Court Opinion

ID: 4647202
Source: CourtListenerOpinion
Date Created: 2020-12-28 22:00:09.547924+00
Date Added: 2024-06-11T08:01:04.088646
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of --                       )
                                    )
KF&S Corp.                          )               ASBCA Nos. 62223, 62292
                                    )
Under Contract No. W91QVN-15-D-0027 )

APPEARANCE FOR THE APPELLANT:                       Song Yong Eui, Esq.
                                                     Central IP & Law
                                                     Seoul, Korea

APPEARANCES FOR THE GOVERNMENT:                     Scott N. Flesch, Esq.
                                                     Chief Trial Attorney
                                                    MAJ Abraham Young, JA
                                                     Trial Attorney

              OPINION BY ADMINISTRATIVE JUDGE OSTERHOUT
          ON THE GOVERNMENT’S MOTION FOR SUMMARY JUDGMENT

        The dispute concerns a firm-fixed-price contract, Contract No. W91QVN-15-D-0027
(the contract), between the United States Army (the government or the Army) and KF&S
Corp. (KF&S or appellant), to provide security guard services at access control points in the
Republic of Korea (Korea or ROK). During performance of the contract, the Korean
minimum wage increased. KF&S requested an adjustment for the increased minimum
wages. The contracting officer denied the claim. Appellant appealed. The government
filed a motion for summary judgment, arguing that appellant could not obtain the relief it
sought because the contract did not contain a clause permitting price adjustments due to
labor changes. Appellant responded 1 that the applicable clauses were not included due to
the government’s discriminatory practice of including the clauses in domestic contracts but
not in foreign contracts and should now be included in the contract as a matter of law. We
grant the government’s motion.

          STATEMENT OF FACTS (SOF) FOR PURPOSES OF THE MOTION

         1. The Army awarded the contract on June 25, 2015 (R4, tab 1 at 1).

1   Appellant titled its submission as “Motion to Deny Government’s Motion for Summary
        Judgment” but we are treating it as appellant’s response to the motion.
     2. The contract included a requirement to ensure compliance with “Article 65,
ROK Labor law” (R4, tab 1 at 69 ¶ 6.3.2).2

      3. The contract incorporated, by reference, Federal Acquisition Regulation (FAR)
52.212-4, CONTRACT TERMS AND CONDITIONS—COMMERCIAL ITEMS
(DEC 2014) (R4, tab 1 at 93).

     4. FAR 252.222-7002, COMPLIANCE WITH LOCAL LABOR LAWS
(OVERSEAS) (JUN 1997) was incorporated into the contract and stated:

                (a) The Contractor shall comply with all—

                (1) Local laws, regulations, and labor union agreements
                governing work hours; and

                (2) Labor regulations including collective bargaining
                agreements, workers’ compensation, working conditions,
                fringe benefits, and labor standards or labor contract matters.

                (b) The Contractor indemnifies and holds harmless the United
                States Government from all claims arising out of the
                requirements of this clause. This indemnity includes the
                Contractor’s obligation to handle and settle, without cost to
                the United States Government, any claims or litigation
                concerning allegations that the Contractor or the United
                States Government, or both, have not fully complied with
                local labor laws or regulations relating to the performance of
                work required by this contract.

                (c) Notwithstanding paragraph (b) of this clause, consistent
                with paragraphs 31.205-15(a) and 31.205-47(d) of the Federal
                Acquisition Regulation, the Contractor will be reimbursed for
                the costs of all fines, penalties, and reasonable litigation
                expenses incurred as a result of compliance with specific
                contract terms and conditions or written instructions from the
                Contracting officer.

(R4, tab 1 at 104)

2   This clause was essentially incorporated by reference and appears to pertain to Korean
         labor laws, such as minimum wage requirements.

