November 2012

The Justice Department’s decision to drop its False Claim Act case against Kellogg, Brown, and Root (“KBR”) over armed private security contractors (“PSC”) in Iraq says as much about the touchy subject over America’s increasing reliance on a private army as it does about the need to fully understand ALL of the terms of your contract.

In United States of America v. Kellogg Brown & Root, U.S. District Court for the District of Columbia, No. 1:10-cv-00530, the Justice Department alleged, among other things, that KBR had violated the False Claims Act when it requested payment for services provided by PSC’s to KBR, KBR executives in theater (i.e, Iraq), and KBR subcontractors also operating in theater.  The government claimed that KBR failed to obtain proper authorization from US Central Command (“CENTCOM”) before employing armed PSC’s to provide security to it and its subcontractors.  The government claimed that KBR’s contract prohibited KBR from employing armed PSC’s.  The basis for the government’s claim is one all too familiar to contractors – the incorporation by reference and compliance with laws clauses in KBR’s contract.

KBR entered into a logistical support contract with the government in 2001, before the War in Iraq began, that had nothing to do with private security.  The contract contained a typical incorporation by reference and compliance clauses found in most contracts.  The clause stated:

[KBR] shall ensure that all personnel hired by or for [KBR] will comply with all guidance, instructions, and general orders applicable to U.S. Armed Forces and DoD civilians as issued by the Theater Commander or his/her representative.  This will include any and all guidance and instructions issued based upon the need to ensure mission accomplishment, force protection, and safety, unless directed otherwise in the task order SOW [Statement of Work]

. . .

The contractor shall comply, and shall ensure that all deployed employees, subcontractors, subcontractors employees, invitees, and agents, comply with pertinent Service and Department of Defense directives, policies, procedures, as well as federal statutes, judicial interpretations and international agreements (e.g. Status of Forces Agreements, Host Nation Support Agreements, ect.) applicable to the U.S. Armed Forces or U.S. citizens in the area of operations.

After several high profile incidents involving PSC’s, CENTCOM and the Coalition Provisional Authority issued order essentially banning PSC from owning privately owned firearms without obtaining permission from CENTCOM first.  The government alleged that these orders became part of KBR’s contract via the incorporation and compliance clauses in the contract and KBR, therefore, violated its contract when it employed PSC who carried privately owned firearms without first obtaining permission of CENTCOM.

The parties litigated the case for two years until the government voluntarily dismissed the case without prejudice.  It is doubtful that KBR is celebrating victory, however. First, because the government withdrew the case “without prejudice” that means it can re-file the case against KBR at a later date provided the statute of limitations has not then run.  Second, KBR probably spent close to – if not in excess – of $1,000,000 in legal fees defending a case brought on by one small clause in its contract.

Like most contractors, before this case, I doubt KBR ever gave much thought to the ramifications of the incorporation and compliance with laws provisions in its contracts.  But, I am sure it will now.  As my old mentor used to tell me, if it was not important, it wouldn’t be in the contract.  Therefore, contractors need to the impact of each clause in its contract.  And, in the case of incorporation, compliance with laws, or flow down provisions, they must consider what other terms will apply to the contract other than those in the written agreement before them.

As the Northeast struggles to regain its footing after Super Storm Sandy, many are asking two questions: (a) When is my power going back on?; and (b) Could any of this been prevented.  While I cannot answer the first question, the answer to the second is yes.

Next to the post-apocalyptic looking devastation on the New Jersey Coast and the fire in Breezy Point, NY, the most shocking thing about Sandy is the havoc  the storm reeked on critical infrastructure systems in New York City.  The reason it is so shocking is much of it was preventable.

While I never served in the military, I find that many military mission planning principals are just as applicable in the civilian world as they are in combat. Two I particularly like are “no plan survives first contact;” and “two is one, and one is none.”  See, even the most sophisticated, best trained, and best equipped military in the history of the world plans for failure.  In fact, even the special operations team who executed the Bin Laden raid – the best of the best of the best – planned for failure.  So, when they lost a helicopter the mission kept going and everyone got out safely.

Apparently, those responsible for critical infrastructure components in NYC never heard of either of these principals.  Generator systems failing at hospitals is simply inexcusable.  Failing electrical substations because of flooding is inexcusable.  Why?  Because their failure was foreseeable.  Let’s start with the generator failures.  It is not as if NYC has not had problems with its electrical grid and blackouts before.  Moreover, it is widely accepted that our electrical grid is junk.  The experts have probably issued more warnings about the need to upgrade our electrical grid than any other infrastructure component.  Therefore, something like a hospital should plan on having to run on generator power for extended periods of time. That means you need to make sure your generator system is redundant.  Your diesel fuel pump to your generator broke? You should have a second one (two is one and one is none).  Rain caused your roof top generator to blow out, plan for it (no plan survives first contact).

What about the subway systems and electrical substations?  Officials have known for years that many of these systems lie in flood plans.  The Army Corp of Engineers has flood plan maps for all of NYC.  They know where flooding is to occur is not based on conjecture or guesses but because it has flooded there before and the geography makes it susceptible to flooding . Maybe not recently, but recently enough for the Corp to let us know it is possible.  Accordingly, critical components should not be placed there and if they are they should be protected from flooding.  Officials should have planned for a flood occurring eventually.  In other words, they should have planned for failure.

In less than ten years we have seen a natural disaster cripple a major American city more because of the lack of planning by officials than mother nature. itself  Perhaps, for all of us, before the next one, they will learn that “no plan survives first contact,” and “two is one and one is none.”