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ASBCA Considers Fraud Based Defense




by:
Vianney Lopez
Smith, Currie & Hancock LLP - Atlanta Office

 
January 8, 2014

Previously published on January 3, 2014

Under the Contract Disputes Act of 1978, 41 U.S.C. § 7101, et seq., the ASBCA’s jurisdiction is limited to deciding appeals from a contracting officer’s decision “relative to a contract made by [the relevant] department or agency.” Traditionally, the boards of contract appeals have not addressed affirmative monetary claims by the government based upon allegations that the contractor has committed fraud. But in International Oil Trading Company, ASBCA Nos. 57491, et al., 13-1 BCA ¶ 35,393, the ASBCA asserted its jurisdiction over the government’s affirmative defense that the underlying contract was void ab initio because the contract was tainted by a contractor’s fraudulent or illegal conduct. If a contract is deemed void ab initio, the government’s position is that it has no obligation to pay the contractor even if the scope of work was fully performed. If sustained, this works as a total forfeiture.

Factual Background

In May 2007, the government awarded International Oil Trading Company (“IOTC”) a contract for the indefinite delivery of fuel to four military installations in Iraq on an as-ordered basis. The fuel was loaded in Aqaba, Jordan, where IOTC prepared a “Fuel Delivery and Acceptance Form” for each tank truck load of fuel, including information such as the weight of the fuel delivery. Shortly after the start of deliveries, the government personnel at the discharge sites in Iraq reported that the gallons of fuel received were less than the loaded gallons that had been indicated on the Fuel Delivery and Acceptance Form. The contracting officer instructed IOTC to adjust its invoice based on the reports of fuel received. Subsequently, in December 2007, IOTC requested payment for the difference between the invoiced quantities of fuel and the reported quantities received. When the government did not make the interim payment, IOTC filed a claim with the contracting officer. The contracting officer denied payment to IOTC and IOTC appealed to the ASBCA. Once at the ASBCA, IOTC moved for partial summary judgment, which the ASBCA granted in part and denied in part.

Following the ASBCA’s decision on IOTC’s summary judgment motion, the government filed an amended answer, alleging IOTC’s fraud and bribery in connection with obtaining the two contracts at issue provided an affirmative defense against IOTC’s payment claim. Specifically, the government alleged that IOTC principals bribed the head of the General Intelligence Directorate of Jordan with $9 million to ensure that IOTC would have no competition for the contracts. The government of Jordan controlled transit permits, which were needed to move the fuel through Jordan to Iraq. The government argued that IOTC could not recover from it on the contracts because the contracts were void ab initio (from the beginning). IOTC moved to strike the defense.

The ASBCA’s Decision

IOTC argued that the ASBCA lacked jurisdiction to consider the government’s defense because it would require a determination that IOTC violated the Foreign Corrupt Practices Act (“FCPA”), 15 U.S.C.A. § 78dd-1, and exercise of such jurisdiction by the ASBCA would be precluded due to the language in sections 7103(a) (5) and 7103(c)(1) of the CDA. The ASBCA held that those sections of the CDA did not apply to the government’s affirmative defense.

Section 7103(a)(5) of the CDA provides that “[t]he authority of this subsection . . . does not extend to a claim or dispute for penalties or forfeitures prescribed by statute or regulation that another Federal agency is specifically authorized to administer, settle, or determine.” The ASBCA rejected IOTC’s argument, focusing on contracting officer’s denial of IOTC’s claims for additional compensation allegedly due under the contract. Thus, the ASBCA held that neither the contracting officer’s final decision nor the government’s defense “claims any penalty or forfeiture prescribed by statute or regulation that another Federal agency is specifically authorized to administer, settle, or determine. There is no penalty or forfeiture imposed by a finding that a contract never came into existence.” The ASBCA also rejected IOTC’s argument that Section 7103(c)(l) of the CDA deprived it of jurisdiction over the government’s defense, holding that neither the contracting officer’s final decision nor the government’s defense “compromise, pay, or otherwise adjust any IOTC claim involving fraud. They deny the IOTC claims entirely.” Second, the ASBCA asserted that it “is not an ‘agency head,’ as defined by the CDA.” Third, the ASBCA held that Section 7103(c)(l) was inapplicable because the ASBCA’s “authority to decide appeals is statutory and not derived by a delegation of authority from an agency head.”

