Background: In Appeal of Laguna Construction Company, Inc., the Armed Services Board of Contracts Appeals (“ASBCA”) found that a contractor’s receipt of kickbacks from subcontractors was both criminal fraud and a material breach of the contract, which eliminated the Government’s obligation to reimburse the contractor for additional work, even if that work was not itself related to the fraud. The ASBCA denied Laguna Construction Company, Inc.’s (“LCC”) certified claim for $2,874,081 in payments disallowed by the Defense Contract Audit Agency (“DCAA”). LCC had received sixteen cost-reimbursable task orders to perform work in Iraq under an Air Force Worldwide Environmental Remediation and Construction contract. Following the filing of its claim, LCC’s Program Manager and Vice President of Operations pled guilty to taking kickbacks with regard to three of the sixteen task orders.
In making its determination, the ASBCA relied on the principle of antecedent breach — the theory that when each party claims that the other has breached the contract, liability will be imposed “on the party that committed the first material breach.” Applying this theory, the ASBCA found that LCC’s program manager and vice president of operations’ acceptance of kickbacks constituted the first material breach under the contract, thus providing the Government with a legal excuse not to pay LCC’s invoices.