Kellogg Brown & Root Services, Inc.

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of -- )

)

Kellogg Brown & Root Services, Inc. ) ASBCA Nos. 56358, 57151

) 57327,58583

)

Under Contract No. DAAA09-02-D-0007 )

APPEARANCES FOR THE APPELLANT: Jason N. Workmaster, Esq.

Raymond B. Biagini, Esq.

Alejandro L. Sarria, Esq.

Herbert L. Fenster, Esq.

John E. Hall, Esq.

Covington & Burling LLP

Washington, DC

APPEARANCES FOR THE GOVERNMENT: Raymond M. Saunders, Esq.

Army Chief Trial Attorney

ChristinaLynn E. McCoy, Esq.

MAJ Lawrence Gilbert, JA

Trial Attorneys

OPINION BY ADMINISTRATIVE JUDGE O'SULLIVAN ON THE

GOVERNMENT'S MOTION TO DISMISS AND APPELLANT'S MOTION FOR

SUMMARY JUDGMENT

These appeals involve costs incurred by Kellogg Brown & Root Services, Inc.

(KBRS) and its subcontractors for private security to accompany company officials

and convoys used to deliver food and other supplies to U.S. and coalition troops in

Iraq during military operations in the 2003-2006 timeframe. Starting in 2007, the

Army withheld a total of $44,059,024.49 from KBRS billings under the contract to

recoup previously paid costs of private security that the government had determined

were unallowable. Three of the appeals, ASBCA Nos. 56358, 57151 and 57327, are

before us on remand from the United States Court of Appeals for the Federal Circuit,

which held that the contract prohibited the use of private security companies (PS Cs)

but, in order to fully resolve the dispute, remanded the appeals to the Board to decide

whether KBRS "properly raised its breach and remedy allegations, and if so, to rule

on those contentions." McHugh v. Kellogg Brown & Root Services, Inc., 626 F. App 'x

974, 978 (Fed. Cir. 2015).

The fourth appeal, ASBCA No. 58583, is before the Board following KBRS's

appeal from a deemed denial of its 29 September 2011 certified claim for breach of

contract. This appeal was not decided by the Board and was consolidated with the

other three appeals only after the appellate remand. On 19 January 2016 the Board

denied the government's pending motion to dismiss this appeal for lack of jurisdiction.

Kellogg Brown & Root Services, Inc., ASBCA No. 58583, 16-1 BCA ~ 36,233.

Following the Board's denial of the government's motion to dismiss in ASBCA

No. 58583, KBRS filed a first amended and consolidated complaint (FACC) in all four

appeals. 1 Thereafter the government filed a motion to dismiss as to all counts and

appellant filed a motion for summary judgment. Oral argument was held on the

motions on 23 August 2016.

DISCUSSION

KBRS in its F ACC asserts the following:

Count I-the government's recovery on its claim is

time-barred because the contracting officer's 30 January

2013 final decision was issued more than six years after

the government's claim accrued, which was no later than

10 June 2005.

Count II-KBRS is entitled to judgment because the Army

breached its contractual obligation to provide adequate

force protection and the use of PSCs was a permissible

remedy.

Count III-the Army breached the contract by requiring

KBRS to perform beyond the original scope and the use of

PSCs was a permissible remedy.

Count IV-the Army breached the contract by failing to

comply with the FAR 16.301-3 requirement to have available

adequate resources to manage a cost reimbursement contract

and use of PSCs was a permissible remedy.

Count V-KBRS is entitled to judgment because the

contract prohibition relied on by the Army applies only in

peacetime, not during war.

1 Prior to the filing of the FACC, KBRS's amended complaints in ASBCA Nos. 56358,

57151, and 573 2 7, filed 16 January 2013, contained three counts: Count I

(Breach of Contract), Count II (Waiver/Ratification), and Count III (Bad Faith).

2

Count VI-KBRS is entitled to judgment because the

government waived the contract prohibition on the use of PSCs.

Count VII-KBRS is entitled to judgment because the Army

cannot reopen the firm-fixed-price subcontracts at issue.

Count VIII-under a cost-reimbursement contract, KBRS

is entitled to recover all of its incurred costs so long as they

were not incurred due to fraud, lack of good faith, or

willful misconduct.

Count IX-KBRS is entitled to judgment because the

Army released KBRS from all claims related to the pricing

and award of the ESS subcontracts.

Count X-KBRS is entitled to judgment because the Army

contracting officer's 30 January 2013 final decision was invalid.

Count XI-the Army's damages calculation is inaccurate

and unsupported.

Count XII-the Army acted in bad faith in its decision to

recapture funds from KBRS.

KBRS has moved for summary judgment only on Counts II (breach of contract) and

VI (waiver).

The affirmative defenses asserted by KBRS on 25 March 2013 in its complaint

in ASBCA No. 58583 largely foreshadow the affirmative defenses articulated in

KBRS's FACC. The only new counts in the FACC are Counts IV, V, and VII.

Before considering the parties' arguments, we address the parameters governing

what is, and what is not, properly before us in these consolidated appeals. On appeal

from our 2014 decision, the United States Court of Appeals for the Federal Circuit

(hereinafter "court" or "Federal Circuit") was asked to decide two issues: ( 1) whether

the Board erred in deciding that the contract did not prohibit the use of PSCs, and

therefore that KBRS was entitled to payment for the use of PSCs; and (2) whether the

Board erred in deciding that the Army's affirmative claim against KBRS contained in

the contracting officer's final decision (COFD) issued 30 January 2013 was barred by

the CDA's six-year statute of limitations. McHugh, 626 F. App'x at 976. The court

affirmed the Board on the second issue, finding that the Army's 30 January 2013

affirmative claim was time-barred, but reversed the Board's holding that the contract

did not prohibit the use of PSCs. Id. at 977, 979. The court recognized that "[t]his

3

narrow contract interpretation based on the weapons prohibition ... may not fully

resolve the dispute," and remanded to the Board to determine whether "KBR properly

raised its breach and remedy allegations, and if so, to rule on those contentions."

Id. at 978. In ascertaining the proper scope of the appeals now before us, we are

mindful that our appellate mandate constitutes the law of the case on all issues that

were explicitly or implicitly decided by the court. Exxon Corp. v. United States,

931 F.2d 874, 877 n.7 (Fed. Cir. 1991) (citing lB J. MOORE, J. LUCAS & T. CURRIER,

MOORE'S FEDERAL PRACTICE ii 0.404[10] at 172-74 (2d ed. 1988)). However, we do

not read the court's opinion to foreclose the Board from considering and deciding

other issues presented in these appeals that were not previously decided by the Board

and were therefore never appealed.

I. The Government's Motion to Dismiss

The government has moved to dismiss all counts ofKBRS's FACC and KBRS

has responded in opposition. A short discussion of the approach taken by the

government and how we intend to decide the motion to dismiss is in order. The

government's motion, with respect to some counts of the FACC, asserts that they fail

to state a claim upon which relief can be granted. With respect to other counts, the

government asserts that the Board lacks jurisdiction to entertain them; and with respect

to the remainder, the government argues that they are foreclosed either by law of the

case or by the Federal Circuit's mandate. Because a government claim is at the heart

of the matter and KBRS' s complaint primarily consists of affirmative defenses to that

claim, it is appropriate with respect to certain counts to treat the government's motion

to dismiss as a motion to strike affirmative defenses under Federal Rule of Civil

Procedure (FRCP) 12(f) rather than as a Rule 12(b)(6) motion to dismiss. 2 Further, in

those instances in which the motion to dismiss relies on matters outside the pleadings,

we may treat it as a motion for summary judgment. Dongbuk R&U Engineering Co.,

ASBCA No. 58300, 13 BCA ii 35,389 at 173,637. And, unlike the usual circumstance

in which a motion to dismiss for failure to state a claim is filed before the evidentiary

record has been fully developed, a full record exists in these appeals. Thus, in

considering the government's motion, we will look both to KBRS's FACC and the

record in these appeals.

The parties' contentions on the government's motion to dismiss and the Board's

related dispositions are as follows:

2 In appropriate circumstances, where our rules do not address a matter, we commonly

look to the Federal Rules of Civil Procedure for guidance. TTF, L.L.C.,

ASBCA No. 58494, 13 BCA ii 35,343.

4

Count I (Government Claim Time-Barred) and Count X (COFD Invalid)

The government asserts that Count I fails to state a claim on which relief can be

granted because all but nearly $12 million 3 of the total amount claimed in the final

decision was the subject of both government withholding in 2007-2009 and

subsequent KBRS claims, of which the Board has jurisdiction. Therefore, the three

remanded appeals involve KBRS claims for withheld monies that are properly before

the Board after remand. As to Count X, the Army states that the "invalidity" of the

COFD, like its untimeliness, has no logical connection to whether KBRS i's entitled to

recover on its claims for the withheld sums.

KBRS responds that what is at issue here is a government claim and that claim

is untimely as to the $44 million that was withheld as well as the $12 million that was

not. At oral argument, KBRS summed up its position as being that the government

needed to issue timely COFDs on the withheld amounts in order to "perfect" its claim

(tr. 38). KBRS further states that in the absence of a COFD on the government's claim

for the $44 million, KBRS's 2007, 2009, 2010 and 2011 claims (which KBRS calls

·'submissions") did not '"magically convert" a government claim into contractor

claims. Rather, the principal effect of KBRS's claim submissions was to start the

running of CDA interest and ensure that the Board had jurisdiction over any

subsequent appeals by KBRS. (App. opp'n at 5-6)

The government replies that the Army's notices of withholding were

administrative claims which KBRS could have appealed, but it chose to submit its own

claims for the monies withheld and then appeal from the deemed denials of those

claims (gov't reply at 3-5).

We conclude that Counts I and X of the FACC are within the proper scope of

our consideration. Both of these counts were asserted by KBRS in its complaint in

ASBCA No. 58583 in March of 2013. They were not decided by the Board and thus

were not appealed.

As previously found by the Board, the Army procuring contracting officer

(PCO) and the Defense Contract Audit Agency (DCAA) first notified KBRS by letter

dated 6 February 2007 and DCAA Form 1 (No. 127) of the same date that they were

respectively ·'adjusting payments" (PCO) and "suspending" costs (DCAA) in the

amount of $19,652,815 representing PSC costs incurred by KBRS's subcontractor,

3

As to the nearly $12 million affirmative claim, the Board's holding that this claim

was untimely was affirmed on appeal; therefore, this part of the claim is no

longer before the Board. The exact amount was $11,561,567.55. Kellogg

Brown & Root Services, Inc., ASBCA No. 56358 et al., 14-1 BCA ii 35,639 at

174,520.

5

ESS, in performing the contract (finding 70)4. On 22 October 2007, KBRS submitted

a certified claim to the PCO for the withheld amount. Following a deemed denial,

KBRS appealed to the Board and the appeal was docketed as ASBCA No. 56358.

