Wednesday, June 1, 2016

United States Court of Appeals for the Federal Circuit Provides Guidance on Accrual of Pass-Through Subcontractor Claims

In Kellogg Brown & Root Services, Inc. v. Murphy, the timeliness of prime contractor Kellogg Brown & Root Services, Inc.’s (“KBR”) May 2, 2012, claim to the Army was sole issue on appeal - particularly, whether KBR’s claim had accrued on or before May 2, 2006, for purposes of the Contract Disputes Act’s (“CDA”) 6-year statute of limitations.   The court held that the 6-year statute of limitations had not run.

The project at issue involved KBR’s contract with the Army to construct dining facilities and provide meal and related services for troops in Iraq.  KBR subcontracted with a joint venture between The Kuwait Company for Process Plant Construction & Contracting K.S.C. and Morris Corporation (AUST) PTY Ltd. (“KCPC/Morris”) to implement certain work release orders for the project.  On July 31, 2003, KBR terminated KCPC/Morris for alleged default.  KCPC/Morris disputed the termination but continued performance until transition to a new subcontractor on September 12, 2003.

In 2004, KCPC/Morris filed suit against KBR in the United States District Court for the Eastern District of Virginia based on the termination.  In the suit, KBR claimed that KBR and KCPC/Morris had reached an oral settlement and sought to enforce it.  On January 24, 2005, KBR and KCPC/Morris reached an agreement dividing KCPC/Morris’ alleged costs into two categories and converting the default termination to a termination for convenience.

As part of the agreement, KBR and KCPC/Morris agreed to cooperate to prepare invoices to the Army for KCPC/Morris’ termination costs.  On August 26, 2006, KCPC/Morris submitted to KBR a certified claim.  On November 3, 2006, KBR forwarded KCPC/Morris’ claim to the Army, but KBR did not certify the claim. 

The Army responded on May 30, 2007, that KBR was responsible for negotiating and discussing claims with its subcontractors and that the Army does not comment in advance whether a claim or costs are appropriate.  The Army also refused to meet with or correspond directly with KCPC/Morris.  The Army directed KBR to settle with KCPC/Morris, and then submit a claim to the Army.

On October 10, 2007, KBR “sponsored” KCPC/Morris’ claim and certified the claim on January 10, 2008.  However, on September 8, 2010, KBR withdrew the claim, stating it was a business dispute between KBR and KCPC/Morris.

On August 4, 2011, KCPC/Morris filed suit against KBR in the United States District Court for the Eastern District of Virginia regarding KBR’s handling and submission of KCPC/Morris’ claim to the Army.  KBR and KCPC/Morris ultimately settled the suit, and then on May 2, 2012, KBR submitted a certified claim with the Army for the settlement amount.  The contracting officer did not act on the claim, thereby placing it in the “deemed denied” status.  KBR appealed to the Board.

The CDA requires that a claim “shall be submitted within 6 years after the accrual of the claim”.  41 U.S.C. § 7103(a)(4)(A).  The Army claimed that the 6-year CDA statute of limitations had run and moved to dismiss.  The Board granted the Army’s motion, finding alternative dates for the accrual of the claim - the first on September 12, 2003, when KCPC/Morris ended its work, and the second on January 24, 2005, when KPB and KCPC/Morris agreed to submit KCPC/Morris’ alleged termination costs to the Army.  Both dates preceded the critical limitations date of May 2, 2006.

The court noted that the FAR defines “accrual” of a claim as:

the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known.  For liability to be fixed, some injury must have occurred.  However, monetary damages need not have been incurred.
48 C.F.R. § 33.201.  The court also noted that the FAR, the conditions of the contract, and the facts of a particular case determine when a CDA claim accrues.

KBR argued that until KBR determined the amount of payment KBR would request from the Army, the claim did not yet exist and could not accrue.  KBR argued that until KCPC/Morris provided its costs on August 26, 2006, which KBR ultimately included in KBR’s certified claim to the Army, the claim had not accrued.

The Army presented a theory, which the Board adopted, that the payment of the remaining subcontractor costs following the termination was a “non-routine” request for payment, which accrued as of the date the subcontractor ended its work, in this case, on September 12, 2003.  The Army based its theory on jurisprudence that allows a contractor to immediately seek payment of damages flowing from some unexpected or unforeseen action of the government.  However, the court noted that termination of a subcontractor is not an unforeseen government action.

The court further noted that the limitations period does not begin to run if a claim cannot be filed because of mandatory pre-claim procedures, and here, the Army required KBR to resolve the disputed costs with KCPC/Morris, then submit the claim to the Army.

The court also rejected the Army’s various alternative theories of claim accrual and ultimately reversed the Board’s dismissal and remanded the case to the Board to determine the claim merits.  The court did not identify the date that KBR’s claim did accrue, only that the claim had not accrued before the critical May 2, 2006, date.

For your reference, linked here is a copy of the May 18, 2016, decision.

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