provisions, when the underlying contract was executed before the effective date of the PPA. In its earlier ruling, the court granted plaintiff's motion for summary judgment in part, concluding that the contractual options to renew should be treated as new contracts and thus, options exercised after the effective date of the PPA were subject to the PPA. Upon reconsideration, the court concludes that its earlier ruling was in error...

The critical question under it becomes whether a contract was entered into before or after the effective date of the PPA. Here that distinction is dependent upon another test: whether an option when exercised is a new contract (therefore entered into after the effective date of the PPA) or whether it is a continuation of the former (pre-PPA) contract.

In answering that question this court erred. The court relied on Professor Corbin's analysis that options when exercised are new contracts. See 1A Corbin on Contracts, § 264, at 507 n. 44 (1963). However, that analysis only applies to options where the exclusive, or at least the primary, purpose of the original contract was to obtain the option. With respect to other options the government is correct in its analysis, that is, an option should be treated as a continuation of the original contract. Therefore, in this case, the analysis shifts to whether the option was the exclusive or primary focus of this pre-PPA contract. Clearly the answer must be no. In fact, nothing in the record suggests that the option was other than an incidental part of the purpose behind the government's contracting with IBI. The purpose of the contract was to obtain security services. A but-for test clearly reveals this.

In its earlier ruling this court relied upon a decision of the ASBCA in Honeywell Systems, Inc., ASBCA No. 36227, 89-1 BCA para. 21,258 (1988). This court's opinion noted that the ASBCA in_Honeywell_ treated the exercise of options to renew a contract, exercised after the PPA's effective date, as new contracts, even though the underlying contract was entered into before the PPA's effective date. Upon several rereadings, it appears that the ASBCA also misapplied Professor Corbin's analysis.

While this court's earlier ruling sets out a clear rule, it is a rule that is neither fully supported by Professor Corbin nor, much more importantly, consistent with the Supreme Court's mandate in_Chevron._ The OMB is the part of the government that Congress vested with this responsibility, not the courts. Therefore, part II of the court's March 16, 1990 opinion, 19 Cl. Ct. 715, is VACATED.

Who besides you, in any legal community, embraces your analysis of Varilease? Have they expressed their opinion in any publication?

 

 

 

 

My review is limited to whether good and valid consideration is present to create a “contractual obligation” upon exercise of the option contract (i.e., option CLIN).   The "contractual obligation" of which I speak is the obligation to honor unilaterally issued delivery orders up to a stated maximum.  The issue I’ve framed is not, as you suggest, whether this “contractual obligation” is a new or separate contract.

 

I am not concerned about whether this “contractual obligation" arises in the context of a "new or separate contract." I do nevertheless agree that there is no question but that an option contract is a part of an IDIQ contract (base and contract option ordering periods) and is therefore not a new and separate contract – it’s part of the awarded IDIQ contract.  That option contract came into being at the time the IDIQ contract’s base period was awarded and its consideration is found in the consideration for the base period.  Obviously no new consideration is required for the option contract and, as you state, there is no issue of reliance upon past consideration in creating that option contract. 

 

However, one should not confuse the consideration required for the option contract with the consideration needed for the "contractual obligation" intended to be created upon exercise of that option contract.  The legal consideration for the former (i.e., the option contract") is embedded in the in the base year's consideration which serves as double duty (i.e., consideration for the base year and for the option contract). However, the exercise of that option contract and its consideration is a different matter. 

 

In order for the “contractual obligation” to come into existence upon exercise of the option contract (option CLIN) that “contractual obligation” must be supported by good and valid consideration. At the time of initial award of any IDIQ contract containing option contract CLINs, the space/time continuum occupied by a future ordering period contains no contractual obligation to honor unilaterally issued delivery orders up to a stated maximum.  That obligation arises, if at all, only at the time the option contract is exercised.

 

For example, if you own “Black Acre” and I give you $1000 for the right to buy “Black Acre” for $100,000 for a 12 month period, this creates an option contract with the $1000 serving as consideration for the option contract (itself) and the $100,000 serving as the consideration for the actual contract for the purchase of “Black Acre” when I exercise the option contract.  Upon exercise of the option contract, the $100,000 must be current and valid consideration (not past consideration) in order to create a contract obligation to purchase and sell “Black Acre”.  

 

Likewise, the obligation to honor unilaterally issued delivery orders up to a stated maximum only arises at the time the option contract is exercised which cannot at the time of option exercise "go looking" in the past for its consideration.  Whether viewed as the extension of a prior contract obligation or the entering into a separate contract, in either instance the “contract obligation” first arises at a time where none had ever previously existed.

 

Therefore, it remains that the court in Varilease failed to recognize and address the use of past consideration and its adequacy to support the obligation to honor unilaterally issued delivery orders up to a stated maximum. As such, it failed to join and resolve all issues relevant to the inquiry the court undertook.  In this respect, I consider Varilease to be a flawed decision.    The below contract law principle cited in the Woll v. U.S decision is apposite, as it is highly pertinent and germane to the issue the Varilease court neglected to address.

