McHugh v. Kellogg Brown & Root Services, Inc. , 626 F. App'x 974 ( 2015 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals
for the Federal Circuit
______________________
JOHN M. MCHUGH, SECRETARY OF THE ARMY,
Appellant
v.
KELLOGG BROWN & ROOT SERVICES, INC.,
Appellee
_____________________
2015-1053
______________________
Appeal from the Armed Services Board of Contract
Appeals in Nos. 56358, 57151, 57327, 58559, Administra-
tive Judge Mark N. Stempler, Administrative Judge
Monroe E. Freeman, Jr., Administrative Judge Richard
Shackleford.
______________________
Decided: September 15, 2015
______________________
JONATHAN REID PROUTY, Commercial Litigation
Branch, Civil Division, United States Department of
Justice, Washington, DC, argued for appellant. Also
represented by BENJAMIN C. MIZER, ROBERT E.
KIRSCHMAN, JR.
JASON NICHOLAS WORKMASTER, Covington & Burling
LLP, Washington, DC, argued for appellee. Also repre-
2 ARMY v. KELLOGG BROWN & ROOT SERVICES
sented by RAYMOND B. BIAGINI, HERBERT L. FENSTER,
DANIEL L. RUSSELL, JR., ALEJANDRO LUIS SARRIA, JOHN W.
SORRENTI.
______________________
Before PROST, Chief Judge, LOURIE and BRYSON, Circuit
Judges.
PROST, Chief Judge.
The Secretary of the Army (“Army”) appeals from a
final decision of the Armed Services Board of Contract
Appeals (“Board”) in favor of Kellogg, Brown & Root
Services, Inc. (“KBR”). The Board ruled in favor of KBR,
finding that the contract between the Army and KBR did
not preclude the use of armed subcontractors and that the
Army contracting officer’s additional claim against KBR
in 2013 was barred by the statute of limitations. Kellogg
Brown & Root Servs., Inc., Contract No. DAAA09-02-D-
0007, ASBCA Nos. 56358, 57151, 57327, and 58559, 14-1
BCA ¶ 35,639, 2014 WL 2931488 (June 17, 2014) (“Board
Decision”). We affirm the Board’s conclusion on the
statute of limitations. On the contract interpretation
issue, however, KBR focuses on its contention that the
Army breached its force protection obligations under the
contract, which the Board did not rule on and is the
subject of a separate case pending before the Board.
Limited to the narrow contract interpretation issue now
before us, we agree with the Army. We therefore affirm
in part, reverse in part, vacate in part, and remand.
BACKGROUND
The Army contracted with KBR on December 4, 2001
to provide dining facilities services in the Iraq war under
Contract 0007 in the U.S. Army’s Logistics Civil Augmen-
tation Program or the LOGCAP III contract. Some of
KBR’s subcontractors hired armed escorts by Private
Security Contractors (“PSCs”) in response to deteriorating
security conditions and an alleged inability to obtain force
ARMY v. KELLOGG BROWN & ROOT SERVICES 3
protection from the Army. The use of these PSCs under
the LOGCAP III contract was not authorized by the
Army. Some of KBR’s subcontractors charged their PSC
costs incurred from 2003 to 2006 to KBR, which in turn
passed on the costs to the Army. The Army paid those
PSC costs.
In late 2006, however, the Army started to question
KBR about the use of PSCs. Between 2007 and 2010, the
Army withheld three payments to KBR for PSC costs
previously paid by the Army. The three withheld pay-
ments totaled over $44 million. KBR submitted a certi-
fied claim to the Army’s contracting officer for each of the
withheld payments under the Contract Disputes Act of
1978 (“CDA”). The contracting officer failed to respond
within sixty days of receiving the respective claims for
withheld payments and the claims were deemed denied;
the associated appeals to the Board were docketed as
ASBCA Nos. 56358, 57151, and 57327. On January 30,
2013, the Army’s contracting officer issued a final decision
demanding from KBR an additional amount of nearly $12
million for disallowed PSC costs. KBR appealed this
decision and it was docketed as ASBCA No. 58559.
The Board consolidated the four cases for hearing.
Shortly before trial for the four consolidated cases, KBR
moved to consolidate an additional case, ASBCA No.
58583, in which it alleged that the Army breached its
contractual obligation to provide adequate force protec-
tion. The Board denied KBR’s motion. It agreed with the
Army’s argument that the Army would be prejudiced if
KBR were allowed to raise its new breach theory at the
trial of the four consolidated cases. The Board proceeded
with the hearings on the four consolidated cases and
issued a decision on June 17, 2014 in favor of KBR. The
Board dismissed the Army’s affirmative claim for nearly
$12 million in ASBCA No. 58559 because the Army’s
contracting officer asserted the claim on January 30,
2013, beyond the six-year statute of limitations under the
4 ARMY v. KELLOGG BROWN & ROOT SERVICES
CDA. The Board then rejected the Army’s contention that
the terms of the contract did not allow for the use of PSCs
and ordered the Army to pay the withheld $44 million at
issue in ASBCA Nos. 56358, 57151, and 57327.
