In a much-anticipated decision, the U.S. Court of Appeals for the Federal Circuit, on February 20, 2009,1 affirmed the U.S. Court of Federal Claims' decision2 awarding the federal government more than $50 million dollars against the Daewoo Engineering and Construction Co., Ltd. (Daewoo) and forfeiting the contractor's other claims in excess of $13 million.3

Factual Background

The Project  

In 1998, Daewoo, in a two-step, best-value procurement, submitted a bid to the U.S. Army Corps of Engineers (Corps) of $73 million to build a 53-mile road in the Republic of Palau.4 Daewoo's bid was the lowest qualified bid, with the next lowest at $100 million. The contract documents revealed the site of construction to be subject to severe rainy conditions with difficult soils. When the Corps received Daewoo's bid, while satisfied that Daewoo had the capability to perform the work, it questioned Daewoo's price, later permitting Daewoo to adjust its bid and ultimately awarding the contract to Daewoo for some $88.6 million. Construction began in October 2000 and was to conclude within 1,080 days.

The Claim

Daewoo encountered substantial difficulties in performance on the job, attributing its delays and additional costs to allegedly excessively humid and rainy conditions and overly moist soils, which it claimed were unanticipated and which it attributed to the Corps "superior knowledge." When negotiations broke down with the Corps over issues relating to its claims for extras and for additional time, in March 2002, Daewoo submitted a certified request for equitable adjustment (REA) to the Corps for "additional costs as of December 31, 2001," of approximately $13.4 million in "incurred costs" and, according to the Corps, a further request of $50,629,855.88, for "costs [from] January 1, 2002 and [f]orward."5 Daewoo also requested a time extension of 776 days.

Daewoo, as the basis for its claim, asserted that the contract specifications were defective, that the Corps had failed to cooperate and disclose superior knowledge, and that the contract was impossible to perform within the allotted time. As will be seen below, a pivotal issue in the trial court dealt with the amount that Daewoo had actually certified, i.e., the $13.4 million claim or the full $63.9 million claim. The written claim was certified in the larger amount; and indeed, upon the contracting officer's rejection of Daewoo's REA, the contractor's complaint filed in the Court of Federal Claims in December 2002 was also for $63.9 million, as asserted in the REA and incorporating, by reference, the entire REA. Much of the trial court's lengthy opinion revolves around the factual determination of the amount Daewoo claimed, i.e., whether Daewoo was claiming $13 million or nearly $64 million. The trial court resoundingly held that the certified claim was for the higher amount.

Daewoo's Suit and the Trial

The trial of Daewoo's case took 13 weeks. At the conclusion of the plaintiff's case, the government requested and was granted permission, over strenuous objection by the plaintiff, to file counterclaims. The government sought to recover as a penalty the total of the Daewoo claim of almost $64 million under the Contract Disputes Act,6 on the theory that the claim was entirely fraudulent. In addition, the government made a claim for only a $10,000 penalty under the False Claims Act.7 Finally, the government asserted a special plea in fraud and sought forfeiture of all of Daewoo's claims.8

The Court of Federal Claims deemed the substance of Daewoo's claim "wholly without merit, its claims are fraudulent."9 Moreover, the trial court's decision is virtually contemptuous of Daewoo's case and its presentation, raising numerous serious allegations regarding the actions of the plaintiff and its counsel.10

Essentially, Daewoo contended that the Corps materially misrepresented what the weather conditions would be to perform the contracts, which caused Daewoo to incur much higher expenses and made the project run far beyond the original 1,080 days allotted.11 The trial court, in an extensive 40-page decision, completely rejected the factual basis for Daewoo's claims, found that its claims for future costs in excess of $50 million were submitted in bad faith and subject to recovery as a penalty under the Contract Disputes Act, awarded the government the $10,000 it had requested under the False Claims Act and finally forfeited that portion of the claim, some $13 million, not specifically deemed fraudulent.

Daewoo's Purported False Certification of More Than $50 Million in Future Damages

While the trial court meticulously rejected the merits of Daewoo's claim for costs incurred prior to January 1, 2002, the balance of Daewoo's claim for future damages suffered a more ignominious fate, being rejected on grounds that it was fraudulent.

Despite the fact that (a) the certified REA, which Daewoo submitted and was rejected by the Corps' contracting officer, and (b) Daewoo's complaint filed with the U.S. Court of Federal Claims, incorporating the REA, both were in a total amount of almost $64 million, the principal issue on appeal dealt with the issue of whether the trial court was correct in determining that the purported fraudulent claim of more than $50 million for "costs [from] January 1, 2002 and [f]orward" had actually been certified by Daewoo.

During the presentation of Daewoo's case-in-chief, Daewoo's project manager initially testified that he had certified the company's claim for almost $64 million. The Court of Appeals quoted a colloquy between Daewoo's project manager and government counsel as follows:

Q. Mr. Kim, you certified the claim to the U.S. Government where Daewoo was asking the government to pay Daewoo over $60 million, right?

A. We-yeah, I certified over 60 million, yeah.

. . . .

Q. This was not a $13 million claim and we'll submit another claim later for our future damages, right? It was a $63 million claim.

