1589 Donald C. Winter, SECRETARY OF THE NAVY v. Bath Iron Works Corporation

United States Court of Appeals for the Federal Circuit
2006-1578, -1589
Donald C. Winter, SECRETARY OF THE NAVY,
Appellant,
v.
BATH IRON WORKS CORPORATION,
Appellee.
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BATH IRON WORKS CORPORATION,
Appellant,
v.
Donald C. Winter, SECRETARY OF THE NAVY,
Appellee.
Kirk T. Manhardt, Senior Trial Counsel, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for the Secretary of the
Navy. With him on the brief were Peter D. Keisler, Acting Attorney General, Jeanne E.
Davidson, Director, and William F. Ryan, Assistant Director. Of counsel on the brief was
James T. DeLanoy, Senior Trial Attorney, Office of the General Counsel, Navy Litigation
Office, United States Department of the Navy, of Washington, DC.
Richard C. Johnson, Smith Pachter McWhorter, PLC, of Vienna, Virginia, argued for
Bath Iron Works Corporation. Of counsel were Erin R. Karsman and David S. Stern.
Patricia H. Wittie, Oldaker, Biden & Belair, LLP, of Washington, DC, for amicus
curiae American Shipbuilding Association.
Appealed from: United States Armed Services Board of Contract Appeals
Administrative Judge David W. James, Jr.

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United States Court of Appeals for the Federal Circuit
2006-1578, -1589
Donald C. Winter, SECRETARY OF THE NAVY,
Appellant,
v.
BATH IRON WORKS CORPORATION,
Appellee.
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BATH IRON WORKS CORPORATION,
Appellant,
v.
Donald C. Winter, SECRETARY OF THE NAVY,
Appellee.
__________________________
DECIDED: October 4, 2007
__________________________
Before NEWMAN, RADER, and PROST, Circuit Judges.
PROST, Circuit Judge.
The Department of the Navy (“Navy”) appeals a December 22, 2005 decision of
the Armed Services Board of Contract Appeals (“ASBCA” or “board”) holding that Bath

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Iron Works Corporation (“BIW”) was entitled to an equitable contract adjustment related
to the repair of corroded pipes in a ship it was building for the Navy. Bath Iron Works
Corp., ASBCA No. 54544, 06-1 BCA ¶ 33,158 (Dec. 22, 2005) (“Initial Decision”). BIW
cross-appeals the board’s April 21, 2006 decision to remand to the parties the
determination of whether and to what extent any Contract Dispute Act (“CDA”) interest
was due as a result of the adjustment. Bath Iron Works Corp., ASBCA No. 54544, 06-1
BCA ¶ 33,272 (Apr. 21, 2006) (“Reconsideration Decision”). Because the ASBCA
incorrectly concluded that an improperly performed flush of the piping at issue was a
“defect” in the vessel, we vacate and remand the case for further proceedings and
dismiss BIW’s cross-appeal.
I. BACKGROUND
On March 6, 1998, the Navy awarded BIW a fixed-price, incentive fee contract to
construct six guided missile destroyers (“DDGs”). The contract included an insurance
clause that precluded BIW from carrying insurance “against any form of loss of or
damage to the vessels or to the materials or equipment therefor.” Instead, the contract
included an “all-risk” insurance clause, which provided that:
The Government assumes the risks of loss of and damage to the vessels
and such materials and equipment which would have been assumed by
the underwriters if the Contractor had procured and maintained throughout
the term of this contract, on behalf of itself and the Government, insurance
. . . (i) under the forms of Marine Builders Risk (Navy Form-Syndicate)
policy . . . as set forth in the pamphlet . . . dated 23 November 1942,1 or
(ii) under any policy forms which the Assistant Secretary of the Navy
(RD&A), Insurance Office shall determine were customarily carried or
would have been customarily carried by the Contractor in the absence of
1 The 1942 Marine Builders Risk (Navy Form-Syndicate) policy provides
coverage for “all risks, including fire, while [the vessel is] under construction and/or
fitting out.” (J.A. A200862.)
