Omaha Breach: Doctrine of First Breach May Hinge on Correct Contract Interpretation

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Which party first breached a contract often plays a determinative role in assessing entitlement for damages in a contract dispute. This theory is often referred to as the First or Material Breach Doctrine. Under the First Breach Doctrine, if a party has committed a first and material breach of a contract, that party cannot then attempt to enforce other provisions of the same contract against a subsequent breach by the other party.

In Army v. Kellogg Brown & Root Services, the Federal Court of Claims addressed an appeal from an ASBCA decision awarding a contractor $44 million in damages against the U.S. Army. The appeal by the Army focused, in part, on which party was responsible for the first material breach of their contract. 

The case arose from a dispute between KBR and the Army on a dining facilities LOGCAP III contract to be performed in Iraq during the Iraq War in the 2000s. Starting in 2003, some of KBR’s subcontractors hired private security contractors (PSCs) in response to deteriorating security conditions and an alleged failure by the Army to provide adequate protection. KBR’s subcontractors passed these costs on to KBR, who then passed those costs on to the Army. From 2003 to 2006, the Army made repeated payments to KBR for these services, but in late 2006 the Army began to take issue with the payment of these security costs. The Army asserted that it was due a credit for the PSC services and began withholding payments from KBR to cover those PSC costs.  Ultimately, the Army withheld $44 million from KBR and asserted an additional claim for $12 million for PSC costs that were inappropriately billed (the $12 million claim was later determined to be time barred). 

In response, KBR submitted a certified claim for the withheld $44 million. At the hearing before the ASBCA, KBR asserted two theories of recovery: (1) the contract did not bar the hiring of PSCs for security protection; and (2) the hiring of PSC and the associated costs were justified by the Army’s breach of its obligation to provide adequate security protection under the contract. 

KBR’s first theory of recovery rested on the interpretation of two clauses in the contract, which the Army claimed barred the arming of KBR’s subcontractor employees. The cited clauses prohibited (a) “the use of personally owned firearms by contractor personnel” and (b) “the use of armed civilian personnel.” The ASBCA determined that neither of the clauses cited by the Army provided a specific prohibition against the use of PSCs, reasoning that “the relevant contract provisions addressed only individual employee’s access to firearms for self-defense” but not “the use of armed private security companies.” Having determined that the contract did not bar the use of PSCs, the ASBCA found in favor of KBR and did not address in detail KBR’s second theory of recovery regarding the Army’s failure to provide adequate security protection. 

On appeal, the Federal Court of Claims disagreed with the ASBCA’s interpretation of the contract provisions cited by the Army. The Court of Claims determined that the contract clauses did not distinguish between arming PSC employees and arming other subcontractors’ employees, such as food services subcontractors. The Court of Claims then remanded the case for further consideration by the ASBCA after finding that the ASBCA had not rendered a legal conclusion relating to KBR’s second theory of breach by the Army for failure to provide adequate security protection.

The circumstances of this KBR case are a great example of why clarity in contracting is so important. Over-reliance on vague or ambiguous provisions in a contract can lead to harsh results when a court disagrees with your interpretation and holds you in breach. The interpretation of a few minor and, perhaps, poorly worded clauses could determine which party is in first breach of the contract and responsible for resulting damages to the other party. The KBR case also illustrates another important consideration in government contracting and construction contracting, generally. When you find yourself in, or heading towards, a dispute, it is useful to develop multiple, alternative bases for entitlement. KBR’s ability to fall back on a separate theory of first breach—that the Army did not provide adequate security protection as required under the contract—may preserve a $44 million claim.