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.

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