Laguna Construction Company v. Defense
2016 U.S. App. LEXIS 12981
| Fed. Cir. | 2016Background
- Laguna Construction received a cost-reimbursement DoD WERC contract (multiple task orders) for work in Iraq (contract FA8903-04-D-8690); physical work completed by 2010.
- DCAA audited Laguna’s FY2006 incurred costs and disallowed substantial subcontract costs; 14 vouchers submitted in 2011 (approx. $2.87M claimed) were rejected and appealed to the ASBCA under the CDA.
- Government investigations revealed kickback schemes: project manager Salinas pled guilty (conspiracy/Anti‑Kickback Act); EVP Christiansen pled guilty to conspiring to defraud the United States; indictments/charges against other Laguna principals followed.
- Government amended its ASBCA answer to assert an affirmative defense that Laguna committed a prior material breach via solicitation/acceptance of kickbacks, excusing government nonperformance; Board granted government summary judgment on that defense and did not reach Laguna’s merits arguments.
- On appeal, the Federal Circuit affirmed: the Board had jurisdiction to consider the defense and Laguna’s employees’ admitted criminal conduct (and guilty pleas) established a material breach of the FAR Allowable Cost and Payment clause (FAR 52.216-7), excusing government payment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Board jurisdiction over gov’t fraud-based affirmative defense | Laguna: government’s defense is a “claim” requiring contracting officer decision, so ASBCA lacks jurisdiction | Gov’t: defense is affirmative (prior material breach) not a contractual “claim” and ASBCA may adjudicate without deciding underlying fraud | ASBCA had jurisdiction; defense not a claim requiring CO decision |
| Applicability of prior-material-breach defense in CDA context | Laguna: CDA displaces common-law prior breach defense | Gov’t: prior material breach federal common law still applies in CDA cases | Prior-material-breach doctrine applies and is not displaced by the CDA |
| Whether Laguna committed a material breach (kickbacks/allowable cost violation) | Laguna: government accepted prices and could audit/reconcile; alleged waiver by continued performance | Gov’t: admitted guilty pleas and admissions show vouchers inflated by kickbacks violating FAR 52.216-7; material because fraud undermines contract integrity | Laguna materially breached by fraud (kickbacks) and vouchers were inflated; breach imputable to Laguna and material |
| Waiver/continued performance defense | Laguna: government knew of scheme earlier and kept paying/performing, thus waived the defense | Gov’t: only after convictions/pleas did a known right arise; audit/payments before conviction did not constitute waiver | No waiver: government reasonably invoked prior-breach defense after guilty plea; continued audits/payments did not bar defense |
Key Cases Cited
- Christopher Village, L.P. v. United States, 360 F.3d 1319 (Fed. Cir.) (prior material breach can excuse government performance)
- Joseph Morton Co., Inc. v. United States, 757 F.2d 1273 (Fed. Cir.) (fraudulent conduct is material breach)
- J.E.T.S., Inc. v. United States, 838 F.2d 1196 (Fed. Cir.) (CDA contract may be defeated by fraud-based defense)
- United States v. Acme Process Equip. Co., 385 U.S. 138 (U.S.) (government may rid itself of contracts tainted by kickbacks)
- United States v. Mississippi Valley Generating Co., 364 U.S. 520 (U.S.) (contracts tainted by conflicts/fraud may be disaffirmed)
- Raytheon Co. v. United States, 747 F.3d 1341 (Fed. Cir.) (distinguishing equitable adjustments/claims that alter contract terms)