Kellogg Brown & Root Services, Inc.

ARMED SERVICES BOARD OF CONTRACT APPEALS
Appeals of -- )
)
Kellogg Brown & Root Services, Inc. ) ASBCA Nos. 56358, 57151
) 57327,58583
)
Under Contract No. DAAA09-02-D-0007 )
APPEARANCES FOR THE APPELLANT: Jason N. Workmaster, Esq.
Raymond B. Biagini, Esq.
Alejandro L. Sarria, Esq.
Herbert L. Fenster, Esq.
John E. Hall, Esq.
Covington & Burling LLP
Washington, DC
APPEARANCES FOR THE GOVERNMENT: Raymond M. Saunders, Esq.
Army Chief Trial Attorney
ChristinaLynn E. McCoy, Esq.
MAJ Lawrence Gilbert, JA
Trial Attorneys
OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN ON THE
GOVERNMENT'S MOTION TO DISMISS AND APPELLANT'S MOTION FOR
SUMMARY JUDGMENT
These appeals involve costs incurred by Kellogg Brown & Root Services, Inc.
(KBRS) and its subcontractors for private security to accompany company officials
and convoys used to deliver food and other supplies to U.S. and coalition troops in
Iraq during military operations in the 2003-2006 timeframe. Starting in 2007, the
Army withheld a total of $44,059,024.49 from KBRS billings under the contract to
recoup previously paid costs of private security that the government had determined
were unallowable. Three of the appeals, ASBCA Nos. 56358, 57151 and 57327, are
before us on remand from the United States Court of Appeals for the Federal Circuit,
which held that the contract prohibited the use of private security companies (PS Cs)
but, in order to fully resolve the dispute, remanded the appeals to the Board to decide
whether KBRS "properly raised its breach and remedy allegations, and if so, to rule
on those contentions." McHugh v. Kellogg Brown & Root Services, Inc., 626 F. App 'x
974, 978 (Fed. Cir. 2015).
The fourth appeal, ASBCA No. 58583, is before the Board following KBRS's
appeal from a deemed denial of its 29 September 2011 certified claim for breach of
contract. This appeal was not decided by the Board and was consolidated with the
other three appeals only after the appellate remand. On 19 January 2016 the Board
denied the government's pending motion to dismiss this appeal for lack of jurisdiction.
Kellogg Brown & Root Services, Inc., ASBCA No. 58583, 16-1 BCA ~ 36,233.
Following the Board's denial of the government's motion to dismiss in ASBCA
No. 58583, KBRS filed a first amended and consolidated complaint (FACC) in all four
appeals. 1 Thereafter the government filed a motion to dismiss as to all counts and
appellant filed a motion for summary judgment. Oral argument was held on the
motions on 23 August 2016.
DISCUSSION
KBRS in its F ACC asserts the following:
Count I-the government's recovery on its claim is
time-barred because the contracting officer's 30 January
2013 final decision was issued more than six years after
the government's claim accrued, which was no later than
10 June 2005.
Count II-KBRS is entitled to judgment because the Army
breached its contractual obligation to provide adequate
force protection and the use of PSCs was a permissible
remedy.
Count III-the Army breached the contract by requiring
KBRS to perform beyond the original scope and the use of
PSCs was a permissible remedy.
Count IV-the Army breached the contract by failing to
comply with the FAR 16.301-3 requirement to have available
adequate resources to manage a cost reimbursement contract
and use of PSCs was a permissible remedy.
Count V-KBRS is entitled to judgment because the
contract prohibition relied on by the Army applies only in
peacetime, not during war.
1 Prior to the filing of the FACC, KBRS's amended complaints in ASBCA Nos. 56358,
57151, and 573 2 7, filed 16 January 2013, contained three counts: Count I
(Breach of Contract), Count II (Waiver/Ratification), and Count III (Bad Faith).
2
Count VI-KBRS is entitled to judgment because the
government waived the contract prohibition on the use of PSCs.
Count VII-KBRS is entitled to judgment because the Army
cannot reopen the firm-fixed-price subcontracts at issue.
Count VIII-under a cost-reimbursement contract, KBRS
is entitled to recover all of its incurred costs so long as they
were not incurred due to fraud, lack of good faith, or
willful misconduct.
Count IX-KBRS is entitled to judgment because the
Army released KBRS from all claims related to the pricing
and award of the ESS subcontracts.
Count X-KBRS is entitled to judgment because the Army
contracting officer's 30 January 2013 final decision was invalid.
Count XI-the Army's damages calculation is inaccurate
and unsupported.
Count XII-the Army acted in bad faith in its decision to
recapture funds from KBRS.
KBRS has moved for summary judgment only on Counts II (breach of contract) and
VI (waiver).
The affirmative defenses asserted by KBRS on 25 March 2013 in its complaint
in ASBCA No. 58583 largely foreshadow the affirmative defenses articulated in
KBRS's FACC. The only new counts in the FACC are Counts IV, V, and VII.
Before considering the parties' arguments, we address the parameters governing
what is, and what is not, properly before us in these consolidated appeals. On appeal
from our 2014 decision, the United States Court of Appeals for the Federal Circuit
(hereinafter "court" or "Federal Circuit") was asked to decide two issues: ( 1) whether
the Board erred in deciding that the contract did not prohibit the use of PSCs, and
therefore that KBRS was entitled to payment for the use of PSCs; and (2) whether the
Board erred in deciding that the Army's affirmative claim against KBRS contained in
the contracting officer's final decision (COFD) issued 30 January 2013 was barred by
the CDA's six-year statute of limitations. McHugh, 626 F. App'x at 976. The court
affirmed the Board on the second issue, finding that the Army's 30 January 2013
affirmative claim was time-barred, but reversed the Board's holding that the contract
did not prohibit the use of PSCs. Id. at 977, 979. The court recognized that "[t]his
3
narrow contract interpretation based on the weapons prohibition ... may not fully
resolve the dispute," and remanded to the Board to determine whether "KBR properly
raised its breach and remedy allegations, and if so, to rule on those contentions."
Id. at 978. In ascertaining the proper scope of the appeals now before us, we are
mindful that our appellate mandate constitutes the law of the case on all issues that
were explicitly or implicitly decided by the court. Exxon Corp. v. United States,
931 F.2d 874, 877 n.7 (Fed. Cir. 1991) (citing lB J. MOORE, J. LUCAS & T. CURRIER,
MOORE'S FEDERAL PRACTICE ii 0.404[10] at 172-74 (2d ed. 1988)). However, we do
not read the court's opinion to foreclose the Board from considering and deciding
other issues presented in these appeals that were not previously decided by the Board
and were therefore never appealed.
I. The Government's Motion to Dismiss
The government has moved to dismiss all counts ofKBRS's FACC and KBRS
has responded in opposition. A short discussion of the approach taken by the
government and how we intend to decide the motion to dismiss is in order. The
government's motion, with respect to some counts of the FACC, asserts that they fail
to state a claim upon which relief can be granted. With respect to other counts, the
government asserts that the Board lacks jurisdiction to entertain them; and with respect
to the remainder, the government argues that they are foreclosed either by law of the
case or by the Federal Circuit's mandate. Because a government claim is at the heart
of the matter and KBRS' s complaint primarily consists of affirmative defenses to that
claim, it is appropriate with respect to certain counts to treat the government's motion
to dismiss as a motion to strike affirmative defenses under Federal Rule of Civil
Procedure (FRCP) 12(f) rather than as a Rule 12(b)(6) motion to dismiss. 2 Further, in
those instances in which the motion to dismiss relies on matters outside the pleadings,
we may treat it as a motion for summary judgment. Dongbuk R&U Engineering Co.,
ASBCA No. 58300, 13 BCA ii 35,389 at 173,637. And, unlike the usual circumstance
in which a motion to dismiss for failure to state a claim is filed before the evidentiary
record has been fully developed, a full record exists in these appeals. Thus, in
considering the government's motion, we will look both to KBRS's FACC and the
record in these appeals.
The parties' contentions on the government's motion to dismiss and the Board's
related dispositions are as follows:
2 In appropriate circumstances, where our rules do not address a matter, we commonly
look to the Federal Rules of Civil Procedure for guidance. TTF, L.L.C.,
ASBCA No. 58494, 13 BCA ii 35,343.
4
Count I (Government Claim Time-Barred) and Count X (COFD Invalid)
The government asserts that Count I fails to state a claim on which relief can be
granted because all but nearly $12 million 3 of the total amount claimed in the final
decision was the subject of both government withholding in 2007-2009 and
subsequent KBRS claims, of which the Board has jurisdiction. Therefore, the three
remanded appeals involve KBRS claims for withheld monies that are properly before
the Board after remand. As to Count X, the Army states that the "invalidity" of the
COFD, like its untimeliness, has no logical connection to whether KBRS i's entitled to
recover on its claims for the withheld sums.
KBRS responds that what is at issue here is a government claim and that claim
is untimely as to the $44 million that was withheld as well as the $12 million that was
not. At oral argument, KBRS summed up its position as being that the government
needed to issue timely COFDs on the withheld amounts in order to "perfect" its claim
(tr. 38). KBRS further states that in the absence of a COFD on the government's claim
for the $44 million, KBRS's 2007, 2009, 2010 and 2011 claims (which KBRS calls
·'submissions") did not '"magically convert" a government claim into contractor
claims. Rather, the principal effect of KBRS's claim submissions was to start the
running of CDA interest and ensure that the Board had jurisdiction over any
subsequent appeals by KBRS. (App. opp'n at 5-6)
The government replies that the Army's notices of withholding were
administrative claims which KBRS could have appealed, but it chose to submit its own
claims for the monies withheld and then appeal from the deemed denials of those
claims (gov't reply at 3-5).
We conclude that Counts I and X of the FACC are within the proper scope of
our consideration. Both of these counts were asserted by KBRS in its complaint in
ASBCA No. 58583 in March of 2013. They were not decided by the Board and thus
were not appealed.
As previously found by the Board, the Army procuring contracting officer
(PCO) and the Defense Contract Audit Agency (DCAA) first notified KBRS by letter
dated 6 February 2007 and DCAA Form 1 (No. 127) of the same date that they were
respectively ·'adjusting payments" (PCO) and "suspending" costs (DCAA) in the
amount of $19,652,815 representing PSC costs incurred by KBRS's subcontractor,
3
As to the nearly $12 million affirmative claim, the Board's holding that this claim
was untimely was affirmed on appeal; therefore, this part of the claim is no
longer before the Board. The exact amount was $11,561,567.55. Kellogg
Brown & Root Services, Inc., ASBCA No. 56358 et al., 14-1 BCA ii 35,639 at
174,520.
5
ESS, in performing the contract (finding 70)4. On 22 October 2007, KBRS submitted
a certified claim to the PCO for the withheld amount. Following a deemed denial,
KBRS appealed to the Board and the appeal was docketed as ASBCA No. 56358.