(Finding 72; see also KBRS's FACC iiii 7, 70, 73-74)

On 24 August 2009, KBRS submitted an invoice under the contract for

payment of $22,279,678.49. On or about 1 September 2009, the government

withheld the entire amount of the invoice on the recommendation of DCAA to "take

immediate action to recoup the disapproved costs" in a revised DCAA Form I

(No. 127 Revision- I, 3 August 2009). KBRS submitted a certified claim to the PCO

on 20 October 2009 for $21, 131, 743 of the withheld amount. When no decision

issued on its claim, KBRS appealed the deemed denial of its claim and the appeal was

docketed as ASBCA No. 57151. (Finding 75)

In March 2010, the government withheld an additional $2, 126,531 from

payments otherwise due under the contract to recoup additional PSC costs. Thereafter,

on 16 June 2010, KBRS submitted a certified claim for that amount plus the remainder

of the 1 September 2009 withholding for a total claim amount of $3,274,466.49.

Following the PCO's failure to issue a final decision on the claim, KBRS appealed the

deemed denial and it was docketed as ASBCA No. 57327. (Finding 76; see also

KBRS's FACC iiii 9, 83-84)

The applicable legal standard in considering a motion to strike pursuant to

FED. R. CIV. P. l 2(F) is whether the pleading asserts an "insufficient defense" or

contains any "redundant, immaterial, impertinent, or scandalous matter." Only if a

defense is insufficient as a matter of law will it be stricken. Danae, Inc., ASBCA

Nos. 30227, 33394, 88-3 BCA ii 20,993 at 106,071; Space Age Engineering, Inc.,

ASBCA No. 25761 et al., 83-2 BCA ii 16,789 at 83,439 (citing Anchor Hocking Corp.

v. The Jacksonville Electric Authority, 419 F. Supp. 992 (D.C. M.D. Fla. 1976)).

We conclude, based on the facts alleged in the FACC (as well as the facts

previously found by the Board), that the PCO issued timely final decisions on the

government's claim. As set forth above, the government's claim was asserted by the

PCO, in writing, by set-off and withholding, in February 2007, September 2009, and

March 2010. In Placeway Construction Corp. v. United States, 920 F .2d 903, 906-07

(Fed. Cir. 1990), the court reversed the lower court's dismissal for lack of jurisdiction

where the contractor had appealed from the government's assertion of a right of set off.

Though there was no "final decision" labeled as such and no notice of appeal rights, the

court held that the CO had effectively issued a final decision and granted a government

claim in the amount of the set off. See also KAL ME.I. Manufacturing & Trade, Ltd.,

4

References to "findings" refer to findings of fact in our previous decision, Kellogg

Brown & Root Services, 14-1 BCA ii 35,639.

6

ASBCA No. 44367 et al., 94-1BCA,-i26,582 at 132,257 (citing Placeway, 920 F.2d at

902) (government's withholding constituted "a final decision on a government claim").

Likewise, here the PCO's decisions may not have conformed to the

usual COFD format, including the language required by the CDA to inform a

contractor of its appeal rights, but they were nevertheless a "formal and final action

equivalent to a decision from which the contractor could appeal." P.X Engineering

Co., ASBCA No. 38215, 89-2 BCA ,-i 21,859 at 109,952 (contractor could appeal

from unilateral contract modification); see also Systron Donner, Inertial Division,

ASBCA No. 31148, 87-3 BCA ,-i 20,066 (CO's determination ofCAS noncompliance

was appeal able final decision). The decisions were issued within six years of the date

we previously found that the government knew or should have known of the use of

PSCs to perform the contract-IO June 2005. KBRS, 14-1 BCA ,-i 35,639 at 174,520.

KBRS could have directly appealed the PCO's withholdings but chose to file claims

contesting the withholdings in order to start the running of CDA interest. Moreover,

KBRS has not been prejudiced by the omission of final decision language and an

explanation of appeal rights, as is evidenced by its prompt filing of certified claims

and appeals from deemed denials. Thus, we agree with the government that the

affirmative defens es contained in Counts I and X should be stricken because they fail

as a matter of law, and grant the government's motion to strike as to Counts I and X of

the FACC.

Counts II (Prior Material Breach-Force Protection), III (Prior Material Breach-Cardinal

Change), and IV (Prior Material Breach-Noncompliance with FAR 16.301-3)

The government contends that Counts II, III and IV should be dismissed for

lack of jurisdiction because KBRS did not submit a claim to the CO alleging these

grounds for relief (gov't mot. at 4-6). In the alternative, for any of the three counts for

which the Board finds it has jurisdiction, the government moves to dismiss for failure

to state a claim for relief, on the grounds that KBRS is not entitled in law to breach the

contract as a remedy for the government's breach (id. at 6-7), and also that KBRS has

no valid claim for breach for the government's alleged failure to provide required

force protection because it had adequate remedies under the contract (id. at 8-9).

Finally, with respect to the same three counts, the government argues in the alternative

that they are time-barred because KBRS's September 2011 claim for breach was filed

more than six years after accrual of the claim (id. at 9).

For its part, KBRS argues that the Board has jurisdiction over Counts II through

IV because these counts, which allege different prior material breaches by the

government, are common law defenses to the government's claim which are not

required to be submitted to a contracting officer (CO) for a decision; and in any event,

the allegations made in the counts fall ·'within the scope" of four previous claims ·

submitted to the PCO ( app. opp' n at 7-13 ). Because common law defenses are not

7

required to be the subject of claims, the government's argument that Counts II through

IV are time-barred also fails (id. at 22). Addressing the government's alternative

ground for dismissal, KBRS contends that the counts state a claim upon which relief

can be granted, because a party's prior material breach excuses the other party's later

breach (id. at 14-18). KBRS adds that the government is foreclosed from claiming that

KBRS had an adequate contract remedy and could have delayed its performance

without penalty under the contract's "excusable delay" clause, because this issue was

decided against the government in the Board's 2014 decision and was not appealed

(id. at 18-19).

In reply, the government argues that KBRS is only entitled to assert that a

"mere defense" need not be submitted to a contracting officer for decision if it has

timely appealed from a government claim (gov't reply at 6). The government argues

with respect to Counts II-IV that KBRS's submission of certified claims for the

amounts withheld by the government means that the appeals do not involve a

government claim, 5 thus restricting the Board's jurisdiction to the contents of KBRS's

certified claims (id.). Further, the government posits that KBRS was required under

M Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010), to

have submitted a timely certified claim of breach because it alleges that the

government's prior material breach excused KBRS from complying with any contract

prohibition on the use of PSCs and thus "seeks an adjustment of contract terms." (Id.)

Counts II-IV are within the proper scope of our consideration on remand.

Counts II and III were asserted as affirmative defenses in ASBCA No. 58583 in

KBRS's complaint filed 25 March 2013, and have not yet been decided by the Board.

Additionally, our appellate mandate specifically instructs us to consider whether

KBRS 's breach and remedy allegations are properly before us and, if so, to rule on

them. Count IV was not separately asserted until KBRS filed its F ACC, but it, along

with Counts II and III, asserts prior material breach as an affirmative defense.

We also conclude that we have jurisdiction over Counts II-IV. The government

argues that the Board lacks jurisdiction because the "claims" asserted by these three

counts were not clearly presented to the contracting officer for a decision (gov'tmot.

at 4-6). We have already found that KBRS's 29 September 2011 breach claim

underlying Count II adequately apprised the PCO that the basis for the claim was the

Army's failure to meet its contractual obligation to provide force protection, 6 and the

government withdrew its request for reconsideration of that finding at oral argument

5

We note this assertion is inconsistent with the government's argument with respect to

Counts I and X that KBRS could have appealed directly from the government

claims effected by the Army's notices of withholding (gov't reply at 4-5).

6

Kellogg Brown & Root Services, Inc., ASBCA No. 58583, 16-1BCAii36,233 at

176,771.

8

(tr. 45). As to Counts III and IV, they were not presented to the Army CO for

decision. We hold as to all three counts that they are affirmative defenses that do

not seek adjustment of the terms of the contract, and therefore did not need to

be presented to the CO for decision for the Board to have jurisdiction under

M Maropakis. Laguna Construction Company v. Carter, 828 F .3d 1364, 1369-73

(Fed. Cir. 2016); see also ASFA International Construction Industry and Trade, Inc.,

ASBCA No. 57880, 14-1BCA~35,736 at 174,911.

The government also argues that KBRS is entitled to assert a "mere defense" to

a government claim only if it has timely appealed from a government claim and that

the appeals before us do not involve a government claim because KBRS filed its own

claims for the withheld costs. Both parties have shifted position on whether it is a

contractor claim or a government claim that is before us, depending on the results

produced. We have already held with respect to Counts I and X, to the government's

benefit, that these appeals involve timely asserted government claims to recover

allegedly unallowable costs previously paid. With respect to Counts II through IV, we

hold the same, this time to the detriment of the government's argument. Additionally,

because these counts each invoke prior material breach and thus are affirmative

defenses that need not have been presented to the CO for a decision, we reject the

government's further argument that they are time-barred by the CDA's six-year statute

of limitations (gov't mot. at 9). In doing so, we deem it unnecessary to determine

whether KBRS' s 29 September 2011 claim would have been timely if in fact it

constituted a contractor claim rather than a defense to a government claim.

Alternatively, the government asserts that Counts II through IV fail to state a

claim for relief. The government argues that hiring and billing the government for the

costs of PSCs does not qualify as "mitigation of damages" and that a prior material

breach by the government does not entitle KBRS to also breach the contract while

continuing to perform it. In other words, KBRS had to choose between ending the

contract and electing to continue performance, and if it chose the latter, its contract

obligations continued in full force and effect. (Gov't mot. at 6-7) The government

also contends that KBRS had no valid claim of breach because it had contractual

remedies for government failures to provide force protection (gov't mot. at 8). 7

7

In a footnote, the government reiterates its argument that Count II independently fails

to state a claim for relief because adjudication of whether the Army provided

force protection "commensurate with the threat" is a non-justiciable political

question. The Board previously rejected this argument on the ground that we

have jurisdiction to determine whether the government met its contractual

obligations. KBRS, 14-1 BCA ~ 35,639 at 174,522. This issue was not

appealed, and we consider it foreclosed under the doctrine of law of the case.

See Exxon Corp., 931 F.2d at 877 n.7.

9

The doctrine of prior material breach holds that when a party to a contract

is sued for breach, it may defend on the ground that a legal excuse for its

nonperformance existed at the time of the alleged breach. Faced with two parties to a

contract, each of whom claims breach by the other, courts will often impose liability

on the party that committed the first material breach. Long Island Savings Bank,

FSB v. United States, 503 F.3d 1234, 1251 (Fed. Cir. 2007) (false certification

constituted material failure of performance precluding plaintiffs' claim for breach

damages) (citing Barron Bancshares, Inc. v. United States, 366 F.3d 1360, 1380

(Fed. Cir. 2004); and Christopher Village, L.P. v. United States, 360 F.3d 1319, 1334

(Fed. Cir. 2004)).

In Laguna Construction, 828 F.3d 1364, the Federal Circuit affirmed the

ASBCA' s grant of summary judgment to the government on its affirmative defense of

prior material breach. The contractor had filed a claim for the unpaid costs of

performing an environmental remediation and construction contract in Iraq. It then

appealed to the Board from the contracting officer's deemed denial of its claim.

