In late December 2016, the Armed Services Board of Contract Appeals (“ASBCA”) dismissed two claims that had been lodged against Lockheed Martin Integrated Systems, Inc. (“Lockheed Martian”) by the United States Army based on the government’s reliance on a “plainly invalid legal theory.” See ASBCA No. 59508, 2016 WL 7655944 (Dec. 20, 2016). The decision, which consolidated Lockheed Martin’s appeal of two contracting officer’s final decisions, concerned claims by the government for alleged breach of contract by Lockheed Martin in the amounts of $102,294,891.00 and $14,494,740.00, respectively. Each of these claims arose out of an audit in 2014 by the Defense Contract Audit Agency that found work performed by Lockheed Martin subcontractors was not appropriately backed up or substantiated.
When Lockheed Martin received the contracting officer’s final decision on each of these claims, Lockheed Martin appealed the decision to the ASBCA, which directed the Army to file a complaint asserting the government’s claims. Lockheed Martin then filed a motion to dismiss the complaint arguing that the Army’s claims were unfounded because the Federal Acquisition Regulation (FAR) did not require Lockheed Martin to perform the tasks that formed the basis of the Army’s complaint. Namely, mismanaging its subcontractors in violation of FAR 42.202. Although the Army admitted in its response to the motion to dismiss that FAR 42.202 was not specifically incorporated into Lockheed Martin’s contract, this provision of the FAR was the entire basis of the original audit report, the contracting officer’s final decisions, and the Army’s complaint.
In dismissing the Army’s complaint with prejudice, the ASCBA pointed out the folly of the Army’s very circular argument:
The government summarizes the essence of its claim, which is that [Lockheed]’s breach of a contractual duty to manage its subcontractors led it to breach the contract by submitting claims for subcontract costs that were unallowable because [Lockheed] breached its contractual duty to manage its subcontractors. Thus, ipso facto, if [Lockheed] did not breach a duty to manage its subcontractors, it did not submit unallowable costs for payment, and if it did not submit unallowable costs for payment, it did not breach the contract.
The holding of the ASBCA can be summarized as follows: a provision of the FAR that is not specifically incorporated into a contract cannot be the basis of a breach of contract claim because it results in alleged breach of non-existent duties. The takeaway from this decision is that the entire FAR is not automatically incorporated into government contracts. Only those provisions of the FAR that are specifically incorporated into a government contract are binding on the parties.