(Finding 72; see also KBRS's FACC iiii 7, 70, 73-74)
On 24 August 2009, KBRS submitted an invoice under the contract for
payment of $22,279,678.49. On or about 1 September 2009, the government
withheld the entire amount of the invoice on the recommendation of DCAA to "take
immediate action to recoup the disapproved costs" in a revised DCAA Form I
(No. 127 Revision- I, 3 August 2009). KBRS submitted a certified claim to the PCO
on 20 October 2009 for $21, 131, 743 of the withheld amount. When no decision
issued on its claim, KBRS appealed the deemed denial of its claim and the appeal was
docketed as ASBCA No. 57151. (Finding 75)
In March 2010, the government withheld an additional $2, 126,531 from
payments otherwise due under the contract to recoup additional PSC costs. Thereafter,
on 16 June 2010, KBRS submitted a certified claim for that amount plus the remainder
of the 1 September 2009 withholding for a total claim amount of $3,274,466.49.
Following the PCO's failure to issue a final decision on the claim, KBRS appealed the
deemed denial and it was docketed as ASBCA No. 57327. (Finding 76; see also
KBRS's FACC iiii 9, 83-84)
The applicable legal standard in considering a motion to strike pursuant to
FED. R. CIV. P. l 2(F) is whether the pleading asserts an "insufficient defense" or
contains any "redundant, immaterial, impertinent, or scandalous matter." Only if a
defense is insufficient as a matter of law will it be stricken. Danae, Inc., ASBCA
Nos. 30227, 33394, 88-3 BCA ii 20,993 at 106,071; Space Age Engineering, Inc.,
ASBCA No. 25761 et al., 83-2 BCA ii 16,789 at 83,439 (citing Anchor Hocking Corp.
v. The Jacksonville Electric Authority, 419 F. Supp. 992 (D.C. M.D. Fla. 1976)).
We conclude, based on the facts alleged in the FACC (as well as the facts
previously found by the Board), that the PCO issued timely final decisions on the
government's claim. As set forth above, the government's claim was asserted by the
PCO, in writing, by set-off and withholding, in February 2007, September 2009, and
March 2010. In Placeway Construction Corp. v. United States, 920 F .2d 903, 906-07
(Fed. Cir. 1990), the court reversed the lower court's dismissal for lack of jurisdiction
where the contractor had appealed from the government's assertion of a right of set off.
Though there was no "final decision" labeled as such and no notice of appeal rights, the
court held that the CO had effectively issued a final decision and granted a government
claim in the amount of the set off. See also KAL ME.I. Manufacturing & Trade, Ltd.,
4
References to "findings" refer to findings of fact in our previous decision, Kellogg
Brown & Root Services, 14-1 BCA ii 35,639.
6
ASBCA No. 44367 et al., 94-1BCA,-i26,582 at 132,257 (citing Placeway, 920 F.2d at
902) (government's withholding constituted "a final decision on a government claim").
Likewise, here the PCO's decisions may not have conformed to the
usual COFD format, including the language required by the CDA to inform a
contractor of its appeal rights, but they were nevertheless a "formal and final action
equivalent to a decision from which the contractor could appeal." P.X Engineering
Co., ASBCA No. 38215, 89-2 BCA ,-i 21,859 at 109,952 (contractor could appeal
from unilateral contract modification); see also Systron Donner, Inertial Division,
ASBCA No. 31148, 87-3 BCA ,-i 20,066 (CO's determination ofCAS noncompliance
was appeal able final decision). The decisions were issued within six years of the date
we previously found that the government knew or should have known of the use of
PSCs to perform the contract-IO June 2005. KBRS, 14-1 BCA ,-i 35,639 at 174,520.
KBRS could have directly appealed the PCO's withholdings but chose to file claims
contesting the withholdings in order to start the running of CDA interest. Moreover,
KBRS has not been prejudiced by the omission of final decision language and an
explanation of appeal rights, as is evidenced by its prompt filing of certified claims
and appeals from deemed denials. Thus, we agree with the government that the
affirmative defens es contained in Counts I and X should be stricken because they fail
as a matter of law, and grant the government's motion to strike as to Counts I and X of
the FACC.
Counts II (Prior Material Breach-Force Protection), III (Prior Material Breach-Cardinal
Change), and IV (Prior Material Breach-Noncompliance with FAR 16.301-3)
The government contends that Counts II, III and IV should be dismissed for
lack of jurisdiction because KBRS did not submit a claim to the CO alleging these
grounds for relief (gov't mot. at 4-6). In the alternative, for any of the three counts for
which the Board finds it has jurisdiction, the government moves to dismiss for failure
to state a claim for relief, on the grounds that KBRS is not entitled in law to breach the
contract as a remedy for the government's breach (id. at 6-7), and also that KBRS has
no valid claim for breach for the government's alleged failure to provide required
force protection because it had adequate remedies under the contract (id. at 8-9).
Finally, with respect to the same three counts, the government argues in the alternative
that they are time-barred because KBRS's September 2011 claim for breach was filed
more than six years after accrual of the claim (id. at 9).
For its part, KBRS argues that the Board has jurisdiction over Counts II through
IV because these counts, which allege different prior material breaches by the
government, are common law defenses to the government's claim which are not
required to be submitted to a contracting officer (CO) for a decision; and in any event,
the allegations made in the counts fall ·'within the scope" of four previous claims ·
submitted to the PCO ( app. opp' n at 7-13 ). Because common law defenses are not
7
required to be the subject of claims, the government's argument that Counts II through
IV are time-barred also fails (id. at 22). Addressing the government's alternative
ground for dismissal, KBRS contends that the counts state a claim upon which relief
can be granted, because a party's prior material breach excuses the other party's later
breach (id. at 14-18). KBRS adds that the government is foreclosed from claiming that
KBRS had an adequate contract remedy and could have delayed its performance
without penalty under the contract's "excusable delay" clause, because this issue was
decided against the government in the Board's 2014 decision and was not appealed
(id. at 18-19).
In reply, the government argues that KBRS is only entitled to assert that a
"mere defense" need not be submitted to a contracting officer for decision if it has
timely appealed from a government claim (gov't reply at 6). The government argues
with respect to Counts II-IV that KBRS's submission of certified claims for the
amounts withheld by the government means that the appeals do not involve a
government claim, 5 thus restricting the Board's jurisdiction to the contents of KBRS's
certified claims (id.). Further, the government posits that KBRS was required under
M Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), to
have submitted a timely certified claim of breach because it alleges that the
government's prior material breach excused KBRS from complying with any contract
prohibition on the use of PSCs and thus "seeks an adjustment of contract terms." (Id.)
Counts II-IV are within the proper scope of our consideration on remand.
Counts II and III were asserted as affirmative defenses in ASBCA No. 58583 in
KBRS's complaint filed 25 March 2013, and have not yet been decided by the Board.
Additionally, our appellate mandate specifically instructs us to consider whether
KBRS 's breach and remedy allegations are properly before us and, if so, to rule on
them. Count IV was not separately asserted until KBRS filed its F ACC, but it, along
with Counts II and III, asserts prior material breach as an affirmative defense.
We also conclude that we have jurisdiction over Counts II-IV. The government
argues that the Board lacks jurisdiction because the "claims" asserted by these three
counts were not clearly presented to the contracting officer for a decision (gov'tmot.
at 4-6). We have already found that KBRS's 29 September 2011 breach claim
underlying Count II adequately apprised the PCO that the basis for the claim was the
Army's failure to meet its contractual obligation to provide force protection, 6 and the
government withdrew its request for reconsideration of that finding at oral argument
5
We note this assertion is inconsistent with the government's argument with respect to
Counts I and X that KBRS could have appealed directly from the government
claims effected by the Army's notices of withholding (gov't reply at 4-5).
6
Kellogg Brown & Root Services, Inc., ASBCA No. 58583, 16-1BCAii36,233 at
176,771.
8
(tr. 45). As to Counts III and IV, they were not presented to the Army CO for
decision. We hold as to all three counts that they are affirmative defenses that do
not seek adjustment of the terms of the contract, and therefore did not need to
be presented to the CO for decision for the Board to have jurisdiction under
M Maropakis. Laguna Construction Company v. Carter, 828 F .3d 1364, 1369-73
(Fed. Cir. 2016); see also ASFA International Construction Industry and Trade, Inc.,
ASBCA No. 57880, 14-1BCA~35,736 at 174,911.
The government also argues that KBRS is entitled to assert a "mere defense" to
a government claim only if it has timely appealed from a government claim and that
the appeals before us do not involve a government claim because KBRS filed its own
claims for the withheld costs. Both parties have shifted position on whether it is a
contractor claim or a government claim that is before us, depending on the results
produced. We have already held with respect to Counts I and X, to the government's
benefit, that these appeals involve timely asserted government claims to recover
allegedly unallowable costs previously paid. With respect to Counts II through IV, we
hold the same, this time to the detriment of the government's argument. Additionally,
because these counts each invoke prior material breach and thus are affirmative
defenses that need not have been presented to the CO for a decision, we reject the
government's further argument that they are time-barred by the CDA's six-year statute
of limitations (gov't mot. at 9). In doing so, we deem it unnecessary to determine
whether KBRS' s 29 September 2011 claim would have been timely if in fact it
constituted a contractor claim rather than a defense to a government claim.
Alternatively, the government asserts that Counts II through IV fail to state a
claim for relief. The government argues that hiring and billing the government for the
costs of PSCs does not qualify as "mitigation of damages" and that a prior material
breach by the government does not entitle KBRS to also breach the contract while
continuing to perform it. In other words, KBRS had to choose between ending the
contract and electing to continue performance, and if it chose the latter, its contract
obligations continued in full force and effect. (Gov't mot. at 6-7) The government
also contends that KBRS had no valid claim of breach because it had contractual
remedies for government failures to provide force protection (gov't mot. at 8). 7
7
In a footnote, the government reiterates its argument that Count II independently fails
to state a claim for relief because adjudication of whether the Army provided
force protection "commensurate with the threat" is a non-justiciable political
question. The Board previously rejected this argument on the ground that we
have jurisdiction to determine whether the government met its contractual
obligations. KBRS, 14-1 BCA ~ 35,639 at 174,522. This issue was not
appealed, and we consider it foreclosed under the doctrine of law of the case.
See Exxon Corp., 931 F.2d at 877 n.7.
9
The doctrine of prior material breach holds that when a party to a contract
is sued for breach, it may defend on the ground that a legal excuse for its
nonperformance existed at the time of the alleged breach. Faced with two parties to a
contract, each of whom claims breach by the other, courts will often impose liability
on the party that committed the first material breach. Long Island Savings Bank,
FSB v. United States, 503 F.3d 1234, 1251 (Fed. Cir. 2007) (false certification
constituted material failure of performance precluding plaintiffs' claim for breach
damages) (citing Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1380
(Fed. Cir. 2004); and Christopher Village, L.P. v. United States, 360 F.3d 1319, 1334
(Fed. Cir. 2004)).
In Laguna Construction, 828 F.3d 1364, the Federal Circuit affirmed the
ASBCA' s grant of summary judgment to the government on its affirmative defense of
prior material breach. The contractor had filed a claim for the unpaid costs of
performing an environmental remediation and construction contract in Iraq. It then
appealed to the Board from the contracting officer's deemed denial of its claim.