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the foregoing requirement that the Contractor not carry or incur the
expense of insurance . . . .
The insurance clause further provided that:
under the above identified policies or under this requirement the
Government does not assume any risk with respect to, and will not pay for
any costs of the Contractor for the inspection, repair, replacement, or
renewal of any defects themselves in the vessel(s) or such materials and
equipment due to (A) defective workmanship, or defective materials or
equipment performed by or furnished by the Contractor or its
subcontractors or, (B) workmanship, or materials or equipment performed
by or furnished by the Contractor or its subcontractors which do(es) not
conform to the requirements of the contract, whether or not any such
defect is latent or whether or not any such non-conformance is the result
of negligence;
. . . .
under the above identified policies or under this requirement the
Government does not assume the risk of and will not pay for the costs of
any loss, damage, liability or expense caused by, resulting from, or
incurred as a consequence of delay or disruption of any type whatsoever.
. . . .
Notwithstanding the foregoing, the Contractor shall bear the first $50,000
of loss or damage from each occurrence or incident the risk of which the
Government otherwise would have assumed under the requirements of
this paragraph.
Under the contract, BIW was required to construct each destroyer’s fuel oil fill
and transfer (“FOFT”) system. This system is intended to receive and distribute fuel
from five topside locations on the destroyer to six groups of receiving, storage, and
overflow expansion tanks. From November 9, 2000, to September 17, 2002, BIW
installed, inspected, and conducted hydrostatic pressure tests on the FOFT system of
one of the destroyers, known as “DDG 90.” This was the first DDG BIW constructed on
its “land level transfer facility” in a level position. Prior to DDG 90, BIW had constructed
DDGs on inclined building ways.
After testing the FOFT system, the contract required BIW to flush the FOFT
system with fuel to remove any foreign matter that might have accumulated in the
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system during construction. However, on August 27, 1998, BIW amended its
“Department Operating Instructions” to provide that “[t]he flushing requirements for the
fill system shall be satisfied by flushing the pipe with fresh water.”
On September 9, 2002, one of BIW’s employees departed from both the contract
specification and BIW’s Department Operating Instructions and conducted a flush of the
DDG 90 FOFT system using brackish water from the Kennebec River. Some of this
brackish water remained in the DDG 90 FOFT piping for approximately eight months,
until April and May 2003, when BIW discovered more than seventy holes that appeared
to be caused by corrosion in the DDG 90 FOFT piping.
On May 23, 2003, BIW informed the Navy that it was analyzing the holes in the
DDG 90 FOFT piping. On June 27, 2003, the Navy’s contracting officer directed BIW to
continue with the repair and replacement of the damaged piping, but explained that the
direction was provided without prejudice to any of the government’s rights and did not
authorize any changes in the terms, conditions, delivery schedule, or price of the
contract. The same day, BIW requested an equitable adjustment based upon its repairs
and replacement of the FOFT piping. The contracting officer denied the claim. BIW
appealed to the ASBCA.
The ASBCA applied the insurance clause of BIW’s contract to the facts of this
case and concluded that the “defect” in this dispute, as used in the defective/non-
conforming workmanship exception to the contract’s insurance clause, was the “post-
hydrostatic test flush of DDG 90’s FOFT piping by Kennebec River water on 9
September 2002.” Initial Decision, slip op. at 19. Based on testimony from three expert
witnesses, the board concluded that the brackish water flush combined with the FOFT
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configuration, the accelerated sequencing of the FOFT pipe installation and flushing,
and the use of the land level transfer facility to “cause[] the unforeseen, increased
incidence of corrosion in DDG 90’s piping.” Id. at 14-15. Other factors were also
mentioned by the experts as potentially contributing to the corrosion; however, the
board made no findings with respect to the role played by those factors “since the
experts disagreed whether [those] factors caused DDG 90’s FOFT piping corrosion and
[the board believed] such . . . findings [were] not necessary for the determination of
liability under the Insurance clause.” Id. at 15.
