September 23, 2014

The CDA Statute of Limitations is a Two-Way Street

Arnold & Porter Advisory

The Armed Services Board of Contract Appeals ("ASBCA") issued an important reminder to contractors that, despite the numerous decisions dismissing Government claims as invalid under the Contract Disputes Act ("CDA") statute of limitations, the statute of limitations applies with equal vigor to contactors.  The ASBCA held in Kellogg Brown & Root Serv., Inc., ASBCA No. 58492, 14-2 BCA ¶ ___ ("KBR"), that a claim for costs arising from termination of a subcontract was untimely under the statute of limitations.

This matter arose in the unusual context of a purported, sponsored subcontractor claim.  The prime contractor terminated the subcontractor for default.  After protracted negotiations and litigation, the prime contractor converted the termination to one for convenience, and the subcontractor sought a variety of costs of performance as well as termination settlement proposal costs.1  Although styled as a sponsored claim, the ASBCA analyzed claim accrual based on the actual or constructive knowledge of the prime contractor.  Indeed, that is how the parties argued the case.

The prime contractor argued that, due to the cost type nature of the task order, its claim could not accrue until it submitted an invoice to the Government and the Government refused to pay.  The ASBCA rejected this theory, "because it makes accrual dependent upon KBR's diligence in organizing and submitting its claim."  The ASBCA cited Raytheon Missile Sys., ASBCA No. 58011, 13-1 BCA ¶ 35241 in which the ASBCA rejected a Government argument that a Government claim could not accrue until issuance of a Defense Contract Audit Agency audit report.  The ASBCA quoted from Raytheon Missile Sys. that "'[a]ccrual of a contracting party's claim is not suspended until it performs an audit or other financial analysis to determine the amount of its damages.'"  The reference to "other financial analysis" was a clear signal from the ASBCA to contractors.  Rather, the ASBCA held that the claim accrued when the prime contractor had terminated the subcontractor, the subcontractor had completed performance (including a transition period), by which time the subcontractor had incurred additional costs, and by which time the prime contractor knew that the subcontractor disputed the default termination and would seek costs.  The ASBCA also identified two other points later in time, but outside the statute of limitations that could qualify as claim accrual: a verbal agreement regarding the liability and a written settlement agreement to convert the default and identify a "settlement amount."

Regarding the element of injury that is necessary for claim accrual, i.e., that "some injury must have occurred," the ASBCA rejected the notion that injury could not be known until an initial claim submitted (and later withdrawn) in 2006, when the prime contractor knew amounts of the claim in its settlement discussions and litigation with the subcontractor in 2004 and 2005.  The ASBCA held that its decision in Raytheon Co. Space & Airborne Sys., ASBCA No. 57801 et al 13-1 BCA ¶ 35,319 dictated otherwise, specifically quoting (and adding a reference to "contractor"):

               Claim accrual does not depend on the degree of detail provided, whether the contractor revises the calculations later, or whether the contractor characterizes the impact as "immaterial."  It is enough that the government [or contractor] knows, or has reason to know, that some costs have been incurred, even if the amount is not finalized or a fuller analysis will follow.               

Important about this holding on the injury element is that the ASBCA has confirmed that a claimant cannot assert that its claim does not accrue until it has a more refined updated assessment of the injury amount.  Knowing or having reason to know of some injury is sufficient to set the clock running.

Of final significance, the ASBCA held that the doctrine of equitable tolling did not apply, because the prime contractor had not diligently pursued its rights.  Rather, the ASBCA cited multi-year-long gaps between actions the prime contractor took in pursuit of its claim. 

Here, the prime contractor made many of the same arguments that the Government has asserted in cases where the Government was unsuccessful in preserving its untimely claims.  Contractors must be wary of standards for claim accrual and particularly the development of the case law.  Even if a case disposes of a Government claim, the underlying rationale could apply in the case of a contractor.

For more detail on the law involving the CDA statute of limitations, click on the following:

*Mr. Pompeo successfully represented Raytheon in the two Raytheon cases discussed in this Advisory, as well as in two other statute of limitation cases.

  1. In response to an initial claim that the prime ultimately withdrew, the Government stated that the matter was one strictly between the prime contractor and subcontractor, and was outside the purview of the Contracting Officer.  The reported facts do not suggest that the Government terminated any work.  It is unclear why the Government did not argue lack of jurisdiction due to lack of privity of contract.

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