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     5. The contract included Army Federal Acquisition Regulation Supplement
(AFARS) 5152.222-4034, KOREAN LABOR LAW which stated:

              Contractors and subcontractors at all tiers, shall honor
              employees’ rights in full compliance with Korean Labor Law,
              including the rights of succession of employment. Failure to
              comply may be deemed breach or default of the contract and
              evidence of nonresponsibility. Such violation of Korean
              Labor Law may be evidenced by a Republic of Korea
              Ministry of Labor determination, a court decision, or a Labor
              Relations Commission adjudication. If a contractor is found
              to be in serious violation and fails to take adequate corrective
              action promptly, [United States Forces Korea] may consider
              this grounds for determining the contractor to be
              non-responsible for future Government contracts.

(R4, tab 1 at 113)

       6. FAR 52.222-43, FAIR LABOR STANDARDS ACT AND SERVICE
CONTRACT LABOR STANDARDS-PRICE ADJUSTMENT (MULTIPLE YEAR
AND OPTION CONTRACTS) (MAY 2014) was not contained in the contract. Due to
the fact that the contract was to be performed outside the United States, we find that this
clause was properly excluded from the contract.

       7. Similarly, DFARS 252.216-7003, ECONOMIC PRICE ADJUSTMENT—
WAGE RATES OR MATERIAL PRICES CONTROLLED BY A FOREIGN
GOVERNMENT (MAR 2012) was not included in the contract. We find that the
applicable provision promulgating usage of this clause allows for its discretionary use in
contracts performed in a foreign country and, as such, was not mandated for inclusion
into the subject contract.

       8. On August 7, 2017, KF&S submitted a request to the contracting officer (CO)
to increase the price of the contract based on an increase in the Korean minimum wage
laws (R4, tab 11 at 3, 33).

       9. On August 8, 2019, KF&S filed a certified claim with the CO, requesting
additional funds to cover the increases in the Korean minimum wage laws (R4, tab 11).
Appellant stated that FAR 52.222-43 should have been included in the contract and
needed to be applied even though it was not (R4, tab 11 at 3). Appellant classified the
government’s prior denials of its request for equitable adjustment for the same issue as a
misunderstanding or confusion of the claim (R4, tab 11 at 3-4). Appellant stated that the
government was mistaken when it denied the requests because none of the rates were

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below the minimum wage (R4, tab 11 at 3-4). Appellant provided a breakdown of the
claim (R4, tab 11 at 4-5).

       10. On October 4, 2019, the CO issued a Final Decision (COFD), denying the
claim in full (R4, tab 14). The CO asserted that appellant incorrectly asserted that
FAR 52.222-43 should be applied to the contract (R4, tab 14 at 2). The CO also stated
that DFARS 252.216-7003 “was intentionally excluded” from the contract (R4, tab 14
at 2). The CO also opined that appellant misinterpreted the Minimum Wage Act because
none of appellant’s employees were paid less than the minimum wage (R4, tab 14 at 2).

      11. On October 18, 2019, appellant filed an appeal at the Board. The appeal was
docketed as ASBCA No. 62223.

       12. In its complaint, appellant alleged that the government should have included
an escalation clause to allow for ROK minimum wage increases (compl. at 1-2).
Appellant stated that the CO’s act of denying KF&S’s claim for increased costs was
arbitrary and capricious because the CO focused on “basic pay” instead of comparing the
proposed hourly wage with the ROK minimum wage requirement (compl. at 5). Further,
appellant stated that KF&S was unfairly required to accept the full risk of the ROK
hourly wage increase (compl. at 5). Appellant also discussed how a proposed hourly
wage should be calculated (compl. at 7-12). Appellant argued that because the contract
required it to comply with Korean law, FAR 52.222-43 required the government pay for
any increases in the ROK labor laws (compl. at 12-14).

        13. On December 4, 2019, appellant filed an appeal to update the amount claimed
to include performance of the contract for a later timeframe. The Board docketed this
appeal as ASBCA No. 62292 and consolidated it with ASBCA No. 62223.

       14. On December 26, 2019, the Board granted the government’s request to apply
the motion for summary judgment to both appeals because both complaints arose from
increases in the minimum wage in Korea but applied to different timeframes and
permitted appellant to respond again.

