Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

In trying to pool resources amongst related entities, lines may blur as to whether the personnel on a given project are employed by the domestic entity in accordance with the contract requirements and terms of proposal. While the facts of ABS Development Corporation, ASBCA Nos. 6022, et al. are on the extreme side of noncompliance, the decision offers a good reminder of the importance of doing what you say you’re going to do—particularly where the issue involved is material to contract award.

In ABS, the Armed Services Board of Contract Appeals (ASBCA) declared a contract void ab initio after determining the subject work was performed by the contractor’s non-U.S. parent company. The contract related to certain construction work on an Israeli Navy shipyard with an amended contract price of approximately $46 million. The work was restricted to “United States firms only” and offers from non-U.S. firms would be rejected.

The contractor, ABS, was a Delaware corporation based in New York, but was a subsidiary of Ashtrom International, Ltd., which was wholly owned by Ashtrom Group Ltd. (an Israeli company). After the Government communicated some initial concerns regarding the lack of ABS personnel on the ground in Israel, ABS responded that it would “directly prequalify and employ all Construction Management personnel. In total, ABS’s revised proposal represented that 20 management and design-level positions that the original proposal indicated would be filled by Ashtrom Group personnel would be filled by ABS personnel who would be on-site in Israel.

ABS eventually brought claims against the Government seeking additional compensation and an extension of time to the contract performance period. It also challenged the government’s assessment of liquidated damages for alleged late completion of the contract work. In response, the Government contended the contract was void ab initio because ABS allegedly misrepresented that it would have on-site ABS project managers in Israel to obtain the contract, but did not actually hire anyone to work in Israel.

During discovery, ABS’s CEO testified at his deposition that all of the funds paid to ABS during performance were then transferred to the Ashtrom Group—Israeli companies. There was also evidence that “ABS understood that the project was too big for it, and wanted Ashtrom to carry it out.” Contrary to the representations it made in its revised proposal, ABS never hired an on-site project manager. Nor did it hire any of the other individuals depicted in its proposed personnel chart. Instead, the Israeli-based “Ashtrom Group paid those persons, with money transferred to Ashtrom Group by ABS.”

The ASBCA looked at the distinction between a standard breach claim and one for misrepresentation:

When a contractor makes a promise of future performance in a proposal and later fails to perform, this generally will be a basis for liability for breach of contract but not for misrepresentation; to also prove misrepresentation, the government must prove a misrepresentation at the time of proposal, such as that the contractor did not intend to perform or knew it could not perform. Where an appellant has obtained a contract through a material misrepresentation, with no realistic intention of performing in accordance with that representation, the contract is void ab initio, resulting in denial of the appeal.

(internal citations omitted).

The ASBCA ultimately found that ABS never hired anyone to perform on-site work and that it never actually intended to hire any on-site personnel. It further found that had ABS “not misrepresented to the contracting officer that it would hire ABS personnel to fill key, on-site management positions, the contracting officer would not have awarded ABS the contract.” As a result, the contract was found void ab initio.