Meanwhile, the government had been investigating allegations that Laguna's employees

were receiving kickbacks from subcontractors. Several employees and officers of

Laguna pied guilty to criminal indictments from 2010 to 2013. After the last of these

pleas, the government moved to amend its answer in the appeal to include the

affirmative defense that it was not liable for Laguna's claim since Laguna had

committed a prior material breach of the contract by soliciting and accepting kickbacks,

which constituted fraud against the United States. In granting summary judgment for

the government, the Board observed that Laguna had breached the duty of good faith

and fair dealing by its acts of fraud, and had also breached the Allowable Cost and

Payment clause, FAR 52.216-7, by submission of vouchers that were improperly inflated

to include the kickbacks.

The Federal Circuit affirmed the Board on the grounds that Laguna committed

the first material breach by violating the Allowable Cost and Payment clause, which

states that a cost is allowable only if it is reasonable and complies with the terms of the

contract. Laguna, 828 F .3d at 13 72-73. The court found "unpersuasive" Laguna's

argument that the remedies available to the government under the contract's

termination and Anti-Kickback clauses foreclosed application of the common law

defense of prior material breach. The court stated that the government could have

availed itself of those clauses, but was not required to do so, and "may use the prior

material breach doctrine to defeat a contractor's breach claim." Id. at 1371. The court

also rejected the argument that the government waived the defense by continuing to

perform the contract until 2015 when it knew of the kickbacks as early as 2008,

finding it was reasonable of the government to wait to invoke the defense un.til after

the last of the guilty pleas was entered. Id. at 1372.

10

With that background, we address the arguments that the government makes

in pressing its case that Counts II-IV fail to state a claim. First, the government

advances the proposition that a party who chooses to continue to perform waives any

prior material breach as a matter of law (gov't mot. at 6-7). We do not agree. In

Northern Helex Co. v. United States, 197 Ct. Cl. 118, 129 (1972), the government's

primary defense to the contractor's claim for breach damages for nonpayment on a

contract to deliver helium was that the contractor waived its right to claim total breach

by continuing performance and treating the lack of payment as immaterial. The court

acknowledged that "there is venerable authority" that when performance is continued

in spite of a known breach, the wronged party can no longer avail itself of that excuse.

However, the court observed that "it is very doubtful that, even when first formulated,

that rule disregarded particular circumstances justifying further performance in the

specific case." Id. at 125.

While acknowledging "the general proposition" that a party cannot continue

performing after a material breach (although stopping performance would be fair and

convenient), run up damages, and then go to court, the court found for two reasons that

Northern Helex had not waived its right to damages for the government's material

breach. First, the contractor's continued performance was commercially reasonable,

because its helium extraction facilities were so interrelated with the rest of its

operations that its helium facilities must continue in operation whether the helium was

sold or wasted, and since it had no storage facilities, and there was no other market for

the gas, it had no realistic alternative but to continue to tender helium to the

government. Northern Helex, 197 Ct. Cl. at 126. As Judge Davis concluded:

[T]o determine whether waiver has occurred, a more

complex inquiry must be made than merely, "did

performance continue?" The guiding principle is whether,

in the individual circumstances, the seller exercised

"reasonable commercial judgment" in continuing to

manufacture and deliver, in the effort to mitigate damages,

although his obligation to perform has been discharged by

the buyer's total breach.

Id. at 129.

Second, there was a "special aspect" to the case, which was that "the action

taken by Northern Helex was consistent with the purpose of the program, the

conservation of a valuable national resource.'' The court went on to elaborate:

In considering the Government's failure to observe the

procedural requirements of the National Environmental

Policy Act of 1969 when it terminated the contracts of the

11

three other suppliers, the Tenth Circuit characterized the

termination as "an action which has environmental

consequences, namely rapid depletion of the helium

resources of the country." National Helium Corp. v.

Morton, 455 F.2d 650 (10th Cir. 1971). The decision,

requiring that the Secretary at least consider the

environmental impact of his action, is predicated on the

view expressed by Congress "that it is in the national

interest to foster ... [the development and] distribution of

supplies of helium ... sufficient to provide for essential

government activities."

Northern He/ex, 197 Ct. Cl. at 126 (footnote and citation omitted). This "special

aspect" was also held by the court to be good reason for the company's continued

performance.

The record in these appeals similarly supports the conclusion that continuing to

perform the contract with PSC protection was not only a commercially reasonable

decision on the part of KBRS and its subcontractors, 8 but also that it was consistent

with the purpose of the contract and in the national interest. In our previous decision

we cited testimony that, for example, without a convoy every three days the military

dining facilities would run out of food to feed the soldiers (finding 52), underscoring

the important national interest in continuing to run the supply convoys. We also noted

that the contract was a "rated'" order potentially subjecting KBRS to criminal penalties

for failure to deliver within the required time. KBRS, 14-1 BCA ~ 35,639 at 174,521.

Thus, KBRS's affirmative defenses of prior material breach (Counts II-IV) are not

insufficient as a matter of law simply because KBRS continued to perform the

contract.

The government also argues that the defense of prior material breach is

inapplicable here because it is a defense to a claim of breach and the government has

not asserted a claim of breach against KBRS (gov't reply at 10). We disagree. The

government's claim against KBRS, that KBRS and its subcontractors violated the

contract prohibition against employing PSCs and that KBRS billed the government for

8

We also note that while KBRS was continuing to perform, Army COs with

knowledge of KB RS/ subcontractor use of PSCs continued paying KBRS' s

invoices and took no other action to stop the use of PSCs. The Army did not

seek to disallow PSC costs until February 2007. Under the circumstances, it

would have been reasonable for KBRS to think, at least until February of 2007,

that the parties had achieved a mutually acceptable solution that allowed KBRS

to continue to accomplish its warfighter support mission despite the

acknowledged force protection issues.

12

unallowable PSC costs in violation of the Allowable Cost & Payment clause, is plainly

a claim of breach regardless of the fact that the government may not have used the

word "breach'' to describe its claim. See also Laguna, 828 F.3d at 1371 (contractor,

by billing the government for unallowable costs, violated the Allowable Cost &

Payment clause and committed material breach of contract).

The government's next argument is that KBRS cannot claim that its PSC costs

were incurred to mitigate the damages caused by the Army's prior material breach

because, under Count II, the PSC costs are the damages caused by the alleged breach

(gov't reply at 10). In its FACC, KBRS alleges both that it incurred the PSC costs to

mitigate damages caused by the Army's prior material breach, and that the Army's

prior material breach excused it from any subsequent failure to comply with the

contract's prohibition on the use of PSCs (FACC ,-i,-i 123-25). Although we are not

convinced that these types of damages are mutually exclusive, 9 we do not think that

the government's proffered distinction between PSC costs as damages caused by a

breach and PSC costs as costs incurred in mitigation of damages that otherwise would

result from a breach makes a difference in the context of deciding the government's

motion to dismiss, because in these appeals KBRS is first and foremost asserting prior

material breach as a defense to the government's claim of breach.

The government's last argument for the proposition that Counts II-IV "fail to

state a claim for relief' is that the contract afforded KBRS adequate remedies for any

government-caused delays pursuant to the Changes and Excusable Delay clauses and

therefore the dispute arises "under the contract," rendering KBRS' s breach claim

invalid (gov't mot. at 8). The government recognizes that the Board previously

rejected its argument that KBRS's sole remedy for government failure to provide the

level of force protection promised in the contract was delay, but argues that our prior

ruling rested principally on the premise that the contract allowed the use of PSCs (id.).

This notion is not supported by the government's citation to our 2014 decision. In our

prior decision we rejected the identical argument, stating that it was fortunate for the

troops who depended on KBRS for life support that KBRS and its subcontractors did

not adopt the attitude now suggested by the government. We also noted that the

contract was a "rated order" under which a failure to deliver within the required time

could be subject to criminal penalties. Only then did we observe that "[m]oreover, the

9

For example, if the alleged breach had not occurred (i.e., the contractually promised

level of force protection had been provided by the Army to KBR and its

subcontractors), KBRS and its subcontractors would not have incurred PSC

costs (damages). But also, ifKBRS and its subcontractors had not hired and

paid PSCs to perform their missions when force protection was not available, it

is entirely conceivable that the resulting damages could have been vastly in

excess of the cost of the PSCs. (See app. reply at 9-11)

13

government's argument presupposes that PSCs were prohibited under the terms of the

contract." KBRS, 14-1BCA~35,639 at 174,521. Clearly, this additional observation

was not the driver of our rejection of the government's "delay" argument. And since

our 2014 decision, the Federal Circuit issued its decision in Laguna in which it

explicitly held that the availability of a contract remedy does not mean the wronged

party must avail themselves of that remedy in lieu of the affirmative defense of prior

material breach. 828 F.3d at 1371. The government is bound by our prior holding

which is the law of the case. Exxon Corp., 931 F.2d at 877 n.7.

The government also attempts in its motion to distinguish between "mere

delay,'' which it states is permissible under a rated order, and "willful failure to

perform," which is not permissible (gov't mot. at 8). We decline the invitation to

reconsider our prior holding on the basis of a hypothetical dividing line between "mere

delay'' in deliveries and willful failure to perform. The record in these appeals

indicates that any such line was extremely thin, if not non-existent. The military

dining facilities needed to be resupplied no less often than every three days to keep the

soldiers fed. (Finding 52) Moreover, we have found as fact that during the years

2003-2006 the government was unable to provide force protection at the levels

specified in the contract and that the use of PSCs by KBRS and its subcontractors to

supplement government force protection was reasonably necessary to accomplish the

logistical support mission of the contract and task orders thereunder. KBRS, 14-1

BCA ~ 35,639 at 174,521, and findings 13-60.

Therefore, we conclude that the affirmative defenses of prior material breach

contained in Counts II-IV are not insufficient as a matter of law simply because the

Excusable Delay clause was incorporated into the contract. 10 The government's

motion to strike is denied as to Counts II, III, and IV.

Counts V ((LOGCAP III Special H Clauses Applied Only in Peacetime), VI (Army

Waived Contract's Prohibition on Use of PSCs), VII (The Army is Prohibited from

Re-opening Firm-Fixed-Price Subcontracts), and VIII (KBRS is Entitled to

Reimbursement of Its Incurred Costs Absent Evidence of Willful Misconduct)

The government moves to dismiss these four counts as foreclosed by either law

of the case or by our appellate mandate (or both). As to Counts V and VIII, the

government contends that "[t]hese counts must be dismissed because they conflict

with the Federal Circuit's express holdings that the H Clauses were applicable and

barred the use of armed PSCs in contract performance" (gov't mot. at 10). As to

Count VII, the government points out that in Kellogg, Brown & Root Services, Inc.,

10

While the government's motion also mentions that the contract contained the

Changes clause, it makes no argument regarding remedies available under that

clause (gov't mot. at 8).

14

ASBCA No. 56358, 12-1BCAii35,001at172,015, we held that "[i]n the context

of determining the reasonableness of a subcontract fixed price under a cost

reimbursement prime contract, the government may properly consider the components

of that subcontract fixed price." And as to Count VI, the government states that

KBRS's waiver argument is foreclosed by the Federal Circuit's declination ofKBRS's

invitation to affirm the Board's 2014 decision on the alternative ground that the

government gave permission to KBRS and its subcontractors to use PSCs, stating that

'·we do not find any of those purported alternative grounds persuasive." 11 As to these

four counts, we treat the government motion as one to strike affirmative defenses.