The Army timely appealed to this court. We have ju-
risdiction under 28 U.S.C. § 1295(a)(10) and 41 U.S.C.
§ 7107(a)(1).
DISCUSSION
Under the CDA, 41 U.S.C. §§ 7101–7109, we review
the Board’s decisions on questions of law de novo. Sharp
Elecs. Corp. v. McHugh, 707 F.3d 1367, 1371 (Fed. Cir.
2013). Contract interpretation is a question of law. Teg-
Paradigm Envtl., Inc. v. United States, 465 F.3d 1329,
1336 (Fed. Cir. 2006). Factual findings shall be set aside
if “the decision is (A) fraudulent, (B) arbitrary, or capri-
cious, or so grossly erroneous as to necessarily imply bad
faith, or (C) not supported by substantial evidence.” 41
U.S.C. § 7107(b)(2); Ingalls Shipbuilding, Inc. v. O’Keefe,
986 F.2d 486, 488-89 (Fed. Cir. 1993).
The Army raises two issues on appeal. First, the Ar-
my argues that the contract prohibited the use of PSCs
and therefore KBR was not entitled to payment for the
use of PSCs. Second, the Army argues that the Army’s
affirmative demand against KBR on January 30, 2013
was not barred by the CDA’s six-year statute of limita-
tion. We address each issue in turn.
I. Contract Interpretation
The Army’s theory is that the contract prohibited the
use of PSCs because “PSCs, by definition, consist of armed
subcontractor employees,” and the contract prohibited the
arming of such employees. Reply Br. 3. The Army cites
Clause H-21 of the contract for prohibiting the use of
personally owned firearms by contractor personnel. The
Army also cites Clause H-13 of the contract for requiring
that all personnel hired by or for the contractor shall
ARMY v. KELLOGG BROWN & ROOT SERVICES 5
comply with all applicable guidance, instructions, and
general orders, thus further incorporating Army regula-
tions that prohibited the use of armed civilian personnel.
The regulations relied upon by the Army include
CENTCOM General Order No. 1A, Army Regulation 715-
9, entitled “Contractors Accompanying the Force,” and the
Army’s “Contractors on the Battlefield” field manual.
Based on the Army Regulation and the field manual, the
Army further explains that arming contractor personnel
could jeopardize their status as civilians.
KBR does not dispute that the contract prohibited the
arming of employees of KBR and its food services subcon-
tractors. Rather, KBR implies that the contract’s weap-
ons prohibition did not apply to the PSCs, arguing that
“[n]ot a single one of the provisions upon which the Gov-
ernment relies, however, even remotely alludes to the
hiring or use of PSCs” and that there was a “material
difference between arming individual contractor employ-
ees and retaining a professional private armed security
company having its own employees, arms and ammuni-
tion.” Appellee’s Br. 34–35 (internal quotation marks
omitted).
KBR’s arguments simply mirror the Board’s reason-
ing. The Board’s opinion rested on the central premise
that the contract and applicable regulations lacked explic-
it and specific prohibition against the use of PSCs. The
Board reasoned that the relevant contract provision
addressed only individual employee’s access to firearms
for self-defense, but did not address the use of armed
private security companies. The Board similarly inter-
preted the weapons prohibition in CENTCOM General
Order No. 1A as a code of personal conduct not relevant to
the question of using armed private security contractors.
The Board did not address Army Regulation 715-9 and
the Army’s “Contractors on the Battlefield” field manual
that the Army cites on appeal.
6 ARMY v. KELLOGG BROWN & ROOT SERVICES
KBR and the Board are correct that the contract and
the applicable Army regulations did not specifically
mention Private Security Contractors or PSCs. But a lack
of specific reference to PSCs does not mean that KBR and
its subcontractors were free to hire PSCs with civilian
personnel carrying privately-owned weapons. Under
KBR’s theory, the contract and Army regulations prohib-
ited, for example, truck drivers and other food services
subcontractor employees from carrying their own rifles in
the delivery trucks. But according to KBR, the contract
and Army regulations permitted KBR’s food services
subcontractors to subcontract further for the services of
PSCs, employing civilians carrying privately-owned
weapons to protect the delivery trucks. KBR contends
without explanation that there was a “material differ-
ence” in the weapons prohibition as applied to employees’
self-protection and the hiring of other civilians for protec-
tion. Appellee’s Br. 35.
