ethics corner

September 2007

Contractors See Rise in Fraud Counterclaim

By L. James D’Agostino and Sean M. Connolly

Government contract fraud counterclaims are on the rise, and court decisions increasingly are recognizing fraud liability.

The government may assert counterclaims seeking setoffs based on a special pleas in fraud, under the False Claims Act or the Contract Disputes Act. Fraud counterclaims at the Court of Federal Claims do not require a contracting officer’s final decision and monetary relief owed to the government may exceed a contractor’s original claim. Filed in response to contractor claims or requests for other financial relief, government fraud claims can ravage a company’s bottom-line. Given this power and potential impact, clearly, the ethical and legal considerations surrounding contract claims submissions are paramount.

There are several recent Court of Federal Claims decisions involving government counterclaims for fraud. Contractor claims and appealing contracting officer denials have always been significant business decisions, for customer relationship reasons, and also given the time and money costs of preparation and prosecution. The courts’ increasing receptiveness to government fraud claims adds a new dimension that must now be considered.

During the last fiscal year, successful government fraud counterclaims severely impacted several companies in fines and claims forfeitures. For example, in Daewoo Engineering and Construction Ltd., the court assessed $50 million in damages under the Contract Disputes Act for knowingly false claims. The court, charging “gamesmanship,” pointed out that Daewoo “did not expect to find itself in court trying to justify its case” and instead went for simple payment of a negotiated amount of its claim, and concluded that this “shoot first” approach to claims submission deserved a $50 million message. The court found that Daewoo violated the False Claims Act and the Contract Disputes Act.

In another case, Morse Diesel International, Inc., a government counterclaim alleged that Morse Diesel was apparently “floating” payments for bonds and submitted “paid” invoices before they were actually paid, under a contract requiring progress payment applications and certifications, but only after the company had made the payments itself. The court found that Morse Diesel payment applications were false, and that some claims were inflated to include rebate amounts for which the government was entitled to credit. Under its fixed-price contracts, while Morse Diesel may not have netted more in government payments than it otherwise would have, premature submittals cost the company more than $53 million in potential claims against the government, which the Court deemed to have been forfeited.

A third example, M.A. DeAtley Construction Inc., finds the government accusing M.A. DeAtley of submitting a false certified claim with the Department of Transportation for “added work” that should not have been considered additional work under the contract. There, the contract required M.A. DeAtley to lay a specific type of rock as a foundation. While laying rock from a government-designated source, M.A. DeAtley found that the rock failed to satisfy contract standards. The government would not accept a credit and allow the company to leave the rock already laid, and required the company to replace the rock. While this may sound like a case where two reasonable parties may disagree, instead of a fraudulent claim by one party, the Court would not grant M.A. DeAtley’s motion to dismiss the government’s fraud claim because it found it is possible that the government ultimately could win on its fraud claim.

These cases make clear that companies must recognize that government claims are serious business and must be flagged as high risks that deserve vigilance and proactive planning. All corporate ethics and compliance programs need systems to check and double-check government submissions before final signature and submission. All corporate ethics policies and procedures should include a best practices section for preparing and filing claims against the government.

A modest investment in time and money, preparing and training on a process, will reduce the long-term risk of defending government civil false claims, suspension and debarment actions, and even criminal actions, which all impact profits, and can be fatal to a company. Claims that are accurate are far more likely to be paid, to say nothing as to good government relations, and future business.

Claims impact a company’s overall financial performance. Recent case law covering government fraud claims should be understood, with an eye toward a rigorous review of internal corporate claims processes.

The law has always barred the knowing submission of false claims with the intent of defrauding or deceiving the government. The standard for certified claims, however, has become considerably more rigorous. No longer is it sufficient to submit what are viable contentions, where the “backup” or systems will not permit verification of a claim’s accuracy. In light of recent cases, even with good intentions, it would be folly to file claims to the government, and thereafter determine the details that support that claim. The time and money costs of that approach, responding to investigations and defending allegations of fraud, are simply too great to permit.

Jim D’Agostino and Sean Connolly are attorneys at the international law firm of Greenberg Traurig. The opinions expressed here are solely those of the authors and are not intended to provide legal advice or represent the view of NDIA or the NDIA Ethics Committee.

Please email your comments to SErwin@ndia.org

Back To Top