Board Allows Government to Add Powerful “Unclean Hands” Affirmative Defense on Eve of Hearing

Last month, the Armed Services Board of Contract Appeals allowed the Government to amend its answer to add an “unclean hands” affirmative defense, a mere two months before the scheduled hearing date.

Raytheon appealed from a Contracting Officer’s Final Decision denying its $48,195,191 claim for extra Systems Engineering and Program Management (SEPM) services under the subject “Lot 27” contract to provide missiles, telemetry units, other deliverables and SEPM, and from the CO’s denial of its supplemental $48,311,385 claim for additional SEPM services under the contract. On February 20, 2018, about two months before the hearing date, the Government moved to amend its answer to add the following affirmative defense:

“Unclean Hands” — The firm-fixed-price contract for Lot 27 was the latest production contract in a “house of cards” knowingly constructed by Raytheon to sell more missiles to the United States than otherwise could be paid for by the fund amount certified as available to the Air Force for the Lot 27 contract when signed. Raytheon's complicity in such unfunded contract actions, prohibited by the Anti-Deficiency Act (31 U.S.C. 1341) and FAR Subpart 32.7 (Contract Funding), bars all of Raytheon's claims in this appeal under the “unclean hands” doctrine.

Raytheon Co., ASBCA No. 60448, 2018 WL 1964930 (Apr. 9, 2018).

As articulated by the Government, this last-minute defense would have barred “all of Raytheon’s claims.” Not surprisingly, Raytheon opposed the motion, including on the following grounds:

• The Board did not have jurisdiction to entertain the defense because the Government did not submit it in the form of a claim to the Contracting Officer;
• The Government did not justify the defense, or its delay in raising it, noting that Air Force personnel consistently claimed that the Lot 27 contract was fully funded;
• Raytheon would be prejudiced if the amendment were allowed because it did not have the opportunity to conduct discovery on the defense, which would involve complex funding and budget inquiries, and expert evidence on the new defense.

The Government asserted that during the last round of depositions, “Raytheon revealed that it had an undisclosed pre-award plan to complete the Lot 27 contract work ‘with future appropriated funds siphoned away from future missile production contracts that Raytheon hoped to obtain on an annual basis.’” To this, Raytheon replied that the motion was brought in bad faith, because the Government’s own documents, and witness testimony, demonstrated that the CO’s responsible for awarding Lot 27 were well aware, prior to contract award, of the bidding practices to which the Government claimed to have learned only in late January 2018.” The Government also asserted that the amendment would not require further discovery or expert evidence, and neither nor the Government wanted to extend the hearing date, which had already been twice extended.

The Board swiftly rejected Raytheon’s first argument that it lacked jurisdiction. Because the Government’s claim did not seek money or an adjustment to the contract’s terms, the Board reasoned, there was no need for the Government to submit the claim to the Contracting Officer for a final decision.

The Board then stated that leave to amend should be “freely given” in the absence of undue delay, bad faith or dilatory motive, futility, or undue prejudice to the opposing party, and then turned to the central questions of “whether the Government had enough information to assert its proposed affirmative defense.” Here the Board concluded that it had “insufficient evidence” to deny the Government’s motion, specifically, that there was insufficient evidence to (1) “conclude that the Government delayed unduly in raising the defense,” (2) “establish bad faith on the part of the government, which appellant bears the burden to prove,” and (3) “decide whether the amendment would be futile on the ground that the government has not established a basis for its assertion that appellant’s claims are barred under the doctrine of unclean hands.”

For these reasons, the Board granted the Government’s motion. The Board did not extend the hearing date, but did state it would keep the record open after the hearing to allow Raytheon to conduct further discovery.

Several points are worthy of note about this decision.

First, this decision reminds us that, although most claims must be presented to the Contracting Officer, including claims first asserted as affirmative defenses, (see, e.g., M Maropakis Carpentry, Inc. v. United States, 609 F. 3d 1323 (Fed. Cir. 2010)), if the affirmative defense does not seek money or an adjustment of contract terms, presentation to the CO is not necessary. Although the Government benefited from the rule here, this decision should, in theory as well as practice, apply equally to contractors.

Second, although this was the Government’s motion, it is evident that the Board effectively shifted the burden of proof to Raytheon. As noted above, the Board found “insufficient evidence” to deny the Government’s motion with respect to three distinct points (delay in raising the defense, bad faith, futility). The Board relied upon a Supreme Court decision for the standard to be applied to a party moving to amend an answer:

In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be “freely given.” Of course, the grant or denial of an opportunity to amend is within the discretion of the [[[Court].

Raytheon Co., ASBCA No. 60448, 2018 WL 1964930 (Apr. 9, 2018) (citing Foman v. Davis, 371 U.S. 178, 182 (1962) (emphasis added)). Here, even in this relatively brief decision, it was apparent that Raytheon articulated “an apparent or declared reason” why the Government should not be permitted to amend its answer at such a late time. Nevertheless, the language of the decision makes clear that, once the Government raised its defense, the burden was upon Raytheon to demonstrate that the defense was meritless and that the motion should be denied.  One wonders whether, if it were the contractor that raised the affirmative defense, the result would have been the same.

Third and finally, this decision illustrates how the long-standing presumption that “government officials act in good faith” can be extended to benefit the Government, even in the face of “insufficient evidence.” Here, it appears that Raytheon’s decision to raise bad faith as an argument contributed to the Board’s decision to not only shift the burden to Raytheon to prove that the Government should not be allowed to amend but, also, that the quality and quantity of Raytheon’s evidence had to be “clear and convincing” (a high standard) in order to prevail. The facts as presented in the decision certainly suggest that the Government’s eleventh hour attempt to knock out the entirety of Raytheon’s claims may have been motivated by bad faith, especially given the assertion that the Contracting Officer was aware of Raytheon’s bidding practices. But rather than consider and resolve this question on the evidence presented, the Board turned the bad faith argument against Raytheon, resulting in a decision that allowed the Government to add a powerful defense on the eve of the hearing, subjected Raytheon to additional, unforeseen discovery after the hearing, and potentially forced Raytheon to adjust its overall litigation strategy – consequences far from insignificant.

We welcome your thoughts and comments.