Meanwhile, the government had been investigating allegations that Laguna's employees
were receiving kickbacks from subcontractors. Several employees and officers of
Laguna pied guilty to criminal indictments from 2010 to 2013. After the last of these
pleas, the government moved to amend its answer in the appeal to include the
affirmative defense that it was not liable for Laguna's claim since Laguna had
committed a prior material breach of the contract by soliciting and accepting kickbacks,
which constituted fraud against the United States. In granting summary judgment for
the government, the Board observed that Laguna had breached the duty of good faith
and fair dealing by its acts of fraud, and had also breached the Allowable Cost and
Payment clause, FAR 52.216-7, by submission of vouchers that were improperly inflated
to include the kickbacks.
The Federal Circuit affirmed the Board on the grounds that Laguna committed
the first material breach by violating the Allowable Cost and Payment clause, which
states that a cost is allowable only if it is reasonable and complies with the terms of the
contract. Laguna, 828 F .3d at 13 72-73. The court found "unpersuasive" Laguna's
argument that the remedies available to the government under the contract's
termination and Anti-Kickback clauses foreclosed application of the common law
defense of prior material breach. The court stated that the government could have
availed itself of those clauses, but was not required to do so, and "may use the prior
material breach doctrine to defeat a contractor's breach claim." Id. at 1371. The court
also rejected the argument that the government waived the defense by continuing to
perform the contract until 2015 when it knew of the kickbacks as early as 2008,
finding it was reasonable of the government to wait to invoke the defense un.til after
the last of the guilty pleas was entered. Id. at 1372.
10
With that background, we address the arguments that the government makes
in pressing its case that Counts II-IV fail to state a claim. First, the government
advances the proposition that a party who chooses to continue to perform waives any
prior material breach as a matter of law (gov't mot. at 6-7). We do not agree. In
Northern Helex Co. v. United States, 197 Ct. Cl. 118, 129 (1972), the government's
primary defense to the contractor's claim for breach damages for nonpayment on a
contract to deliver helium was that the contractor waived its right to claim total breach
by continuing performance and treating the lack of payment as immaterial. The court
acknowledged that "there is venerable authority" that when performance is continued
in spite of a known breach, the wronged party can no longer avail itself of that excuse.
However, the court observed that "it is very doubtful that, even when first formulated,
that rule disregarded particular circumstances justifying further performance in the
specific case." Id. at 125.
While acknowledging "the general proposition" that a party cannot continue
performing after a material breach (although stopping performance would be fair and
convenient), run up damages, and then go to court, the court found for two reasons that
Northern Helex had not waived its right to damages for the government's material
breach. First, the contractor's continued performance was commercially reasonable,
because its helium extraction facilities were so interrelated with the rest of its
operations that its helium facilities must continue in operation whether the helium was
sold or wasted, and since it had no storage facilities, and there was no other market for
the gas, it had no realistic alternative but to continue to tender helium to the
government. Northern Helex, 197 Ct. Cl. at 126. As Judge Davis concluded:
[T]o determine whether waiver has occurred, a more
complex inquiry must be made than merely, "did
performance continue?" The guiding principle is whether,
in the individual circumstances, the seller exercised
"reasonable commercial judgment" in continuing to
manufacture and deliver, in the effort to mitigate damages,
although his obligation to perform has been discharged by
the buyer's total breach.
Id. at 129.
Second, there was a "special aspect" to the case, which was that "the action
taken by Northern Helex was consistent with the purpose of the program, the
conservation of a valuable national resource.'' The court went on to elaborate:
In considering the Government's failure to observe the
procedural requirements of the National Environmental
Policy Act of 1969 when it terminated the contracts of the
11
three other suppliers, the Tenth Circuit characterized the
termination as "an action which has environmental
consequences, namely rapid depletion of the helium
resources of the country." National Helium Corp. v.
Morton, 455 F.2d 650 (10th Cir. 1971). The decision,
requiring that the Secretary at least consider the
environmental impact of his action, is predicated on the
view expressed by Congress "that it is in the national
interest to foster ... [the development and] distribution of
supplies of helium ... sufficient to provide for essential
government activities."
Northern He/ex, 197 Ct. Cl. at 126 (footnote and citation omitted). This "special
aspect" was also held by the court to be good reason for the company's continued
performance.
The record in these appeals similarly supports the conclusion that continuing to
perform the contract with PSC protection was not only a commercially reasonable
decision on the part of KBRS and its subcontractors, 8 but also that it was consistent
with the purpose of the contract and in the national interest. In our previous decision
we cited testimony that, for example, without a convoy every three days the military
dining facilities would run out of food to feed the soldiers (finding 52), underscoring
the important national interest in continuing to run the supply convoys. We also noted
that the contract was a "rated'" order potentially subjecting KBRS to criminal penalties
for failure to deliver within the required time. KBRS, 14-1 BCA ~ 35,639 at 174,521.
Thus, KBRS's affirmative defenses of prior material breach (Counts II-IV) are not
insufficient as a matter of law simply because KBRS continued to perform the
contract.
The government also argues that the defense of prior material breach is
inapplicable here because it is a defense to a claim of breach and the government has
not asserted a claim of breach against KBRS (gov't reply at 10). We disagree. The
government's claim against KBRS, that KBRS and its subcontractors violated the
contract prohibition against employing PSCs and that KBRS billed the government for
8
We also note that while KBRS was continuing to perform, Army COs with
knowledge of KB RS/ subcontractor use of PSCs continued paying KBRS' s
invoices and took no other action to stop the use of PSCs. The Army did not
seek to disallow PSC costs until February 2007. Under the circumstances, it
would have been reasonable for KBRS to think, at least until February of 2007,
that the parties had achieved a mutually acceptable solution that allowed KBRS
to continue to accomplish its warfighter support mission despite the
acknowledged force protection issues.
12
unallowable PSC costs in violation of the Allowable Cost & Payment clause, is plainly
a claim of breach regardless of the fact that the government may not have used the
word "breach'' to describe its claim. See also Laguna, 828 F.3d at 1371 (contractor,
by billing the government for unallowable costs, violated the Allowable Cost &
Payment clause and committed material breach of contract).
The government's next argument is that KBRS cannot claim that its PSC costs
were incurred to mitigate the damages caused by the Army's prior material breach
because, under Count II, the PSC costs are the damages caused by the alleged breach
(gov't reply at 10). In its FACC, KBRS alleges both that it incurred the PSC costs to
mitigate damages caused by the Army's prior material breach, and that the Army's
prior material breach excused it from any subsequent failure to comply with the
contract's prohibition on the use of PSCs (FACC ,-i,-i 123-25). Although we are not
convinced that these types of damages are mutually exclusive, 9 we do not think that
the government's proffered distinction between PSC costs as damages caused by a
breach and PSC costs as costs incurred in mitigation of damages that otherwise would
result from a breach makes a difference in the context of deciding the government's
motion to dismiss, because in these appeals KBRS is first and foremost asserting prior
material breach as a defense to the government's claim of breach.
The government's last argument for the proposition that Counts II-IV "fail to
state a claim for relief' is that the contract afforded KBRS adequate remedies for any
government-caused delays pursuant to the Changes and Excusable Delay clauses and
therefore the dispute arises "under the contract," rendering KBRS' s breach claim
invalid (gov't mot. at 8). The government recognizes that the Board previously
rejected its argument that KBRS's sole remedy for government failure to provide the
level of force protection promised in the contract was delay, but argues that our prior
ruling rested principally on the premise that the contract allowed the use of PSCs (id.).
This notion is not supported by the government's citation to our 2014 decision. In our
prior decision we rejected the identical argument, stating that it was fortunate for the
troops who depended on KBRS for life support that KBRS and its subcontractors did
not adopt the attitude now suggested by the government. We also noted that the
contract was a "rated order" under which a failure to deliver within the required time
could be subject to criminal penalties. Only then did we observe that "[m]oreover, the
9
For example, if the alleged breach had not occurred (i.e., the contractually promised
level of force protection had been provided by the Army to KBR and its
subcontractors), KBRS and its subcontractors would not have incurred PSC
costs (damages). But also, ifKBRS and its subcontractors had not hired and
paid PSCs to perform their missions when force protection was not available, it
is entirely conceivable that the resulting damages could have been vastly in
excess of the cost of the PSCs. (See app. reply at 9-11)
13
government's argument presupposes that PSCs were prohibited under the terms of the
contract." KBRS, 14-1BCA~35,639 at 174,521. Clearly, this additional observation
was not the driver of our rejection of the government's "delay" argument. And since
our 2014 decision, the Federal Circuit issued its decision in Laguna in which it
explicitly held that the availability of a contract remedy does not mean the wronged
party must avail themselves of that remedy in lieu of the affirmative defense of prior
material breach. 828 F.3d at 1371. The government is bound by our prior holding
which is the law of the case. Exxon Corp., 931 F.2d at 877 n.7.
The government also attempts in its motion to distinguish between "mere
delay,'' which it states is permissible under a rated order, and "willful failure to
perform," which is not permissible (gov't mot. at 8). We decline the invitation to
reconsider our prior holding on the basis of a hypothetical dividing line between "mere
delay'' in deliveries and willful failure to perform. The record in these appeals
indicates that any such line was extremely thin, if not non-existent. The military
dining facilities needed to be resupplied no less often than every three days to keep the
soldiers fed. (Finding 52) Moreover, we have found as fact that during the years
2003-2006 the government was unable to provide force protection at the levels
specified in the contract and that the use of PSCs by KBRS and its subcontractors to
supplement government force protection was reasonably necessary to accomplish the
logistical support mission of the contract and task orders thereunder. KBRS, 14-1
BCA ~ 35,639 at 174,521, and findings 13-60.
Therefore, we conclude that the affirmative defenses of prior material breach
contained in Counts II-IV are not insufficient as a matter of law simply because the
Excusable Delay clause was incorporated into the contract. 10 The government's
motion to strike is denied as to Counts II, III, and IV.
Counts V ((LOGCAP III Special H Clauses Applied Only in Peacetime), VI (Army
Waived Contract's Prohibition on Use of PSCs), VII (The Army is Prohibited from
Re-opening Firm-Fixed-Price Subcontracts), and VIII (KBRS is Entitled to
Reimbursement of Its Incurred Costs Absent Evidence of Willful Misconduct)
The government moves to dismiss these four counts as foreclosed by either law
of the case or by our appellate mandate (or both). As to Counts V and VIII, the
government contends that "[t]hese counts must be dismissed because they conflict
with the Federal Circuit's express holdings that the H Clauses were applicable and
barred the use of armed PSCs in contract performance" (gov't mot. at 10). As to
Count VII, the government points out that in Kellogg, Brown & Root Services, Inc.,
10
While the government's motion also mentions that the contract contained the
Changes clause, it makes no argument regarding remedies available under that
clause (gov't mot. at 8).
14
ASBCA No. 56358, 12-1BCAii35,001at172,015, we held that "[i]n the context
of determining the reasonableness of a subcontract fixed price under a cost
reimbursement prime contract, the government may properly consider the components
of that subcontract fixed price." And as to Count VI, the government states that
KBRS's waiver argument is foreclosed by the Federal Circuit's declination ofKBRS's
invitation to affirm the Board's 2014 decision on the alternative ground that the
government gave permission to KBRS and its subcontractors to use PSCs, stating that
'·we do not find any of those purported alternative grounds persuasive." 11 As to these
four counts, we treat the government motion as one to strike affirmative defenses.