According to the board, “[t]he unforeseen, increased incidence of corrosion in
DDG 90’s FOFT piping . . . was a ‘fortuitous or casualty loss’ under the terms of the
Insurance clause,” id., and “BIW’s investigation, repair[] and replacement of [the]
corroded FOFT piping were not within the defective workmanship exception to the
Insurance clause,” id. at 21. Therefore, the board found that BIW was entitled to an
equitable adjustment for all but the costs of re-performing the flush of the DDG 90 FOFT
piping and awarded it damages of $1.13 million. Id. at 23. The board, however, denied
BIW’s request for CDA interest. Id. BIW filed a motion for reconsideration regarding
various damage issues and the denial of CDA interest. In response, the board
increased the damage award to $1.17 million, and remanded to the parties for a
determination of whether, or to what extent, any CDA interest is due. Reconsideration
Decision, slip op. at 11. The Navy appeals both the board’s decision that BIW was
entitled to a contract adjustment and its quantum determination. BIW cross-appeals the
board’s decision to remand the CDA interest determination to the parties. We have
jurisdiction pursuant to 28 U.S.C. § 1295(a)(10).
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II. DISCUSSION
A. Standard of Review
Contract interpretation by the ASBCA is a question of law reviewed de novo by
this court. Lear Siegler Servs., Inc. v. Rumsfeld, 457 F.3d 1262, 1266 (Fed. Cir. 2006).
The board’s factual findings, on the other hand, may only be set aside if they are: (1)
fraudulent, (2) arbitrary or capricious, (3) so grossly erroneous as to necessarily imply
bad faith, or (4) not supported by substantial evidence. 41 U.S.C. § 609(b); Lear Siegler
Servs., 457 F.3d at 1265-66.
B. BIW’s Entitlement to an Adjustment
On appeal, the Navy argues that the ASBCA misinterpreted the contract’s
insurance clause to exclude from coverage only the costs BIW incurred in re-performing
the flush of the DDG 90 FOFT piping. According to the Navy, the ASBCA (1)
disregarded the distinction the insurance clause exclusion draws between
defective/non-conforming workmanship and defects in the vessels due to such
defective/non-conforming workmanship, and (2) improperly added a “fortuitous event”
exception to the exclusion.
In this case, the board held that the “post-hydrostatic test flush of DDG 90’s
FOFT piping by Kennebec River water on 9 September 2002,” was a “defect[] . . . in the
vessel” as used in the defective/non-conforming workmanship exclusion to the
contract’s insurance clause and that “[t]he unforeseen, increased incidence of corrosion
in DDG 90’s FOFT piping . . . was a ‘fortuitous or casualty loss’ under the terms of the
Insurance clause.” Initial Decision, slip op. at 19.
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As an initial matter, the government is correct that there is no “fortuitous or
casualty” exception to the defective/non-conforming workmanship exclusion from the
contract’s insurance clause. The government, however, incorrectly characterizes the
board’s decision in the case. The board did not read such an exception into the
defective/non-conforming workmanship exclusion. All-risk insurance clauses, such as
that in this case, by their very nature, only apply when there has been a fortuitous or
casualty loss. See Meridian Leasing, Inc. v. Associated Aviation Underwriters, Inc., 409
F.3d 342, 350 (6th Cir. 2005) (“All-risk insurance coverage . . . is a type of coverage that
traditionally provides indemnification for ‘fortuitous and extraneous’ events.”); Buczek v.
Cont’l Cas. Ins. Co., 378 F.3d 284, 287 (3d Cir. 2004) (“All-risks insurance . . . generally
allows recovery for all fortuitous losses, unless the policy contains a specific exclusion
expressly excluding the loss from coverage.”); Dow Chem. Co. v. Royal Indem. Co., 635
F.2d 379, 386 (5th Cir. 1981) (“[R]ecovery under an all-risk policy will be allowed for all
fortuitous losses not resulting from misconduct or fraud, unless the policy contains a
specific provision expressly excluding the loss from coverage.”) By the terms of the
contract, the only time a fortuitous defect in the vessel is not covered is when that defect
is “due to (A) defective workmanship, materials, or equipment performed by or furnished
by the Contractor or its subcontractors or, (B) workmanship, materials, or equipment
performed by or furnished by the Contractor or its subcontractors that do(es) not
conform to the requirements of the contract.” It is incorrect to state that there is a
fortuitous or casualty loss exception to the defective/non-conforming workmanship
exclusion. Either the exclusion applies or it does not. Here, the board held that it did
not.