KBRS in response states that the issue of whether the contract's H clauses

only applied in peacetime (Count V) was never squarely before the Federal Circuit

because the Board never decided it. It was presented on appeal only as an alternative

ground on which the appellate court could affirm the Board's decision, and was

opposed by the government not on the merits, but because the Board had not made

findings on the issue and a remand would be necessary before it could be considered

(app. opp'n at 24-25). As to Count VI (waiver), KBRS opposes the government

motion on the ground that the "permission" argument that it advanced on appeal as an

alternative ground for affirmance is distinct from the "waiv~r" defense asserted in

Count VI-while the former advances the proposition that use of PSCs was allowed,

the premise of the latter is that the use of PSCs was not allowed but this restriction was

waived by the government. Thus, the appellate decision should have no effect on

KBRS's ability to pursue its waiver defense. (Id. at 26-27)

On Count VII, KBRS points out that the Board expressly advised the parties

that its 2012 decision denying cross-motions for summary judgment was interlocutory

and any error therein was subject to correction in the Board's final decision on the

merits following the hearing. KBRS adds that during the hearing on the merits, the

presiding judge invited it to raise the argument again in its post-hearing briefing, and it

did so. Therefore, it concludes, the issue is not foreclosed. (App. opp'n at 27-28)

With respect to Count VIII, KBRS responds that the Federal Circuit's opinion was

limited to the contract interpretation issue and neither explicitly nor implicitly reached

KBRS' s argument that under a cost reimbursement contract a contractor is entitled to

recover all its incurred costs unless they stem from fraud, lack of good faith, or willful

misconduct (id. at 28-29).

In reply, the government cites to the transcript of the hearing on the merits to

argue that the presiding Board judge had no interest in revisiting the issue presented

by Count VII and in fact did not revisit it in the Board's decision on the merits,

confirming that the issue was settled (gov't reply at 19). The government also points

11 Count VI was not part of the government's original motion to dismiss, but was

added to it by letter supplement dated 9 February 2016.

15

out that KBRS has not distinguished Grumman Aerospace Corp. v. United States,

549 F.2d 767 (Ct. Cl. 1977), the precedent on which the Board relied in its 2012

decision, and that the Federal Circuit did not find this ground persuasive when it was

raised on appeal as an alternative ground for affirmance (gov't reply at 19).

Which of these counts pose issues that are properly before us at this stage of the

proceedings? Count V asserts as a defense that the H clauses which the Federal

Circuit interpreted in deciding the contract interpretation issue raised in the

government's appeal only applied in peacetime and thus were inapplicable to

performance in the war conditions under which the PSC costs were incurred. While

we acknowledge KBRS' s argument that this issue was not before the Federal Circuit

on appeal because it was never decided by the Board, we conclude that this issue is

foreclosed on remand. The court's holding on appeal that the H clauses prohibited

KBRS and its subcontractors from hir~ng PSCs by necessary implication decides the

issue of whether the H clauses were applicable. SUFI Network Services, Inc. v.

United States, 817 F .3d 773, 779 (Fed. Cir. 2016), and cases cited therein. Therefore,

we grant the government's motion and strike the affirmative defense presented in

Count V.

Count VI asserts the affirmative defense that the Army waived any right to

refuse to reimburse the PSC costs incurred by KBRS or its subcontractors on the basis

that use of PSCs was prohibited by the contract. We agree with KBRS that the

defense of waiver is distinct from the argument advanced by KBRS on appeal that it

received "permission" to use PSCs as an alternative ground for affirming our 2014

decision. Moreover, the waiver defense was asserted by KBRS in the remanded

appeals (ASBCA Nos. 56358, 57151, and 57327) well prior to the hearing on the

merits, but was not decided by the Board and not appealed by the government, and

was not, therefore, before the Federal Circuit on appeal. 12 And, since the issue was not

decided by us on the merits, and was not necessary to the Federal Circuit's disposition

of the contract interpretation issue, we are not barred from considering it on remand.

Laitram Corp. v. NEC Corp., 115 F.3d 947, 951-52 (Fed. Cir. 1997) (citing Conway v.

Chemical Leaman Tank Lines, Inc., 644 F.2d 1059, 1062 (5th Cir. 1981)). The

government does not raise any argument in support of its motion to strike Count VI

other than its argument that consideration of Count VI is foreclosed by our appellate

mandate. Therefore, we deny the government's motion as to Count VI.

We also find that Count VII is properly before us and that we may consider

it in these remand proceedings. The Board's 2012 decision denied the parties'

cross-motions for summary judgment. In the course of doing so, the Board addressed

12 KBRS also asserted the defense of waiver in Count V of its initial complaint in

ASBCA No. 58583, which was filed on 25 March 2013. The issue has not been

decided in that appeal either.

16

KBRS's contention that the government has no contractual right to disallow a particular

component of a subcontract fixed price:

However, none of the authorities cited for this proposition

involved the allowability of a questioned component of a

subcontract fixed price as a reimbursable cost under a cost

reimbursement prime contract. In the context of determining

the reasonableness of a subcontract fixed price under a cost

reimbursement prime contract, the government may properly

consider the components of that subcontract fixed price.

[Citation omitted]

KBRS, 12-1 BCA ~ 35,001 at 172,015 (citing Grumman Aerospace Corp., 549 F.2d at

77 4-7 5 ). The Board noted that there remained a genuine issue of material fact as to

whether, at the time the 11 subcontracts at issue were awarded, the component for

PSC costs included in the subcontract fixed prices was reasonable as to both the need

for, and the amount of, that component. Id. at 172,016. After a hearing on the merits,

the Board found as a matter of fact that the PSC costs incurred by KBRS and its

subcontractors were reasonable under FAR 31.201-3(a). KBRS, 14-1BCA~35,639 at

174,521. The Board did not address in that decision KBRS's contention that the

government could not disallow specific components of the price of a firm-fixed-price

subcontract, presumably finding it unnecessary in light of its holding that the contract

did not prohibit the use of PSCs.

The law of the case doctrine does not apply to issues that were not decided.

l 8B WRIGHT, MILLER & COOPER, FEDERAL PRACTICE AND PROCEDURE: LAW OF THE

CASE 2d § 4478 at 664-67. In its 2012 interlocutory decision the Board's discussion of

the Grumman Aerospace case may well have been dicta, since it was not necessary to

the result-denying the cross-motions for summary judgment on the basis of unresolved

issues of material fact. But even ifthe Board's discussion was more than dicta, it did

not decide the issue presented to us now. The defense presented to us by KBRS in its

FACC Count VII is:

Under applicable regulations, including the FAR, and the

federal common law applicable to government contracts,

the Army is barred from reopening firm-fixed price

subcontracts awarded under a cost-reimbursement prime

contract to contest the allowability of a particular

component included in the subcontract price.

(FACC at 29, ~ 180) KBRS alleges in Count VII that it awarded the subcontracts in

issue between 2003 and 2006 pursuant to its approved purchasing system for the

provision of dining and other logistical support services at total prices it determined

17

were fair and reasonable based on competition and/or price analysis. The

government's position all along in this case has been that the costs in question are

unallowable based on the contract's prohibition against using PSCs, not that the total

subcontract prices were unreasonable. Presumably for that reason, the government did

not appeal the Board's finding that the PSC costs incurred by KBRS and its

subcontractors were reasonable. 13

Because the issue presented by Count VII was presented to but not decided by the

Board, and was neither before the Federal Circuit on appeal nor necessarily implicated in

its decision, we do not view the appellate court's statement that the alternate grounds

(one of which mirrored Count VII) presented by KBRS for affirmance were "not

persuasive" to signify anything other than that the court declined KBRS 's invitation to

affirm on alternate grounds not properly before it. In conclusion, Count VII is properly

before us now. The government's motion to strike is denied as to Count VII.

We also find that Count VIII is properly before us. This defense-that under a

cost reimbursement contract KBRS is entitled to recover its incurred costs absent

evidence of fraud, lack of good faith, or willful misconduct-was raised by KBRS in its

25 March 2013 complaint in ASBCA No. 58583 and has not been decided on the

merits. We do not agree with the government that the Federal Circuit's decision that

the contract prohibited the use of PSCs equates to a finding that the costs of PSCs are

unallowable under the contract (gov't reply at 20). We note the court itself

characterized its decision as one of "narrow contract interpretation based on the

weapons prohibition" and did not purport to decide the question of cost allowability.

McHugh, 626 F. App'x at 978.

The case law cited by the government does not persuade us to its view. Geren

v. Tecom, Inc., 566 F.3d 1037, 1041 (Fed. Cir. 2009) merely recognizes that to be

allowable a cost must comply with the "terms of the contract," and that "where neither

the contract nor the FAR dictates the treatment of specific costs, we must determine

how those costs are to be treated by looking to'' the principles and standards in FAR

Subpart 31.2. In this case, there was no term of the contract or FAR cost principle

dictating the treatment of PSC costs. 14 In Kellogg, Brown & Root Servs., Inc. v.

13

To be sure, we recognize that the government's position may also be that the costs

were unreasonable because they were specifically prohibited by contract.

However, that position is still based on a term of the contract disallowing a

specific type of cost, not any determination that the total price of the subcontracts

was unreasonable, which was what the Grumman Aerospace case and the Board's

2012 decision addressed.

14

In Geren, the court noted that costs resulting from a breach of a contractual

obligation are not allowable costs under a contract. 566 F .3d at 1043 (citing

Dade Brothers, Inc. v. United States, 325 F.2d 239, 240 (Ct. Cl. 1963)). This

18

United States, 728 F.3d 1348, 1359 (Fed. Cir. 2013), the Federal Circuit rejected a

similar argument made by KBRS in that case, holding that in determining the

reasonableness of costs, evidence of willful misconduct, gross negligence, or arbitrary

conduct could be relevant, but such evidence is not required to disallow costs as

unreasonable. This is a ruling by our appellate authority in a different case. It is

binding precedent, but it does not implicate the law of the case doctrine or otherwise

preclude us from deciding a similar issue on the record created in these appeals.

Therefore, the government's motion to strike is denied as to Count VIII.

Count IX (The Army Released KBRS from All Claims Related to the Pricing and

A ward of Eleven ESS Subcontracts and KBRS is Entitled to Recover PSC Amounts

Associated with Those Subcontracts)

The government moves to dismiss Count IX or in the alternative for

summary judgment on the ground that PSC costs were expressly excluded from the

2010 and 2011 settlement agreements relied on by KBRS, either by the underlying

Forms 1 or by the underlying audit reports (gov't mot. at 12). KBRS maintains that

any exclusion in the underlying Forms 1 is ineffective to counter the broad language

of the settlement agreements (app. opp'n at 29). The government replies that the

settlement agreements clearly state their intent to settle only claims relating to the

specified Forms 1, which do not include the Form 1 in which DCAA questioned

the PSC costs, No. 127 and revision 1 to same, which has not been settled (gov't reply

at 20, ex. G-4). We treat this portion of the government's motion as one for summary

judgment on Count IX. There are no material facts in dispute, only the parties'

differing interpretations of the settlement agreements.