 

"As a fundamental proposition, "a contract must be supported by sufficient and valuable consideration ... \[and\] past consideration is no consideration."  United States Court of Federal Claims, Nick WOLL, Plaintiff, v. The UNITED STATES, Defendant. No. 98-564C. Dec. 8, 1999.

Try this version:

My review is limited to whether good and valid consideration is present to create a “contractual obligation” upon exercise of the option contract (i.e., option CLIN). The contractual obligation of which I speak is the obligation to honor unilaterally issued delivery orders up to a stated maximum.The issue I’ve framed is not, as you suggest, whether this “contractual obligation” is a new or separate contract.

I am not concerned about whether this “contractual obligation" arises in the context of a new or separate contract.I do nevertheless agree;that there is no question but that an option contract is a part of an IDIQ contract (base and contract option ordering periods) and is therefore not a new and separate contract – it’s part of the awarded IDIQ contract. That option contract came into being at the time the IDIQ contract’s base period was awarded and its consideration is found in the consideration for the base period. Obviously no new consideration is required for the option contract and, as you state, there is no issue of reliance upon past consideration in creating that option contract.

However, one should not confuse the consideration required for the option contract with the consideration needed for thecontractual obligation; intended to be created upon exercise of that option contract. The legal consideration for the former (i.e., the option contract") is embedded in the in the base year consideration which serves as double duty (i.e., consideration for the base year and for the option contract). However, the exercise of that option contract and its consideration is a different matter.

In order for the “contractual obligation” to come into existence upon exercise of the option contract (option CLIN) that “contractual obligation” must be supported by good and valid consideration. At the time of initial award of any IDIQ contract containing option contract CLINs, the space/time continuum occupied by a future ordering period contains no contractual obligation to honor unilaterally issued delivery orders up to a stated maximum. That obligation arises, if at all, only at the time the option contract is exercised.

For example, if you own “Black Acre” and I give you $1000 for the right to buy “Black Acre” for $100,000 for a 12 month period, this creates an option contract with the $1000 serving as consideration for the option contract (itself) and the $100,000 serving as the consideration for the actual contract for the purchase of “Black Acre” when I exercise the option contract. Upon exercise of the option contract, the $100,000 must be current and valid consideration (not past consideration) in order to create a contract obligation to purchase and sell “Black Acre”.

Likewise, the obligation to honor unilaterally issued delivery orders up to a stated maximum only arises at the time the option contract is exercised which cannot at the time of option exercise go looking in the past for its consideration. Whether viewed as the extension of a prior contract obligation or the entering into a separate contract, in either instance the “contract obligation” first arises at a time where none had ever previously existed.

Therefore, it remains that the court in Varilease failed to recognize and address the use of past consideration and its adequacy to support the obligation to honor unilaterally issued delivery orders up to a stated maximum. As such, it failed to join and resolve all issues relevant to the inquiry the court undertook. In this respect, I consider Varilease to be a flawed decision. The below contract law principle cited in the Woll v. U.S decision is apposite, as it is highly pertinent and germane to the issue the Varilease court neglected to address.

"As a fundamental proposition, a contract must be supported by sufficient and valuable consideration ... [and] past consideration is no consideration." United States Court of Federal Claims, Nick WOLL, Plaintiff, v. The UNITED STATES, Defendant, No. 98-564C. Dec. 8, 1999.

Space/time continuum?

You don't make sense to me. I don't know where you get the idea that no new consideration is needed to bind the contractor to the option but that new consideration is needed to bind the contractor to the obligation entailed by the option. I don't get that. Woll does not stand for your proposition. However, you seem to be wedded to Woll, so I won't waste my time trying to change your mind.

The government solicits a single promise from a prospective contractor to (1) sell specified goods or services on order at stipulated prices for one year and (2) to extend that promise at the government's option for a second year.

In consideration for that promise, the government promises (a) to order and pay for a stated minimum during the first year, ( to pay for any additional goods and services ordered during that year, and ( c) to pay for any goods and services ordered during the option year.

The contractor makes one promise in return for one consideration. Why is any further consideration required upon exercise of the option in order to bind the contractor to perform during the option period? The government could just as easily have written the contract for two years. Since you agree that an extension option is not a new contract, but a continuation an existing contract, whence the requirement for new consideration for performance during the option year?

Are you saying that the consideration for agreeing to the option is not sufficient to bind the contractor to perform if the government exercises the option? Are you saying that there must be one consideration for the option itself and another consideration for performance under it? If so, are you aware of a case or a treatise that supports you? It's not Woll, because those weren't the facts in Woll. Woll was not about exercising an option.

Since you have cited nothing but Woll in support of your proposition, and since the facts in Woll are distinguishable from those of the situation that you address, I am not persuaded. Is anyone? As you said, no one in the DOD legal community agrees with you. I will add that I know of no one in any other legal community that agrees with you. I have heard of no other dissents like yours, and there are an awful lot of smart lawyers out there.

