Appeals of
EUROPA BAKERY, INC.

LEASE AGREEMENT

PSBCA Nos. 4994 and 5172

APPEARANCE FOR APPELLANT:
Rolando X. Vazquez, Esq.

APPEARANCE FOR RESPONDENT:
Carrie M. Branson, Esq.
St. Louis Law Department
United States Postal Service

OPINION OF THE BOARD

            Appellant, Europa Bakery, Inc., has appealed from a decision of the contracting officer denying its claim that it was entitled to the payment of higher rent than the amount specified in its lease with Respondent, United States Postal Service, for one or more option periods.  A hearing was held in San Juan, Puerto Rico.  Only entitlement is at issue in this proceeding (Order of February 16, 2005).

FINDINGS OF FACT

            1.  In June 1987, after becoming aware that Respondent was seeking a new location for its Fernandez Juncos Station, Appellant’s president wrote to the Manager, Support Services, for Respondent’s Caribbean District, indicating that Appellant had a site that it could lease to Respondent for the new station.  At about the same time, Respondent placed ads in local newspapers soliciting offers from the public for rental sites for the same station.  In response to Appellant’s letter, the Support Services Manager (“Manager”) visited Appellant’s building and discussed with him the process for making a formal offer.  (Hearing Transcript, pages (Tr.) 9, 10, 30, 95-97).  The Manager did not have contracting authority or authority to negotiate with prospective lessors at any time relevant to this dispute.  The Manager’s responsibilities were to act as liaison between Respondent’s contracting office in Windsor, Connecticut and contractors and prospective contractors in the Puerto Rico area.  (Tr. 16, 21, 27-28, 64, 66).

            2.  Following discussions with the Manager, in August 1987 Appellant made a formal offer to Respondent.  The offer was made on a PS Form 7400, entitled “Agreement to Lease.”  An Agreement to Lease form was used by Respondent in those instances in which some construction activity was required before the commencement of the actual lease term.  The form was filled out by Respondent’s personnel and was presented to Appellant’s president for his signature.  Appellant’s president signed the offer on August 10, 1987, and imprinted the corporate seal over his signature.  By its terms, the offer was irrevocable for a period of 120 days from the date of the offer, or until December 8, 1987.  (Respondent’s Exhibit (RExh.) B; Tr. 15, 22, 99-100, 84; contra Tr. 34, 35, 57-58).

            3.  The Agreement to Lease provided, in relevant part, that the rent for the initial five-year lease term would be $56,900 per annum.  The Agreement also provided three five-year option periods.  The annual rent specified for the first option period was $65,435.  The annual rent specified for both the second and third option periods was $75,250 – i.e., there was no increase provided between the second and third option periods.  (RExh. B).

            4.  In a November 20, 1987 letter, the Manager informed Appellant that the Fund Investment Committee of the Postal Service had approved the terms and amounts of the Agreement to Lease.  The “terms and amounts” set out in the letter were exactly those contained in the Agreement to Lease – i.e., a base term at $56,900 per annum, and three option periods at $65,435, $75,250, and $75,250 per annum, respectively.  (Appeal File, Tab (AF) 1; Stipulation, paragraphs (Stip.) 1, 2).

            5.  By letter dated February 3, 1988, Appellant’s president extended the time for Respondent’s acceptance of the offer until March 1, 1988.  In March 1988, the parties executed a lease for the property, with the five-year base term beginning January 1, 1988, and containing the same three five-year option periods.  The rental amounts specified in the lease were the same as those contained in the Agreement to Lease and reflected in the Manager’s November 20, 1987 letter.  Appellant’s president executed the lease for Appellant.  Respondent’s contracting officer in Windsor, Connecticut executed it for Respondent.  (RExh. C; AF 2; Tr. 23, 43).  Respondent’s Manager was the only official of Respondent who had had any direct dealings with Appellant prior to execution of the lease (Tr. 97, 116).

            6.  The record is silent with regard to any further activity until February 10, 1997, when Appellant’s president wrote to the Manager, explaining that the cost of living in Puerto Rico had doubled, as had comparable rents in the area of the post office.  The president asked that Appellant be considered, if possible, for a prospective rent increase or a new contract.  Appellant’s president sent a follow-up letter on June 24, 1997, asking for a response.  (AF 3, 4).

            7.  The Manager forwarded the letters to the Postal Service contracting officer with jurisdiction over the Caribbean District.  By letter dated September 30, 1997, the contracting officer responded, advising that the lease did not provide for an adjustment of rents as requested by Appellant and that it was Postal Service policy not to make such adjustments until such time as the lease expired and a new lease was negotiated.  (AF 5, 7).