We are not persuaded that KBR’s alleged “material
difference” existed. We discern no support in the contract
or the applicable Army regulations to place KBR and its
direct (food services) subcontractors on one side of the
weapons prohibition and secondary (security) subcontrac-
tors on the other. There is no question that the PSCs’
personnel were civilians carrying nongovernment-issued
weapons. Army regulations such as CENTCOM General
Order No. 1A prohibited such civilian personnel from the
possession or use of privately owned firearms, ammuni-
tion and explosives. E.g., J.A. 550. This longstanding
Army policy was incorporated into the LOGCAP III
contract by clauses H-13 and H-19.
We therefore interpret the contract’s weapons prohibi-
tion to apply equally to the employees of KBR and its food
services subcontractors, as well as to the personnel of the
security subcontractors engaged for the LOGCAP III
contract. Because the contract prohibited contractors’ and
subcontractors’ employees from carrying nongovernment-
ARMY v. KELLOGG BROWN & ROOT SERVICES 7
issued weapons, we conclude that the use of armed PSCs
fell outside the scope of the LOGCAP III contract. We
therefore reverse the Board’s conclusion that the
LOGCAP III contract allowed the use of PSCs.
This narrow contract interpretation based on the
weapons prohibition, however, may not fully resolve the
dispute between the parties. KBR argues that we could
alternatively affirm the Board based on its “holding that
the use of PSCs was an allowable ‘remedy’ for the Gov-
ernment’s breach of its contractual obligation to provide
adequate force protection.” Appellee’s Br. 21. A threshold
question for us is whether these breach and remedy issues
are properly before us on appeal. We note that the
Board’s opinion made several findings of fact that appear
favorable to KBR concerning its allegations of the Army’s
prior breach of contract and of using PSCs as an allowable
remedy. But we do not read the Board’s opinion as reach-
ing any ultimate legal conclusion on these issues.
Indeed, even KBR conceded during oral argument
that there is some vagueness in the Board’s opinion on
whether the Board ruled on the breach and remedy is-
sues. Oral Arg. at 19:35–23:10, available at
http://www.cafc.uscourts.gov/oral-argument-recordings/
15-1053/all. We therefore remand ASBCA Nos. 56358,
57151, and 57327 to the Board to decide in the first in-
stance whether KBR properly raised its breach and reme-
dy allegations, and if so, to rule on those contentions. 1
II. Statute of Limitations
The Board also dismissed the Army’s affirmative
claim for nearly $12 million in ASBCA No. 58559 because
1 We have also considered KBR’s contentions that
we could affirm the Board’s conclusions in favor of KBR
on additional alternative grounds. We do not find any of
those purported alternative grounds persuasive.
8 ARMY v. KELLOGG BROWN & ROOT SERVICES
the Army’s contracting officer asserted the claim on
January 30, 2013, more than six years after the claim
accrued on June 10, 2005. See 41 U.S.C. § 7103(a)(4)(A).
The Board found that on June 10, 2005, an Army con-
tracting officer consented to a food services subcontract
document submitted by KBR in which the pricing justifi-
cation expressly included the statement that the subcon-
tractor was “using the services of a professional security
company to transport” the food services personnel to their
respective sites. Board Decision at ¶ 60 (quoting J.A.
5550).
The Army argues that the Board erred because the
statute of limitations did not start when the Army knew
or should have known of the use of PSCs. The operative
marker, according to the Army, should be when it knew or
should have known that KBR would be seeking reim-
bursement from the Army for the use of PSCs.
Even if we accept the Army’s contention on the proper
event to start the statute of limitations period, the Army
still loses on this issue. The June 10, 2005 KBR docu-
ment cited by the Board was entitled “REQUEST FOR
CREDIT” that was submitted to and approved by the
Army. J.A. 5544. This June 10, 2005 credit request
included correspondence from a KBR subcontractor to
KBR that explicitly justified a price increase for: “Securi-
ty: Private companies are contracted to escort personnel
to and from sites. In addition, when military convoys are
not available, we use private security companies.” J.A.
5550.
The Army’s only challenges to the June 10, 2005 cred-
it request are that the document did not explicitly state
KBR’s intent to seek payment for the PSC costs and that
there was no witness testimony about this credit request.
But the Army offers no explanation why a credit request
attaching a subcontractor’s justification for a price in-
crease based on the use of PSCs should not have put the
ARMY v. KELLOGG BROWN & ROOT SERVICES 9
Army on notice that it would be paying for the use of
PSCs. Because of the specificity of the information in the
June 10, 2005 credit request, we are not persuaded by the
Army’s arguments. We therefore conclude that KBR’s
June 10, 2005 credit request provided substantial evi-
dence to support the Board’s finding that the statute of
limitations period began by June 10, 2005. We therefore
affirm the Board’s dismissal of ASBCA No. 58559 because
the Army asserted the claim more than six years after it
accrued.
AFFIRMED-IN-PART, REVERSED-IN-PART,
VACATED-IN-PART and REMANDED
COSTS
Each party shall bear its own costs.