"An option to purchase consists of two elements: (1) the offer to sell, which does not become a contract until accepted; and (2) the completed contract to leave the offer open for a specified time." 77 Am. Jur. 2d Vendor and Purchaser § 28, American Jurisprudence, Second Edition, May 2012, Vendor and Purchaser, Romualdo P. Eclavea, J.D., Rachel M. Kane, M.A., J.D., Jeffrey J. Shampo, J.D., Eric C. Surette, J.D., and Mary Babb Morris, J.D., of the staff of the National Legal Research Group, Inc.

An option contract is a continuing offer that's supported by consideration which must be kept open. The obligation is unilateral and binding only on the one making the promise. The recipient of the promise has the legal power to consummate a second contract, since an option contract "consists of two elements: (1) the offer to sell, which does not become a contract until accepted; and (2) the completed contract to leave the offer open for a specified time." Both the option and the underlying contract must be supported by consideration.

An IDIQ optional ordering period CLIN is an option contract. That option contract gives the Government the right to enter into a contract obligation where none ever existed.When one accepts that offer by exercising the option, consideration must coincide in time with acceptance of the irrevocable offer to honor delivery orders up to stated maximum. However, the guaranteed minimum from the base period is past consideration. Current and good consideration is needed to provide the requisite consideration for acceptance of the irrevocable offer to form a contract obligation to honor delivery orders up to stated maximum. If an IDIQ contract option period does not have a minimum it would be like the above "Black Acre" example I gave not having the $100,000 for the actual purchase of Black Acre i.e., the second contract. I can't simplify any more for you.

No, I am not fixated on the Woll case. It was just low hanging fruit. There are three (3) other Court of Claims Government contract cases with the same holding.

General Bronze Corp. v. U. S. 168 Ct.Cl. 176, 338 F.2d 117, November 13, 1964.

"In the succinct words of Professor Williston: The doctrine that past consideration is no consideration represents the overwhelming weight of authority and is almost universally followed. This has been the law since early times. 1 Williston on Contracts Sec. 142 (3d ed. 1957)."

Houdaille Industries, Inc. v. U.S., 138 Ct.Cl. 301, 151 F.Supp. 298, May 08, 1957

"It stated only that the work was already completed and only referred to that prior acceptance. Moreover, the work under the contract had been accepted almost four years earlier. Therefore, the recital relied upon by defendant can refer only to past consideration, if consideration at all, which the law of contracts treats as no consideration."

Sheppard v. U.S., Fed.Cl., 2011 WL 6370078 Fed.Cl., December 20, 2011.

"The court notes that Mr. Sheppard's incarceration cannot serve as the consideration exchanged for the government's purported obligations under the asserted contract. See id. (The general rule almost universally followed is that past consideration is no consideration)."

My post is a teaching point, not an attempt to persuade.

I most respectfully disagree with your legal analysis. An IDIQ contract with a minimum guarantee is a contract under which the parties agree that future orders may be placed at specified pricing under agreed upon terms and conditions. If an IDIQ contract includes the right of the government to unilaterally exercise options to extend the ordering period, the right to exercise those options is part of the initial contract supported by the minimum guarantee consideration. There is no need to to provide additional consideration at the time of exercise of any option to extend the ordering period. With respect to any orders placed, consideration for each order is the same as with any ordinary contract - if you perform these services or provide these products (consideration from vendor), I will pay you this money (consideration from the government). The reason a minimum amount guarantee is required in connection with the initial IDIQ contract is that without that, there is only a conditional promise to pay which is not adequate consideration. A minimum guarantee solves that problem by making the government promise to pay the minimum amount unconditional - even if the vendor is never actually required by the government to perform any services or provide any supplies, the government must pay the minimum amount guaranteed to the vendor. Because the government generally doesn't like pay for nothing (ie, make a minimum payment but receive no services or supplies), some government agencies have a policy of placing an order for the minimum quantity at the same time as or shortly after issuing an IDIQ. Then the "consideration" for the entire IDIQ contract becomes merged with the "consideration" paid for the initial quantity of services or supplies. Nevertheless, as a legal matter, the promise of the vendor to supply services and supplies in accordance with the IDIQ is in and of itself sufficient "consideration" from a legal perspective to balance the government's promise to pay the minimum amount without the vendor ever actually having to supply any services or supplies. I haven't stated this elegantly, but I hope it might persuade you to take another look at how you are analyzing the legal issues.

Teach what? And what kind of teacher does not try to persuade? What kind of students do you have? I tell mine not to believe any assertion I make unless I can prove it. I make them force me to make an argument and evaluate my argument for validity.

You continue to cite cases about past consideration. I understand that doctrine. What you have to show, and have not, as far as I'm concerned, is that the doctrine has any bearing in the case of an option to extend an IDIQ contract.

An extension option is an irrevocable offer to continue to be bound by the terms of the IDIQ contract for an additional period of time. If I understand your position, the promise to buy a minimum in the first year of the contract serves only as consideration for agreeing to include the option in the contract -- consideration for making the offer -- but not to perform if the offer is accepted. Is that correct? Do I understand you rightly? Please answer that question. I do not want to continue if you won't confirm my understanding or correct me.

If my understanding is correct, then please show me a decision or a treatise that supports your point with respect to options -- that consideration for the option itself is not consideration for performance if the option is exercised. Remember, exercise of the option is not a new offer.