            8.  On or about September 17, 1997, Respondent exercised the second option, thereby extending the lease term to December 31, 2002, at $75,250 per annum.  By letter to the contracting officer, dated October 15, 1997, Appellant’s president indicated that he was revising the “Exercise of Renewal Option” form he had received from the Postal Service to reflect what he contended were comparable rents for the area.  He also indicated that there were portions of the Agreement to Lease that he believed had to be “corrected and amended” to reflect comparable rents.  (AF 6, 8).

            9.  By letter to the contracting officer, dated October 28, 1997, Appellant’s president took issue with the contracting officer’s position expressed in his September 30, 1997 letter.  Appellant’s president argued that that position contradicted communications he had had with Respondent’s Manager, in which the Manager had specified to him that the rents would be renegotiable every five years.  In response, through letters dated November 24, 1997, and January 12, 1998, the contracting officer reiterated his position that there was no basis for amending the lease.  (AF 9, 11, 13).

            10.  On or about March 22, 2001, the contracting officer exercised the final option, extending the lease to December 31, 2007, at $75,250 per annum (AF 15).

            11.  By letters to the Caribbean District Manager and the contracting officer in October 2002, Appellant’s president again raised the issue of rent adjustments to which he believed Appellant was entitled.  In response, by letter dated October 31, 2002, the contracting officer reiterated his position that he would not renegotiate the lease and that the lease would remain in effect until the end of the option term.  (AF 17-19).

            12.  In letters to the Caribbean District Manager and the contracting officer, dated November 15, 2002, Appellant’s president stated that the rental would be the equivalent of $128,128.80 per annum, beginning January 1, 2003, if Respondent decided to continue to occupy the facility.  In response, the contracting officer issued a final decision, dated November 26, 2002, in which he reminded Appellant that the last option period had previously been exercised, and stated that the lease would remain in force until the end of that period at an annual rental of $75,250.  (AF 20, 22).  Appellant filed a timely appeal of the final decision, which appeal was docketed as PSBCA No. 4994.

            13.  In July 2003, after it had been determined that Appellant was seeking in excess of $100,000, Appellant filed a certified claim with the contracting officer.  By final decision dated April 12, 2004, the contracting officer denied the claim, and Appellant filed a timely appeal, which appeal was docketed as PSBCA No. 5172.  (Stip. 25-28; RExh. F).

DECISION

            Appellant argues that Respondent’s Manager was “duly authorized” by Respondent when he negotiated the terms of the lease with Appellant’s president.  Appellant contends that its president was assured by Respondent’s Manager that the option rental amounts would be negotiable, notwithstanding the fixed rentals stated in the Agreement to Lease and lease.  Appellant also argues that the terms of the lease were proposed entirely by Respondent’s Manager, and that Appellant’s president did not understand the documents he was asked to sign and did not have time to seek counsel when the documents were presented to him for signature.  Finally, Appellant, citing 41 U.S.C. §601, argues that Respondent’s Manager converted the lease agreement into a “null and fraudulent document” when he “misrepresented facts about the contract, and made false statements of substantive facts … with intent to deceive or mislead” which statements allegedly misled Appellant’s president with regard to the lease.

            Respondent argues that the plain language of the lease provides for fixed rents for each renewal option period and that the Board may not consider parol evidence that would alter the terms of an unambiguous written contract.  With respect to Appellant’s argument that the contract was entered into through fraudulent misrepresentation, Respondent argues that, even assuming the misrepresentation took place, Appellant ratified the contract by continuing performance rather than attempting to avoid it.  Finally, Respondent argues that its Manager lacked contracting authority or authority to negotiate for the Postal Service and, therefore, could not agree to terms binding on Respondent.

            The written lease before us in this proceeding unambiguously provides for the payment of specified, fixed rentals during the base and option periods.  Appellant argues, however, that its president and Respondent’s Manager, who was the only official of Respondent with whom Appellant had dealings, shared a different understanding of the basis for the lease – i.e., that rentals for the option periods would be negotiable.  In effect, Appellant asks that the Board reform the lease to reflect what Appellant contends was the parties’ intended agreement.

            Reformation is appropriate when the written agreement does not reflect the true agreement of the parties.  See, e.g., Philippine Sugar Estates Development Co., Ltd. v. Government of the Philippine Islands, 247 U.S. 385, 389 (1918); American Employers Insurance Co. v. United States, 812 F.2d 700, 705 (Fed. Cir. 1987); Olson Plumbing & Heating Co. v. United States, 602 F.2d 950, 958 (Ct. Cl. 1979); Kenneth F. Zarrilli, PSBCA No. 3148, 1994 PSBCA Lexis 16 (June 30, 1994).  Before a contract will be reformed, however, the party seeking reformation must establish either that there was in fact a mutual mistake by the parties or that the other party knew or should have known that the party seeking reformation was operating under a mistake when it agreed to the contract.  See Philippine Sugar, 247 U.S. at 391; Burnett Elecs. Lab., Inc. v. United States, 479 F.2d 1329, 1333, 202 Ct. Cl. 463, 471 (1973); Zarrilli, supra; 2719 Building Partnership, PSBCA No. 1651, 1987 PSBCA LEXIS 61 (Sept. 8, 1987).

