Government Contracts Monitor

In a Rare Move, ASBCA Holds Contract Void Ab Initio Based Upon Fraudulent Misrepresentation

July 1, 2013

The Armed Services Board of Contract Appeals (“ASBCA”) recently held a contract void ab initio for fraud in the inducement where the contractor fraudulently misrepresented its relationship with a proposed subcontractor holding certifications critical to the contractor’s eligibility for award. Servicios y Obras Isetan S.L., ASBCA No. 57584 (April 5, 2013).

The case involved a firm fixed-priced U.S. Air Force contract for construction of the Fire Training Hardstand at Morón Air Base, Spain. Among other things, the solicitation had required that offerors, either individually or via their proposed subcontractors, hold an updated “Certificate of Classification” issued by the local government contractor registration office covering specified groups, sub-groups and categories. Servicios y Obras Isetan (“Isetan”), on its own, was only qualified in one of the categories. In order to establish its eligibility in other categories, Isetan submitted an alleged agreement with the Spanish company Heliopol, S.A., signed on behalf of both Isetan and Heliopol, as well as a Certificate of Classification for Heliopol establishing that such company met numerous classification categories. Based upon this and other information, the Air Force awarded the contract to Isetan.

The contract required the awardee, within ten calendar days after award, to furnish a Bank Letter of Guarantee for performance of the work, in a specified amount, and stated that “[f]ailure to furnish the letter . . . may be deemed a breach of contract.” Isetan failed to timely provide the required Guarantee. Notwithstanding that the Contract provided that the Contracting Officer (“CO”) would not issue the Notice to Proceed until approval and acceptance of the Guarantee, the CO issued the Notice to Proceed on September 29, 2008. Several months later, Isetan provided the required bank guarantee.

Shortly thereafter, the bank that Isetan claimed issued the letter of guarantee informed the CO that the bank had no record that guarantees for the work had ever been issued. Despite the CO providing Isetan a further opportunity to submit a valid bank letter of guarantee, no valid guarantee was ever submitted. The Air Force Office of Special Investigation (“AFOSI”) initiated an investigation, and issued an initial report suspending Isetan for submitting “forged bid bonds.”

Meanwhile, the CO contacted Heliopol, which advised that it had not entered into any agreement with Isetan for this project. The AFOSI expanded its then ongoing investigation into Isetan to include this issue, and provided in its final report, that the purported signatory of the previously provided subcontract claimed that “he had no knowledge of the arrangement and at no time had signed the private contract.”

By letter dated November 3, 2010, the CO terminated the contract for default, citing the “submission of a fraudulent bid bond.” Isetan appealed this default termination to the Board, and also sought monetary recovery. The Government moved to dismiss, or alternatively to deny the appeal, on several grounds including that the contract was void ab initio for fraud in the inducement based upon the fictitious Heliopol subcontract.

The Board held that it has jurisdiction to determine whether a contract is void ab initio, and determined that the instant contract was void based upon the established facts here. The Board noted the general rule that “a contract tainted by fraud or wrongdoing is void ab initio.” While recognizing such as a “severe remedy,” the Board stated that such remedy is “couched in the potential for injury to the public interest by actions which compromise the integrity of the Federal contracting process.” The Board stated, “[m]ost importantly, [such remedy] is not limited to situations where the contractor has been convicted in a criminal action stemming from the misrepresentation.”

The Board then stated that “in order to render a contract voidable, three requirements must be met in addition to the requirement that there must have been a misrepresentation: (1) the misrepresentation must have been either fraudulent or material; (2) the misrepresentation must have induced the recipient to make the contract; and (3) the recipient must have been justified in relying on the misrepresentation.”

Applying these principles here, the Board had no trouble concluding (1) that Isetan had misrepresented its relationship with Heliopol, (2) that the Air Force had reasonably relied on such representation in finding that Isetan met the bidding requirements, and (3) that Isetan would have been technically unacceptable had it not misrepresented the facts, since Isetan did not possess the requisite certifications on its own. The Board therefore determined the subject contract void ab initio and denied Isetan’s appeal.

This case provides another graphic reminder of the many remedies available to the Government for fraud or wrongdoing in connection with obtaining or performing a federal contract, and that sometimes a contractor needs to know when to call it quits and stop fighting.

Hopewell Darneille is the attorney responsible for the content of this article.