Government Contracts Monitor
When Your Government Contract Is Based On Fraud, Don’t Bother Trying To Submit A Claim
September 16, 2013
Every once in a while you come across a case so absurd, that you just have to ask “what were they thinking?” Appeal of Dongbuk R&U Engineering Co., Ltd., ASBCA No. 58300 (Aug. 13, 2013) is one of those cases. One who fraudulently induces the government to enter into a contract should have no expectation of receiving payment on that contract.
The U.S. Army Contracting Command Korea issued a solicitation for Military Family Housing maintenance services at Osan Air Base. Among the maintenance services required were plumbing, electrical, and HVAC. The solicitation clearly indicated that employees performing the services must possess Class I technician licenses issued by the Republic of Korea Government. Dongbuk R&U Engineering Co., Ltd. (“Dongbuk”) submitted a proposal for the maintenance services that listed key personnel – including plumbers, electricians, and HVAC technicians – as well as purported Class I technician licenses for each person listed. The Contracting Officer specifically noted the Class I licenses and expressly relied on the existence of the Class I licenses when awarding the maintenance service contract to Dongbuk.
During the second option period of the contract, in response to an anonymous tip, the Air Force Office of Special Investigations investigated Dongbuk for alleged fraudulent activity. During the investigation, it was discovered that all but one of the Class I licenses Dongbuk submitted with its proposal were forgeries and the remaining license belonged to a Dongbuk employee who never received an installation pass and therefore never did any maintenance services work for Dongbuk at Osan Air Base.
The matter was referred to the Korean authorities for criminal prosecution. As part of the criminal investigation, the CEO of Dongbuk “admitted to using resumes found in Dongbuk’s human resources pool of files for former and potential employee hires to append to Dongbuk’s contract proposal. He additionally stated that Dongbuk never hired these Class I licensed technicians because it was too expensive to do so, it instead hired unlicensed or Class II technicians in violation of the contract terms; USFK required 1st Class technicians and would not have wanted to sign the contract if it had known 1st Class technicians were not being employed, and there was a high possibility that his company would have been at a disadvantage in obtaining the contract if it had not supplied with its proposal the resumes identifying its employees as Class I technicians.” The investigation also found that Dongbuk had given – and the CO Representative accepted - a $13,000 bribe. The ROK investigation also found that Dongbuk had performed substandard work and damaged Osan Air Base HVAC equipment in an amount exceeding $1 million.
Simultaneously, the Defense Criminal Investigative Service (“DCIS”) began an investigation of Dongbuk for fraud and bribery. When served with a suspension letter at the start of the DCIS investigation, Dongbuk’s CEO explained to authorities that “the reason Dongbuk submitted inflated invoices for reimbursable material costs was to cover the losses Donguk incurred performing the contract; he knew what he did was wrong, but he needed to recover his losses; he paid COR Song $13,000 in bribe money; he had under-bid the contract; and providing Class I licensed technicians ‘was very expensive.’”
A Korean criminal court convicted Dongbuk’s CEO of passing forged documents, lying about licensure, fraud, and making bribes. Based on this conviction, Dongbuk and its CEO received a five year debarment from the U.S. Air Force for “egregious misconduct.”
The Air Force Audit Agency subsequently issued a Summary of Audit Results finding Dongbuk overcharged the United States over $145,000 for the period October 2008 through May 2011. The audit did not cover the last three months of Dongbuk’s contract - June, July or August 2011 - because the United States withheld payment from Dongbuk for those months.
After all of this, Dongbuk submitted a claim to the CO for more than $159,000 for previously submitted June, July, and August 2011 invoices. After getting no response from the CO regarding the claim, Dongbuk filed an appeal with the Armed Services Board of Contract Appeals.
The Government defended based on the affirmative defense of fraud. The ASBCA wholeheartedly agreed. It found undisputed evidence that Dongbuk had fraudulently induced the government to enter into a contract based on knowingly false statements regarding Class I licenses and that Dongbuk never had any intention of providing Class I licensed technicians. Because the CO expressly relied on Dongbuk’s claims that it would provide Class I licensed technicians and such a claim was materially false, the ASBCA held that the entire contract with Dongbuk had been the result of a fraud. Because the contract was “tainted from its inception by fraud,” the ASBCA held that the contract was void ab initio – meaning that there never was a valid contract between Dongbuk and the government. In the absence of any valid contract, Dongbuk had no claim against the government.
In closing, the ASBCA held:
Dongbuk engaged in fraud to obtain the award. The alleged rights it seeks to enforce (payment for work performed) spring directly from the contract, which is illegal and fraudulent. No tribunal of law will lend its assistance to carry out the terms of an illegally obtained contract. The fact that the government received some benefit does not relieve Dongbuk from the consequences of its fraud. When one has been guilty of fraud, one cannot recover in any form of action.
You can’t make this stuff up.
Michael J. Schrier is the attorney responsible for the content of this article.