The Court of Appeals for the Federal Circuit has issued its much anticipated opinion in Daewoo Engineering & Construction Co. v. United States, No. 07-5129 (Fed. Cir. Feb. 20, 2009). The Federal Circuit affirmed the judgment of the Court of Federal Claims (“COFC”) against Daewoo in the amount of $50.6 million, leaving intact one of the largest judgments ever reported under the anti-fraud provision of the Contract Disputes Act (“CDA”), 41 U.S.C. § 604. The decision in Daewoo is important, not only for the size of the judgment, but also because the line drawn between the amount of Daewoo’s claim that was fraudulent and the amount that was not fraudulent continues to raise as many questions as it answers. Together with the opinion of the COFC, the Federal Circuit’s opinion in Daewoo underscores the need for early involvement of counsel in the disputes process and should be carefully studied by any contractor contemplating a claim against the government.

The COFC’s judgment against Daewoo was based on the contractor’s submission of a $64 million claim under a construction contract. Daewoo Eng’g & Constr. Co. v. United States, 73 Fed. Cl. 547, 595-96 (2006). Daewoo’s claim was comprised of $13.3 million in costs that were allegedly incurred as of December 31, 2001, plus another $50.6 million, which was Daewoo’s estimate of the additional costs it would incur through completion of the contract. The COFC held that the latter portion—the $50.6 million in “future” costs—was “unsupported” because of fraud within the meaning of § 604 of the CDA, and entered judgment against Daewoo in that amount.

On appeal, Daewoo raised several challenges to the COFC’s judgment: (1) the judgment violates the Constitution because it is disproportionate to any actual damages sustained by the Government; (2) Daewoo’s certified claim was not a “claim” for $64 million under the Contract Disputes Act; and (3) even if it was a claim for that amount, it was not fraudulent. The Federal Circuit rejected each of Daewoo’s arguments, affirming the COFC’s determination that the $50.6 million “future cost” portion of Daewoo’s claim was fraudulent. This aspect of the opinion raises questions because the distinction between these costs and the remainder of Daewoo’s claim remains unclear.

In the trial Court’s opinion, the COFC stated that it “suspect[ed] that Daewoo’s entire claim is fraudulent,” 73 Fed. Cl. at 595, but concluded that “[i]t is theoretically possible that plaintiff’s $13 million claim [i.e., the costs incurred prior to December 31, 2001] represents an amount that it could have incurred because of defective specifications, had such a theory been applicable.” Id. at 596. By contrast, the COFC found that the future costs were included in the claim as a “negotiating ploy” rather than in a good faith belief that it was entitled to this amount. Id. at 585, 595-96. Ultimately, the COFC concluded: “Whether Daewoo wanted the money or wanted the Government's attention, $64 million was not an amount the Government owed plaintiff at the time of certification, and plaintiff knew it.” Id. The Federal Circuit accepted the COFC’s finding that the $50.6 million future cost portion of the claim was not submitted “in good faith,” and that the amount did not “accurately reflect[] the contract adjustment for which the Contractor believes the Government is liable,” both of which are required by 41 U.S.C. § 605(c)(1). Op. at 12.

On appeal, Daewoo argued that, because both the “incurred” and “future” portions of the claim were based on the same legal theories, the COFC’s ruling that all future costs were fraudulently claimed was inconsistent with the court’s holding that all incurred costs were not. In rejecting this argument, the Federal Circuit drew a distinction not apparent from the COFC’s opinion between the underlying legal theories of Daewoo’s claim on one hand, and the calculation of the different categories of costs on the other. According to the Federal Circuit: “The Court of Federal Claims did not find that Daewoo’s theories of the government’s breach of the contract . . . were fraudulent (though it ultimately found these theories to be without merit). Rather, the Court of Federal Claims found that Daewoo’s $50.6 million projected cost calculation was fraudulent.” Op. at 10 (emphasis added). The Federal Circuit observed that Daewoo improperly “assumed that 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 was not responsible. The calculation then simply assumed that Daewoo’s current daily expenditures represented costs for which the government was responsible.” Id. The Federal Circuit further observed that Daewoo “used no outside experts to make its certified claim calculation, and at trial made no real effort to justify the accuracy of the claim for future costs or even to explain how it was prepared.” Id. Instead, the court pointed out, “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.” Id.

The Federal Circuit’s opinion does not distinguish between the manner in which the incurred and future cost portions of the claim were calculated. Nor did the COFC draw such a distinction; instead, the COFC’s opinion suggests that the failure to account for contractor-caused delay and inefficiency permeated all aspects of the claim. E.g., 73 Fed. Cl. at 579-81. Thus, although one could argue that Daewoo is limited to the situation where the contractor gives no consideration whatsoever to known delays and inefficiencies on its part, the absence of an express limitation to that effect and a clear distinction between the fraudulent and non-fraudulent aspects of Daewoo’s claim will raise questions regarding Daewoo’s application to future disputes. Productivity and delay analyses are inherently complicated and judgmental exercises that often turn on the credibility of experts who routinely challenge each others’ opinions on causation as incorrect, selective, unscientific, or even unfounded. Daewoo threatens to blur the distinction between challenges to the merits of a claim and allegations of fraud.