The two settlement agreements are appended to the government's motion as

exhibits G-5 (2010 agreement) and G-6 (2011 agreement). The 2010 settlement

agreement recites that it is in settlement of five specified DCAA Forms 1: Nos. 143,

145, 147, 148, and 153, for a total of $13,269,983 including $12,349,633 in direct

subcontract cost (ex. G-5 at 2-3). The 2011 settlement agreement similarly states that it

is in settlement of six specified Forms 1: Nos. 142, 144, 151, 152, 154, and 157, for a

total of $34,236,526 including $33,024,789 in direct subcontract cost (ex. G-6 at 2-3).

Both settlement agreements contain the following language (with one minor

grammatical variation not pertinent to the meaning):

case was remanded to us with specific instructions to determine ifKBRS's

breach of the contractual prohibition on use of PSCs was excused by the

government's prior material breach. With this issue open, we infer that the

absence of any determination in the court's decision on the allowability of the

costs was a considered choice.

19

[T]he Government, to the extent permitted by law, remises,

releases, and discharges the Contractor, its officers, agents,

and employees of and from all civil liabilities, obligations,

claims, appeals, and demands which it now has or hereafter

may have, whether known or unknown, administrative,

judicial, legal, or equitable, arising under or in any way

related to the Forms 1.

(Ex. G-5 at 4, ~ 8, ex. G-6 at 4, ~ 5)

Four of the underlying Forms I-Nos. 142, 144, 152, and 154-specifically

excluded the PSC costs disapproved by Form I No, 127, revision I (ex. G-7 at 9,

ex. G-9 at 10, ex. G-14 at 11, ex. G-16 at 13). A review of the remainder of the

Forms 1, along with their underlying audit reports, makes it clear that PSC costs

are not among the costs disapproved (exs. G-8, G-10-13, G-15, G-17-24). Therefore,

PSC costs were not within the scope of the two settlement agreements and KBRS's

contentions to the contrary must fail. Moreover, KBRS does not dispute that the

Form 1 disallowing the PSC costs has not been settled.

We note also that the settlement agreements resulted in a near-complete win

for KBRS: of the disapproved costs that were the subject of the 2010 agreement,

KBRS recovered $12,349,633 out of a total of $13,269,983. Of the disapproved costs

that were the subject of the 2011 agreement, KBRS recovered $31,073,009 out of a

total of $33,024,789 in direct subcontract costs, plus applicable overhead and base fee.

(Ex. G-5 at 3, ex. G-6 at 3-4) These numbers render nonsensical KBRS's argument

that the settlements encompassed subcontract PSC costs, since if one were to believe

that to be true, it would lead to the conclusion that KBRS has already recovered the

vast majority of those costs.

For the reasons stated, we grant summary judgment to the government on

Count IX of the FACC.

Counts XI (Army's Quantum Calculation is Inaccurate and Unsupported) and XII

{Army Acted in Bad Faith)

KBRS asserts in Count XI of the FACC that, for several reasons, the damages

calculation underlying the Army's withholding is flawed. This contention is premature

at best and, in the interests of judicial economy, we see no reason to address it

before entitlement has been decided. Therefore, the government's motion to dismiss

Count XI is denied without prejudice to its reinstatement in appropriate circumstances.

In Count XII KBRS states it is entitled to findings of fact that the Army

acted in bad faith by, it alleges, effecting the withholdings in question in response to

20

Congressional inquiries and without conducting any investigation into the underlying

facts regarding the hostile conditions in Iraq from 2003-2006 and the military's

inability to provide the promised level of force protection. The requested findings are

not tied to any particular claim or affirmative defense advanced by KBRS in this

litigation. Rather, KBRS asserts that the requested findings are the relief to which it is

entitled (FACC at 34-35). Moreover, KBRS represented to the Board at oral argument

that no new findings of fact are necessary to decide its motion for summary judgment

(tr. 58).

The government moves to dismiss Count XII for failure to state a claim,

positing that "[a]ppellants cannot come before the Board for freestanding 'findings'

unconnected to well-pleaded claims for contractual relief' (gov't mot. at 13). KBRS

responds simply that the requested findings "are clearly within the scope of these

appeals" and that the government has not cited to any legal authority prohibiting us

from making the requested findings (app. opp'n at 30).

· We have been presented with no reason why the Board should make new

findings of fact unconnected to any contractual claim or defense before it. We

therefore grant the government's motion to strike as to Count XII.

In conclusion, the surviving counts ofKBRS's FACC are II,HI, IV, VI,

VII, VIII, and XI. We now turn to KBRS's motion for summary judgment.

II. KBRS's Motion for Summary Judgment

KBRS has moved for summary judgment on the affirmative defenses presented

by Counts II (prior material breach) and VI (waiver), and the government has opposed.

The standards for summary judgment before the Board are well established 15 and

need little elaboration here. Summary judgment should be granted if it has been

shown that there are no genuine issues of material fact and the moving party is

entitled to judgment as a matter oflaw. Celotex Corp. v. Catrett, 477 U.S. 317,

322 (1986). A non-movant seeking to defeat summary judgment by suggesting

conflicting facts "must set forth specific facts showing that there is a genuine issue

for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (quoting

First National Bank ofArizona v. Cities Service Co., 391 U.S. 253, 288-89 (1968)).

The posture in which we are asked to decide appellant's motion differs from

the usual, in that there has already been a lengthy hearing on the merits in three of

these appeals. Appellant relies on the Board's findings of fact set forth in our

15

Board Rule 7(c)(2) provides that the Board looks to FED. R. CIV. P. 56 for guidance

in deciding motions for summary judgment.

21

decision in KBRS, 14-1 BCA ~ 35,639, for its statement of undisputed material facts

(app. mot. at 2). The government does not dispute those findings of fact and has

proposed "additional material facts" drawn from the existing record in these appeals

(gov't opp'n at 2-3). The parties agree that the Board need not find further facts in

order to decide the motion (tr. 59).

Based on the foregoing, we find the following facts to be undisputed for

purposes of the motion.

STATEMENT OF FACTS (SOF) FOR PURPOSES OF APPELLANT'S

MOTION FOR SUMMARY JUDGMENT

1. Contract No. DAAA09-02-D-0007 (contract or Contract 0007), awarded

to KBRS on 14 December 200 I by the Army Operations Support Command,

Rock Island, Illinois (hereinafter Rock Island), was a cost-plus-award-fee,

indefinite-quantity, indefinite-delivery contract which was part of the Army's Logistics

Civil Augmentation Program (LOGCAP) and is also referred to as the LOGCAP III

contract (findings 2, 3). The contract included the FAR 52.211-15, DEFENSE PRIORITY

AND ALLOCATION REQUIREMENTS (SEP 1990) clause, which stated: "This is a rated

order certified for national defense use, and the Contractor shall follow all the

requirements of the Defense Priorities and Allocation Systems regulation (15 CFR 700)."

The cited regulation stated in pertinent part:

§ 700.3 Priority ratings and rated orders.

(a) Rated orders are identified by a priority rating .... Rated

orders take preference over all unrated orders as necessary to

meet delivery dates ....

(b) Persons receiving rated orders must give them preferential

treatment as required by this regulation. This means a person

must accept and fill a rated order for items that the person

normally supplies ....

(c) All rated orders must be scheduled to the extent possible to

ensure delivery by the required delivery date.

22

§ 700. 7 Compliance

(a) Compliance with the provisions of this regulation .. .is required

by the Defense Production Act.. .. Violators are subject to

criminal penalties.

(Findings 4, 5)

2. The contract also contained section H, Special Contract Requirements,

which set forth the following clause:

H-16 Force Protection

• While performing duties [in accordance with] the terms

and conditions of the contract, the Service Theater

Commander will provide force protection to contractor

employees commensurate with that given to

Service/Agency (e.g., Army, Navy, Air Force, Marine,

DLA) civilians in the operations area unless otherwise

stated in each task order.

(Finding 9)

3. Following the invasion and occupation of Iraq in March 2003, Rock Island

issued task orders under the contract for logistic and life-support services, including

food service and billeting, for the coalition combat forces. Task Order (TO) 59, with

an initial total ceiling price of $802,065, 733, was issued effective 24 June 2003, and

its successor, TO 89, was issued effective 1 May 2005 with an initial ceiling price of

$4,972,882,216. Paragraph 1.10 in Change 5 to the TO 59 Statement of Work

(SOW), effective 27 August 2003, stated: "The government will provide for the

security of contractor personnel in convoys and on site, commensurate with the threat,

and [in accordance with] the applicable Theater Anti-Terrorism/Force Protection

guidelines." Paragraph 1.7 of the TO 89 SOW as issued on 1 May 2005 stated: "The

Government will provide for the force protection and security of contractor personnel

in convoys and on site, commensurate with the threat, and [in accordance with] the

applicable Theater Anti-Terrorism/Force Protection guidelines." (Findings 11, 13)

4. Attacks on KBRS and subcontractor supply convoys began in June 2003.

KBRS warned the Rock Island PCO on 27 June 2003 that failure to provide force

protection in accordance with the LOGCAP III contract would mean that KBRS

and subcontractor vehicle convoys would have to be delayed, adversely affecting

timely delivery of food service support. (Findings 14, 15) The Deputy Commander

of the Coalition Forces Land Component Command (CFLCC) from 2003-2004,

23

Major General (MG) Stephen Speakes, testified that he arrived in Iraq in late June and

that it was obvious to him that "we were taking new levels of threat to our supply and

relief formations across Iraq." Among the options he considered for dealing with the

increased threat were assigning more combat units to protect the convoys, and looking

at the potential for hired contractual security. (Finding 16)

5. On 9 July 2003, KBRS met with MG Speakes and reported that the personnel

and equipment casualties from attacks on its convoys and those of its subcontractors

from mid-May to date were 7 killed, 7 wounded, 4 missing and 10 trucks missing.

MG Speakes noted: "Tomorrow the government will provide convoy protection for

46% of the convoys waiting to travel north. This level of support must increase, but

presently the government is short convoy escort vehicles and shooters (shotgun

riders).'' The parties discussed KBRS contracting for private security, and agreed that

"LOGCAP Planners will develop a revised statement of work requesting contracted

security.'' (Finding 19)

6. On 19 September 2003, MG Speakes sent the following message and formal

request to the Rock Island Commander:

Subject: CFLCC Request for Help with LOGCAP

Contractor Convoy Security.

[I]n message below we request your help in solving one of

our most vexing problems, specifically convoy security for

contracted operations in Iraq .... [W]e see no other optoin

[sic] but to ask that the current contract provisoins [sic] be

amended to support operations in Iraq. We appreciate your

support and hope that this is a request that is

supportable ....

MEMORANDUM FOR Commander, Army Field Support

Command. Rock Island, 1161299

SUBJECT: Adequate Force Protection for the Logistics

Civil Augmentation Program (LOGCAP) Convoys in

Kuwait and Iraq

1. Request Army Field Support Command (AFSC) review

the basic LOGCAP contract and provide a contractual

recommendation allowing Kellogg Brown & Root (KBR)

the authorization to pursue a civilian transport and

24

transportation security company to conduct convoy escorts

missions for the execution of convoys in Iraq during the

movement of government materiel on theater supply

routes. The current force protection posture, pending

reductions in force structure, present and future demands

for military police forces, all support the need to explore

options other than military escorts in order to conduct

secure and unhindered convoy operations.

