The Federal Circuit’s holding in Laguna Construction Co. v. Carter seemed, when the case was decided in 2016, to scale back the Armed Services Board of Contract Appeals’ (“ASBCA”) jurisdiction to entertain fraud-related defenses. 828 F.3d 1364. In that case, the government asserted a defense that Laguna could not recover in its claims because several of the company’s officials had pled guilty to a kickback scheme involving those contracts. The ASBCA found in the Government’s favor, relying on the guilty pleas as having established the underlying fraud. On appeal of that decision, Laguna argued that the ASBCA lacked jurisdiction to hear fraud-based defenses under the Contract Disputes Act. The Federal Circuit confirmed that the Board had jurisdiction, though it only seemed to allow the defense because “the Board did not have to make any factual findings of fraud.” In other words, it appeared that the ASBCA could not entertain a fraud defense absent a decision from a tribunal with jurisdiction over criminal or civil fraud cases.

A recent case, however, makes it clear that, at least in the Board’s opinion, the Federal Circuit’s holding in Laguna did not reach as far as it first appeared. In the case, Appeals of International Oil Trading Company (“IOTC”), IOTC claimed that it was underpaid for fuel transported to military installations in Iraq through Jordan under a contract with the Defense Logistics Agency (“DLA”). ASBCA Nos. 54791, 57492, 57493 (Jan. 12, 2018). DLA asserted an affirmative defense, alleging that IOTC won the contract by bribing Jordanian officials for the permits necessary to transport fuel through the country. DLA argued that the contracts were void at their inception (i.e., void ab initio) under common law due to fraud and bribery, which would preclude IOTC from recovering. IOTC moved to strike the defense in 2013, arguing that the ASBCA did not have jurisdiction over DLA’s defense because of the statutory bar on its consideration of fraud claims. The Board denied that motion.

In light of the Federal Circuit’s decision in Laguna, IOTC filed a new motion to strike the defense in 2017. Its motion argued that Laguna “recalibrated the legal landscape,” preventing the ASBCA from entertaining jurisdiction over fraud-related defenses without an underlying finding of fraud by a court. According to IOTC, its cases subsequent to Laguna made it clear that the Board could not entertain DLA’s defense because it would require the ASBCA to make its own factual finding of fraud. The ASBCA squarely rejected that argument, pointing out that Laguna “said nothing to restrict the Board’s power to determine the validity of a contract when the government alleges that it is void ab initio due to fraud or bribery in its acquisition.” The Board went on to note that IOTC had failed to establish that any ASBCA case decided in the wake of Laguna actually supported the argument that the Board had fundamentally changed its position with respect to its jurisdiction.

Accordingly, the ASBCA held that “IOTC has failed to demonstrate that Laguna abrogates the Board’s prior denial of its motion to strike the government’s first affirmative defense, or holds that the Board may not decide it.” As the ASBCA pointed out, the Supreme Court has held that “the government must be able to ‘rid itself’ of contracts that are ‘tainted’ by fraud.”

The decision in IOTC is significant because it shows that ASBCA is unwilling to surrender jurisdiction over fraud-related defenses, although the Federal Circuit (and Supreme Court) ultimately has the final say on just how far the ASBCA’s jurisdiction reaches.

Ms. Kelley represented the government in the case during her time as assistant counsel for DLA and wrote the agency’s opposition to IOTC’s motion. This post is based on the publicly issued opinion.

About the Author: Kathryn M. Kelley is an associate with PilieroMazza in the Government Contracts Group at our Colorado office. She may be reached at [email protected].