I'm always eager to learn a new thing. But in order for you to teach me, or anybody else for that matter, you have to make a coherent case and a valid argument. You seem to think that citing cases that all articulate the same legal rule -- past consideration is no consideration -- resolves the issue. It does not. You have to show that the rule applies to the issue and facts at hand. And that is what I find wanting in your presentation.

eriand2,

I don't think that you understand what "past consideration" is. The way you have been using the term (e.g., contrasting it with "good and current" consideration), it seems that you think it means consideration for a contract formed in the past. That is not what it means. Far from it.

First, let's distinguish between executory, executed, and past consideration.

Executory consideration:

Something given or accepted in return for a promise, where the promised act remains to be performed on a future date. For example, A promises to deliver widgets to B at some future date and B promises to pay A for the widgets when he receives the shipment. If A does not deliver the widgets to B, B can sue A for breach of contract.

Executed consideration:

Something given or accepted in return for a promise whose promised act has been performed. Using the example above, if A timely delivers the widgets to B, A's consideration becomes executed.

Past consideration:

Something that has already been given or some act that has already been performed that cannot therefore be induced by the other party's thing, act, or promise in exchange and is not truly a consideration. For example, A gives B a ride to the market and back home again. When A delivers B to his house, B promises to give A some gas money. A cannot sue B to enforce B's promise since the consideration (A's act of giving B a ride) occurred before B's promise. A gave B the ride without expecting anything in return. (A did not give B a ride in exchange for B giving A gas money.)

While your position that past consideration is not valid consideration is correct, it has no application to the exercise of an option that extends an ordering period under an IDIQ contract. In that case, the exchange of promises occurs concurrent with executory consideration and prior to executed consideration.

Yes. . . sort of. . .the funds obligated in the first year of the contract serve only two purposes: 1) consideration for the base year ordering period and 2) consideration for the option contract created by awarding the option CLIN (i.e., contract obligation establishing only the irrevocable offer). If the irrevocable offer is accepted, the funds obligated in the first year are not consideration to perform the underlying contract obligation (i.e., obligation to honor orders to the stated maximum).

So even though I referred to a "second contract" in the above post, it is more like this: #1 = basic IDIQ contract; #2 = option contract obligation and #3 = underlying contract obligation created upon exercise of #2 provided all the elements of a contract are present at the time of exercise. All three (#1, #2 and #3) are in the context of one IDIQ contract but only #1 and #2 are extant contract obligations on initial award. As to #3, all the elements of a contract must be present for the underlying contract obligation to arise and the funds obligated in the first year are past consideration for this new contract obligation intended to arise within the context of the overall IDIQ contract. Both the option contract and the underlying contract must be supported by consideration.

While the Fifth Circuit, Court of Appeals addresses state law in its PLANTATION KEY DEVELOPERS decision, it is nevertheless addresses my understanding of the common law of contracts to which, in my opinion, federal government contracts are subject:

Colonial fails to recognize its agreement for what it is, an option contract. An option contract has two elements: 1) the underlying contract which is not binding until accepted; and 2) the agreement to hold open to the optionee the opportunity to accept. Frissell v. Nichols, 94 Fla. 403, 114 So. 431, 433 (1927).

Both the option and the underlying contract must be supported by consideration

. Donahue v. Davis, 68 So.2d 163 (Fla.1953); Koplin v. Bennett, 155 So.2d 568 (Fla. 1st DCA 1963). In this case, the consideration for the option to bind Colonial to a six month extension was the $60,000 which Plantation had already paid. Plantation was obligated to pay the additional $30,000 only if it chose To exercise its option and To bind Colonial to the quoted rates for the extended period.

PLANTATION KEY DEVELOPERS, INC v. COLONIAL MORTGAGE COMPANY OF INDIANA, INC

, 589 F.2d 164, February, 6 1979.

We may differ on our understanding of this matter but at least we have clarified the issue at hand..... Best Regards, Eriand

Thanks. Yes, we do disagree. I have to move on, but I want to make one last comment.

First, Plantation Key Developers, Inc. v. Colonial Mortgage Company of Indiana, Inc., may be found at 589 F.2d 164. I think you have misread that decision and I suggest that you read it again. Anyone interested in this topic should also read it and come to their own conclusion.

In that case a developer (Plantation) contracted with a lender (Colonial) for a line of credit for a development project. They agreed to a one year line of credit at a negotiated interest rate and specified points, for which the developer would pay a $60,000 commitment fee. They also agreed that the developer could have two six month extension options on interest/points terms to be offered prior to exercise based on market conditions. The developer agreed to pay $30,000 for each extension if it exercised its option.

The developer paid the $60,000, but when the time came for the developer to propose interest and points for the first extension, the lender proposed terms the developer said were inconsistent with the agreement to base them on market conditions. The developer did not exercise its option, did not pay the $30,000, and sued the lender for breach. In its defense, the lender claimed that there was no breach, because the developer had to pay the $30,000 before it was entitled to an extension, and since it did not pay the $30,000 there was no contract for the option.