2. The LOGCAP Basic contract and Statements of Work

(SOW) needs to be modified to allow for KBR to provide

contract security for their convoys moving government

materiel on theater supply routes in Kuwait and Iraq. This

change to authorization and utilization of contracted

security should be in compliance with US Federal and

Military Regulations that established the current base

contract.

3. The contract should be administered by KBR or its

subcontractor, with standards and operating procedures in

accordance with the senior military police organization in

theater. The scope of operations or task execution plan

will be developed by KBR and accepted through the

appropriate contracting and command channels.

4. We understand that there will be legal and perception

concerns in the use of contracted security, but with

pending reductions in force structure, present and future

demands on contractor support, we must ensure unimpeded

flow of supplies. We believe this is a viable course of

action.

MG Speakes expected that Rock Island would prepare a proposal for contract

modification that he could submit for approval by the appropriate commanders in Iraq

and at CENTCOM. However, he testified: "'Despite my repeated efforts, to my

knowledge I never got a formal proposal back, and I never was able to take anything

and formally bring it up to a higher staff to ask for their help." (Findings 20, 21)

7. On 24 November 2003, the commander of the Defense Contract

Management Agency (DCMA) activity in Kuwait, CDR Kent Caldwell, USN, sent a

message to the CFLCC 143rct Transportation Command. The message cited the

25

conflicting standards in operation orders (OPORDS) issued by CFLCC and CJTF-7 16

for convoy protection, and further stated in pertinent part:

As convoy security is contractually required to be provided

by the government and be consistent with the standards set

for all DOD civilians, I believe the government is faced

with an unexecutable task. As I understand it, they are no

longer resourced to comply with either standard, especially

when you consider that contractors cannot carry weapons.

Their need for external security is greater [than] that of

armed soldiers moving in military convoys for which the

majority of the guidance found in both OPORD's applies.

While I understand and appreciate the resource

restrictions on both soldiers and government equipment to

perform the missions assumed by KBR under the

LOGCAP III contract, the Army has entered into a contract

with KBR and is apparently unable to provide the requisite

security and protection requirements established by either

CFLCC or CJTF-7. If uncorrected this will significantly

impact the fuel, line haul, mail, and Class 1 transportation

mission areas supported under this contract.

(Finding 23)

8. On 19 December 2003, CJTF-7 Fragmentary Operations Order (FRAGO)

1242, (KBR Convoy Security Procedures) stated in relevant part:

ATTACKS AGAINST KELLOGG, BROWN AND ROOT

(KBR) CONVOYS HA VE DRAMA TI CALLY

INCREASED DURING THE MONTHS OF OCTOBER

AND NOVEMBER. BASED UPON INTELLIGENCE

ESTIMATES, THE THREAT OF FUTURE ATTACKS

AGAINST KBR CONVOYS IS PROJECTED TO

INCREASE DURING THE MONTHS OF DECEMBER

2003 THROUGH APRIL 2004 .... SINCE THE BEGINNING

16 Combined Joint Task Force-7 (CJTF-7) was the initial designation of the coalition

military forces in Iraq. On 15 May 2004, the designation was changed to Multi

National Force-Iraq (MNF-I). CJTF-7 and MNF-I reported to the Theater

Commander, CENTCOM. KBRS, 14-1 BCA i! 35,639 at 174,522 n.3.

26

OF OCTOBER, TH[E] MAJORITY OF ATTACKS

AGAINST KBR CONVOYS HA VE BEEN THE RESULT

OF IEDS AND SMALL ARMS FIRE. NINETY PERCENT

OF ALL ATTACKS DIRECTED SPECIFICALLY

AGAINST KBR CONVOYS HA VE OCCURRED ON MSR

TAMPA. HOWEVER, SEGMENTS OF ASRJACKSON,

MSR MICHIGAN, MSR MIL TON AND MSR MOBILE

REMAIN EXTREMELY DANGEROUS TO KBR

CONVOYS. KBR CONVOYS REMAIN EXTREMELY

VULNERABLE TO ATTACKS AT REST STOPS, REFUEL

POINTS, TRAFFIC CHOKE POINTS, LOCATIONS OF

VEHICLE BREAKDOWNS, HAND-OFF POINTS FOR

CONVOY SECURITY ESCORTS, MSC BOUNDARY

LINES ... AND MOVEMENT UNDER OVERHEAD

PASSES.

(Finding 24)

9. On 22 February 2004, the KBRS Deputy Area Manager for V Corps North

sent the following message to the troop unit that was responsible for force protection

in that area:

For your information the military has failed to comply with

providing escort requirements. Time and time again we

have sent emails after emails and made phone calls after

phone calls to get this escort requirement taken care of. As

you know last week a convoy was arranged for four (4)

trucks and they were abandoned while in route because of

the speed of travel. I would like to point out this same

subcontractor had employees shot in a drive by shooting

yesterday around B3, so they are a marked target.

It was also briefed on the last [meeting with the

government] that [the government] would prefer to have at

least nine (9) to ten (10) trucks in a convoy. We consulted

with our subcontractor and they hired additional trucks for

a total often (10) trucks which are loaded and ready to go,

when request for convoy was acquired today, KBR was

told [the government] was not able to provide the escorts

due to lack of assets and would not have the assets for two

to three weeks if then. This has directly affected our

ability to carry out our tasked assigned to KBR by CJTF7,

27

plus is causing the subcontractor to occur [sic] unexpected

costs.

The government answer to KBRS's 22 February 2004 message was that:

(i) "these combat units were sent here to fight the war, not do escorts for KBR ONLY";

(ii) the tasking placed on the troop unit responsible for providing the force protection

was 'enormous'; and (iii) when the troop unit was ready to resume escort duty, 'I will

let you ... know."' (Findings 30, 31)

10. On 12 April 2004, CJTF-7 FRAGO 622 described the current convoy

security situation as follows:

THE ENEMY IS PROSECUTING A DELIBERATE

OPERATION TO INTERDICT OUR LINES OF

COMMUNICATION (LOC). WITH THE

SIMULTANEOUS ATTACKS ON SIX OVERPASSES

ON 10-12 APRIL 04, IT IS APPARENT THE ENEMY

HAS TAKEN HIS CAMPAIGN BEYOND

HARASSMENT THROUGH DIRECT ACTION TO A

DELIBERATE EFFORT FOCUSED ON THEATER LOC

INTERDICTION.

CURRENT SITUATION. ALONG MSRS LEADING INTO

AND OUT OF BAGHDAD THERE HA VE

BEEN 66 ATTACKS IN THE LAST WEEK, 49 ATTACKS

ONE WEEK AGO, AND 50 TWO WEEKS AGO. THERE

HA VE BEEN 3 COMPLEX ATTACKS/AMBUSHES IN

LAST THREE DAYS RESULTING IN THE DESTRUCTION

OF A REFUELING CONVOY ... DESTRUCTION OF

4 OVERP ASSES ... AND THE AMBUSH OF A

CONVOY .... THE MSRS BETWEEN 1) BAGHDAD AND

BALLAD, 2) BAGHDAD AND KARBALA, AND 3)

BAGHDAD AND FALLUJAH ARE EXTREMELY

DANGEROUS AND CONTINUE TO BE HIGHLY

SUSCEPTIBLE TO THREAT ACTIVITY RANGING FROM

IEDS TO SMALL ARMS AND RPG

ATTACKS/AMBUSHES.

CURRENT ASSESSMENT: ATTACKS ARE MUCH

HIGHER THIS WEEK AND UPWARD TREND IS

LIKELY TO CONTINUE AS A RESULT OF THE

CONTINUED SADR/MAHDI MILITIA UNREST, AND

28

OPERATIONS AGAINST THREAT FORCES IN

WESTERN IRAQ.

(Finding 32)

11. On 14 April 2004, the DCMA administrative contracting officer (ACO) for

TO 59 (MAJ Hills) reported to the Commander, DCMA Northern Iraq (L TC Blaine)

the following:

All indications are that the government has failed to live up

to its contractual obligation to provide Force Protection

(FP) to the TTM convoys (T00059). Given that, KBR is

currently not required to run most (if any) convoy routes.

They did run three convoys to Anaconda today. Only one

made it. The other two got lost. They are now at an FOB.

KBR may not run any convoys tomorrow ifthe

government does not improve its track record on FP. The

same MP escorts that got them lost are to bring the two

convoys in to Anaconda tomorrow. The best I can tell at

this time is that they have never ran the route they are

about to set out on. Based on my discussions with TTM' s

PM .. .I went over and talked to the 13th COSCOM CC .. .I

told him of KBR's concerns. I feel contractually the

government is not living up to its contractual obligations.

[The COSCOM Commander] stated that COSCOM was

doing their part by providing a soldier for every third truck.

He said it was the 15th MP's that were providing the escort

not COSCOM and that the issue of getting lost was ... not a

FP issue " ... they are all safe aren't they." I just want to go

on record that absent any new information from the

government, I concur with KBR in that the government is

not providing FP commensurate with the threat. If they

choose not to run tomorrow I would be hard pressed to

disagree with them. Oh by the way, one of the trucks in

one of the lost convoys got destroyed by an IED.

(Finding 33)

12. Lieutenant General (L TG) Ricardo Sanchez, commander ofCJTF-7 and its

successor unit from June 2003 to July 2004, testified that there was insufficient

capacity to accomplish all the tasks that were assigned to the force on the ground in

Iraq during that period and that he did not have sufficient resources to provide the

same level of protection to KBRS that was being provided to civilians. For that

29

reason, he stated, in the "fall and early winter of 2003, we very clearly established

within the command that the capacity of the force, the quantity of the force, and the

demands of the mission ... we were not going to be able to continue supporting that

without private security." By March 2004, he testified, there were between 10 and

20 private security contractors operating in Iraq, and he believed their presence and

assistance in accomplishing the mission was welcomed by commanders at the

battalion and brigade level. (Findings 35, 37, 38)

13. Following termination of the Coalition Provisional Authority (CPA) and

establishment of the Interim Iraq Government as the civil government oflraq on

30 June 2004, CENTCOM issued a Warning Order (WARNORD) on 4 July 2004

entitled "CONTRACTOR RISK MITIGATION" that tasked commanders to develop

courses of action (COAs) for U.S. Government contractor risk mitigation in Iraq. The

WARNORD stated that MNF-1 had not to date provided protection for contractors

·'AS CONTRACTOR SECURITY IS NOT A SPECIFIED MILITARY MISSION,"

and further stated that "CONTRACTORS ARE PRIMARILY RESPONSIBLE FOR

THEIR OWN SECURITY." The WARNORD concluded that "given the current

security environment in Iraq, all USG agencies must coordinate protection of USG

contractors through a combination of coalition military forces, Iraq security forces, and

private security companies." (Finding 39)

14. From March to September 2004, attacks on KBRS subcontractor

employees and vehicles continued, with 5 employees killed, 1 beaten, and 25 missing

or held captive (finding 40). On 29 August 2004 KBRS notified LTC Sean O'Day,

Commander of DCMA Northern Iraq, that a subcontractor convoy escorted by a

private Iraqi security company had been ambushed and three trucks were missing.

L TC O'Day remarked that there might be questions why private security and not a

military escort was used for protection. At the hearing, he testified that security was

always a big issue, and that there weren't enough military forces in Iraq to do

everything that needed to be done and provide convoy security for contractors.