            We have made no finding with respect to preaward conversations regarding the negotiability of option prices, conversations that Appellant alleges took place between its president and Respondent’s Manager.  However, in this instance there can be no reformation even if we were to conclude that those discussions took place exactly as alleged by Appellant,[1] since Appellant has not shown that Respondent’s Manager had authority to bind the Postal Service to any agreement.  See Rich Macauley, AGBCA No. 2000-155-3, 01-1 BCA ¶ 31,350 at 154,811.  The risk of determining the authority of the Manager to agree to the terms alleged by Appellant fell on Appellant, Federal Crop Insurance v. Merrill, 332 U.S. 380, 384 (1947); City of El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990), and the only record evidence on this point indicates that Respondent’s Manager had no actual contracting authority (Finding 1), and thus could not bind Respondent.

            The only person identified in the record as having authority to bind Respondent was the contracting officer who executed the lease on behalf of Respondent, and there is no evidence or allegation either that he shared Appellant’s president’s understanding of what the arrangements were with regard to rental amounts or that he was aware of Appellant’s understanding at the time he entered into the lease on behalf of Respondent.  Thus, Appellant has failed to show either that there was a mutual mistake or that there was a unilateral mistake on Appellant’s part of which Respondent was aware.  Under these facts, reformation of the lease is not justified.  See 2719 Building Partnership, PSBCA No. 1651, 1987 PSBCA LEXIS 61 (Sept. 8, 1987).

            With regard to Appellant’s argument that its president did not understand the documents he was being asked to sign and had no time to seek counsel, we note that there was a period of months between the initial offer (by way of the Agreement to Lease) in August 1987 and the execution of the lease in March 1988.  Further, included in that period was a period of time during which Appellant’s otherwise irrevocable offer had technically expired (Finding 2).  During that entire period Appellant’s president was free to seek counsel or other aid to ensure that the documents he signed reflected what he believed the rental arrangements to be, but he apparently did not do so.  Accordingly, we do not accept Appellant’s argument.

            Finally, we do not address Appellant’s argument that the lease was turned into a “null and fraudulent document” by the actions of Respondent’s Manager.  Appellant stated its argument in a single sentence, without any citations to case law, and has not offered any further explanation of the argument itself or of its relevance to Appellant’s claim that it is owed additional rent for the option periods.  It is not clear whether Appellant is arguing that the lease was void (“null”) or voidable (for fraud), or that a declaration on the subject by the Board would be relevant to its claim – which is essentially a claim for damages under a reformed contract.  Appellant’s citation to 41 U.S.C. §601 (which contains, under subpart (7), a definition of “misrepresentation of fact” – a term used only in 41 U.S.C. §604 addressing failure by a contractor to support its claim) does not clarify the purpose or relevance of the argument.  To give meaning to this argument would require us to speculate as to what Appellant intended, and we see no reason to do so in this case.[2]

            Accordingly, for the reasons stated above, the appeals are denied.

David I. Brochstein
Administrative Judge
Vice Chairman

I concur                                                                       I concur:
William A. Campbell                                                     Norman D. Menegat
Administrative Judge                                                  Administrative Judge
Chairman                                                                     Board Member

[1]   Parol evidence of discussions prior to or contemporaneous with the adoption of the lease (or Agreement to Lease) is admissible when offered to prove mistake.  See, e.g., National Australia Bank v. United States, 452 F.3d 1321, 1330 (Fed. Cir. 2006); Restatement (Second) of Contracts, § 214 (1981); 6-26 Corbin on Contracts § 580.

[2]   Appellant’s Complaint in these appeals contains a demand for tort damages, citing Title 31 of the Laws of Puerto Rico Annotated (31 L.P.R.A. §§5141, 5142).  These sections of law are under the general heading of “Obligations Contracted Without Agreement,” which includes “Quasi Contracts” and “Obligations Which Arise Due to Fault or Negligence.”  Sections 5141 and 5142 fall under the latter subheading and describe matters over which the Board lacks jurisdiction.  E.g., Gavosto Associates, Inc., PSBCA Nos. 4058, 4131, 4144, 4333, 01-1 BCA ¶ 31,389; Rodney Trevett, PSBCA Nos. 4255, 4452, 01-1 BCA ¶ 31,236; Donald E. Skaggs, PSBCA Nos. 4486, 4487, 00-2 BCA ¶ 30,933.  Accordingly, we do not address this subject further.