Court of Federal Claims Holds Government Abused Discretion in Terminating Contract for Convenience; Also Finds Contractor Liable for Violations of the False Claims Act

Gulf Group Gen. Enters. Co. W.L.L. v. United States
2013 U.S. Claims LEXIS 899 (Fed. Cl. July 2, 2013)

This action arose from a contractor’s claim that the U.S. Army (the “Army” or the “Government”) abused its discretion in terminating contracts for its convenience. In September 2004, Gulf Group General Enterprises Co. W.L.L. (“Gulf Group”) entered into four contracts worth approximately $15.8 million with the Army to provide cleanup and sanitation services in Kuwait. Three of the contracts—the camp package master blanket purchase agreement for provisions (the “BPA contract”), the latrine contract, and the dumpster contract—were terminated by the Army for its convenience within a month after they were awarded. The fourth contract, for bottled water distribution (the “bottled water contract”), was not terminated and instead extended into 2005.

In December 2005, Gulf Group submitted a series of claims to the Government for losses it allegedly incurred because of the termination of the three contracts and for losses from delays in bottled water deliveries it alleged were caused by the Government’s requirement that military convoys escort its delivery trucks into Iraq. After its claims were denied, Gulf Group filed four separate complaints with the Federal Court of Claims in 2007 that were subsequently consolidated in 2008. Gulf Group’s complaints alleged abuse of discretion and arbitrary and capricious action by the Army concerning the terminations, and, therefore, breaches of the BPA contract, the latrine contract, and the dumpster contract. Gulf Group further asserted that the Government violated its duty of good faith and fair dealing by causing delays for the delivery of Gulf Group’s bottled water pursuant to the bottled water contract.

In response, the Government asserted fraud-related counterclaims and affirmative defenses under the False Claims Act alleging that Gulf Group knowingly submitted false or fraudulent claims to the Government under the four contracts. The Government contended that Gulf Group submitted claims under the four contracts for an amount significantly greater than what was owed, and that, under the antifraud provision of the Contract Disputes Act, Gulf Group had to pay the Government the money it claimed which is not supported, plus the Government’s costs in reviewing the claims.

The Court first considered whether Gulf Group had “knowledge,” as defined by the False Claims Act to include “reckless disregard,” that the claims Gulf Group submitted to the Government were false or fraudulent. All invoices submitted by Gulf Group were reviewed, signed and submitted by Gulf Group’s attorney. They had also been signed by Gulf Group’s owner. However, the submitted claims were inflated and contained gross inaccuracies. For example, despite being terminated less than a month into the Project, Gulf Group claimed amounts greater than the total sum it would have been entitled to under the dumpster contract had the contract been performed. In defense, Gulf Group, a foreign company, argued that it did not know how to compile and submit a government claim and that it relied on advisors in submitting the claim. The Court rejected these arguments. The Court held that “a failure to make a minimal examination of records can constitute deliberate ignorance or reckless disregard, for which a contractor may be found liable under the False Claims Act.” The Court determined that had Gulf Group conducted even a minimal inquiry into the accuracy of the claims submitted, they would have been aware of the inconsistencies and inaccuracies therein. “Although Gulf Group…relied on [its] advisors as to how to submit claims…those advisors [failed] to provide competent advice…” This reliance did not excuse Gulf Group from reviewing its settlement proposals and claim submissions, and evinced “a reckless disregard for accuracy” under the False Claims Act. The Court concluded that Gulf Group submitted conflicting, incorrect, and baseless claims regarding the BPA contract, the latrine contract, and the dumpster contract in 2005 and in 2007. Accordingly, the Court found Gulf Group liable for the maximum statutory penalty of $11,000 per claim, for a total amount of $66,000 for the six violations of the False Claims Act.

Despite the established liability under the False Claims Act, the Court found that the Government had not proven that the claims were made with intent to deceive the Government. The Court reasoned that because Gulf Group had relied upon “advisors” to prepare those claims, it did not intend to deceive the Government with their submission, which would have resulted in their forfeiture under the Special Plea in Fraud statute. Therefore, the Court went on to assess the merits of Gulf Group’s claims against the Government for wrongful termination.

With regard to the BPA contract, the Court found that Army officials offered a reasonable and good faith explanation for its termination. The officials supported Gulf Group’s assertion that the termination of the BPA contract was contingent on Gulf Group being awarded a BPA for a larger military base, Camp Virginia. Gulf Group ultimately was not awarded the Camp Virginia contract, but the Court found that the Government had no contractual obligation to make the award.

Conversely, the Court found that the Government had improperly terminated the latrine and dumpster contracts because it failed to “establish[] a legitimate basis for doing so,” which amounted to an abuse of discretion. The Court noted that various Army officials presented a number of different and often conflicting reasons for terminating Gulf Group’s dumpster and latrine contracts, none of which were reasonable or consistent with the Government’s obligation to act in good faith. An alleged security incident was chief among those reasons. In the incident, a Gulf Group employee asked about the layout of the military base Camp Arifjan and made drawings of buildings around the base, purportedly to determine placement locations for dumpsters. The Court determined, however, that the Army’s termination of these contracts “based on security reasons, without finding a need to even open a case or begin a formal investigation…is not reasonable or best practices, and is arbitrary and capricious.” In fact, the Court found that Government personnel “were simply motivated… ‘to get Gulf Group off the bases.’” As a result, the Court ruled that “[a]lthough a termination for convenience generally does not entitle a contractor to anticipatory profits, a termination for convenience ‘tainted by bad faith or an abuse of contracting discretion,’ which amounts to a breach of contract, may entitle a plaintiff to expectancy damages.” Accordingly, the Court found that Gulf Group was entitled to both lost profits and contract preparation costs under the latrine and dumpster contracts.

Finally, with regard to the bottled water contract, the Court determined that Gulf Group could not recover any money for losses it allegedly suffered from delays in bottled water deliveries because the Government’s requirement that Gulf Group make its deliveries into Iraq with a military convoy was a sovereign act and not part of a contractual agreement.

Therefore, the Court ordered the Government to pay Gulf Group approximately $560,000 for losses it suffered from the Army’s termination of the latrine and dumpster contracts. The Court also directed Gulf Group to pay the Government $66,000 for the six False Claims Act violations resulting from Gulf Group’s submission of inflated claims in 2005 and 2007.

Jeffery R. Mullen

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