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The board, however, misapplied the exclusion to the facts of this case. Although
the insurance clause explicitly excludes from coverage “defects themselves in the
vessel” due to defective/non-conforming workmanship, the board held that the “post-
hydrostatic test flush of DDG 90’s FOFT piping by Kennebec River water” was such a
defect. Initial Decision, slip op. at 19 (emphasis added). The post-hydrostatic test flush
of the FOFT piping, however, is not a part of the vessel. Accordingly, although it may
have given rise to corrosion, the flush, itself, cannot be a defect in the vessel.
Instead, the “defect in the vessel” in this case is the corroded DDG 90 FOFT
piping. The only question is whether the corrosion was “due to (A) defective
workmanship, or defective materials or equipment performed by or furnished by the
Contractor or its subcontractors or, (B) workmanship, or materials or equipment
performed by or furnished by the Contractor or its subcontractors which do(es) not
conform to the requirements of the contract.” If it was, the costs of inspection, repair,
replacement, or renewal of the FOFT piping are properly borne by BIW and not the
Navy.
Here, the board has already determined that the Kennebec River water flush of
DDG 90’s FOFT piping did not conform to the contract specification. See id. at 21
(describing the brackish water flush as “nonconforming” and “improper”). The question
is whether the corrosion was “due to” the nonconforming flush, as required by the
defective/nonconforming workmanship exclusion to the contract’s insurance clause.
Although the Navy argues that the board made findings of fact sufficient for this
court to hold that the corrosion in the DDF 90 FOFT piping was due to the
nonconforming brackish water flush, we disagree. In fact, the board explicitly held that,
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while the nonconforming flush may have contributed to the corrosion of the FOFT
piping, id. at 14-15, it “was not necessarily the cause in fact or the proximate cause of
the corrosion.” Id. at 21. As such, we lack sufficient findings of fact to determine
whether the inspection, repair, replacement, and renewal costs associated with the
FOFT piping corrosion are subject to the defective/nonconforming workmanship
exclusion to the contract’s insurance clause. Accordingly, we vacate and remand this
case to the board for further proceedings to determine whether the corrosion in the
DDG 90’s FOFT piping was “due to” the nonconforming flush of the piping. If it was,
BIW, and not the Navy, would be liable for the costs of inspecting, repairing, replacing,
and/or renewing the FOFT piping. In light of our vacatur and remand of the board’s
entitlement determination, the Navy’s appeal of the quantum determination is, therefore,
moot.
C. BIW’s Cross-Appeal Seeking CDA Interest
Lastly, BIW cross-appeals the board’s decision to remand the CDA interest
determination to the parties. Our jurisdiction over appeals from a decision of the
ASBCA, however, is limited to final decisions. 28 U.S.C. § 1295(a)(10). Here, there
has been no final decision. See Teledyne Cont’l Motors v. United States, 906 F.2d
1579, 1583 (Fed. Cir. 1990) (“A ‘remand’ to the parties and the contracting officer is
even less final than a decision to remand to an administrative agency.”). Moreover,
even if we possessed jurisdiction to hear BIW’s cross-appeal, our vacature of the
board’s decision regarding BIW’s entitlement to an adjustment renders BIW’s cross-
appeal moot. Accordingly, we dismiss BIW’s cross-appeal.
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2006-1578, -1589 10
III. CONCLUSION
Because the ASBCA incorrectly concluded that an improperly performed flush of
the piping at issue was a “defect” in the vessel, as used in the contract’s insurance
clause, we vacate and remand the case for further proceedings and dismiss BIW’s
cross-appeal.
VACATED-IN-PART, REMANDED-IN-PART, AND DISMISSED-IN-PART

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