COFC Decision Provides Valuable Lessons to Contractors About Termination for Defaults, Fixed Price Contracts and Fraud Counterclaims

Those looking for an intriguing summer read should look no further than Judge Bruggink’s 84-page opinion in Liquidating Trustee Ester Du Val of Ki Liquidation, Inc. v. United States, CoFC No. 06-465C (June 2014).  This story stems from the government’s decision to terminate for default Kullman Industries’ (Kullman) contract to build the U.S. Embassy compound in Dushanbe, Tajikstan.  After trial, the Court of Federal Claims ruled on a myriad of claims.  Pertinently, it (i) upheld the government’s termination for default decision; (ii) denied the Kullman’s $4.3 million claim for geotechnical work allegedly performed outside the terms of the contract; and (iii) granted the government’s fraud counterclaims based on the violations of the False Claims Act.  This decision provides a few valuable lessons:

• Don’t walk off the job – Although the project experienced delays and a new completion date was not formally established, Kullman eventually stopped working on the project with no apparent intention of returning to work.  As a result, the government terminated the contract for default.  Kullman argued that its actions were justified because (i) it was experiencing financial distress and (ii) it would not have been able to complete the project due to the government not providing permanent power to the worksite as of the termination date.  The Court summarily rejected these arguments, finding that the “overwhelming evidence that [Kullman] abandoned the project . . . alone trumps any possible shortcomings in contract administration.”  A “[t]ermination for default is justified when the contractor abandons the project while there is still work to be completed.”  In other words, no matter what the government does, never walk off the job and abandon it.
• Understand your written contract –  Kullman unsuccessfully argued that it was required to perform certain geotechnical work outside the terms of the contract, and that it was provided an allowance for this work, the price of which would be set at a later date.  Dismissing a variety of arguments, the Court’s decision focused on its review of the contract:  “a literal reading of the contract plainly supports defendant’s contention that plaintiff assumed the risk for how much the geotechnical and foundation work would cost when it agreed to a fixed price.”  The Court also found that Kullman’s apparent understanding was “merely the agency’s recognition that, only if [Kullman] could establish a differing site condition due to unusual soil condition would the agency have to face additional cost.”  Contractors must understand the implications of entering into a fixed price contract, and realize that, but for the execution of a modification increasing the contract price, there is no guarantee of payment for work performed over the contract’s firm fixed price.  In addition, contractors should carefully review the solicitation, their proposal and the statement of work to ensure the proposed price reflects that actual scope of work.
• Carefully review certifications –  In its invoices, Kullman certified that “[a]ll payments due to subcontractors and suppliers from previous payments received under the contract have been made, and timely payments will be made from the proceeds of the payment covered by this certification . . . .”  The government argued that Kullman violated the False Claims Act (FCA) because Kullman was paid in full for all of one supplier’s work, but Kullman failed to pay in full that supplier.  At trial, Kullman explained its interpretation of the certification – that Kullman “had paid its subcontractors and suppliers as much as it could of the amounts due under the subcontract agreements, or, alternatively, that [Kullman] could make the certification so long as it had some understanding with the suppliers about paying amounts due over time.”  Although the Court found that Kullman did not “mean to deceive the government” and that Kullman truly believed its interpretation was appropriate, this “nuanced interpretation does not, however, overcome its clear inaccuracy. We remain persuaded that he should have known the statement was inaccurate and should not have signed it.”  Although this false certification did not amount to a violation of the Forfeiture of Fraudulent Claims Act, it did violate the FCA.  The Court explained: “ [t]he fact that [Kullman] thought [the certification] was accurate under a strained view of the circumstances does not make it any less false in the sense meant by the statute.”  The Court also dismissed Kullman’s argument that there was no FCA violation because the government was aware of Kullman’s financial issues and had reasons to know that it could not pay all its suppliers.  The Court found that the contracting officer did not “specifically know” or have “first hand knowledge” that the certifications at issue were “not correct.”  “[F]or government knowledge to vitiate fraud, it must approach something like specific consent or an agreed-upon interpretation of the terms of the certification such that the parties agree that the certification does not mean what it otherwise appears to mean.”  The upshot is that contractors should carefully review all certifications, and when in doubt about an interpretation, contact counsel.