Law360, Nashville (June 19, 2017, 5:49 PM EDT) — The Armed Services Board of Contract Appeals in a decision made public Monday has awarded KBR Inc. around $44 million for security costs related to an Iraq War supply contract, saying the U.S. Army’s failure to provide contracted levels of security obviated any allegedly extracontractual hiring of security.
Because the need for Kellogg Brown & Root Services Inc. and its subcontractors to hire private security to accompany company officials and convoys, allegedly in violation of the underlying supply contract, stemmed from the Army’s initial material failure to provide contractually promised levels of security, the Army must pay just over $44 million in claimed cost reimbursements, plus interest, the ASBCA ruled in its June 8 decision, made public Monday.
“It is hard to imagine a contract breach more material than this one, which eviscerated the promise at the heart of the justification for the government’s claim,” the board said.
KBR had been contracted to provide food and other supplies to U.S. and coalition troops in Iraq between 2003 and 2006 under the massive multi-award Logistics Civil Augmentation Program, or LOGCAP III, contract. As part of its work, it hired private security contractors, or PSCs, to accompany those convoys and company officials working in Iraq.
But beginning in 2007, the Army withheld reimbursement for those security costs, saying those costs were unallowable under the contract, because its terms prohibited the use of PSCs. Ultimately, those withheld reimbursements totaled a little over $44 million, and KBR appealed to the board.
The ASBCA ruled in June 2014 that the disputed contract did not prohibit KBR’s hiring of PSCs, ordering the Army to pay the withheld $44 million and also denying the Army’s bid for an additional $11.6 million from the company for allegedly unauthorized cost claims, saying the latter claim had been filed outside the relevant statute of limitations.
The Army appealed to the Federal Circuit, which in September 2015 upheld the untimeliness ruling, but found that the LOGCAP deal effectively did not allow the hiring of armed PSCs and that the Army had legitimately withheld payment. The appeals court sent the dispute back to the ASBCA, noting the board had yet to decide on all of KBR’s claims, particularly related to an alleged breach of contract by the Army.
And after deciding on related jurisdictional and timeliness arguments asserted variously by KBR and the Army, the board found once again that the Army must pay the withheld $44 million, granting summary judgment to KBR on its affirmative defense of a prior material breach of the contract by the Army.
The Army had made the first material of the disputed deal by failing to provide the promised level of military “force protection” and security to KBR, therefore excusing any subsequent contractual breach by KBR related to hiring PSCs, the board ruled.
After deadly attacks on KBR convoys began in June 2003 the company asked the Army multiple times to beef up protection, which was a reasonable expectation under the terms of the contract, whether those convoys were operated by KBR or subcontractors, the board found.
The Army and U.S. Department of Defense officials were well aware of the need for this additional protection and that the Army was contractually obligated to provide it, the ASBCA said. But because of resource constraints that had prioritized warfighting, the Army failed to do so, leading to the “widely recognized” need for PSCs, according to the decision.
Despite the “many and continuing failures” to provide the contracted protection, the government had argued that the Army’s breach of the contract was not material, but it was, the board found. And KBR’s continued performance under its contract after the government’s failures could not excuse those contractual breaches either, as that was a “commercially reasonable decision,” according to the board.
Given the evidentiary record in the dispute showed KBR’s claimed security costs were reasonable and incurred only when the Army failed to live up to its contractual promises, the company is entitled to the full $44 million withheld from it, plus interest back to 2007, the board ruled.
KBR in a statement provided to Law360 on Monday said it was pleased with the ruling, calling it a “major step toward final resolution of this legacy legal issue.”
“We are encouraged that this ruling moves us closer to preserving key protections that allow contractors on the battlefield to support the war fighters in their missions,” it said.
Lt. Col. Monica Womack, a spokeswoman for the Army, told Law360 Tuesday that it is “studying the decision and is considering its options.”
Judges Lynda T. O’Sullivan, Richard Shackleford and Owen C. Wilson sat on the panel for the ASBCA.
KBR is represented by Jason N. Workmaster, Raymond B. Biagini, Alejandro L. Sarria, Herbert L. Fenster, and John E. Hall of Covington & Burling LLP.
The Army is represented by in-house counsel Raymond M. Saunders, ChristinaLynn E. McCoy, and Maj. Lawrence Gilbert.
The case is Appeals of Kellogg Brown & Root Services Inc. Under Contract No. DAAA09-02-D-0007, ASBCA numbers 56358, 57151, 57327, and 58583, before the Armed Services Board of Contract Appeals.
–Editing by Orlando Lorenzo.
Correction: A previous version of this story misstated the interest amount. The error has been corrected.