KBRS in response states that the issue of whether the contract's H clauses
only applied in peacetime (Count V) was never squarely before the Federal Circuit
because the Board never decided it. It was presented on appeal only as an alternative
ground on which the appellate court could affirm the Board's decision, and was
opposed by the government not on the merits, but because the Board had not made
findings on the issue and a remand would be necessary before it could be considered
(app. opp'n at 24-25). As to Count VI (waiver), KBRS opposes the government
motion on the ground that the "permission" argument that it advanced on appeal as an
alternative ground for affirmance is distinct from the "waiv~r" defense asserted in
Count VI-while the former advances the proposition that use of PSCs was allowed,
the premise of the latter is that the use of PSCs was not allowed but this restriction was
waived by the government. Thus, the appellate decision should have no effect on
KBRS's ability to pursue its waiver defense. (Id. at 26-27)
On Count VII, KBRS points out that the Board expressly advised the parties
that its 2012 decision denying cross-motions for summary judgment was interlocutory
and any error therein was subject to correction in the Board's final decision on the
merits following the hearing. KBRS adds that during the hearing on the merits, the
presiding judge invited it to raise the argument again in its post-hearing briefing, and it
did so. Therefore, it concludes, the issue is not foreclosed. (App. opp'n at 27-28)
With respect to Count VIII, KBRS responds that the Federal Circuit's opinion was
limited to the contract interpretation issue and neither explicitly nor implicitly reached
KBRS' s argument that under a cost reimbursement contract a contractor is entitled to
recover all its incurred costs unless they stem from fraud, lack of good faith, or willful
misconduct (id. at 28-29).
In reply, the government cites to the transcript of the hearing on the merits to
argue that the presiding Board judge had no interest in revisiting the issue presented
by Count VII and in fact did not revisit it in the Board's decision on the merits,
confirming that the issue was settled (gov't reply at 19). The government also points
11 Count VI was not part of the government's original motion to dismiss, but was
added to it by letter supplement dated 9 February 2016.
15
out that KBRS has not distinguished Grumman Aerospace Corp. v. United States,
549 F.2d 767 (Ct. Cl. 1977), the precedent on which the Board relied in its 2012
decision, and that the Federal Circuit did not find this ground persuasive when it was
raised on appeal as an alternative ground for affirmance (gov't reply at 19).
Which of these counts pose issues that are properly before us at this stage of the
proceedings? Count V asserts as a defense that the H clauses which the Federal
Circuit interpreted in deciding the contract interpretation issue raised in the
government's appeal only applied in peacetime and thus were inapplicable to
performance in the war conditions under which the PSC costs were incurred. While
we acknowledge KBRS' s argument that this issue was not before the Federal Circuit
on appeal because it was never decided by the Board, we conclude that this issue is
foreclosed on remand. The court's holding on appeal that the H clauses prohibited
KBRS and its subcontractors from hir~ng PSCs by necessary implication decides the
issue of whether the H clauses were applicable. SUFI Network Services, Inc. v.
United States, 817 F .3d 773, 779 (Fed. Cir. 2016), and cases cited therein. Therefore,
we grant the government's motion and strike the affirmative defense presented in
Count V.
Count VI asserts the affirmative defense that the Army waived any right to
refuse to reimburse the PSC costs incurred by KBRS or its subcontractors on the basis
that use of PSCs was prohibited by the contract. We agree with KBRS that the
defense of waiver is distinct from the argument advanced by KBRS on appeal that it
received "permission" to use PSCs as an alternative ground for affirming our 2014
decision. Moreover, the waiver defense was asserted by KBRS in the remanded
appeals (ASBCA Nos. 56358, 57151, and 57327) well prior to the hearing on the
merits, but was not decided by the Board and not appealed by the government, and
was not, therefore, before the Federal Circuit on appeal. 12 And, since the issue was not
decided by us on the merits, and was not necessary to the Federal Circuit's disposition
of the contract interpretation issue, we are not barred from considering it on remand.
Laitram Corp. v. NEC Corp., 115 F.3d 947, 951-52 (Fed. Cir. 1997) (citing Conway v.
Chemical Leaman Tank Lines, Inc., 644 F.2d 1059, 1062 (5th Cir. 1981)). The
government does not raise any argument in support of its motion to strike Count VI
other than its argument that consideration of Count VI is foreclosed by our appellate
mandate. Therefore, we deny the government's motion as to Count VI.
We also find that Count VII is properly before us and that we may consider
it in these remand proceedings. The Board's 2012 decision denied the parties'
cross-motions for summary judgment. In the course of doing so, the Board addressed
12 KBRS also asserted the defense of waiver in Count V of its initial complaint in
ASBCA No. 58583, which was filed on 25 March 2013. The issue has not been
decided in that appeal either.
16
KBRS's contention that the government has no contractual right to disallow a particular
component of a subcontract fixed price:
However, none of the authorities cited for this proposition
involved the allowability of a questioned component of a
subcontract fixed price as a reimbursable cost under a cost
reimbursement prime contract. In the context of determining
the reasonableness of a subcontract fixed price under a cost
reimbursement prime contract, the government may properly
consider the components of that subcontract fixed price.
[Citation omitted]
KBRS, 12-1 BCA ~ 35,001 at 172,015 (citing Grumman Aerospace Corp., 549 F.2d at
77 4-7 5 ). The Board noted that there remained a genuine issue of material fact as to
whether, at the time the 11 subcontracts at issue were awarded, the component for
PSC costs included in the subcontract fixed prices was reasonable as to both the need
for, and the amount of, that component. Id. at 172,016. After a hearing on the merits,
the Board found as a matter of fact that the PSC costs incurred by KBRS and its
subcontractors were reasonable under FAR 31.201-3(a). KBRS, 14-1BCA~35,639 at
174,521. The Board did not address in that decision KBRS's contention that the
government could not disallow specific components of the price of a firm-fixed-price
subcontract, presumably finding it unnecessary in light of its holding that the contract
did not prohibit the use of PSCs.
The law of the case doctrine does not apply to issues that were not decided.
l 8B WRIGHT, MILLER & COOPER, FEDERAL PRACTICE AND PROCEDURE: LAW OF THE
CASE 2d § 4478 at 664-67. In its 2012 interlocutory decision the Board's discussion of
the Grumman Aerospace case may well have been dicta, since it was not necessary to
the result-denying the cross-motions for summary judgment on the basis of unresolved
issues of material fact. But even ifthe Board's discussion was more than dicta, it did
not decide the issue presented to us now. The defense presented to us by KBRS in its
FACC Count VII is:
Under applicable regulations, including the FAR, and the
federal common law applicable to government contracts,
the Army is barred from reopening firm-fixed price
subcontracts awarded under a cost-reimbursement prime
contract to contest the allowability of a particular
component included in the subcontract price.
(FACC at 29, ~ 180) KBRS alleges in Count VII that it awarded the subcontracts in
issue between 2003 and 2006 pursuant to its approved purchasing system for the
provision of dining and other logistical support services at total prices it determined
17
were fair and reasonable based on competition and/or price analysis. The
government's position all along in this case has been that the costs in question are
unallowable based on the contract's prohibition against using PSCs, not that the total
subcontract prices were unreasonable. Presumably for that reason, the government did
not appeal the Board's finding that the PSC costs incurred by KBRS and its
subcontractors were reasonable. 13
Because the issue presented by Count VII was presented to but not decided by the
Board, and was neither before the Federal Circuit on appeal nor necessarily implicated in
its decision, we do not view the appellate court's statement that the alternate grounds
(one of which mirrored Count VII) presented by KBRS for affirmance were "not
persuasive" to signify anything other than that the court declined KBRS 's invitation to
affirm on alternate grounds not properly before it. In conclusion, Count VII is properly
before us now. The government's motion to strike is denied as to Count VII.
We also find that Count VIII is properly before us. This defense-that under a
cost reimbursement contract KBRS is entitled to recover its incurred costs absent
evidence of fraud, lack of good faith, or willful misconduct-was raised by KBRS in its
25 March 2013 complaint in ASBCA No. 58583 and has not been decided on the
merits. We do not agree with the government that the Federal Circuit's decision that
the contract prohibited the use of PSCs equates to a finding that the costs of PSCs are
unallowable under the contract (gov't reply at 20). We note the court itself
characterized its decision as one of "narrow contract interpretation based on the
weapons prohibition" and did not purport to decide the question of cost allowability.
McHugh, 626 F. App'x at 978.
The case law cited by the government does not persuade us to its view. Geren
v. Tecom, Inc., 566 F.3d 1037, 1041 (Fed. Cir. 2009) merely recognizes that to be
allowable a cost must comply with the "terms of the contract," and that "where neither
the contract nor the FAR dictates the treatment of specific costs, we must determine
how those costs are to be treated by looking to'' the principles and standards in FAR
Subpart 31.2. In this case, there was no term of the contract or FAR cost principle
dictating the treatment of PSC costs. 14 In Kellogg, Brown & Root Servs., Inc. v.
13
To be sure, we recognize that the government's position may also be that the costs
were unreasonable because they were specifically prohibited by contract.
However, that position is still based on a term of the contract disallowing a
specific type of cost, not any determination that the total price of the subcontracts
was unreasonable, which was what the Grumman Aerospace case and the Board's
2012 decision addressed.
14
In Geren, the court noted that costs resulting from a breach of a contractual
obligation are not allowable costs under a contract. 566 F .3d at 1043 (citing
Dade Brothers, Inc. v. United States, 325 F.2d 239, 240 (Ct. Cl. 1963)). This
18
United States, 728 F.3d 1348, 1359 (Fed. Cir. 2013), the Federal Circuit rejected a
similar argument made by KBRS in that case, holding that in determining the
reasonableness of costs, evidence of willful misconduct, gross negligence, or arbitrary
conduct could be relevant, but such evidence is not required to disallow costs as
unreasonable. This is a ruling by our appellate authority in a different case. It is
binding precedent, but it does not implicate the law of the case doctrine or otherwise
preclude us from deciding a similar issue on the record created in these appeals.
Therefore, the government's motion to strike is denied as to Count VIII.
Count IX (The Army Released KBRS from All Claims Related to the Pricing and
A ward of Eleven ESS Subcontracts and KBRS is Entitled to Recover PSC Amounts
Associated with Those Subcontracts)
The government moves to dismiss Count IX or in the alternative for
summary judgment on the ground that PSC costs were expressly excluded from the
2010 and 2011 settlement agreements relied on by KBRS, either by the underlying
Forms 1 or by the underlying audit reports (gov't mot. at 12). KBRS maintains that
any exclusion in the underlying Forms 1 is ineffective to counter the broad language
of the settlement agreements (app. opp'n at 29). The government replies that the
settlement agreements clearly state their intent to settle only claims relating to the
specified Forms 1, which do not include the Form 1 in which DCAA questioned
the PSC costs, No. 127 and revision 1 to same, which has not been settled (gov't reply
at 20, ex. G-4). We treat this portion of the government's motion as one for summary
judgment on Count IX. There are no material facts in dispute, only the parties'
differing interpretations of the settlement agreements.
