Earlier this month, the Armed Services Board of Contract Appeals held that the U.S. Army breached its contractual obligation to provide physical security to its principal logistical support contractor, KBR, during the height of the Iraq War.  As a consequence, the Board found that KBR was entitled to be reimbursed for $44 million, plus interest, in costs that the Government had withheld from KBR relating to KBR’s and its subcontractors’ use of private security. 

Before the Board, the Army had argued that the costs in question were unallowable because KBR’s LOGCAP III contract with the Government prohibited the use of private security.  In response, KBR argued (among other things) that any violation of this prohibition had been excused by the Government’s prior material breach of its obligation to provide physical security.  On the basis of an extensive documentary and testimonial record (including a month-long trial), the Board agreed with KBR, finding:

[D]espite the many and continuing failures of the government to provide the promised level of force protection to KBRS and its subcontractors . . . , the government seeks to disallow the PSC costs incurred . . . in order to accomplish [the] mission under the LOGCAP contract despite the government’s breach, and argues that its breach was not material.  It is hard to imagine a contract breach more material than this one, which eviscerated the promise at the heart of the justification for the government’s claim.

Decision at 39.

The Army had tried to convince the Board not to address the merits of KBR’s prior material breach defense.  In this regard, the Army had raised three principal arguments:  (1) under the Federal Circuit’s Maropakis decision, KBR’s assertion of prior material breach needed to be submitted to the contracting officer for a final decision and KBR did not timely do so; (2) KBR had waived its prior material breach defense by continuing to perform; and (3) KBR’s only remedy for the Army’s breach was to delay performance.  The Board rejected each of these arguments, and its treatment of these issues — which arise in many disputes with the Government — may prove helpful to contractors in the future.