IOTC also argued that the only basis for the government’s defense for taint of bribery and fraud in the formation of the contracts was a violation of the FCPA and that the U.S. Department of Justice had exclusive statutory authority over FCPA claims. The ASBCA disagreed, finding that “[a] government contract is void ab initio under the common law for taint of fraud, bribery or other misconduct compromising the integrity of the Federal contracting process, without a criminal conviction.”

In exercising jurisdiction over the government’s fraud defense in the case at hand, the ASBCA discussed Environmental Safety Consultants, Inc., ASBCA No. 53485, 02-2 BCA ¶31,904, in which the ASBCA held that it had jurisdiction over the government’s affirmative defense of fraud in the contractor’s claim for additional costs of performance because the allegation of fraud was “not a Government claim asserted as the Government’s own right, but a response which raises a defense to [the contractor’s] claim for a quantum recovery” and that this defense was relevant to the merits of the contractor’s claim as it placed in issue the amount of out-of-pocket expenses and legal obligations that could constitute recoverable costs. Moreover, the ASBCA distinguished the case at hand from its decision in Environmental Systems, Inc., ASBCA No. 53283, 03-1 BCA ¶ 32, 167, in which the ASBCA held that it lacked jurisdiction over allegations that closely tracked the provisions of the False Claims Act, 31 U.S.C. 3729. The ASBCA noted, however, that in that same case it exercised jurisdiction over the government’s allegation that the contractor’s submission of false progress payment requests was a material breach of the contract thereby justifying default termination.

With this precedent in mind, the ASBCA concluded that it could exercise jurisdiction over the government’s affirmative defense because the defense did not track the provisions of the CPA or any other criminal statute, nor did it claim any damages, forfeiture or penalties from IOTC. Rather, that the government’s defense alleged only that the contracts under which IOTC was claiming money damages from the government were void ab initio for taint of fraud and bribery by IOTC in obtaining and retaining the contracts. Analyzing the record evidence, the ASBCA found a causal link between the alleged bribery and the formation of the contract such that the contract was tainted from the beginning and therefore was void. Because the underlying claims were IOTC’s claims to compensation under those contracts, the validity of the contracts was relevant to the merits of IOTC’s claims.

Earlier 2013 Decision and Implications

In an earlier 2013 decision, Servicious y Obras Isetan S.L., ASBCA No. 57584, 13-1 BCA ¶35,279, the board also denied the contractor’s claim after concluding that the contractor’s clear misrepresentation of fact in its proposal regarding its qualifications rendered the contract void ab initio. Application of this affirmative defense to a contractor’s representations in its proposal warrants that every contractor consider the significance of these decisions by the ASBCA. It is unlikely that government agency lawyers will miss their significance when defending against a contractor’s claim. As a consequence, agency lawyers are not likely to carefully examine the complete record of performance and initial proposals to find a basis to assert this defense even if it is well after the initial complaint and answer have been filed.

The government’s fraud defense in this case was just that—a defense to the contractor’s underlying payment claim. In order to rule on the underlying claim, the ASBCA must determine the validity of the contract, considering whether it was tainted by illegal conduct. Thus, while this case may appear to expand the ASBCA’s statutory jurisdiction, the case emphasizes the ASBCA’s role as fact finder and suggests that fraud based defenses such as proposal misrepresentations, etc., will be addressed in the context of the ASBCA’s resolution of the underlying contract claims before it.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Vianney Lopez
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Government Contracts
 
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