The court held that the the $60,000 the developer had paid for the first year was consideration for both the initial lending period and the extension options. The lender had breached the contract because it had not proposed terms for the option consistent with the agreementt. That's why the court said:

Colonial fails to recognize its agreement for what it is, an option contract. An option contract has two elements: 1) the underlying contract which is not binding until accepted; and 2) the agreement to hold open to the optionee the opportunity to accept. [Citation of precedent omitted.] Both the option and the underlying contract must be supported by consideration. [Citation of precedent omitted.] In this case, the consideration for the option to bind Colonial to a six month extension was the $60,000 which Plantation had already paid.

Emphasis added. The lender did not understand that it was bound to the option because the $60,000 paid for the first year was consideration for the first year and the options. The developer did not have to pay the $30,000 before the lender was obligated to propose appropriate option terms.

The decision does not stand for the proposition that there had to be further consideration in order to bind the lender to perform under the option. That is not what the decision was about. The decision stands for the proposition that one consideration can cover both the initial contract and the option, which is consistent with Varilease and supports my position, not yours. The minimum to be bought in the first year of an IDIQ contract can be consideration for performance under the option if that is what the parties agree to.

Second, I'll leave this from the Restatement of Contracts, Second, Sec. 83:

Sec. 83. One Consideration For A Number Of Promises

Consideration is sufficient for as many promises as are bargained for and given in exchange for it if it would be sufficient

(a) for each one of them if that alone were bargained for, or

( for at least one of them, and its insufficiency as consideration for any of the others is due solely to the fact that it is itself a promise for which the return promise would not be a sufficient consideration.

Illustrations:

1. A pays B or promises B to pay him $5, not then owed by A, in consideration of which B promises A to give him a book and also promises to surrender a letter. Both of B's promises are supported by sufficient consideration.

2. A pays B or promises B to pay him $50 not then owed by A, in exchange for the following promises: a promise by C to dig a well for D, a promise by E to discharge F from a debt of $100 owing by F to E. All the promises are supported by sufficient consideration.

3. A promises to pay B $1000 in exchange for B's promises to complete a building B is then under an existing duty to A to complete, and to do other specified work. Though A's promise would be insufficient consideration for B's promise to complete the building if that promise were the only one made by B, since both of the parties must be bound or neither is bound, B's additional promise removes the obstacle and both B's promises are supported by sufficient consideration.

That rule applies to options in IDIQ contracts. The promise to buy a minimum in the first year at the prices stipulated is adequate consideration for performance during both the first year and the option year if that is what the parties agreed to during contract formation.

Best regards,

Vern

Don Acquisition

While it is true that the first year's minimum is not past consideration in application to the formation of the option contract obligation (i.e., the option CLIN) which arises in the base year and forces the contractor to keep its offer open, the exercise of that option (i.e., acceptance of the offer) requires consideration to form the new underlying contract obligation where none previously existed and may not rely upon something that has already been given or some act that has already been performed in support of the base year’s obligation to honor delivery orders up to the base year ‘s stated maximum. There is a difference between the option contract itself and the the underlying contract obligation to honor deliver orders up to a stated maximum.

Don Acquisition

While it is true that the first year's minimum is not past consideration in application to the formation of the option contract obligation (i.e., the option CLIN) which arises in the base year and forces the contractor to keep its offer open, the exercise of that option (i.e., acceptance of the offer) requires consideration to form the new underlying contract obligation where none previously existed and may not rely upon something that has already been given or some act that has already been performed in support of the base year’s obligation to honor delivery orders up to the base year ‘s stated maximum. There is a difference between the option contract itself and the the underlying contract obligation to honor deliver orders up to a stated maximum.

The basis for your assertion in bold was that "past consideration is no consideration." Now that you seem to acknowledge that you've been misusing the term "past consideration", what support do you offer now?

I acknowledge no such thing.

Formation of the contract obligation underlying the OPTION CONTRACT (i.e., the option CLIN which merely keeps the offer open) may not rely upon something that has already been given in support of the base year obligation to honor delivery orders up to the base year‘s stated maximum. Formation of the new contract obligation underlying the OPTION CONTRACT cannot look back into time and “reuse” that which already been given to support of the contractor’s base year obligation to honor delivery orders up to the base year‘s stated maximum. I offer my above “Black Acre” example again: if you own “Black Acre” and I give you $1000 for the right to buy “Black Acre” for $100,000 for a 12 month period, this creates an option contract with the $1000 serving as consideration for the option contract itself (merely keeps the offer open) and the $100,000 serving as the consideration for the actual contract obligation for the purchase of “Black Acre” when it arises. When the option contract is exercised the $100,000 must be advanced. Likewise a minimum must be advanced to serve as consideration for the purchase of a new obligation to honor delivery orders up t a stated maximum for the new “fixed period” required by FAR Part 16.

While it is true, as stated in my prior post, that the first year's minimum is not past consideration relative to the formation of the option contract obligation (i.e., the option CLIN) which option contract is formed contemporaneously with the initial award of the base year (i.e., the base year’s min serves a double duty as both consideration for the base year and the option contract), the first year's minimum is past consideration (i.e., “no consideration” and therefore not good consideration) relative to the prospective contract obligation underlying the OPTION CONTRACT and may not be used to form that new contract obligation upon the option contract's exercise.

eriand2, are you saying that when an option is exercised a new contract is formed?