The two settlement agreements are appended to the government's motion as
exhibits G-5 (2010 agreement) and G-6 (2011 agreement). The 2010 settlement
agreement recites that it is in settlement of five specified DCAA Forms 1: Nos. 143,
145, 147, 148, and 153, for a total of $13,269,983 including $12,349,633 in direct
subcontract cost (ex. G-5 at 2-3). The 2011 settlement agreement similarly states that it
is in settlement of six specified Forms 1: Nos. 142, 144, 151, 152, 154, and 157, for a
total of $34,236,526 including $33,024,789 in direct subcontract cost (ex. G-6 at 2-3).
Both settlement agreements contain the following language (with one minor
grammatical variation not pertinent to the meaning):
case was remanded to us with specific instructions to determine ifKBRS's
breach of the contractual prohibition on use of PSCs was excused by the
government's prior material breach. With this issue open, we infer that the
absence of any determination in the court's decision on the allowability of the
costs was a considered choice.
19
[T]he Government, to the extent permitted by law, remises,
releases, and discharges the Contractor, its officers, agents,
and employees of and from all civil liabilities, obligations,
claims, appeals, and demands which it now has or hereafter
may have, whether known or unknown, administrative,
judicial, legal, or equitable, arising under or in any way
related to the Forms 1.
(Ex. G-5 at 4, ~ 8, ex. G-6 at 4, ~ 5)
Four of the underlying Forms I-Nos. 142, 144, 152, and 154-specifically
excluded the PSC costs disapproved by Form I No, 127, revision I (ex. G-7 at 9,
ex. G-9 at 10, ex. G-14 at 11, ex. G-16 at 13). A review of the remainder of the
Forms 1, along with their underlying audit reports, makes it clear that PSC costs
are not among the costs disapproved (exs. G-8, G-10-13, G-15, G-17-24). Therefore,
PSC costs were not within the scope of the two settlement agreements and KBRS's
contentions to the contrary must fail. Moreover, KBRS does not dispute that the
Form 1 disallowing the PSC costs has not been settled.
We note also that the settlement agreements resulted in a near-complete win
for KBRS: of the disapproved costs that were the subject of the 2010 agreement,
KBRS recovered $12,349,633 out of a total of $13,269,983. Of the disapproved costs
that were the subject of the 2011 agreement, KBRS recovered $31,073,009 out of a
total of $33,024,789 in direct subcontract costs, plus applicable overhead and base fee.
(Ex. G-5 at 3, ex. G-6 at 3-4) These numbers render nonsensical KBRS's argument
that the settlements encompassed subcontract PSC costs, since if one were to believe
that to be true, it would lead to the conclusion that KBRS has already recovered the
vast majority of those costs.
For the reasons stated, we grant summary judgment to the government on
Count IX of the FACC.
Counts XI (Army's Quantum Calculation is Inaccurate and Unsupported) and XII
{Army Acted in Bad Faith)
KBRS asserts in Count XI of the FACC that, for several reasons, the damages
calculation underlying the Army's withholding is flawed. This contention is premature
at best and, in the interests of judicial economy, we see no reason to address it
before entitlement has been decided. Therefore, the government's motion to dismiss
Count XI is denied without prejudice to its reinstatement in appropriate circumstances.
In Count XII KBRS states it is entitled to findings of fact that the Army
acted in bad faith by, it alleges, effecting the withholdings in question in response to
20
Congressional inquiries and without conducting any investigation into the underlying
facts regarding the hostile conditions in Iraq from 2003-2006 and the military's
inability to provide the promised level of force protection. The requested findings are
not tied to any particular claim or affirmative defense advanced by KBRS in this
litigation. Rather, KBRS asserts that the requested findings are the relief to which it is
entitled (FACC at 34-35). Moreover, KBRS represented to the Board at oral argument
that no new findings of fact are necessary to decide its motion for summary judgment
(tr. 58).
The government moves to dismiss Count XII for failure to state a claim,
positing that "[a]ppellants cannot come before the Board for freestanding 'findings'
unconnected to well-pleaded claims for contractual relief' (gov't mot. at 13). KBRS
responds simply that the requested findings "are clearly within the scope of these
appeals" and that the government has not cited to any legal authority prohibiting us
from making the requested findings (app. opp'n at 30).
· We have been presented with no reason why the Board should make new
findings of fact unconnected to any contractual claim or defense before it. We
therefore grant the government's motion to strike as to Count XII.
In conclusion, the surviving counts ofKBRS's FACC are II,HI, IV, VI,
VII, VIII, and XI. We now turn to KBRS's motion for summary judgment.
II. KBRS's Motion for Summary Judgment
KBRS has moved for summary judgment on the affirmative defenses presented
by Counts II (prior material breach) and VI (waiver), and the government has opposed.
The standards for summary judgment before the Board are well established 15 and
need little elaboration here. Summary judgment should be granted if it has been
shown that there are no genuine issues of material fact and the moving party is
entitled to judgment as a matter oflaw. Celotex Corp. v. Catrett, 477 U.S. 317,
322 (1986). A non-movant seeking to defeat summary judgment by suggesting
conflicting facts "must set forth specific facts showing that there is a genuine issue
for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (quoting
First National Bank ofArizona v. Cities Service Co., 391 U.S. 253, 288-89 (1968)).
The posture in which we are asked to decide appellant's motion differs from
the usual, in that there has already been a lengthy hearing on the merits in three of
these appeals. Appellant relies on the Board's findings of fact set forth in our
15
Board Rule 7(c)(2) provides that the Board looks to FED. R. CIV. P. 56 for guidance
in deciding motions for summary judgment.
21
decision in KBRS, 14-1 BCA ~ 35,639, for its statement of undisputed material facts
(app. mot. at 2). The government does not dispute those findings of fact and has
proposed "additional material facts" drawn from the existing record in these appeals
(gov't opp'n at 2-3). The parties agree that the Board need not find further facts in
order to decide the motion (tr. 59).
Based on the foregoing, we find the following facts to be undisputed for
purposes of the motion.
STATEMENT OF FACTS (SOF) FOR PURPOSES OF APPELLANT'S
MOTION FOR SUMMARY JUDGMENT
1. Contract No. DAAA09-02-D-0007 (contract or Contract 0007), awarded
to KBRS on 14 December 200 I by the Army Operations Support Command,
Rock Island, Illinois (hereinafter Rock Island), was a cost-plus-award-fee,
indefinite-quantity, indefinite-delivery contract which was part of the Army's Logistics
Civil Augmentation Program (LOGCAP) and is also referred to as the LOGCAP III
contract (findings 2, 3). The contract included the FAR 52.211-15, DEFENSE PRIORITY
AND ALLOCATION REQUIREMENTS (SEP 1990) clause, which stated: "This is a rated
order certified for national defense use, and the Contractor shall follow all the
requirements of the Defense Priorities and Allocation Systems regulation (15 CFR 700)."
The cited regulation stated in pertinent part:
§ 700.3 Priority ratings and rated orders.
(a) Rated orders are identified by a priority rating .... Rated
orders take preference over all unrated orders as necessary to
meet delivery dates ....
(b) Persons receiving rated orders must give them preferential
treatment as required by this regulation. This means a person
must accept and fill a rated order for items that the person
normally supplies ....
(c) All rated orders must be scheduled to the extent possible to
ensure delivery by the required delivery date.
22
§ 700. 7 Compliance
(a) Compliance with the provisions of this regulation .. .is required
by the Defense Production Act.. .. Violators are subject to
criminal penalties.
(Findings 4, 5)
2. The contract also contained section H, Special Contract Requirements,
which set forth the following clause:
H-16 Force Protection
• While performing duties [in accordance with] the terms
and conditions of the contract, the Service Theater
Commander will provide force protection to contractor
employees commensurate with that given to
Service/Agency (e.g., Army, Navy, Air Force, Marine,
DLA) civilians in the operations area unless otherwise
stated in each task order.
(Finding 9)
3. Following the invasion and occupation of Iraq in March 2003, Rock Island
issued task orders under the contract for logistic and life-support services, including
food service and billeting, for the coalition combat forces. Task Order (TO) 59, with
an initial total ceiling price of $802,065, 733, was issued effective 24 June 2003, and
its successor, TO 89, was issued effective 1 May 2005 with an initial ceiling price of
$4,972,882,216. Paragraph 1.10 in Change 5 to the TO 59 Statement of Work
(SOW), effective 27 August 2003, stated: "The government will provide for the
security of contractor personnel in convoys and on site, commensurate with the threat,
and [in accordance with] the applicable Theater Anti-Terrorism/Force Protection
guidelines." Paragraph 1.7 of the TO 89 SOW as issued on 1 May 2005 stated: "The
Government will provide for the force protection and security of contractor personnel
in convoys and on site, commensurate with the threat, and [in accordance with] the
applicable Theater Anti-Terrorism/Force Protection guidelines." (Findings 11, 13)
4. Attacks on KBRS and subcontractor supply convoys began in June 2003.
KBRS warned the Rock Island PCO on 27 June 2003 that failure to provide force
protection in accordance with the LOGCAP III contract would mean that KBRS
and subcontractor vehicle convoys would have to be delayed, adversely affecting
timely delivery of food service support. (Findings 14, 15) The Deputy Commander
of the Coalition Forces Land Component Command (CFLCC) from 2003-2004,
23
Major General (MG) Stephen Speakes, testified that he arrived in Iraq in late June and
that it was obvious to him that "we were taking new levels of threat to our supply and
relief formations across Iraq." Among the options he considered for dealing with the
increased threat were assigning more combat units to protect the convoys, and looking
at the potential for hired contractual security. (Finding 16)
5. On 9 July 2003, KBRS met with MG Speakes and reported that the personnel
and equipment casualties from attacks on its convoys and those of its subcontractors
from mid-May to date were 7 killed, 7 wounded, 4 missing and 10 trucks missing.
MG Speakes noted: "Tomorrow the government will provide convoy protection for
46% of the convoys waiting to travel north. This level of support must increase, but
presently the government is short convoy escort vehicles and shooters (shotgun
riders).'' The parties discussed KBRS contracting for private security, and agreed that
"LOGCAP Planners will develop a revised statement of work requesting contracted
security.'' (Finding 19)
6. On 19 September 2003, MG Speakes sent the following message and formal
request to the Rock Island Commander:
Subject: CFLCC Request for Help with LOGCAP
Contractor Convoy Security.
[I]n message below we request your help in solving one of
our most vexing problems, specifically convoy security for
contracted operations in Iraq .... [W]e see no other optoin
[sic] but to ask that the current contract provisoins [sic] be
amended to support operations in Iraq. We appreciate your
support and hope that this is a request that is
supportable ....
MEMORANDUM FOR Commander, Army Field Support
Command. Rock Island, 1161299
SUBJECT: Adequate Force Protection for the Logistics
Civil Augmentation Program (LOGCAP) Convoys in
Kuwait and Iraq
1. Request Army Field Support Command (AFSC) review
the basic LOGCAP contract and provide a contractual
recommendation allowing Kellogg Brown & Root (KBR)
the authorization to pursue a civilian transport and
24
transportation security company to conduct convoy escorts
missions for the execution of convoys in Iraq during the
movement of government materiel on theater supply
routes. The current force protection posture, pending
reductions in force structure, present and future demands
for military police forces, all support the need to explore
options other than military escorts in order to conduct
secure and unhindered convoy operations.
