Post-Award Discretion Risk and Lessons from Rekhter

From Lady Duff-Gordon to Rekhter

In Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88 (1917), a fashion designer granted an exclusive right to market her name and designs in exchange for fifty percent of “all profits and revenues.” The contract imposed no express obligation on the marketer to promote the designer’s work or generate sales. The dispute turned on whether his discretion allowed nonperformance without breach.

Justice Cardozo found that it did not. As he put it, “The acceptance of the exclusive agency was an assumption of its duties.” More broadly: “A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed.”

In modern public procurement, the issue often arises not from vague drafting or nonperformance, but from how discretion is exercised. For example, in Rekhter v. Washington State Department of Social and Health Services, 180 Wn.2d 102 (2014), private providers delivered in-home care services under contracts that tied compensation to specified tasks and capped total payment. After award, the agency adopted a “shared living” rule that automatically reduced authorized paid hours by 15 percent for providers living with care recipients.

The court concluded that the agency breached the implied duty of good faith and fair dealing. By using its discretion to reduce payment without reducing required performance, the agency defeated the reasonable expectations of the providers. This implied duty was not “free floating,” as the state argued, but arose from the grant and exercise of discretionary authority itself. According to the court, “the implied duty of good faith and fair dealing applies when one party has discretion to select the formula or method used to calculate a particular value in the contract.”

We see these principles applied at the federal level as well. In Agility Public Warehousing Co. KSCP v. Mattis, 852 F.3d 1370 (Fed. Cir. 2017), the contractor expressly agreed, by bilateral modification, to a cap on transportation fees. The Federal Circuit nonetheless held that an implied-duty claim could proceed where the government allegedly administered performance in a way that made compliance with the cap impracticable—by unnecessarily delaying the return of trucks and failing to expand on-site storage—while leaving Agility’s performance obligations intact. Even negotiated discretion, the court emphasized, must be exercised in a way that preserves the economic substance of the bargain.

In cases such as Rekhter and Agility, the question is not whether discretion fits within the text, but whether it is exercised within the bargain the parties reasonably contemplated at formation.

You can read Rekhter and Agility at Washington Reports and Justia, respectively. Lady Duff-Gordon is available at NYCourts.gov.

Common Examples of Discretion

Discretionary terms show up all over the government contracts world, including:

• Fixed-price services where workload or tasking is defined by post-award “direction”
• Acceptance criteria left to subjective agency judgment
• IDIQ estimates that shape proposal pricing but aren’t binding
• Regulatory changes, such as stricter Buy American Act and cybersecurity requirements

This last bullet illustrates a broader pattern. Government contracts are especially susceptible to discretionary risk because they incorporate extensive regulatory obligations. While these are typically fixed by clause version at execution, long-running vehicles often incorporate updated clause versions over time—through GSA Schedule refreshes, option exercises, or similar mechanisms—expanding requirements without a commensurate adjustment to pricing. The tension is most acute in fixed-price arrangements, where evolving compliance obligations can materially increase performance costs that were not built into the original bargain.

The problem from the contractor’s perspective is that courts generally do not permit damages recovery for harm caused by public and general regulatory change. Even when new requirements make performance more expensive, the change is treated as an act of the government in its sovereign capacity rather than a breach of contract. Courts usually describe this as the sovereign acts doctrine. See United States v. Winstar Corp., 518 U.S. 839 (1996).

The doctrine has its limits, however. Government action loses its protection when it is not general and instead frees the government from its contractual commitments.

Benign Terms

Even terms that appear benign on their face can become discretionary once administrative choices come into play. For example, continued coordination beyond a target date—particularly where the contractor is actively performing and has committed resources—can demonstrate that the parties treated the date as a planning benchmark rather than a firm cutoff. Where the contract lacks mechanisms for notice, cure, or payment adjustment, that discretion can harden into an all-or-nothing decision to cancel, increasing dispute risk and exposure for both parties.

Too often, these issues are confronted for the first time after performance is well underway. When contractors voice concerns such as, “This is not what we signed up for,” agencies often point to their hands being tied. The most common example is the one cited in Rekhter: “We are following our policies.” The case underscores that policy justifications, standing alone, are not enough to displace an obligation to exercise contractual discretion consistent with the bargain.

Bounding Discretion

Given these risks, contractors should ask questions such as these when reviewing contract terms:

• Who controls the post-award mechanism that defines scope or payment, and what constrains that control?
• Is payment capped while performance obligations remain variable?
• If discretion increases effort or cost, is there a path to adjustment or relief?

In Rekhter, providers operated within a state-administered program and may have had little negotiating leverage. Still, to the extent leverage existed, they might have tied compensation more closely to discrete services, established minimum payment floors for required tasks, or required adjustment where changes in agency methodology reduced compensation without reducing scope.

Where such efforts are absent or unsuccessful, and discretion begins to operate outside the contract’s pricing, it becomes essential to document costs. Doing so may be the difference between having a path forward and having none. Those paths may include discussion, a request for equitable adjustment, or, in some cases, a formal claim.

Takeaway

From the contractor’s perspective, agency discretion can appear benign at award but become burdensome in performance. The difference often turns on whether that discretion is identified early and addressed through objective boundaries, pricing that reflects the risk, and/or a clear path to adjustment.