It seems that government contractors are increasingly facing government affirmative defenses of fraud in response to their appeals. Contractors need to be aware of the differing jurisdictional standards when confronted with a government affirmative defense of fraud, especially in proceedings before the Armed Services Board of Contract Appeals (“ASBCA”). A number of decisions in the last few years have opined on the ASBCA’s jurisdiction.
Interestingly, the ASBCA’s jurisdiction over fraud defenses appears to be more extensive when the Government asserts an affirmative defense that a contract is void due to fraud occurring during contract formation. When this is the case, the ASBCA has held that it can make the necessary factual findings of fraud itself. See, e.g., International Oil Trading Co., ASBCA Nos. 57491, et al., 2018-1 BCA ¶ 36,985 (2018); ABS Develop. Corp., ASBCA Nos. 60022, 60023, 17-1 BCA ¶ 36,842 (2017); Schuepferling, Gmbh & Co., KG, ASBCA Nos. 45564, et al., 98-1 BCA ¶ 29,659 (1988). On the other hand, when the Government asserts an affirmative defense alleging that fraud occurred during contract performance, the ASBCA has consistently held that it cannot make the factual determination of fraud, and must rely upon factual findings of fraud from a court of competent jurisdiction, e.g., a federal court. Supply & Service Team GmbH, ASBCA No. 59630, 17-1 BCA ¶ 36,678 (2017); ERKA Constr. Co., Ltd., ASBCA No. 57618, 12-2 BCA ¶ 35,129 (2012); AAA Eng’g & Drafting, Inc., ASBCA No. 48729, 01-1 BCA ¶ 31,256 (2001).
Recently, the Federal Circuit reviewed the ASBCA’s jurisdiction over an affirmative defense of fraud in Laguna Constr. Co. v. Carter, 828 F.3d 1364, 1368 (Fed. Cir. 2016). In that case, the contractor appealed a contracting officer’s denial of its claim for unpaid invoices. The Government asserted an affirmative defense of first material breach for submitting invoices inflated by illegal subcontractor kickbacks. The Federal Circuit held that the ASBCA could take jurisdiction over the affirmative defense even though the alleged breach involved allegations of fraud in contract performance over which the ASBCA normally does not have jurisdiction. The Court explained that the ASBCA could not make the factual determination of the underlying fraud, but instead must rely upon findings of fraud made by a court of competent jurisdiction. Notably, the court did not limit its holding to affirmative defenses alleging fraud during contract performance.
The ASBCA, however, has declined to apply the Federal Circuit’s Laguna precedent to a Government affirmative defense that a contract is void due to fraud occurring during its formation. See, e.g., International Oil Trading Co., ASBCA Nos. 57491 et al, 18-1 BCA ¶ 36, 985; ABS Develop. Corp., ASBCA Nos. 60022, 60023, 17-1 BCA ¶ 36,842. In both of those cases, the contractor relied upon Laguna in arguing that the Government’s affirmative fraud defenses were not viable due to the lack of factual findings made by courts of competent. In rejecting those arguments, the ASBCA held that the Laguna decision did not address an affirmative defense that the contract was void due to fraud in the inducement. However, those decisions do not address the underlying question: Where does the ASBCA get the jurisdiction to make the factual findings necessary to establish the alleged fraud in the inducement? The authors of the International Oil and ABS decisions assumed that, because the ASBCA can declare a contract void, it can make the factual determinations necessary to establish the fraud defense – even though it would not otherwise have jurisdiction over the underlying fraud actions.
The ASBCA’s International Oil and ABS decisions limit the scope of the Federal Circuit’s Laguna decision, while maximizing the Board’s jurisdiction over Government affirmative fraud defenses. The result is an application of two very different jurisdictional standards. If an alleged fraud occurs before contract award, the ASBCA takes the position that it has jurisdiction to make factual determinations that fraud in fact occurred. If, however, the alleged fraud occurs after contract award, the ASBCA recognizes that it does not have jurisdiction to make a factual determination of fraud and must rely upon a factual determination of fraud made by a court of competent jurisdiction. Hopefully, the Federal Circuit will weigh in on the ASBCA’s conclusions about its jurisdiction over to make findings of fraud in contract formation. Without this clarification, contractors may be left to wonder what jurisdictional standard the ASBCA will apply when confronted with a government affirmative defense of fraud.