2. The LOGCAP Basic contract and Statements of Work
(SOW) needs to be modified to allow for KBR to provide
contract security for their convoys moving government
materiel on theater supply routes in Kuwait and Iraq. This
change to authorization and utilization of contracted
security should be in compliance with US Federal and
Military Regulations that established the current base
contract.
3. The contract should be administered by KBR or its
subcontractor, with standards and operating procedures in
accordance with the senior military police organization in
theater. The scope of operations or task execution plan
will be developed by KBR and accepted through the
appropriate contracting and command channels.
4. We understand that there will be legal and perception
concerns in the use of contracted security, but with
pending reductions in force structure, present and future
demands on contractor support, we must ensure unimpeded
flow of supplies. We believe this is a viable course of
action.
MG Speakes expected that Rock Island would prepare a proposal for contract
modification that he could submit for approval by the appropriate commanders in Iraq
and at CENTCOM. However, he testified: "'Despite my repeated efforts, to my
knowledge I never got a formal proposal back, and I never was able to take anything
and formally bring it up to a higher staff to ask for their help." (Findings 20, 21)
7. On 24 November 2003, the commander of the Defense Contract
Management Agency (DCMA) activity in Kuwait, CDR Kent Caldwell, USN, sent a
message to the CFLCC 143rct Transportation Command. The message cited the
25
conflicting standards in operation orders (OPORDS) issued by CFLCC and CJTF-7 16
for convoy protection, and further stated in pertinent part:
As convoy security is contractually required to be provided
by the government and be consistent with the standards set
for all DOD civilians, I believe the government is faced
with an unexecutable task. As I understand it, they are no
longer resourced to comply with either standard, especially
when you consider that contractors cannot carry weapons.
Their need for external security is greater [than] that of
armed soldiers moving in military convoys for which the
majority of the guidance found in both OPORD's applies.
While I understand and appreciate the resource
restrictions on both soldiers and government equipment to
perform the missions assumed by KBR under the
LOGCAP III contract, the Army has entered into a contract
with KBR and is apparently unable to provide the requisite
security and protection requirements established by either
CFLCC or CJTF-7. If uncorrected this will significantly
impact the fuel, line haul, mail, and Class 1 transportation
mission areas supported under this contract.
(Finding 23)
8. On 19 December 2003, CJTF-7 Fragmentary Operations Order (FRAGO)
1242, (KBR Convoy Security Procedures) stated in relevant part:
ATTACKS AGAINST KELLOGG, BROWN AND ROOT
(KBR) CONVOYS HA VE DRAMA TI CALLY
INCREASED DURING THE MONTHS OF OCTOBER
AND NOVEMBER. BASED UPON INTELLIGENCE
ESTIMATES, THE THREAT OF FUTURE ATTACKS
AGAINST KBR CONVOYS IS PROJECTED TO
INCREASE DURING THE MONTHS OF DECEMBER
2003 THROUGH APRIL 2004 .... SINCE THE BEGINNING
16 Combined Joint Task Force-7 (CJTF-7) was the initial designation of the coalition
military forces in Iraq. On 15 May 2004, the designation was changed to Multi
National Force-Iraq (MNF-I). CJTF-7 and MNF-I reported to the Theater
Commander, CENTCOM. KBRS, 14-1 BCA i! 35,639 at 174,522 n.3.
26
OF OCTOBER, TH[E] MAJORITY OF ATTACKS
AGAINST KBR CONVOYS HA VE BEEN THE RESULT
OF IEDS AND SMALL ARMS FIRE. NINETY PERCENT
OF ALL ATTACKS DIRECTED SPECIFICALLY
AGAINST KBR CONVOYS HA VE OCCURRED ON MSR
TAMPA. HOWEVER, SEGMENTS OF ASRJACKSON,
MSR MICHIGAN, MSR MIL TON AND MSR MOBILE
REMAIN EXTREMELY DANGEROUS TO KBR
CONVOYS. KBR CONVOYS REMAIN EXTREMELY
VULNERABLE TO ATTACKS AT REST STOPS, REFUEL
POINTS, TRAFFIC CHOKE POINTS, LOCATIONS OF
VEHICLE BREAKDOWNS, HAND-OFF POINTS FOR
CONVOY SECURITY ESCORTS, MSC BOUNDARY
LINES ... AND MOVEMENT UNDER OVERHEAD
PASSES.
(Finding 24)
9. On 22 February 2004, the KBRS Deputy Area Manager for V Corps North
sent the following message to the troop unit that was responsible for force protection
in that area:
For your information the military has failed to comply with
providing escort requirements. Time and time again we
have sent emails after emails and made phone calls after
phone calls to get this escort requirement taken care of. As
you know last week a convoy was arranged for four (4)
trucks and they were abandoned while in route because of
the speed of travel. I would like to point out this same
subcontractor had employees shot in a drive by shooting
yesterday around B3, so they are a marked target.
It was also briefed on the last [meeting with the
government] that [the government] would prefer to have at
least nine (9) to ten (10) trucks in a convoy. We consulted
with our subcontractor and they hired additional trucks for
a total often (10) trucks which are loaded and ready to go,
when request for convoy was acquired today, KBR was
told [the government] was not able to provide the escorts
due to lack of assets and would not have the assets for two
to three weeks if then. This has directly affected our
ability to carry out our tasked assigned to KBR by CJTF7,
27
plus is causing the subcontractor to occur [sic] unexpected
costs.
The government answer to KBRS's 22 February 2004 message was that:
(i) "these combat units were sent here to fight the war, not do escorts for KBR ONLY";
(ii) the tasking placed on the troop unit responsible for providing the force protection
was 'enormous'; and (iii) when the troop unit was ready to resume escort duty, 'I will
let you ... know."' (Findings 30, 31)
10. On 12 April 2004, CJTF-7 FRAGO 622 described the current convoy
security situation as follows:
THE ENEMY IS PROSECUTING A DELIBERATE
OPERATION TO INTERDICT OUR LINES OF
COMMUNICATION (LOC). WITH THE
SIMULTANEOUS ATTACKS ON SIX OVERPASSES
ON 10-12 APRIL 04, IT IS APPARENT THE ENEMY
HAS TAKEN HIS CAMPAIGN BEYOND
HARASSMENT THROUGH DIRECT ACTION TO A
DELIBERATE EFFORT FOCUSED ON THEATER LOC
INTERDICTION.
CURRENT SITUATION. ALONG MSRS LEADING INTO
AND OUT OF BAGHDAD THERE HA VE
BEEN 66 ATTACKS IN THE LAST WEEK, 49 ATTACKS
ONE WEEK AGO, AND 50 TWO WEEKS AGO. THERE
HA VE BEEN 3 COMPLEX ATTACKS/AMBUSHES IN
LAST THREE DAYS RESULTING IN THE DESTRUCTION
OF A REFUELING CONVOY ... DESTRUCTION OF
4 OVERP ASSES ... AND THE AMBUSH OF A
CONVOY .... THE MSRS BETWEEN 1) BAGHDAD AND
BALLAD, 2) BAGHDAD AND KARBALA, AND 3)
BAGHDAD AND FALLUJAH ARE EXTREMELY
DANGEROUS AND CONTINUE TO BE HIGHLY
SUSCEPTIBLE TO THREAT ACTIVITY RANGING FROM
IEDS TO SMALL ARMS AND RPG
ATTACKS/AMBUSHES.
CURRENT ASSESSMENT: ATTACKS ARE MUCH
HIGHER THIS WEEK AND UPWARD TREND IS
LIKELY TO CONTINUE AS A RESULT OF THE
CONTINUED SADR/MAHDI MILITIA UNREST, AND
28
OPERATIONS AGAINST THREAT FORCES IN
WESTERN IRAQ.
(Finding 32)
11. On 14 April 2004, the DCMA administrative contracting officer (ACO) for
TO 59 (MAJ Hills) reported to the Commander, DCMA Northern Iraq (L TC Blaine)
the following:
All indications are that the government has failed to live up
to its contractual obligation to provide Force Protection
(FP) to the TTM convoys (T00059). Given that, KBR is
currently not required to run most (if any) convoy routes.
They did run three convoys to Anaconda today. Only one
made it. The other two got lost. They are now at an FOB.
KBR may not run any convoys tomorrow ifthe
government does not improve its track record on FP. The
same MP escorts that got them lost are to bring the two
convoys in to Anaconda tomorrow. The best I can tell at
this time is that they have never ran the route they are
about to set out on. Based on my discussions with TTM' s
PM .. .I went over and talked to the 13th COSCOM CC .. .I
told him of KBR's concerns. I feel contractually the
government is not living up to its contractual obligations.
[The COSCOM Commander] stated that COSCOM was
doing their part by providing a soldier for every third truck.
He said it was the 15th MP's that were providing the escort
not COSCOM and that the issue of getting lost was ... not a
FP issue " ... they are all safe aren't they." I just want to go
on record that absent any new information from the
government, I concur with KBR in that the government is
not providing FP commensurate with the threat. If they
choose not to run tomorrow I would be hard pressed to
disagree with them. Oh by the way, one of the trucks in
one of the lost convoys got destroyed by an IED.
(Finding 33)
12. Lieutenant General (L TG) Ricardo Sanchez, commander ofCJTF-7 and its
successor unit from June 2003 to July 2004, testified that there was insufficient
capacity to accomplish all the tasks that were assigned to the force on the ground in
Iraq during that period and that he did not have sufficient resources to provide the
same level of protection to KBRS that was being provided to civilians. For that
29
reason, he stated, in the "fall and early winter of 2003, we very clearly established
within the command that the capacity of the force, the quantity of the force, and the
demands of the mission ... we were not going to be able to continue supporting that
without private security." By March 2004, he testified, there were between 10 and
20 private security contractors operating in Iraq, and he believed their presence and
assistance in accomplishing the mission was welcomed by commanders at the
battalion and brigade level. (Findings 35, 37, 38)
13. Following termination of the Coalition Provisional Authority (CPA) and
establishment of the Interim Iraq Government as the civil government oflraq on
30 June 2004, CENTCOM issued a Warning Order (WARNORD) on 4 July 2004
entitled "CONTRACTOR RISK MITIGATION" that tasked commanders to develop
courses of action (COAs) for U.S. Government contractor risk mitigation in Iraq. The
WARNORD stated that MNF-1 had not to date provided protection for contractors
·'AS CONTRACTOR SECURITY IS NOT A SPECIFIED MILITARY MISSION,"
and further stated that "CONTRACTORS ARE PRIMARILY RESPONSIBLE FOR
THEIR OWN SECURITY." The WARNORD concluded that "given the current
security environment in Iraq, all USG agencies must coordinate protection of USG
contractors through a combination of coalition military forces, Iraq security forces, and
private security companies." (Finding 39)
14. From March to September 2004, attacks on KBRS subcontractor
employees and vehicles continued, with 5 employees killed, 1 beaten, and 25 missing
or held captive (finding 40). On 29 August 2004 KBRS notified LTC Sean O'Day,
Commander of DCMA Northern Iraq, that a subcontractor convoy escorted by a
private Iraqi security company had been ambushed and three trucks were missing.
