Government Contracts Monitor

ASBCA Determines Contract Obtained Through Material Misrepresentation Void Ab Initio, Negating Both Contractor and Government Claims Under the Voided Contract

March 27, 2019

In a no-longer so infrequent scenario, the Armed Services Board of Contract Appeals (ASBCA or Board) recently held a contract void ab initio where the contract was obtained through material misrepresentation. Specifically, the erstwhile contractor had told the Government that the contractor intended to use its own personnel on-site in Israel, without which representation the Government would not have awarded the contract. However, the Board determined that the contractor, in fact, had no intent to hire or provide its own on-site personnel, and instead subcontracted performance to an affiliated company. In view of the void ab initio ruling, the Board sustained the Government’s fraudulent inducement defense and denied the contractor’s affirmative recovery claims. However, in a “what’s good for the goose is good for the gander” ruling, the Board also sustained, on the same basis, the contractor’s appeal challenging the Government’s liquidated damages assessment, effectively denying both parties any recovery under the voided contract. ABS Development Corp., ASBCA Nos. 60022, 60023, et al. (Jan. 7, 2019).

The case involved a 2010 contract for construction work at an Israeli Navy shipyard in Haifa, Israel. The contract was awarded for $26,956,562, and, as amended, had increased to approximately $46 Million, all of which had been paid to the contractor. The contractor and appellant was ABS Development Corp., a Delaware corporation based in New York. ABS represented itself, in its 2010 proposal, as a subsidiary of Ashtrom International, Ltd., which was fully owned by Ashtrom Group Ltd, an Israeli company.

The solicitation and resultant contract stated that the procurement was restricted to U.S. firms, and that offers from non-U.S. firms would be rejected. ABS stated, in its initial proposal, that only two project personnel (ABS’s CEO and a purchasing manager) would be ABS employees, neither of whom would be on-site in Israel. The remaining 39 personnel identified in the provided proposed organization chart would be Ashtrom Group personnel, subcontractors or independent consultants.

The Contracting Office informed ABS that it was in the competitive range, but that weaknesses had been identified in its proposal, including that ABS “has no presence in Israel,” and that the “US Government does not negotiate with subcontractors.” The Government offered ABS a chance to revise its proposal, and also asked ABS to review its price to see if any additional cost savings could be realized.

ABS submitted a revised proposal, stating that it would “directly prequalify and employ all Construction Management personnel, and that the project manager and both assistant project managers would be ABS employees on-site in Israel. ABS further represented that 20 management and design-level positions would be filled by ABS personnel who would be on-site in Israel. Based on these representations the Contracting Officer awarded to ABS. However, ABS never hired anybody to work at the project site in Israel, and all on-site work was performed by Ashtrom Group employees or subcontractors. The Board found that ABS never intended, itself, to hire any on-site personnel, and that had ABS responded to the Contracting Officer’s concerns by confirming that ABS intended to perform as initially proposed, ABS would not have been awarded the contract.

ABS filed seven separate appeals, affirmatively seeking additional compensation and an extension of time. ABS also appealed the Government’s assessment of liquidated damages for alleged late completion of the contract work. The Government defended ABS’s affirmative claims by asserting, among other things, that the contract should be deemed void ab initio, based on ABS’s up-front misrepresentations.

The Board pointed out that a contractor’s failure to perform in accordance with promised future performance in a proposal generally provides a basis for breach liability, not misrepresentation. The Board stated that, to void a contract based on misrepresentation, the Government must prove “a misrepresentation at the time of proposal, such as that the contractor did not intend to perform or knew it could not perform.” In such cases, “[w]here an appellant has obtained a contract through a material misrepresentation, with no realistic intention of performing in accordance with that representation, the contract is void ab initio, resulting in denial of the appeal.”

The Board determined that such was the case here. Specifically, the Board found that ABS made numerous up-front misrepresentations, that such misrepresentations were material, and that the misrepresentations were made to induce the award to ABS. The Board further found that ABS never intended to hire any on-site personnel, and that the Contracting Officer would not have awarded to ABS but for ABS’s misrepresentations. The Board therefore determined that the contract here was void ab initio. In view of this holding, the Board found it unnecessary to address the parties’ other arguments, and summarily denied all of ABS’s affirmative claims. However, the Board sustained ABS’s appeal challenging the Government’s liquidated damages assessment, stating, on the same basis, that “no valid contract ever came into existence.” “As such, the government cannot assess liquidated damages” under a non-existent contract.

The bottom line here is two-fold: first, the Government continues to look for and assert, where plausible, fraud and misrepresentation as affirmative defenses to contractor claims; and second, contractors that engaged in questionable fraudulent conduct or misrepresentation to get a contract, or in the performance thereof, should think twice before bringing affirmative claims, and incurring all the associated costs, since such misconduct may provide an independent bar to recovery, and further also may jeopardize payment of any outstanding contract balances. Here, while the Board’s ruling barred any further affirmative contract recovery, the appellant at least had already been paid the full adjusted $46M contract amount. (However, it is not known, from the decision, whether the Government separately has or is seeking any other recovery from the contractor.)

The only favorable aspect of this decision for the contractor is that the Government’s liquidated damages assessment also was barred. This aspect of the Board’s decision reveals that the Government’s fraudulent misrepresentation defense, while a powerful weapon against contractor claims, is two-sided, and also will bar contract-based claims by the Government, if the defense succeeds and the contract is voided.

Attorneys

Hopewell Darneille