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$50 Million Fraud Penalty Against Contractor on Federal Project Affirmed by Appeals Court
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March 2, 2009
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By Jeffrey R. Gans
Howrey LLP
The U.S. Court of Appeals for the Federal Circuit has affirmed a finding that Daewoo Engineering and Construction Co., Ltd. must pay the U.S. government $50,629,855.88 in penalties for a Contract Disputes Act violation plus $10,000 for a False Claims Act violation. Daewoo Engineering and Construction Co., Ltd. v. United States, No. 2007-5129 (February 20, 2009).
The court also held that Daewoo’s right to any compensation for its claims was forfeited under 28 USC §2514 because of fraud. The appeal was taken from Daewoo Engineering and Construction Co., Ltd. v. United States, 73 Fed.Cl. 547 (2006).
Daewoo contracted to build a 53-mile road around the island of Babeldaob in the Republic of Palau. Daewoo initially bid $73 million. The next low bid was $100 million, and the federal government had estimated the project cost at $100 million to $250 million. After the government questioned the bid, Daewoo raised its price to $88.6 million, and it was awarded the contract. Construction began in October 2000 and was to be completed in 1,080 days.
But, the project experienced delays that Daewoo blamed on humidity, rain and the island’s moist soil. On March 29, 2002, Daewoo submitted a certified request for equitable adjustment with two primary cost components: $13,348,793.07 for additional costs incurred as of December 31, 2001, and $50,629,855.88 “in costs January 1, 2002 [and] [f]orward,” for a total of nearly $64 million. Daewoo contended that the project specifications were defective, that the government breached its duty to cooperate, that the government failed to disclose superior knowledge it possessed and that performance within the contractual time period was impossible. After the contracting officer denied the claim, Daewoo filed suit.
Daewoo’s complaint in its lawsuit tracked its claim, seeking the same costs as in its request for equitable adjustment. But, Daewoo’s case-in-chief at trial did not track the claim.
At the close of Daewoo’s case, the government filed its fraud counterclaims, suggesting that the difference between the claim and Daewoo’s trial presentation motivated the charges. The U.S. counterclaim sought the full amount of Daewoo’s request for equitable adjustment as a penalty under the Contract Disputes Act (41 USC §604), $10,000 for violation of the False Claims Act (31 USC §3729) and forfeiture of Daewoo’s claims as provided in 28 USC §2514.
The trial in the U.S. Court of Federal Claims lasted 13 weeks. The court found for the U.S. government on all material points, concluding that there was clear and convincing evidence that Daewoo had knowingly presented a false claim with the intention of being paid for it. The court found that at least $50 million of Daewoo’s certified claims were made in bad faith, and on that basis, the court assessed the $50.6 million penalty against Daewoo under the Contract Disputes Act. Daewoo appealed.
On appeal, the parties disputed the amount of claims that actually had been certified. The Contract Disputes Act requires federal contractors to certify that their claims are made in good faith and that the amounts sought accurately reflect the contract adjustment for which the contractor believes the government is liable.
The government asserted that a $64 million claim had been certified, but Daewoo claimed that it had certified only a $13 million claim. It insisted that the $50.6 million in future costs set out in its certified claim were not sought as a matter of right but were merely an estimate intended to encourage the government to modify the contract specifications.
The Court of Appeals found the language of Daewoo’s request for equitable adjustment to be ambiguous. The ambiguity created a question of fact that, on appeal, could be disturbed only if found to be clearly erroneous. The Court of Appeals found that the extrinsic evidence “unquestionably supports the [trial court’s]… factual finding that the contractor intended to make a claim for $64 million.”
The Appeals Court found no reason to disturb the fundamental underpinning of the lower court’s decision: that the “certified claim was simply a ‘negotiating ploy’ and that Daewoo ‘did not honestly believe that the Government owed it the various amounts stated when it certified the claim.’ ”
In the request for equitable adjustment, Daewoo said it calculated its $50.6 million projection of costs to complete by multiplying the number of days of additional performance it expected by its average daily costs of performance for the last three months in 2001. Daewoo characterized this “ ‘as an estimate for costs extending into the future.’ ”
Even though the methodology was explained in the request for equitable adjustment, the Appeals Court agreed that the claim was fraudulent because Daewoo simply “assumed the government was responsible for each day of additional performance… without even considering whether there was any contractor-caused delay or delay for which the government wasn’t responsible.” Daewoo’s calculation thus assumed that all of its “current daily expenditures represented costs for which the government was responsible.”
The opinion noted that Daewoo made little attempt on appeal to demonstrate error in the lower court’s fraud findings. Instead, the appeals court explained, Daewoo challenged the decision on the grounds that “a claim can be fraudulent only if it rests upon false facts rather than on a baseless calculation.” The court rejected this assertion. “By certifying a claim for damages in the amount of $64 million, Daewoo represented that the claim was made ‘in good faith.’ It is well established that a baseless certified claim is a fraudulent claim.” The court noted that Congress included this provision in the statute to stop “horsetrading” in negotiations based on inflated claims.
The Court of Appeals cited the trial testimony of Daewoo’s expert and fact witnesses as proof of Daewoo’s bad faith. “Daewoo’s damages experts at trial treated the certified claim computation as essentially worthless, did not utilize it, and did not even bother to understand it.” Further, Daewoo’s fact witness “regarding the calculation of [its] certified claim ‘left no doubt that [Daewoo’s] case was unsupportable and was pursued by Daewoo with fraudulent intent.’ ”
Daewoo also challenged the award on the grounds that it was unconstitutional under the Eighth and Fifth Amendments, but both arguments were rejected as meritless, as the federal government’s loss, if the fraud had been successful, was proportionate to the penalty award.
Finally, the Court of Appeals held that the factual basis for imposing the $50 million penalty on Daewoo also supported findings that Daewoo had violated the False Claims Act and had forfeited its claims under 28 USC §2514. The court noted that under §2514, all claims are forfeited even if only some of them are fraudulent.
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For more information about the issues covered in this report, please contact Jeffrey Gans in our Washington office at 202-383-7340 or at gansj@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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