(Findings 40, 41)

15. Craig Peterson, KBRS's Program Manager in Iraq from November 2004 to

1 April 2005, testified that although he did not have specific knowledge, KBRS

subcontractors in Iraq had to be using PSCs because "[i]fthey were not using PSCs,

I have no idea how they did their job. None -yvhatsoever. Because they couldn't have

gone anywhere." Mr. Peterson further testified as to the availability of military

protection for KBRS subcontractor convoys:

I myself, as the head [of LOGCAP] and a retired general

officer, would be on an installation and ask the young

lieutenant or captain who has got a convoy going to

Arifjan or somewhere if I could pile in. They said, "I don't

30

do contractors." I said, "I'm Craig Peterson. I'm in charge

of LOGCAP." They said, "I don't do contractors."

Q. They didn't say, "Who?"

A. No .... So, I mean, it -- ifl got kicked out of

convoys, then there is no doubt in my mind that subs did.

(Findings 49, 50)

16. KBRS's principal subcontractor in Iraq was Eurest Support Services

Worldwide (ESS), who installed and operated military dining facilities (DFACs) at

specified sites throughout Iraq and concluded its operations in Iraq on 30 June 2006.

ESS's operation manager from June 2003 to June 2006 was Steven Murray. Mr. Murray

testified that ESS used PSCs for the entire period of its performance in Iraq to

supplement military force protection:

[W]e pretty consistently used, from early '03 and all the

way through our departure in '06, PSD [private security

detachment] teams to move people and money and

equipment in and out of the country, because again, even

in '05 and '06, the [military] convoy system would not let

our NTVs [non-tactical vehicles] in the convoy. If you

disclosed you're carrying cash, you're not getting in the

convoy with cash, and it was a total cash economy the

whole time we were there .

.. .It became extremely difficult to move things

between sites. We'd approach - we tried to use some

military force protection on the site, and I personally talked

to two or three commanders about this. We were told

pretty consistently that the military is not there to babysit

contractors.

I had some people ... stuck on a southern site, and I

needed to move them to a northern site. [They were

included in a government convoy but] halfway through

Baghdad, they stopped our vehicle ... [S]aid they got a call

to go on a mission and they took off in another

31

direction .... [W]e dispatched, enormous cost, ... a PSD team

to go and pick them up .

... Another occasion happened whereby we were

moving equipment ... we had two or three large 500 kV

generators ... at one site; we had to move them across

Baghdad to another site. They [the government] agreed to

move us .

...Halfway there, they told our truck to pull over and

wait. They had to leave, and they left. Never saw my

truck again. It was just gone. The driver, .. .! don't know

what happened to him. The truck was gone.

We learned our lesson very quick. We did ask,

from time to time, and most times it was "We're not doing

that. We can't do that. We're warfighters. Take care of

yourselves." It's extremely difficult to move between

sites, and it was a pretty regular need of ours to do that. ...

Money, people, sometimes food .... [We] only

carried two or three days' worth of food [at each dining

facility site]. So if you don't have a delivery coming in

every third day, you're in trouble. You can't feed soldiers.

That was unacceptable to us, as a caterer, and to our client,

KBR. We could not fail.

So we had to move food, and the military would not

touch it from intra-theater. They had bigger things to do

than to move contractors.

Q: Did there ever come a time when you simply

gave up on seeking force protection?

A. Honestly, no. It was in our interest. I mean this

is a business, and if I didn't have to pay a PSD team, which

were not cheap, and I could get it in a convoy, I'd rather

use a convoy. It didn't always fit with our business

unfortunately.

32

Either you didn't have the time to do it, or they

wouldn't do it. But always, even up until middle of June

of 2006, when we were leaving, we tried to use convoys as

much as we could. It's a cost saver for us. So but the

answer ts yes. We never gave up trying to do that.

(Findings 51, 52)

17. Lack of force protection extended to static security as well as security

for convoys. Mr. Murray testified that between January and June of 2006, as

demobilization activities began, the military was either leaving or on their way out.

Although it tried to secure military force protection, in several instances ESS was left

to move people and assets out of installations that had been left completely open, and

had to bring PSCs in to provide security for the compound while assets were taken

down and loaded, and then used "our own guns to move those things across country."

(Finding 53)

18. Most if not all of the subcontracts awarded by KBRS to perform LOGCAP

III were awarded on a negotiated firm-fixed-price basis (finding 54). Asked if ESS

made or lost money on its use of PSCs at the hearing, Mr. Murray testified that the

use of PSCs was unequivocally a money-losing proposition. He explained that ESS

proposed and negotiated a price based on an estimated use of PSCs, and that as the

scope of work expanded and the security situation worsened, both the frequency of

use and the cost per mission of PSCs increased far beyond the estimated amount, with

the result that "[w]e incurred more costs than we charged [KBRS]." (Finding 54)

19. LTC Scott Sheridan succeeded LTC O'Day as commander of DCMA

Northern Iraq in November 2004. On 22 April 2005 the award fee determination for

KBRS's performance of TO 59 for the previous year was issued with a rating of

'·excellent" and specific note of the challenging circumstances under which that

rating was earned, including "attacks on and hijacking of your convoys" and

"lack of force protection to escort convoys with needed materials." LTC Sheridan

briefed the award fee determination the next day, underscoring the same two special

considerations-"[o]perating in a non-permissive environment" and "[a]vailability of

escorts." (Findings 43-45)

20. KBRS's initial policy in Iraq was not to use private security to perform the

contract because force protection was supposed to be provided by the Army (finding 46).

However, KBRS senior managers did begin to use private security to be able to move

around from location to location, and this was known in 2004 to both the Rock Island

PCO (Mary Beth Watkins) and the DCMA Iraq commander, COL Ainsworth Mills, who

expressed the opinion at the time that the PSC costs would not be allowable on the

33

contract (finding 4 7). The record contains no evidence that the government, including

the PCO, did anything to stop KBRS from using PSCs (finding 48).

21. The record also shows that the government was aware that KBRS

subcontractors were using PSCs to move convoys and did not object. The KBRS

coordinator for all subcontractor movements from Kuwait into Iraq from mid-July

2003 until some point in 2005 was Ms. Leslie Smith, who testified that while the

primary method of movement was a military escorted convoy, the Army Movement

Control Battalion (MCB) routinely received and granted requests to move with private

security. These requests were made expressly and in writing on the KBRS MP Escort

Allocation Request submitted daily to the MCB. In addition, Ms. Smith on 24 March

2004 sent a memorandum to MAJ Grady Sessoms, the designated point of contact at

the MCB, stating in part that "Private security is allowed. Iraqi security escorts wait in

Iraq to hook up with their convoy." On no occasion did MAJ Sessoms or anyone else

at MCB respond that private security was not allowed. (Findings 57, 58) Moreover,

on I 0 June 2005 a DCMA administrative contracting officer consented to the award of

a food services subcontract with an express pricing justification in the consent

documents referring to the expected use of PSCs to help transport maintenance

personnel to their respective sites (finding 60).

22. The government offered five statements of additional material facts

(GSAMF), for the purpose of demonstrating disputes of material fact preventing the grant

of summary judgment on either Count II or Count VI. They are as follows.

I. In February 2006, Kristan Mendoza, the acting

chief of the Army's LOGCAP Contracting Branch at Rock

Island Arsenal Illinois, wrote to Mary Wade, KBR's

LOGCAP contract manager in Houston, Texas, about a

report that a KBR Tier I LOGCAP III subcontractor had

accidentally discharged a handgun. Ms. Mendoza asked

Ms. Wade, among other things, "what measures are being

taken to ensure that contractor or subcontractor personnel

do not possess firearms in the AO [area of operations]."

The following day, Ms. Wade advised Ms. Mendoza,

among other things, that "[t]he subcontractor terms and

conditions state weapons are not allowed on the project,"

and that KBR's "policy is that no LOGCAP or

subcontractor employees are allowed to carry weapons."

2. In July 2006, Sylvia Youngman, the chief of the

Army's LOGCAP Contracting Branch at Rock Island,

emailed Philip Wagner, a KBR contract administrator,

seeking comments on proposed responses by the Army to

34

questions posed by Representative Henry Waxman

about the LOGCAP III contract. Ms. Youngman proposed

to tell Representative Waxman that KBR "has advised the

Army that it has never directly hired a private security

contractor in support of the execution of a statement of

work under any LOGCAP III Task Order" and that "KBR is

presently unaware of any payments to subcontractors which

include[ d] charges for private security costs, but [KBR]

continues to look into this,'' When Ms. Youngman' s

proposed responses were circulated within KBR,

Chris Heinrich, a KBR legal official, commented internally,

"These answers look to be appropriate."

3. Also in July 2006, William Walter, a senior vice

president of the appellant, who had been the appellant's

Director of Government Compliance from 2003 to 2005,

prepared a declaration for filing in Smith v. Halliburton

Co., No. H-06-0462 (S.D. Tex.), a tort action against the

appellant and its parent company. In a draft declaration,

Mr. Walter stated that "under the LOGCAP Contract

[No. DAAA09-02-D-0007] and Task Order 59, KBRSI

had no obligation to provide, and in fact was prohibited

from providing, force protection for its employees at

[Forward Operating Base] Marez [in Iraq], including

security of any kind to protect KB RSI personnel in the

Dining Facility ... [from] a suicide bomber."

4. "In response to Congressional inquiries about the

use of PS Cs by KBRS and its subcontractors ... ,

Ms. Mendoza on 31 January 2007 obtained documentation

from [KBR subcontractor Eurest Support Services (ESS)]

that in March 2005, 'Security' was 12.55% of 'our labor

pricing in our subcontracts[.]'"

5. In February 2007, George Seagle, an executive of

the appellant, testified before the House Government

Reform Committee. In response to questions from

Representative Waxman, Mr. Seagle testified that KBR had

"never directly subcontracted for armed security under the

LOGCAP contract" and had not "required or directed any of

our subcontractors to subcontract for security either."

(Gov't opp'n at 2-3)

35

DECISION

The government has made a number of different arguments with respect to

Count II of KBRS's FACC. The vast majority of these were made in connection with

the government's motion to dismiss and have been dealt with above. In its briefing,

the only two arguments the government makes specifically in opposition to KBRS's

motion for summary judgment are that ( 1) whether a breach is material is not a

determination appropriate for summary judgment, and (2) we must deny summary

judgment on Count II because there is a genuine dispute of material fact with respect

to the materiality of the Army's breach (gov't opp'n at 11-12). For the latter, the

government offers the following: ( 1) KBRS did not believe at the time it submitted its

claims in three of these appeals that the contract obligated the Army to protect KBRS

subcontractors, meaning that KBRS entered into the LOGCAP contract "with no

expectation of force protection for its subcontractors;" and (2) senior management of

KBRS in 2006-2007 told the government that KBR did not allow either KBR or

subcontractor personnel to carry weapons, meaning that KBR senior management, at

least, did not think that the need for security was so great that the failures in force

protection by the Army amounted to a total or material breach. (Id. at 12)

We address first the government's contention that whether a breach is material

is not an issue that should be decided summarily. The government relies on two

Federal Circuit cases to support this argument. The first is Stone Forest Industries,

Inc. v. United States, 973 F .2d 1548 (Fed. Cir. 1992). Stone Forest is cited for the

following proposition:

Not every departure from the literal terms of a

contract is sufficient to be deemed a material breach of a

contract requirement, thereby allowing the nonbreaching

party to cease its performance and seek appropriate

remedy. The standard of materiality for the purposes of

deciding whether a contract was breached "is necessarily

imprecise and flexible." Restatement (Second) of

Contracts § 241 cmt. a (1981 ).... The determination

depends on the nature and effect of the violation in light of

how the particular contract was viewed, bargained for,

entered into, and performed by the parties.

