Earlier this week, the Federal Circuit unanimously affirmed a 2017 ruling by the Armed Services Board of Contract Appeals (“ASBCA”) that held the United States Government breached its contractual obligation to provide physical security to KBR and its subcontractors during the height of the Iraq War. The decision awards KBR $44 million, plus interest, in private security costs that the Government unilaterally recovered under the LOGCAP III contract.

The Court’s decision is significant in two respects. First, it confirms that the affirmative defense of prior material breach is not a Contract Disputes Act (CDA) “claim” that must be presented to a contracting officer under M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1331 (Fed. Cir. 2010). Second, the decision makes clear that a contractor is entitled to CDA interest on its claim to recover amounts taken or held by the Government to enforce a government claim. We discuss each of these important rulings below.

Background

In December 2001, the Army awarded KBR the LOGCAP III contract to provide logistics services in support of overseas contingency operations. The contract required the Government to provide “force protection” for KBR and its subcontractors so that they could safely and timely perform. Following the March 2003 invasion and subsequent occupation of Iraq, the Government did not have sufficient resources to provide military escorts for its contractors and several KBR and subcontractors employees were killed in insurgent attacks. Insufficient force protection also resulted in substantial delays in the delivery of food and supplies. Faced with strict deadlines, and with the knowledge of numerous Government personnel, KBR and several LOGCAP III subcontractors hired and charged for the use of Private Security Contractors (“PSC”) so that they could continue to perform their contractual duties.

The Government initially paid the PSC costs, but then changed course. Between 2007 and 2010, the Government recouped approximately $44 million of the $103 million in PSC costs it had paid KBR by offset against a series of invoices. After each recoupment, KBR filed a certified CDA claim with the contracting officer for the offset amount, plus interest, asserting primarily that the PSC costs were not prohibited by the contract and were allowable. KBR later filed a “protective” CDA claim for the entire $103 million questioned by the Government. In its protective claim, KBR asserted the common law affirmative defense of prior material breach, alleging that the Government had breached its obligation to provide force protection before KBR and its subcontractors hired PSCs.

Federal Circuit’s Decision

There were two principal questions presented on appeal, both which the Federal Circuit resolved in KBR’s favor. First, the Court held that the ASBCA had jurisdiction over KBR’s affirmative defense of prior material because KBR asserted the defense under the contract as written and simply sought denial of the Government’s monetary claim. In doing so, the Federal Circuit rejected the Government’s argument that jurisdiction was lacking because KBR had not timely presented its defense to the contracting officer in a CDA “claim,” as in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1331 (Fed. Cir. 2010) (holding that “a contractor seeking an adjustment of contract terms must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action”) and Raytheon Co. v. United States, 747 F.3d 1341, 1354 (Fed. Cir. 2014) (reiterating that the CDA’s “jurisdictional prerequisite applies even when a claim is asserted as a defense”).

Instead, the Court followed its more recent decisions in Laguna Construction Co. v. Carter, 828 F.3d 1364 (Fed. Cir. 2016) and Securiforce International America, LLC v. United States, 879 F.3d 1354 (Fed. Cir. 2018), which narrowed the reach of M. Maropakis and Raytheon based on similar reasoning. Sec. of the Army v. Kellogg Brown & Root Servs., Inc., CAFC No. 18-1022, Slip Op. at 9-10 (“Like the contractor in Securiforce and the government in Laguna, KBR asserts the affirmative defense of prior material breach under the contract as written . . . [and] seeks denial of the Army’s monetary claim to over $44 million”). As the Federal Circuit acknowledged, however, the KBR decision is independently noteworthy because denial of the Government’s claim will result in the recovery of money by KBR ─ as opposed to eliminating a purported debt owed by a contractor to the Government. On this key point, the Court explained: “Whether prior material breach is asserted to eliminate a debt as in Laguna or to recover withheld payments as here, the effect is the same – the defense is asserted to defeat a wrongful monetary claim.” See id. at 10.

Second, the Federal Circuit held that KBR was entitled to interest running from the date it filed each of its initial certified claims – even though the underlying dispute emanated from a government claim and even though KBR’s initial claims did not expressly assert the prior material breach defense on which it ultimately prevailed. In so holding, the Court indirectly endorsed long-standing ASBCA precedent, which states that a contractor may file a claim to start the running of CDA interest on amounts taken or held by the Government to enforce a government claim. This is consistent with the plain text of the CDA’s interest provision, 41 U.S.C. § 7109(a)(1), which the Court interpreted as requiring only the submission of a certified claim to the contracting officer for interest to accrue. The Court also rejected the Government’s argument that KBR could not recover interest on claims that did not explicitly include the prior material breach defense, explaining: “We are aware of no authority instructing that a contractor must state in a claim the legal theory upon which it ultimately recovers to start the running of interest.” Sec. of the Army v. Kellogg Brown & Root Servs., Inc., Slip Op. at 12.

Key Takeaways

At bottom, the KBR decision adds another important piece to the M. Maropakis puzzle. It clarifies that, when properly asserted, the affirmative defense of prior material breach is not a CDA claim that must first be presented to the contracting officer ─ even when it results in a contractor recovering costs that were previously recouped by the Government to enforce a government claim. The decision also confirms that, when the Government unilaterally recovers funds by offset, a contractor may recover CDA interest on those amounts by filing a claim with the contracting officer that seeks to invalidate the underlying government claim.