ASBCA Rejects Government’s Frivolous Fraud Defense

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Obermayer Rebmann Maxwell & Hippel LLP

Many of our clients have noticed that the Government is increasingly using accusations of contractor fraud as a defense to valid claims, even when there is no evidence that the contractor intended to deceive the government.  In many cases, the Courts and the Boards of Contract Appeal appear to have sanctioned this creeping expansion of the fraud defense and, not surprisingly, the government keeps trying to push the boundaries further.  In Appeals of Sand Point Services, LLC, NASA moved to dismiss a contractor’s claims before the Armed Services Board of Contract Appeals (ASBCA) because, NASA argued, the Board lacked jurisdiction where the contracting officer’s final decision denied the claim on a “suspicion of fraud.”  The Board rejected this argument—sparking hope that the Government’s inappropriate expansion of the use of fraud allegations as a defense to valid claims has limits.

In Sand Point Services, the contractor, Sand Point Services, LLC (SPS), and its subcontractor, Atlantic Contracting and Material, Inc. (ACM) encountered a differing site condition, which they alleged caused additional costs and delays to the project.  NASA did not agree that the differing site condition had caused the delays to the project, but nonetheless issued a modification for a no-cost time extension to SPS.  Meanwhile, ACM brought suit against SPS’s surety under the Miller Act for its additional costs and delay damages.  In the Miller Act case, the general manager of SPS entered a sworn statement declaring that ACM’s work was incomplete and was not in conformance with the contract requirements.  SPS’s general manager did not swear that the deficiencies or delays were ACM’s fault, but rather that there was a differing site condition that impacted time and costs.

The contracting officer denied SPS’s claim in part because SPS’s sworn statement that ACM had not performed in conformance with the contract requirements made the contracting officer suspect that the claim was fraudulent.  In other words, the contracting officer contended that any time a prime contractor states on the record that there are deficiencies in its subcontractor’s work, the prime’s claim for damages against the government is inherently fraudulent!  Obviously, this was a huge stretch — which was further demonstrated by the fact that the contracting officer did not refer the matter to the agency official responsible for investigating fraud.

Nonetheless, after SPS appealed the denial of its claim to the ASBCA, NASA asked the Board to dismiss SPS’s claims purely on the basis of the contracting officer’s suspicion of fraud.  The Board rightly rejected this argument stating that it has jurisdiction over the claim even when fraud has been alleged.  The Board was clearly skeptical of the fraud allegation because the contracting officer had not referred it for investigation, and because SPS had not even stated that the delays were ACM’s fault.

Ultimately, the contracting officer’s mere suspicion of fraud was simply insufficient to provide a total defense for the Government against SPS’s claims.  The takeaway for contractors is simple—be sure to have a coordinated litigation strategy when simultaneously dealing with claims against the government and a dispute with your subcontractor.  At the same time, don’t fear that frivolous allegations of fraud will prevent you from pursuing valid claims.  Hopefully, the tide has turned on the expansion of government fraud defenses. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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