Id. at 1550-51. In Stone Forest, the Federal Circuit reversed the U.S. Claims Court

and found that the government's denial of access to 15.89 percent of the timber

originally contracted for was a material breach. Id. at 1552.

The second case relied on by the government is Beta Systems, Inc. v. United States,

838 F .2d 1179 (Fed. Cir. 1988), cited for the proposition that questions of contract

36

interpretation requiring the weighing of extrinsic evidence are not amenable to summary

resolution. We think the government's reliance on this decision is misplaced. In Beta

Systems, as in most cases where a court or board is called upon to decide motions for

summary judgment, there had been no trial on the merits. In this case, there was an

extensive hearing on the merits and testimony from numerous government and contractor

witnesses bearing on how the LOGCAP contract and task orders were viewed, bargained

for, entered into, and performed by the parties, as well as detailed factual findings made

by the Board on the basis of that record. Any judgment rendered on this record is not

truly "summary." At oral argument the government appeared to back off the position

taken in its briefs, agreeing that the Board's original findings plus the government's

additional material facts were a sufficient basis for the Board to rule on the motion for

summary judgment (tr. 59).

Next, we turn to the government's argument that KBRS's claims underlying

ASBCA Nos. 56358, 57151, and 57327 show that KBRS had no expectation under the

contract that the Army would provide force protection to any of its subcontractors,

precluding summary judgment at least with respect to the subcontractor PSC costs at

issue (gov't opp'n at 12). For this proposition, the government cites to KBRS's certified

claims of 22 October 2007 (ex. G-1) and 16 June 2010 (ex. G-3) for sums withheld by

the Army to recover allegedly unallowable PSC costs incurred by its subcontractors. It

is true that in these claims, KBRS argued that the contract required the Army to provide

force protection to KBRS employees but did not require the Army to provide force

protection to subcontractor employees (ex. G-1at10-12, ex. G-3 at 13-15). However,

these arguments must be viewed in context. KBRS presented this argument as one of

many reasons why the Army's disallowance of subcontractor PSC costs under

Clause H-16 was improper: if the contract did not obligate the Army to provide force

protection to subcontractors, then it could not be reasonably read to prevent those same

subcontractors from providing for their own force protection, when the Army did not

provide it, and billing the cost of same as a reasonable cost of contract performance.

The undisputed facts show that at the time the contract was being performed,

both KBRS and government personnel believed the government was obligated

under the contract to provide force protection to both KBRS and its subcontractors

(see SOF ii 4 (KBRS warned the Rock Island PCO on 27 June 2003 that failure to

provide force protection adequate to the threat in accordance with the LOGCAP III

contract would mean that KBR and subcontractor vehicle convoys would have to

be delayed, adversely affecting timely delivery of food service support); SOF ii 7

(the commander of DCMA in Kuwait expressed concern in November 2003 that the

government would be unable to meet its contractual obligation to provide security

and protection for KBRS convoys); SOF ii 9 (KBRS manager sent a message in

February 2004 to the troop unit responsible for force protection, saying that "the

military has failed to comply with providing escort requirements" and citing ( 1) the

abandonment of a subcontractor convoy while en route and (2) the assembly of a

37

subcontractor convoy of 10 trucks loaded and ready to go only to be told no military

escort was available and might not be available for weeks); SOF ii 11 (the DCMA

ACO for TO 59 stated to the commander of DCMA Northern Iraq in April 2004 that

"[a]ll indications are that the government has failed to live up to its contractual

obligation to provide Force Protection ... to the [TO 59] convoys .... Given that, KBR is

currently not required to run most (if any) convoy routes.")). The government has

cited to no statement by either KBRS or the government contemporaneous with

contract performance that would support the assertion that KBRS "viewed, bargained

for, entered into, and performed'' the LOGCAP III contract "with no expectation of

force protection for its subcontractors." Therefore, its argument that the Army's

failures to provide force protection to KBRS subcontractors was not a material breach,

because there was no expectation that force protection would be provided, i~

unpersuasive.

Finally, the government asserts that there is a dispute of material fact with

respect to how important government force protection was to KBR itself, given "[t]he

persistence of KBR's official no-weapons policy throughout the claim period"

(gov't opp'n at 12). For this, the government cites to GSAMF paragraphs 1, 2, and 5.

GSAMF 1 deals only with employee possession of private weapons, which KBRS did

prohibit, but not with PSCs, which is how KBRS provided security to its employees in

Iraq when military force protection was not available. GSAMFs 2 and 5 both deal

with accurate statements by KBRS officials that KBRS did not hire a PSC directly in

support of LOGCAP III. The cost of PSCs hired to protect top KBR officials traveling

in the Middle East was incurred by a KBRS office servicing a number of KBRS

contracts in the Middle East, including LOGCAP III, and was allocated to those

contracts as an indirect cost. KBRS, 14-1 BCA ii 35,639 at 174,514. The government

has failed to raise any genuine issue of material fact regarding the importance of force

protection to KBRS under LOGCAP III.

The undisputed facts establish that the government committed the first material

breach under the contract. The invasion and occupation of Iraq occurred in

March 2003. Attacks on convoys began in June 2003, and by 27 June 2003 KBRS

was already warning that the government was not providing force protection in

accordance with its contractual obligation. (SOF iii! 3-4) MG Speakes, the deputy

commander of Coalition land forces in Iraq, quickly assessed that increased force

protection was necessary and requested that the commander at Rock Island have

the LOGCAP III contract amended to allow for use of private security for

convoys moving materiel in Iraq. However, that never happened. (SOF iii! 4-6) In

November 2003, the commander ofDCMA in Kuwait warned that the government

was "faced with an unexecutable task" to provide force protection to convoys in

accordance with applicable standards (SOF ii 7). In response to a KBRS message in

February 2004 that neither it nor its subcontractors were receiving the promised

protection, the responsible military unit replied that "these combat units were sent here

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to fight the war, not do escorts for KBR ONLY" (SOF ii 9). The DCMA ACO stated

in April 2004 in no uncertain terms that the government had failed to live up to its

contractual obligation to provide force protection to the convoys (SOF ii 11 ). Several

witnesses testified that by spring and summer of 2004 it was evident that the force on

the ground was insufficient to accomplish military missions and provide security for

contractors. The need for PSCs to supplement Coalition and Iraqi forces to provide

security to contractors was widely recognized (SOF iii! 12-14).

The government does not seriously dispute that it was obligated under the

LOGCAP III contract to provide force protection to KBRS and its subcontractors

equivalent to that provided to DoD civilians, and obligated under TOs 59 and 89 to

provide them with force protection commensurate with the threat. Indeed, it would be

unconscionable to take the position that the contract prohibited KBRS and its

subcontractors from providing for their own protection, while performing in a war

zone, without otherwise providing for their security. Yet, despite the many and

continuing failures of the government to provide the promised level of force protection

to KBRS and its subcontractors summarized above, the government seeks to disallow

the PSC costs incurred by KBRS and its subcontractors in order to accomplish their

mission under the LOGCAP contract despite the government's breach, and argues

that its breach was not material. 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 government's breach was material.

One of the grounds for the government's motion to dismiss Count II is that

KBRS waived the material breach by continuing to perform the contract. We

previously rejected this argument as a basis for dismissing Count II for failure to state

a claim for relief, stating that the record in these appeals amply demonstrated that

KBRS and its subcontractors made a commercially reasonable decision to continue to

perform the contract with PSC protection rather than abandon performance in response

to the government's breach, and citing the decision of the Court of Claims finding

that continued performance did not waive the government's material breach in

Northern He/ex, 197 Ct. Cl. 118, 129. We also found that this case presents the same

sort of "special aspect" present in Northern He/ex, i.e., that the contractor's continued

performance was consistent with the purpose of the contract and in the national

interest. It is unclear to us whether the government also asserts this ground in

opposition to summary judgment, but to the extent that it does, we hold that KBRS and

its subcontractors did not waive the government's prior material breach by continuing

to perform.

What remains is the question of the appropriate remedy for the government's

material breach. KBRS has raised prior material breach as a defense to the

government's claim of breach embodied in its claim for unallowable costs. Our

appellate precedent recognizes that a party may defend a claim of breach on the

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ground that a legal excuse for its nonperformance existed at the time of the alleged

breach. Long Island Savings Bank, 503 F.3d at 1251 (plaintiffs' claim for damages

precluded by their prior breach-submitting a false certification). In Laguna, 828 F.3d

at 1372-73, the Federal Circuit affirmed this Board's grant of summary judgment to

the government, holding that a contractor's claim for unpaid costs of performing an

environmental remediation and construction contract in Iraq was precluded by the

contractor's prior material breach-violation of the contract's Allowable Cost &

Payment clause.

In these appeals, the government has claimed and withheld from payment to

KBRS the amounts it believes it previously paid in unallowable PSC costs. The basis

for the government's claim of unallowability is that the costs were incurred in

violation of the contract's prohibition against the use of PSCs. Because the record in

these appeals establishes that the claimed PSC costs were reasonable in amount and

were incurred only when necessitated by the government's failure to provide the

contractually promised level of force protection to KBRS and its subcontractors, the

government's prior material breach operates to excuse any subsequent noncompliance

with the contract's PSC prohibition. Thus, the government's claims for unallowable

PSC costs are precluded in their entirety and we grant summary judgment for KBRS

on Count II of its FACC.

CONCLUSION

The government's motion to dismiss is granted as to Counts I, V, and X, and

those affirmative defenses are stricken from KBRS's FACC. The motion to dismiss is

denied as to Counts II, III, IV, VI, VII, and VIII. We grant summary judgment to the

government on Count IX. The government's motion is denied without prejudice as to

Count XI, and granted as to Count XII.

We grant KBRS's motion for summary judgment on Count II of its FACC.

Having done so, we deem it unnecessary to decide whether KBRS is also entitled to

summary judgment on Count VI of its F ACC. The consolidated appeals are sustained

in the amount of $44,059,024.49, with Contract Disputes Act interest as follows: on

$19,652,815 from 22 October 2007, on $21, 131,743 from 20 October 2009, and on

$3,274,466.49 from 16 June 2010.

Dated: 8 June 2017

---

(Signatures continued)

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I concur

RICHARD SHACKLEFORD OWEN C. WILSON

Administrative Judge Administrative Judge

Acting Chairman Acting Vice Chairman

Armed Services Board Armed Services Board

of Contract Appeals of Contract Appeals

I certify that the foregoing is a true copy of the Opinion and Decision of the

Armed Services Board of Contract Appeals in ASBCA Nos. 56358, 57151, 57327,

58583, Appeals of Kellogg Brown & Root Services, Inc., rendered in conformance

with the.Board's Charter.

Dated:

JEFFREY D. GARDIN

Recorder, Armed Services

Board of Contract Appeals

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