ASBCA Jurisdiction and the “Suspicion” of Fraud: Government Overreach Held in Check

Posted on August 21, 2020

In the Appeal of Mountain Movers/Ainsworth-Benning, LLC, ASBCA No. 62164,  the Armed Services Board of Contract Appeals (the “Board”) recently denied a Government motion to dismiss holding that once the Board was vested with jurisdiction, the contracting officer could not divest it of jurisdiction by his unilateral action of withdrawing the contracting officer’s final decision because of a “general belief that there was fraud somewhere in the contract.” This decision reinforces binding precedent of the United States Court of Appeals for the Federal Circuit and the Board.

It also helps check the Government’s use of fraud as a “sword” or offensive/delaying tactic rather than the “shield,” which the Contract Disputes Act (CDA) 41 USC. § 7101-09) is designed to be by not allowing an “agency head to settle, compromise, pay, or otherwise adjust any claim involving fraud.” 41 USC. § 7103(c)(1).

In Mountain Movers, the Board’s jurisdiction vested after MM/AB timely filed an appeal of the contracting officer’s final decision in which the Government found partial merit to MM/AB’s certified claim.  The claim was seeking entitlement to $535,056.87 plus interest, a contract extension of 538 days, remission of liquidated damages in the amount of $132,600.00 and the remaining contract balance due of $181,121.23.  Approximately two months after the appeal was timely filed, the contracting officer rescinded his final decision upon discovery of purportedly fraudulent statements made by MM/AB five years earlier.  The contracting officer rescinded his final decision based upon this supposed fraud and the Government then moved to dismiss MM/AB’s appeal for lack of subject matter jurisdiction.

So, what was the fraud, and how does it relate to the motion?   The alleged “fraud” was concerning a conversation between the President of MM/AB and the Government.  It involved the requirement for MM/AB to submit performance and payment bonds within ten days of its receipt of the notice of award.  The bonds were not submitted by MM/AB and overlooked by the Government for two months.  After such time and without issuing a cure notice to MM/AB, the contracting officer terminated MM/AB for default.  Conversations thereafter between the President of Mountain Movers and the contracting officer involved replacing, clarifying, and/or revising the Joint Venture and allowing Mountain Movers to continue performing the contract.  The substance of the conversations are in dispute, as is the source of the “suspicion of fraud.”  However, the Ward & Berry litigation team was able to highlight the fact that this “fraud”  was not the basis of the certified claim and was not raised by the Government until almost two months after the appeal was filed and almost three months after the contracting officer issued his final decision with no knowledge of the alleged “fraud.” As such, the contracting officer’s final decision could not be based on fraud.

This suspected fraud was the basis for the motion to dismiss by the Government.  The motion was premised on the novel theory that the Government should be entitled to unilaterally remove litigation from the Boards of Contract Appeals, whenever the Government suspects fraud.  The Government’s position was that Congress did not intend for the Government to have to defend claims involving fraud in agency boards, where the Government cannot avail itself of the various defenses and fraud based counterclaims that would be available were the same contract claim to have been filed in federal court.  The Government also argued that keeping jurisdiction over this claim at a Board would provide a “safe forum” for contractors perpetrating fraud to sue the Government while avoiding any liability for its related fraudulent behavior.

The Board, however, disagreed.  First, the Board identified instances where it could hold contractors accountable for fraudulent behavior, such as, the Board’s ability to consider the affirmative defense of material breach, the Board’s ability to make findings of a material misrepresentation of fact in holding a contract void ab initio (to be treated as invalid from the outset), and the Government’s ability to bring suit pursuant to the False Claims Act in Federal District Court. 31 USC. § 3729. Thus, the contention that the Board provided a “safe forum for contractors perpetrating fraud to sue the government while avoiding liability” was not well received.

Second, the Board noted that the plain language of the CDA restricting a contracting officer’s authority to settle, compromise, pay, or adjust any claim involving fraud, must relate to the “claim” and not just the belief that there was fraud somewhere in the contract Joseph Morton, Co. v. United States, 757 F. 2d 1273, 1281 (Fed. Cir. 1985).  Thus, because MM/AB’s claim did not involve fraud, the Board had jurisdiction to hear the matter and may rightfully do so.

Ward & Berry Partner, Tim Furin, notes that he has seen a rising trend in the Government claiming fraud as a defense to claims and appeals. This pattern puts incredible pressure on companies doing business with the Government and, in many instances, results in companies not getting compensated in a timely fashion for rightful claims.

The Board’s decision may be helpful for clients in determining how they wish to approach grappling with “suspicions of fraud” amid non-fraud related claims.   If you are negotiating requests for equitable adjustments or claims with the Government and the Government suddenly “suspects” fraud, Ward and Berry can assist in navigating that process.