Federal Circuit Issues Important Government Contracts Decision in "Contractor-on-the-Battlefield" Dispute

07.12.2019

On July 9, 2019, the U.S. Court of Appeals for the Federal Circuit issued an important decision in a long-running contract dispute regarding the use of private security contractors (PSCs) by the U.S. Army's principal logistical support contractor, KBR, and its subcontractors during the height of the Iraq War. In so doing, the Federal Circuit has affirmed a 2017 decision of the Armed Services Board of Contract Appeals (ASBCA or Board), finding that KBR is entitled to reimbursement of $44 million, plus interest, in costs that the government had initially paid but then recouped from KBR under KBR's cost-reimbursement contract with the Army. 

The Federal Circuit's decision in Secretary of the Army v. Kellogg Brown & Root Services, Docket No. 2018-1022, is particularly significant, as it confirms: (1) even under the court's holding in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 132 (Fed. Cir. 2010), the common law affirmative defense of prior material breach does not need to be presented to a contracting officer in the form of a Contract Disputes Act (CDA) claim in order for a tribunal to later have jurisdiction to hear the defense; and (2) a contractor is entitled to interest when it submits a certified claim demanding repayment of monies that the government recoups when it executes on a government claim. A copy of the court's opinion is here

Summary of Decision

Before the Board, the Army had argued that any costs associated with the use of private security were unallowable because KBR's contract with the Army prohibited the use of private security. In response, KBR argued that any violation of this alleged prohibition had been excused by the government's prior material breach of its obligation to provide force protection to KBR and its subcontractors, and so the costs in question were allowable. The ASBCA agreed with KBR, finding:

[D]espite the many and continuing failures of the government to provide the promised level of force protection to KBRS and its subcontractors . . . , the government seeks to disallow the PSC costs incurred . . . in order to accomplish [the] mission under the LOGCAP contract despite the government's breach, and argues that its breach was not material. It is hard to imagine a contract breach more material than this one, which eviscerated the promise at the heart of the justification for the government's claim. The government's breach was material . . . [and] operate[d] to excuse any subsequent noncompliance with the contract's PSC prohibition.

Slip op. at 5-6. 

On appeal before the Federal Circuit, the government did not challenge the Board's finding that the Army had materially breached the contract. Rather, its two principal contentions were:  (1) under the Federal Circuit's decisions in Maropakis and Raytheon Co. v. United States, 747 F.3d 1341 (Fed. Cir. 2014), the Board had lacked jurisdiction over KBR's affirmative defense of prior material breach because that defense had not been timely presented to the contracting officer in the form of a certified claim; and (2) the Board had improperly found that KBR was entitled to interest running from the dates that KBR had submitted certified claims demanding repayment of the recouped $44 million because (according to the government) those claims had not asserted the breach argument on which KBR ultimately recovered. The Federal Circuit rejected both of these arguments.

On the jurisdictional issue, the Federal Circuit found that KBR had not been required to submit its affirmative defense of prior material breach to the contracting officer. In this regard, the court first found that, unlike the arguments at issue in Maropakis and Raytheon (which the court had found did need to be submitted to the contracting officer), KBR's assertion of breach did not seek the adjustment of contract terms. Rather, as in Laguna Construction Co. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016), and Securiforce International America, LLC v. United States, 879 F.3d 1354 (Fed. Cir. 2018), KBR had asserted the common law defense of prior material breach under the contract as written. Id. at 8. The Federal Circuit also found that KBR's assertion of its defense was not a "claim for money" that needed to be presented to the contracting officer – even though KBR had asserted its defense "to recover payment" of amounts taken by the government and not as defense to "withhold payment" to the government. Id. at 10. On this point, the court held:  "Whether prior material breach is asserted to eliminate debt as in Laguna, or to recover withheld payments as here, the effect is the same — the defense is asserted to defeat a wrongful monetary claim."  Id.

On the interest issue, the Federal Circuit found that the Board had properly determined that interest began to run from the dates that KBR submitted claims seeking repayment of the recouped $44 million, even if those claims had not asserted the breach defense on which KBR ultimately prevailed. Relying on the plain text of the CDA, the Court held: "The Board did not err in determining that the interest period began with the filing of KBR's . . . claims [demanding repayment] because those claims were all certified CDA claims received by the Army's contracting officer. Under the CDA's interest provision, that is all that is required for the interest clock to begin."  Id. at 12.

Conclusion

The question of jurisdiction over affirmative defenses has been the subject of extensive litigation ever since the Federal Circuit issued its Maropakis decision in 2010. The KBR decision is an important development in the Federal Circuit's case law on this issue and should lead to a reduction in litigation on this subject going forward. The decision should also help contractors avoid litigation regarding their entitlement to interest on government claims.

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Jason Workmaster, now of Miller & Chevalier Chartered, argued the case for KBR. KBR was also represented by Alex Sarria, Ray Biagini, Herb Fenster, and Robert Long of Covington & Burling LLP.