While it is true, as stated in my prior post, that the first year's minimum is not past consideration relative to the formation of the option contract obligation (i.e., the option CLIN) which option contract is formed contemporaneously with the initial award of the base year (i.e., the base year’s min serves a double duty as both consideration for the base year and the option contract), the first year's minimum is past consideration (i.e., “no consideration” and therefore not good consideration) relative to the prospective contract obligation underlying the OPTION CONTRACT and may not be used to form that new contract obligation upon the option contract's exercise.

There you go again. You are misusing the term "past consideration." You think that the consideration given upon formation of the IDIQ contract is "past consideration" when it comes to exercising the option. That is not "past consideration." "Past consideration" has a specific meaning. It is used to describe a situation where the consideration is given prior to the exchange of promises. From my post #19:

Past consideration:

Something that has already been given or some act that has already been performed that cannot therefore be induced by the other party's thing, act, or promise in exchange and is not truly a consideration. For example, A gives B a ride to the market and back home again. When A delivers B to his house, B promises to give A some gas money. A cannot sue B to enforce B's promise since the consideration (A's act of giving B a ride) occurred before B's promise. A gave B the ride without expecting anything in return. (A did not give B a ride in exchange for B giving A gas money.)

That does not describe a situation under an IDIQ contract with options whereby the consideration is concurrent and subsequent to the exchange of promises. The discussion on "One consideration for a number of promises" that Vern posted above more accurately describes what happens under an IDIQ contract with options.

Your argument is based on a false premise.

I think the terminology is causing some confusion.

An “Option Contract” is not the same thing as a Contract with Option Periods.

An Option Contract is a contract that sells options. Options are sold to buy something in the future at a specified price. Like a stock option. I sell you a stock option. This stock option (which you paid for) allows you to buy a share from me at the specified option price within a specified period. That “Option Contract” does indeed have two separate elements: (1) the offer to sell (which you paid for and I give you), and (2) the completed contract (the share which you will pay for and I give you if you exercise the option). Both the option element and the share purchase element are supported by consideration. If that Option Contract expires or lapses, I can sell you another Option Contract for additional consideration.

I can see where one might consider an IDIQ Contract to be a collection of Option Contracts, whereby the established contract prices for individual items and services in the IDIQ contract are individual Option Contracts; and at the end of each IDIQ contract period each individual Option Contract expires; and each new IDIQ contract period requires each individual Option Contract to be renewed and needing their own consideration seperate from the prior period's consideration. But I don’t think that is right, a contract price for an item or service within an IDIQ contract is not an Option Contract.

In contrast, exercising an Option Period under a contract does not create an Option Contract. Exercising the option to extend the contract merely extends the term of the contract. It is not creating an Option Contract. The extension is always a part of the underlying contract, whether or not it is exercised, and does not require additional consideration.

I just want to remind readers that this question has been settled by the Federal Circuit. Varilease Technology Group, Inc. v. U.S.,. 289 F.3d 795, 798 (2002). An IDIQ contract need not include minimums for option years. Unless and until the Federal Circuit reverses itself or the Supreme Court overrules them, the Federal Circuit's decision binds the Court of Federal Claims and the boards of contract appeals. The legal scholars I know think that the Federal Circuit's decision is sound. I know of no outcry or commentary in the legal journals that the court erred.

Vern...and how long was there no outcry or commentary about those who thought the earth was flat?

Whynot,

The first three lines of your 4th paragraph up to the word "expires" captures my point. However, I am not suggesting that "exercising an option" is what creates the option contract as you suggest. Rather, the option contract is already created at the moment of the base period's award. The minimum for the base period serves as consideration for both 1) the obligation to honor DOs up to the stated max of the base period and 2) the obligation to keep the offers open for the option periods (option contracts). So, in terms of explaining my position, you're not exactly on point when you say these option contracts need "their own consideration separate from the prior period's consideration". Rather, it's the underlying obligations of each option contract that need their own consideration separate from the prior period's consideration. The option contracts allow for additional "fixed periods" to be created, if exercised, within which orders may be placed. Those option contracts are a part of the IDIQ contract inasmuch as they are CLINs under the IDIQ contract initially awarded and rely upon the base period's consideration for their creation but the underlying obligations that arise upon exercise cannot rely upon the base period's consideration -- they need their own consideration i.e. the $100,000 for Blackacre.

Vern....sorry for being a smart alec...couldn't control myself.

While my position is clearly open to reasonable debate, it is a fact the court failed to "join the issue" in its decision and therefore the case law created by the court in Varilease cannot be said to have ruled on the issue I raise.

Retreadfed,

eriand2, are you saying that when an option is exercised a new contract is formed?