L TC O'Day remarked that there might be questions why private security and not a
military escort was used for protection. At the hearing, he testified that security was
always a big issue, and that there weren't enough military forces in Iraq to do
everything that needed to be done and provide convoy security for contractors.
(Findings 40, 41)
15. Craig Peterson, KBRS's Program Manager in Iraq from November 2004 to
1 April 2005, testified that although he did not have specific knowledge, KBRS
subcontractors in Iraq had to be using PSCs because "[i]fthey were not using PSCs,
I have no idea how they did their job. None -yvhatsoever. Because they couldn't have
gone anywhere." Mr. Peterson further testified as to the availability of military
protection for KBRS subcontractor convoys:
I myself, as the head [of LOGCAP] and a retired general
officer, would be on an installation and ask the young
lieutenant or captain who has got a convoy going to
Arifjan or somewhere if I could pile in. They said, "I don't
30
do contractors." I said, "I'm Craig Peterson. I'm in charge
of LOGCAP." They said, "I don't do contractors."
Q. They didn't say, "Who?"
A. No .... So, I mean, it -- ifl got kicked out of
convoys, then there is no doubt in my mind that subs did.
(Findings 49, 50)
16. KBRS's principal subcontractor in Iraq was Eurest Support Services
Worldwide (ESS), who installed and operated military dining facilities (DFACs) at
specified sites throughout Iraq and concluded its operations in Iraq on 30 June 2006.
ESS's operation manager from June 2003 to June 2006 was Steven Murray. Mr. Murray
testified that ESS used PSCs for the entire period of its performance in Iraq to
supplement military force protection:
[W]e pretty consistently used, from early '03 and all the
way through our departure in '06, PSD [private security
detachment] teams to move people and money and
equipment in and out of the country, because again, even
in '05 and '06, the [military] convoy system would not let
our NTVs [non-tactical vehicles] in the convoy. If you
disclosed you're carrying cash, you're not getting in the
convoy with cash, and it was a total cash economy the
whole time we were there .
.. .It became extremely difficult to move things
between sites. We'd approach - we tried to use some
military force protection on the site, and I personally talked
to two or three commanders about this. We were told
pretty consistently that the military is not there to babysit
contractors.
I had some people ... stuck on a southern site, and I
needed to move them to a northern site. [They were
included in a government convoy but] halfway through
Baghdad, they stopped our vehicle ... [S]aid they got a call
to go on a mission and they took off in another
31
direction .... [W]e dispatched, enormous cost, ... a PSD team
to go and pick them up .
... Another occasion happened whereby we were
moving equipment ... we had two or three large 500 kV
generators ... at one site; we had to move them across
Baghdad to another site. They [the government] agreed to
move us .
...Halfway there, they told our truck to pull over and
wait. They had to leave, and they left. Never saw my
truck again. It was just gone. The driver, .. .! don't know
what happened to him. The truck was gone.
We learned our lesson very quick. We did ask,
from time to time, and most times it was "We're not doing
that. We can't do that. We're warfighters. Take care of
yourselves." It's extremely difficult to move between
sites, and it was a pretty regular need of ours to do that. ...
Money, people, sometimes food .... [We] only
carried two or three days' worth of food [at each dining
facility site]. So if you don't have a delivery coming in
every third day, you're in trouble. You can't feed soldiers.
That was unacceptable to us, as a caterer, and to our client,
KBR. We could not fail.
So we had to move food, and the military would not
touch it from intra-theater. They had bigger things to do
than to move contractors.
Q: Did there ever come a time when you simply
gave up on seeking force protection?
A. Honestly, no. It was in our interest. I mean this
is a business, and if I didn't have to pay a PSD team, which
were not cheap, and I could get it in a convoy, I'd rather
use a convoy. It didn't always fit with our business
unfortunately.
32
Either you didn't have the time to do it, or they
wouldn't do it. But always, even up until middle of June
of 2006, when we were leaving, we tried to use convoys as
much as we could. It's a cost saver for us. So but the
answer ts yes. We never gave up trying to do that.
(Findings 51, 52)
17. Lack of force protection extended to static security as well as security
for convoys. Mr. Murray testified that between January and June of 2006, as
demobilization activities began, the military was either leaving or on their way out.
Although it tried to secure military force protection, in several instances ESS was left
to move people and assets out of installations that had been left completely open, and
had to bring PSCs in to provide security for the compound while assets were taken
down and loaded, and then used "our own guns to move those things across country."
(Finding 53)
18. Most if not all of the subcontracts awarded by KBRS to perform LOGCAP
III were awarded on a negotiated firm-fixed-price basis (finding 54). Asked if ESS
made or lost money on its use of PSCs at the hearing, Mr. Murray testified that the
use of PSCs was unequivocally a money-losing proposition. He explained that ESS
proposed and negotiated a price based on an estimated use of PSCs, and that as the
scope of work expanded and the security situation worsened, both the frequency of
use and the cost per mission of PSCs increased far beyond the estimated amount, with
the result that "[w]e incurred more costs than we charged [KBRS]." (Finding 54)
19. LTC Scott Sheridan succeeded LTC O'Day as commander of DCMA
Northern Iraq in November 2004. On 22 April 2005 the award fee determination for
KBRS's performance of TO 59 for the previous year was issued with a rating of
'·excellent" and specific note of the challenging circumstances under which that
rating was earned, including "attacks on and hijacking of your convoys" and
"lack of force protection to escort convoys with needed materials." LTC Sheridan
briefed the award fee determination the next day, underscoring the same two special
considerations-"[o]perating in a non-permissive environment" and "[a]vailability of
escorts." (Findings 43-45)
20. KBRS's initial policy in Iraq was not to use private security to perform the
contract because force protection was supposed to be provided by the Army (finding 46).
However, KBRS senior managers did begin to use private security to be able to move
around from location to location, and this was known in 2004 to both the Rock Island
PCO (Mary Beth Watkins) and the DCMA Iraq commander, COL Ainsworth Mills, who
expressed the opinion at the time that the PSC costs would not be allowable on the
33
contract (finding 4 7). The record contains no evidence that the government, including
the PCO, did anything to stop KBRS from using PSCs (finding 48).
21. The record also shows that the government was aware that KBRS
subcontractors were using PSCs to move convoys and did not object. The KBRS
coordinator for all subcontractor movements from Kuwait into Iraq from mid-July
2003 until some point in 2005 was Ms. Leslie Smith, who testified that while the
primary method of movement was a military escorted convoy, the Army Movement
Control Battalion (MCB) routinely received and granted requests to move with private
security. These requests were made expressly and in writing on the KBRS MP Escort
Allocation Request submitted daily to the MCB. In addition, Ms. Smith on 24 March
2004 sent a memorandum to MAJ Grady Sessoms, the designated point of contact at
the MCB, stating in part that "Private security is allowed. Iraqi security escorts wait in
Iraq to hook up with their convoy." On no occasion did MAJ Sessoms or anyone else
at MCB respond that private security was not allowed. (Findings 57, 58) Moreover,
on I 0 June 2005 a DCMA administrative contracting officer consented to the award of
a food services subcontract with an express pricing justification in the consent
documents referring to the expected use of PSCs to help transport maintenance
personnel to their respective sites (finding 60).
22. The government offered five statements of additional material facts
(GSAMF), for the purpose of demonstrating disputes of material fact preventing the grant
of summary judgment on either Count II or Count VI. They are as follows.
I. In February 2006, Kristan Mendoza, the acting
chief of the Army's LOGCAP Contracting Branch at Rock
Island Arsenal Illinois, wrote to Mary Wade, KBR's
LOGCAP contract manager in Houston, Texas, about a
report that a KBR Tier I LOGCAP III subcontractor had
accidentally discharged a handgun. Ms. Mendoza asked
Ms. Wade, among other things, "what measures are being
taken to ensure that contractor or subcontractor personnel
do not possess firearms in the AO [area of operations]."
The following day, Ms. Wade advised Ms. Mendoza,
among other things, that "[t]he subcontractor terms and
conditions state weapons are not allowed on the project,"
and that KBR's "policy is that no LOGCAP or
subcontractor employees are allowed to carry weapons."
2. In July 2006, Sylvia Youngman, the chief of the
Army's LOGCAP Contracting Branch at Rock Island,
emailed Philip Wagner, a KBR contract administrator,
seeking comments on proposed responses by the Army to
34
questions posed by Representative Henry Waxman
about the LOGCAP III contract. Ms. Youngman proposed
to tell Representative Waxman that KBR "has advised the
Army that it has never directly hired a private security
contractor in support of the execution of a statement of
work under any LOGCAP III Task Order" and that "KBR is
presently unaware of any payments to subcontractors which
include[ d] charges for private security costs, but [KBR]
continues to look into this,'' When Ms. Youngman' s
proposed responses were circulated within KBR,
Chris Heinrich, a KBR legal official, commented internally,
"These answers look to be appropriate."
3. Also in July 2006, William Walter, a senior vice
president of the appellant, who had been the appellant's
Director of Government Compliance from 2003 to 2005,
prepared a declaration for filing in Smith v. Halliburton
Co., No. H-06-0462 (S.D. Tex.), a tort action against the
appellant and its parent company. In a draft declaration,
Mr. Walter stated that "under the LOGCAP Contract
[No. DAAA09-02-D-0007] and Task Order 59, KBRSI
had no obligation to provide, and in fact was prohibited
from providing, force protection for its employees at
[Forward Operating Base] Marez [in Iraq], including
security of any kind to protect KB RSI personnel in the
Dining Facility ... [from] a suicide bomber."
4. "In response to Congressional inquiries about the
use of PS Cs by KBRS and its subcontractors ... ,
Ms. Mendoza on 31 January 2007 obtained documentation
from [KBR subcontractor Eurest Support Services (ESS)]
that in March 2005, 'Security' was 12.55% of 'our labor
pricing in our subcontracts[.]'"
5. In February 2007, George Seagle, an executive of
the appellant, testified before the House Government
Reform Committee. In response to questions from
Representative Waxman, Mr. Seagle testified that KBR had
"never directly subcontracted for armed security under the
LOGCAP contract" and had not "required or directed any of
our subcontractors to subcontract for security either."
(Gov't opp'n at 2-3)
35
DECISION
The government has made a number of different arguments with respect to
Count II of KBRS's FACC. The vast majority of these were made in connection with
the government's motion to dismiss and have been dealt with above. In its briefing,
the only two arguments the government makes specifically in opposition to KBRS's
motion for summary judgment are that ( 1) whether a breach is material is not a
determination appropriate for summary judgment, and (2) we must deny summary
judgment on Count II because there is a genuine dispute of material fact with respect
to the materiality of the Army's breach (gov't opp'n at 11-12). For the latter, the
government offers the following: ( 1) KBRS did not believe at the time it submitted its
claims in three of these appeals that the contract obligated the Army to protect KBRS
subcontractors, meaning that KBRS entered into the LOGCAP contract "with no
expectation of force protection for its subcontractors;" and (2) senior management of
KBRS in 2006-2007 told the government that KBR did not allow either KBR or
subcontractor personnel to carry weapons, meaning that KBR senior management, at
least, did not think that the need for security was so great that the failures in force
protection by the Army amounted to a total or material breach. (Id. at 12)
We address first the government's contention that whether a breach is material
is not an issue that should be decided summarily. The government relies on two
Federal Circuit cases to support this argument. The first is Stone Forest Industries,
Inc. v. United States, 973 F .2d 1548 (Fed. Cir. 1992). Stone Forest is cited for the
following proposition:
Not every departure from the literal terms of a
contract is sufficient to be deemed a material breach of a
contract requirement, thereby allowing the nonbreaching
party to cease its performance and seek appropriate
remedy. The standard of materiality for the purposes of
deciding whether a contract was breached "is necessarily
imprecise and flexible." Restatement (Second) of
Contracts § 241 cmt. a (1981 ).... The determination
depends on the nature and effect of the violation in light of
how the particular contract was viewed, bargained for,
entered into, and performed by the parties.