A. Yes.12 As the Court of Appeals noted, Mr. Kim later tried to recant this testimony, taking the position that he had certified only the $13 million. The trial court claimed this testimony, and that of related witnesses, not to be credible. Instead, the trial court determined that, in fact, Daewoo had certified an almost $64 million claim, more than $50 million of which it deemed fraudulent.13

Court of Appeals Agrees That the $50 Million Portion Was Simply a "Negotiation Ploy" and Was Fraudulent

The appellate court agreed with the trial court's determination that:

[T]he 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." Id. at 588, 590.14

The Federal Circuit noted that, "On appeal Daewoo makes virtually no effort to show that the Court of Federal Claims' findings of fraud are clearly erroneous." Id. In affirming the trial court's finding, the appellate court rejected Daewoo's argument that, since the government had sought a determination that the entire claim of almost $64 million was fraudulent and the court excluded the $13 million of accumulated extra costs, the trial court's finding of fraud could not stand. As far as the appellate court was concerned, this did not undermine the trial court's findings and rationale that the $50.6 million claim was "'fraudulent without question . . ..' Daewoo Eng'g, 73 Fed. Cl. at 595-96."

The appeals court pointed out that the trial court had also stated that "'[w]e suspect that Daewoo's entire claim is fraudulent.' Id. at 595-96.15

In rejecting Daewoo's argument that "a claim can be fraudulent only if it rests upon false facts rather than on a baseless calculation," the Federal Circuit noted that:

Congress specifically enacted the fraud provision of the Contract Disputes Act "out of concern that the submission of baseless claims contribute[s] to the so-called horsetrading theory where an amount beyond that which can be legitimately claimed is submitted merely as a negotiating tactic." S. Rep. No. 95-1118, at 20 (1978), as reprinted in 1978 U.S.C.C.A.N. 5235, 5254. We have noted that the "purpose of the certification requirement is to trigger a contractor's potential liability for a fraudulent claim under section 604 of the [Contract Disputes] Act." Fischbach & Moore Int'l Corp. v. Christopher, 987 F.2d 759, 763 (Fed. Cir. 1993).16

Appellate Court Rejects Claim That $50 Million Fraud Award Against Daewoo Violated the U.S. Constitution's Eighth and Fifth Amendments

The Federal Circuit also rejected as "baseless" Daewoo's claim that the $50 million award was unconstitutional in that it violated the Eighth Amendment's prohibition against grossly disproportional fines, stating:

Here the potential harm was Daewoo's securing a $50.6 million payment from the government; under these circumstances a $50.6 million penalty is not disproportionate. The fact that the fraud may have been unlikely to succeed does not suggest that a penalty is inappropriate. The same standard and result would follow under the Fifth Amendment, if the penalty here were to be treated as equivalent to punitive damages (an issue we do not decide).17

The Appellate Court Affirmed the Forfeiture of Daewoo's Nonfraudulent Claim Because of the False Certification

In addition to the over $50 million fraud award, the trial court went on to forfeit the remainder of Daewoo's claims not determined to be fraudulent under 28 U.S.C. § 2514, since, under that statute, if only part of the contractor's claim were fraudulent, the entire claim would be forfeited. In so finding, the Court of Appeals determined that the trial court was correct in finding, by clear and convincing evidence, that Daewoo knew when it submitted its certified claim that part of it was false and was submitting it with the intention to be paid.

Lessons Learned from Daewoo

The only way to describe either the trial court's or the appellate court's decisions in this matter is as both a cautionary and devastating tale. Some of the many lessons learned from the Federal Circuit's affirmance of the Court of Federal Claim's Daewoo decision appear to include, among others:

  • Certifying claims to the federal government is extremely serious business. The review of the factual accuracy of the claim and the proper calculation of damages, whether present or future anticipated claims, is absolutely critical both at the outset and throughout the representation. Federal contractors, and the lawyers who represent them, may want to retain the services of consultants familiar with the stringent requirements of federal contracting before they certify their claims and then satisfy themselves of the factual and legal supportability of their claims.
  • Federal contractors act at their peril when they enhance the value of their certified claims for purposes of "negotiation." It may be better to undervalue a claim than overvalue it.
  • The fact that a claim may be for "future" estimated losses does not prevent a determination that they are fraudulent. Unless a party and its counsel have a good-faith basis for estimating and calculating future loses in an amount reasonably anticipated, and not in an effort to enhance negotiation, they are subject to the assertion that such claims are fraudulent and recoverable as penalties. Moreover, under the Contract Disputes Act, the government has to prove the fraudulent intent only by a preponderance of the evidence in order to recover these penalties. Additionally, all the government has to show to recover damages is the amount of the claim that is considered to have been submitted in bad faith and is therefore fraudulent, not the amount by which the government was actually damaged as a result of the assertion of the claim.
  • Professionals, whether forensic experts or attorneys, who may inherit a certified claim from a client who has already certified and filed an REA, may want to make an independent determination regarding the factual and legal basis for the claim, before pursuing the claim further. Significant doubts about the factual and legal bases for the claim should warrant serious consideration of withdrawing the claim and/or exploring recertifying the claim.
  • Litigating in the U.S. Court of Claims is "different," with many more perils than those involved in conventional construction litigation or arbitration. Attorneys who have not had experience litigating there may wish to seek or associate with counsel experienced in both Federal Government Contract Law and the FAR regulations and the procedures of that court.
  • During the trial of this case, the judge apparently repeatedly warned the plaintiff's counsel of his skepticism regarding the validity of the claims, urging the plaintiff to give serious consideration to avoiding the court's issuance of a final determination. Such warnings should not be avoided or ignored. Moreover, in the event a counsel's client refuses to adhere to these warnings, counsel may have to seriously consider withdrawal from the case, or seek the court's permission to withdraw from the case.