The option contracts allow for additional "fixed periods" to be created, if exercised, within which orders may be placed. Those option contracts are a part of the IDIQ contract inasmuch as they are CLINs under the IDIQ contract initially awarded and rely upon the base period's consideration for their creation but the underlying obligations that arise upon exercise cannot rely upon the base period's consideration -- they need their own consideration i.e. the $100,000 for Blackacre.

eriend2, I'm not sure what you are missing here regarding IDIQ contracts. I really think you should go read FAR 16.504 again. 16.504(a)(1) states that the contract must require the Government to order and the contractor to furnish at least a stated minimum quantity of supplies or services. This does not state that the Government must order a minimum quantity in each year of the contract, nor if they exercise the option on the contract.

At the most, your point would only stand if the contract you currently have, or are trying to setup/bid on, stated that there was a min/max on each order, per FAR 16.504(a)(3).

But, I think the crux of your argument is that you believe each option is a new "option contract." I think the language in 16.504(a)(4)(i) is pretty plain however that the options are a part of the base contract, and all that they do is extend it. "Specify the period of the contract, including hte number of options and the period for which the Government may extend the contract under each option;" Notice, in emphasis, the word contract is singular. They are not referring to individual option contracts that arise from option exercise; they are referring to a new ordering period that is exercised on the base contract itself.

But, just for more reference, 16.504( pretty much drives it home with stating that an IDIQ is appropriate when the Government cannot predetermine, above a specified minimum, the precise quanties of supplies or services the Government will require during the contract period, and it would be idadvisable for the Government to commit itself more than a minimum quantity.

Notice the use of the singular tense throughout the entire reading of the section, it is one contract, not a contract that contains multiple option contracts to follow.

Vern....sorry for being a smart alec...couldn't control myself.

No problem. I know the feeling.]

Dcarver,

FAR 16.504 (a) "(a) Description. An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period. The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values."

1. Among the “stated limits” of an IDQ contract are those described in FAR 16 which states that the contract shall require a “stated minimum” and a “stated maximum” of supplies or service to be ordered and furnished during the “fixed period” established by the contract. The base year and each option year of an IDQ contract are separate “fixed periods” under the IDIQ contract and each are to contain a separate minimum and maximum quantity.

2. If the “fixed period” as used in FAR 16 is viewed as the period covered by the base year plus the entire time period covered by the un-exercised option periods, under that interpretation the required minimum quantity could be ordered, per FAR 16, at any time during this hypothetial unitary “fixed period”, to include the last option year (i.e., the last year of the purported unitary “fixed period”) as nothing in FAR 16, so interpreted, would require any orders to be placed in the base year of the contract because FAR 16 only requires orders for the minimum be placed “during” the “fixed period”. Such a view of the required “fixed period” is absurd, as such a result could never have been intended under FAR 16 as it would clearly render the Government’s promise illusory as there is no obligation to exercise the option years after the base year expires.

3. Therefore, since the term “fixed period” does not include the time periods covered by the option years, a contract cannot provide for a single stated maximum for all the contract ordering periods which are separate fixed periods.

4. Hence, option years cannot contain only a stated maximum. Every SF 30 that is used to exercise an option year states “Except as provided herein, all terms and conditions of the document referenced in item 9A(Sol.) or 10A(contracts), as heretofore changed, remains unchanged and in full force and effect.” Many contracting activities have written their contracts to preclude SF 30 from carrying the mandatory minimum into option years by stating that the mandatory minimum shall only apply to the base year. It is ironic that these contracting activities, nevertheless, feel compelled to ignore the application of SF 30 with respect to the minimum but nevertheless apply the operative effect of SF 30 only to the stated maximums to each option year, ostensibly, pursuant to the requirements of FAR 16 which obviously address the need for both a stated maximum and a stated minimum.

5. It is clear from FAR 16 that the stated limits of the contractor’s and Government’s obligations (i.e., stated minimum and maximum) must both co-exist in the same fixed period.

6. The exercise of these options (i.e., those containing only stated maximums) involve the Government in “contract obligations” that are “neither fish nor fowl” and therefore are not supported by an authorized contract type as required by FAR 16 and therefore are prohibited by FAR Part 16.102 ( "Contract types not described in this regulation shall not be used, except as a deviation under Subpart 1.4."

So, what you're saying is, you came up with different definitions than what are supported by Government Contract Case Law, and then applied them to "if/then" scenarios. And then, you come up with an analysis to support such claim. Got it.

I'll continue when you can come up with a logical reason as to why multiple court decisions already stated by Vern do not apply. It seems as if you cannot look past your own opinion on this, so I should of took Verns route earlier and not even responded.

, so I should of took Verns route earlier and not even responded.

"should have taken" please.

eriand2,

What happened to your "past consideration is no consideration" argument? There's no mention of it in your last five posts. Did you realize that you had been misusing the term "past consideration"? If your answer is no, then please define "past consideration" for us.

Don Acquisition,

While questioned and challenged, my position needs no further explanation...it speaks for itself....you of course are free to have a differing view. While my position is clearly open to reasonable debate, it is a fact that the Varilease court failed to "join the issue" in its decision and therefore the case law created by Varilease cannot be said to have ruled on the issue I raise.

dcarver

Try reading FAR Part 16.

You will see that contrary to your assumption..... I "came up" with nothing.