Id. at 1550-51. In Stone Forest, the Federal Circuit reversed the U.S. Claims Court
and found that the government's denial of access to 15.89 percent of the timber
originally contracted for was a material breach. Id. at 1552.
The second case relied on by the government is Beta Systems, Inc. v. United States,
838 F .2d 1179 (Fed. Cir. 1988), cited for the proposition that questions of contract
36
interpretation requiring the weighing of extrinsic evidence are not amenable to summary
resolution. We think the government's reliance on this decision is misplaced. In Beta
Systems, as in most cases where a court or board is called upon to decide motions for
summary judgment, there had been no trial on the merits. In this case, there was an
extensive hearing on the merits and testimony from numerous government and contractor
witnesses bearing on how the LOGCAP contract and task orders were viewed, bargained
for, entered into, and performed by the parties, as well as detailed factual findings made
by the Board on the basis of that record. Any judgment rendered on this record is not
truly "summary." At oral argument the government appeared to back off the position
taken in its briefs, agreeing that the Board's original findings plus the government's
additional material facts were a sufficient basis for the Board to rule on the motion for
summary judgment (tr. 59).
Next, we turn to the government's argument that KBRS's claims underlying
ASBCA Nos. 56358, 57151, and 57327 show that KBRS had no expectation under the
contract that the Army would provide force protection to any of its subcontractors,
precluding summary judgment at least with respect to the subcontractor PSC costs at
issue (gov't opp'n at 12). For this proposition, the government cites to KBRS's certified
claims of 22 October 2007 (ex. G-1) and 16 June 2010 (ex. G-3) for sums withheld by
the Army to recover allegedly unallowable PSC costs incurred by its subcontractors. It
is true that in these claims, KBRS argued that the contract required the Army to provide
force protection to KBRS employees but did not require the Army to provide force
protection to subcontractor employees (ex. G-1at10-12, ex. G-3 at 13-15). However,
these arguments must be viewed in context. KBRS presented this argument as one of
many reasons why the Army's disallowance of subcontractor PSC costs under
Clause H-16 was improper: if the contract did not obligate the Army to provide force
protection to subcontractors, then it could not be reasonably read to prevent those same
subcontractors from providing for their own force protection, when the Army did not
provide it, and billing the cost of same as a reasonable cost of contract performance.
The undisputed facts show that at the time the contract was being performed,
both KBRS and government personnel believed the government was obligated
under the contract to provide force protection to both KBRS and its subcontractors
(see SOF ii 4 (KBRS warned the Rock Island PCO on 27 June 2003 that failure to
provide force protection adequate to the threat in accordance with the LOGCAP III
contract would mean that KBR and subcontractor vehicle convoys would have to
be delayed, adversely affecting timely delivery of food service support); SOF ii 7
(the commander of DCMA in Kuwait expressed concern in November 2003 that the
government would be unable to meet its contractual obligation to provide security
and protection for KBRS convoys); SOF ii 9 (KBRS manager sent a message in
February 2004 to the troop unit responsible for force protection, saying that "the
military has failed to comply with providing escort requirements" and citing ( 1) the
abandonment of a subcontractor convoy while en route and (2) the assembly of a
37
subcontractor convoy of 10 trucks loaded and ready to go only to be told no military
escort was available and might not be available for weeks); SOF ii 11 (the DCMA
ACO for TO 59 stated to the commander of DCMA Northern Iraq in April 2004 that
"[a]ll indications are that the government has failed to live up to its contractual
obligation to provide Force Protection ... to the [TO 59] convoys .... Given that, KBR is
currently not required to run most (if any) convoy routes.")). The government has
cited to no statement by either KBRS or the government contemporaneous with
contract performance that would support the assertion that KBRS "viewed, bargained
for, entered into, and performed'' the LOGCAP III contract "with no expectation of
force protection for its subcontractors." Therefore, its argument that the Army's
failures to provide force protection to KBRS subcontractors was not a material breach,
because there was no expectation that force protection would be provided, i~
unpersuasive.
Finally, the government asserts that there is a dispute of material fact with
respect to how important government force protection was to KBR itself, given "[t]he
persistence of KBR's official no-weapons policy throughout the claim period"
(gov't opp'n at 12). For this, the government cites to GSAMF paragraphs 1, 2, and 5.
GSAMF 1 deals only with employee possession of private weapons, which KBRS did
prohibit, but not with PSCs, which is how KBRS provided security to its employees in
Iraq when military force protection was not available. GSAMFs 2 and 5 both deal
with accurate statements by KBRS officials that KBRS did not hire a PSC directly in
support of LOGCAP III. The cost of PSCs hired to protect top KBR officials traveling
in the Middle East was incurred by a KBRS office servicing a number of KBRS
contracts in the Middle East, including LOGCAP III, and was allocated to those
contracts as an indirect cost. KBRS, 14-1 BCA ii 35,639 at 174,514. The government
has failed to raise any genuine issue of material fact regarding the importance of force
protection to KBRS under LOGCAP III.
The undisputed facts establish that the government committed the first material
breach under the contract. The invasion and occupation of Iraq occurred in
March 2003. Attacks on convoys began in June 2003, and by 27 June 2003 KBRS
was already warning that the government was not providing force protection in
accordance with its contractual obligation. (SOF iii! 3-4) MG Speakes, the deputy
commander of Coalition land forces in Iraq, quickly assessed that increased force
protection was necessary and requested that the commander at Rock Island have
the LOGCAP III contract amended to allow for use of private security for
convoys moving materiel in Iraq. However, that never happened. (SOF iii! 4-6) In
November 2003, the commander ofDCMA in Kuwait warned that the government
was "faced with an unexecutable task" to provide force protection to convoys in
accordance with applicable standards (SOF ii 7). In response to a KBRS message in
February 2004 that neither it nor its subcontractors were receiving the promised
protection, the responsible military unit replied that "these combat units were sent here
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to fight the war, not do escorts for KBR ONLY" (SOF ii 9). The DCMA ACO stated
in April 2004 in no uncertain terms that the government had failed to live up to its
contractual obligation to provide force protection to the convoys (SOF ii 11 ). Several
witnesses testified that by spring and summer of 2004 it was evident that the force on
the ground was insufficient to accomplish military missions and provide security for
contractors. The need for PSCs to supplement Coalition and Iraqi forces to provide
security to contractors was widely recognized (SOF iii! 12-14).
The government does not seriously dispute that it was obligated under the
LOGCAP III contract to provide force protection to KBRS and its subcontractors
equivalent to that provided to DoD civilians, and obligated under TOs 59 and 89 to
provide them with force protection commensurate with the threat. Indeed, it would be
unconscionable to take the position that the contract prohibited KBRS and its
subcontractors from providing for their own protection, while performing in a war
zone, without otherwise providing for their security. Yet, despite the many and
continuing failures of the government to provide the promised level of force protection
to KBRS and its subcontractors summarized above, the government seeks to disallow
the PSC costs incurred by KBRS and its subcontractors in order to accomplish their
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.
One of the grounds for the government's motion to dismiss Count II is that
KBRS waived the material breach by continuing to perform the contract. We
previously rejected this argument as a basis for dismissing Count II for failure to state
a claim for relief, stating that the record in these appeals amply demonstrated that
KBRS and its subcontractors made a commercially reasonable decision to continue to
perform the contract with PSC protection rather than abandon performance in response
to the government's breach, and citing the decision of the Court of Claims finding
that continued performance did not waive the government's material breach in
Northern He/ex, 197 Ct. Cl. 118, 129. We also found that this case presents the same
sort of "special aspect" present in Northern He/ex, i.e., that the contractor's continued
performance was consistent with the purpose of the contract and in the national
interest. It is unclear to us whether the government also asserts this ground in
opposition to summary judgment, but to the extent that it does, we hold that KBRS and
its subcontractors did not waive the government's prior material breach by continuing
to perform.
What remains is the question of the appropriate remedy for the government's
material breach. KBRS has raised prior material breach as a defense to the
government's claim of breach embodied in its claim for unallowable costs. Our
appellate precedent recognizes that a party may defend a claim of breach on the
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ground that a legal excuse for its nonperformance existed at the time of the alleged
breach. Long Island Savings Bank, 503 F.3d at 1251 (plaintiffs' claim for damages
precluded by their prior breach-submitting a false certification). In Laguna, 828 F.3d
at 1372-73, the Federal Circuit affirmed this Board's grant of summary judgment to
the government, holding that a contractor's claim for unpaid costs of performing an
environmental remediation and construction contract in Iraq was precluded by the
contractor's prior material breach-violation of the contract's Allowable Cost &
Payment clause.
In these appeals, the government has claimed and withheld from payment to
KBRS the amounts it believes it previously paid in unallowable PSC costs. The basis
for the government's claim of unallowability is that the costs were incurred in
violation of the contract's prohibition against the use of PSCs. Because the record in
these appeals establishes that the claimed PSC costs were reasonable in amount and
were incurred only when necessitated by the government's failure to provide the
contractually promised level of force protection to KBRS and its subcontractors, the
government's prior material breach operates to excuse any subsequent noncompliance
with the contract's PSC prohibition. Thus, the government's claims for unallowable
PSC costs are precluded in their entirety and we grant summary judgment for KBRS
on Count II of its FACC.
CONCLUSION
The government's motion to dismiss is granted as to Counts I, V, and X, and
those affirmative defenses are stricken from KBRS's FACC. The motion to dismiss is
denied as to Counts II, III, IV, VI, VII, and VIII. We grant summary judgment to the
government on Count IX. The government's motion is denied without prejudice as to
Count XI, and granted as to Count XII.
We grant KBRS's motion for summary judgment on Count II of its FACC.
Having done so, we deem it unnecessary to decide whether KBRS is also entitled to
summary judgment on Count VI of its F ACC. The consolidated appeals are sustained
in the amount of $44,059,024.49, with Contract Disputes Act interest as follows: on
$19,652,815 from 22 October 2007, on $21, 131,743 from 20 October 2009, and on
$3,274,466.49 from 16 June 2010.
Dated: 8 June 2017
---
(Signatures continued)
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I concur
RICHARD SHACKLEFORD OWEN C. WILSON
Administrative Judge Administrative Judge
Acting Chairman Acting Vice Chairman
Armed Services Board Armed Services Board
of Contract Appeals of Contract Appeals
I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA Nos. 56358, 57151, 57327,
58583, Appeals of Kellogg Brown & Root Services, Inc., rendered in conformance
with the.Board's Charter.
Dated:
JEFFREY D. GARDIN
Recorder, Armed Services
Board of Contract Appeals
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