Contractor's claim for compensation leads to fraud judgment

by Ben Vernia | January 30th, 2012

On January 17, Judge Robert H. Hodges, Jr., of the Court of Federal Claims denied an Iraq war contractor’s claim for extra compensation, and instead awarded the government nearly $1.2 million for the contractor’s fraud. In the case, Railway Logistics, Int’l v. U.S., the company held two contracts to provide railcar “bogies” (wheel assemblies) to the Iraqi Republic Railway. When the company failed to perform in a timely manner and provided unacceptable goods, the government terminated the contract for convenience. Normally, termination for convenience entitles contractors to equitable compensation and costs of termination, and the company submitted a claim for approximately $6.4 million – even though the contracts were valued at only $2.5 million.

The government alleged that the claim was fraudulent, raising the Special Plea in Fraud (28 USC 2514) as a defense, and bringing counterclaims against the company under the Contract Disputes Act’s fraud provision and the False Claims Act.

Judge Hodges reviewed each of the items on the company’s claim for compensation, and found that each was either fictitious or inflated several times its real cost. Judge Hodges rejected the company’s argument that its misrepresentations resulted from faulty record-keeping and not fraud, and concluded that even if he accepted the company’s last-minute withdrawal of $3 million in claims, the company nevertheless had submitted $1.8 million in unsupported claims (the government had limited its fraud claim to those costs which were directly contrary to invoiced amounts and those which were obviously and grossly inflated).

After rejected the company’s argument that it was being held liable for fraud without a jury trial, Judge Hodges concluded that the company was liable under the Contract Disputes Act for the amount of the unsupported claim, plus a False Claims Act penalty at the high end of the allowed range – $11,000. He concluded:

Trial of this case revealed that defendant’s business relationship with RLI had no redeeming aspect; it caused a grievous waste of limited resources and hindered the Government’s rebuilding efforts in Iraq. RLI was in obvious breach of both contracts, yet defendant terminated them for convenience of the Government. This would have allowed plaintiff to walk away with little or no cost to itself, yet it sued the Government for millions of dollars on a specious claim, thereby creating still more waste of valuable time and resources.

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