The source of the definitions I cite is FAR Part 16.

eriand2,

Your position is clear, but the original basis of your position ("past consideration is no consideration") is no longer present in your posts. This prompted my question as to why. Have you found this basis to be inapplicable to the exercise of options in IDIQ contracts? Or do you still think that a promise to buy the minimum under an IDIQ is "past consideration" when exercising the option?

eriand2:

The problem you are having is that people don't understand your argument. They don't understand it because your explanations are too complex and you freight them with legal jargon like "past consideration," "black letter law," and now, "join the issue." Most of the readers here are not lawyers. You don't need to use such terminology, and a good explicator would not.

Your argument really isn't as complicated as you are making it. Your posts come across like first drafts of a law review article, and you come across like a recent law school grad. I'm not trying to be insulting. I'm simply giving you a point of view. I know some of the top government contract attorneys in this country, and they don't write like you. And none of them would write anything like, "My post is a teaching point, not an attempt to persuade," which was asinine.

I'm truly interested in what you're trying to say, but I'm tired of trying to sort it out. If you would simplify the structure of your argument, make it brief and clear, and write in plain English, you might get a better reception. And, eriand2, I'm a pretty damned smart and competent reader of law. If I can't understand you, and I don't, not fully, then you should take that as a sign.

Finally, stop posting, then disappearing for a week or two, and then coming back and picking up where you left off. It's discourteous and annoying and it makes you seem like a crank. I don't think you are a crank, but some do, as you can probably tell.

You can take this as well intentioned advice or as an attack. It doesn't matter to me. But if you are really interested in teaching, you will take it as the first. Take some time. Think the argument through, element by element, then write it as though you were explaining it to a non-lawyer friend, without legalese. Don't cite any case law at this point, because your citations have not worked for you. We all know about the need for consideration. So just explain why, in addition to the minimum in the base contract, consideration must be a part of the option itself in order for its exercise to bind the parties.

Vern

eriend2,

My fault for responding in a somewhat...attacking manner.

You did lay out your response somewhat clearly, but where you are losing me (and others?) is where you are stating that each option period is a seperate fixed period, which is completely contradictory to the conclusion that has been reached in Case Law. I think this is what Vern may of been speaking to, but could you explain in a clearer manner I guess why you believe the courts ruled incorrectly in Verilease and others? It is spelled out very clearly in Verilease that minimum gurantees are not required in each option period because the options are part of the contract itself, not a seperate "option contract" as you are implying.

While this chain respectfully waits for the elusive bright line clarity, I was thinking of how the GSA Schedule, as an ID/IQ contract, has some unique characteristics. One, it has the obligatory minimum order requirement; two, it is an “evergreen” contract that never expires; and three, the seller has an minimum order requirement placed on themselves as well, whereby if they don’t sell enough or anything their contract is terminated. So, I wonder if the government never orders the minimum within the no time limit, who is seen as breaching the contract first, the government that never ordered or the contractor that never sold?

I know this horse has been beaten severely and appears dead, but in looking at some Davis Bacon requirements I came across this:

29 C.F.R. PART 4—LABOR STANDARDS FOR FEDERAL SERVICE CONTRACTS

§ 4.145 Extended term contracts.

1. Sometimes service contracts are entered into for an extended term exceeding one year; however, their continuation in effect is subject to the appropriation by Congress of funds for each new fiscal year. In such event, for purposes of this Act, a contract shall be deemed entered into upon the contract anniversary date which occurs in each new fiscal year during which the terms of the original contract are made effective by an appropriation for that purpose. In other cases a service contract, entered into for a specified term by a Government agency, may contain a provision such as an option clause under which the agency may unilaterally extend the contract for a period of the same length or other stipulated period. Since the exercise of the option results in the rendition of services for a new or different period not included in the term for which the contractor is obligated to furnish services or for which the Government is obligated to pay under the original contract in the absence of such action to extend it, the contract for the additional period is a wholly new contract with respect to application of the Act's provisions and the regulations thereunder (see §4.143().

I know the application of this language is limited to Davis Bacon, but it does lend support that an option is a wholly new contract.

Whynot, this langujage is from the DoL SCA regulations. Note the last sentence. This guidance is specifically limited to the provisions of the SCA. On several occasions, the Court of Appeals for the Federal Circuit has explained that from a procurement law perspecitive, an option does not form a new contract but is a part of a larger contract.

In the mid 1980s, I was presented a Disputes Act claim by a contractor for about $30 in unpaid Prompt Payment Act interest. After sending it back to find out what was really going on, we learned that the contractor had over $100,000 in similar claims waiting to be filed. The contract was executed before the effective date of the Prompt Payment Act (IIRC, before 1 Oct 82), but there were options exercised after the PPA became effective. Again, IIRC, the ASBCA ruled that (1) an option is an irrevocable offer that may be accepted in the manner prescribed by the offer, (2) the option exercise is acceptance of that offer, (3) the contract came into existence when the offer was accepted, and (4) therefore the PPA did not apply to the basic contract but did apply to the option periods. I do not know if that is still (or ever was) good law -- I seem to recall contrary holdings.