Beware of False Claims on Public Contracts

By John S. Mrowiec

Prime contractors might face a dilemma when confronted with a subcontractor’s claim for additional compensation.

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If the prime contractor does not oppose the claim but sponsors it in its own claim, absent a well-written liquidating agreement, the prime contractor might be creating admissions that the subcontractor will try to use to recover against the prime contractor or its surety.

But if prime contractor initially opposes the subcontractor’s claim, it might be more difficult for the subcontractor to recover against the prime contractor or its surety.

Finally, if the prime contractor decides to sponsor the subcontractor’s claim, the owner will try to use prime contractor’s prior opposition to the subcontractor’s claim as an admission against the prime contractor’s attempted pass-through.

The prime contractor’s dilemma is even greater when a public contract’s false-claims statute is involved. Those statutes typically provide that the claimant must pay the government’s attorneys’ fees and other penalties for the false claim.

If prime contractor initially opposes the subcontractor’s claim but later sponsors it, the government might not only use the opposition against the sponsored claim component but also bring the government’s own counterclaim under a false claims statute. That was the situation in Trafalgar House Construction, Inc. v. United States, 2007 U.S. Claims LEXIS 125 (Fed. Cl. April 30, 2007).

A Federal Project

The United States Department of Labor awarded a fixed-price contract for $17,270,000 to Trafalgar House Construction Inc. for the construction of the Job Corps Center near Charleston, W. Va. Trafalgar was a subsidiary of Kvaerner Construction Inc.

The prime contractor selected Kimberly Industries Inc. as the earthwork subcontractor. Almost immediately and prior to signing the subcontract, the earthwork subcontractor experienced difficulties at the site. The prime contractor had other difficulties too.

Eventually, the subcontractor served a Miller Act claim-notice and submitted a request for equitable adjustment to the prime contractor under the differing site conditions’ provisions of the prime contract incorporated into the subcontract. While the subcontractor’s claim had a number of claim components, one of them involved a claim concerning special rock fill.

The prime contractor hired a claims consultant to analyze the subcontractor’s Miller Act claim and to review the subcontractor’s portion of a request for equitable adjustment that the prime contractor planned to submit to the government for the prime contractor’s own claims and possible sponsorship of the subcontractor’s claims.
In a May 15, 1997, letter from the consulting firm’s CEO to the prime contractor, the consulting firm asserted that subcontractor’s “bid was ‘grossly inflated’ and ‘overstated and irresponsible.’”

The original consultant’s assessment declared:

“Under no circumstances should [the prime contractor] certify the REA with the [subcontractor’s ] REA included in its present form. . . . I sincerely believe that if [the prime contractor] advises [the subcontractor] . . . on how to answer the audit they could become a part of assisting [the subcontractor] in the preparation of a fraudulent claim,” Trafalgar House Construction II, 2007 U.S. Claims LEXIS 125 at * 16.

On March 31, 1997, the subcontractor initiated a suit in federal court under the Miller Act against the prime contractor’s parent and the Miller Act surety. More than a year later, the prime contractor paid the subcontractor approximately $3.5 million.

Both the prime contractor and the subcontractor agreed to pursue any claims against the government arising from the project jointly by signing a Liquidating Agreement.
The prime contractor then submitted a request for equitable adjustment to the government including all of the subcontractor’s claims, including the special rock fill claim. The government’s Contracting Officer rendered a Final Decision expressing reservations about the subcontractor’s claim components and denying most of the claims. The prime contractor then sued the government in the court of federal claims.

A Losing Claim

The prime contractor lost on all but one of subcontractor’s claim components.
The government had a False Claims Act counterclaim against the prime contractor under 31 U.S.C. § 3729(a). Among other arguments, the government contended that the prime contractor acted in “reckless disregard” for the truth or falsity of the subcontractor’s special rock-fill claim.

The government’s primary argument was that the prime contractor’s own consultant had opined that the claim likely was false.

Beyond that, the government argued that prime contractor had not shared its original consultant’s opinion about the subcontractor’s claim component with the prime contractor’s new consultant. The new consultant testified as an expert on behalf of prime contractor’s attempt to recover on the subcontractor’s claim. The government argued that this was an attempt to hide the prior opinion.

The Trafalgar House II court summarized the law on false claims as follows:
“A contractor will be deemed to have ‘knowingly’ presented a false claim when that individual either has actual knowledge that the claim is false, or acts in ‘deliberate ignorance’ or ‘reckless disregard’ of the truth or falsity of the claim,” Trafalgar House II, 2007 U.S. Claims LEXIS 125 at * 12, citing 31 U.S.C. § 3729(b).

“The Government does not have to prove specific intent to defraud. ‘Reckless disregard’ has been defined as an ‘aggravated form of gross negligence,’” Trafalgar House II, 2007 U.S. Claims LEXIS 125 at * 12, citing UMC Electric Co. v. United States, 43 Fed. Cl. 776, 792 n. 15 (1999) (quoting United States ex rel. Aakhus v. Dyncorp., Inc., 136 F. 3d 676, 682 (10th Cir. 1998)). “At a minimum, a contractor is required to examine records to ensure they are consistent with the submitted claim,” Trafalgar House II, 2007 U.S. Claims LEXIS 125 at * 13 citing UMC Electric Co., 43 Fed. Cl. at 792. The government, however, must establish each element of the cause of action for false claims by a preponderance of the evidence, 31 U.S.C. § 3731(c).

The prime contractor’s initial consultant’s written conclusion was that the subcontractor’s claim component was “grossly inflated,” “overstated and irresponsible” and prime contractor might “become a part of assisting [subcontractor] in the preparation of a fraudulent claim.” The prime contractor failed to provide the initial consultant’s opinion to prime contractor’s testifying expert. Yet, the Trafalgar House II court denied the government’s false claims counterclaim.

The federal claims court was convinced that prime contractor’s $3.5 million payment to the subcontractor, prime contractor’s testifying expert’s independent review of subcontractor’s cost records and the government’s own expert’s failure to characterize the claim as false showed that the government had failed to meet the government’s burden to prove “reckless disregard.” In a realistic observation, the Trafalgar House II court observed that the prime contractor had charged the initial consultant “with creating a record,” a strong rebuttal to the subcontractor’s request for equitable adjustment. Further, the government never entered into the record any evidence regarding the factual basis underlying the original consultant’s conclusions.

Therefore, even though the court awarded nothing on the special rock fill claim, the prime contractor was able to dodge the government’s false claims counterclaim. Yet, the existence of the initial consultant’s written conclusions meant prime contractor had to expend attorneys’ fees fighting the government’s false claims act counterclaim at some risk.



John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.