                             CONTENTIONS OF THE PARTIES

       The government filed a motion for summary judgment, arguing that the contract
contained two clauses requiring KF&S to comply with Korean labor laws but that the
contract did not contain any price escalation clauses (gov’t MSJ at 4-8). The government
agreed that appellant was required to follow Korean law (gov’t MSJ at 4). The
government also agreed that FAR 52.222-43 was not contained in the contract; however,
the government argued that the clause would not be proper in a foreign contract (gov’t
MSJ at 7-8). The government also argued that DFARS 252.216-7003 was a discretionary

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clause that the CO decided not to include, even though appellant did not raise any
arguments concerning the clause (gov’t MSJ at 8-9).

       In its response to the government’s motion for summary judgment, appellant
argued that the CO should have paid for costs that it incurred due to ROK laws that
increased minimum wages, relying on a theory of breach of the covenant of good faith
and fair dealing (app. resp. at 1). 3 Specifically, appellant argued that: 1) the terms of the
contract were unfair because the government included a clause requiring contractors to
comply with Korean labor law but did not include a clause to cover escalations in
minimum wage laws (app. resp. at 3); 2) FAR 52.222-43 was or should have been
applicable to the contract (app. resp. at 3); 3) the decision by the CO to exclude
DFARS 252.216-7003 was arbitrary and capricious (app. resp. at 4); and 4) including
AFARS 5152.222-4034 meant the government should have included a price escalation
clause (app. resp. at 7). Appellant did not assert that the CO promised to pay additional
funds or shift the risk on the firm, fixed-price contract (app. resp.).

       In the government’s reply, the Army stated that most of the arguments appellant
raised were new claims and theories (gov’t reply at 1). The government also individually
addressed appellant’s arguments (gov’t reply).

       Appellant responded and essentially raised the same issues as in its original
response but argued that DFARS 252.216-7003 was a proper clause to consider and
should have been included in the contract (app. second resp. at 3-4). Thus, the
government’s failure to include the clause was an abuse of the CO’s discretion and was
arbitrary and capricious (app. second resp. at 4). Appellant also admitted that it raised
new claims in its response (app. second resp. 1-2) (“Now that the matters contained in the
Motion to Deny are before the Board, the Appellant respectfully requests that the Board
go ahead and consider matters raised in the Motion to Deny.”).

                                         DECISION

I. GOVERNMENT’S MOTION FOR SUMMARY JUDGMENT

        Summary judgment is proper if the record and pleadings demonstrate that there are
no genuine issues of material fact and that the moving party is entitled to judgment as a
matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “The moving party
bears the burden of establishing the absence of any genuine issue of material fact, and all
significant doubt over factual issues must be resolved in favor of the party opposing
summary judgment.” Chugach Federal Solutions, Inc., ASBCA No. 61320, 20-1 BCA
¶ 37,617 at 182,594 (citing Mingus Constructors, Inc. v. United States, 812 F.2d 1387,

3   Appellant calls this “an implied duty of fair dealing and cooperation” and cites Malone
        v. United States, 849 F.2d 1441, 1445 (Fed. Cir. 1988) (app. resp. at 1).

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1390-91 (Fed. Cir. 1987)). To defeat a motion for summary judgment, a non-moving
party must set forth sufficient facts to demonstrate that a genuine issue of material fact
exists. AXXON International, LLC, ASBCA No. 61224 et al., 20-1 BCA ¶ 37,489
at 182,144 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). “A
genuine issue of material fact arises when the nonmovant presents sufficient evidence
upon which a reasonable fact finder, drawing the requisite inferences and applying the
evidentiary standard, could decide the issue in favor of the nonmovant.” C. Sanchez and
Son, Inc. v. United States, 6 F.3d 1539, 1541 (Fed. Cir. 1993). When considering
motions for summary judgment, the evidence produced by the non-moving party is to be
believed and all justifiable inferences are drawn in its favor. Europe Asia Constr.
Logistic, ASBCA No. 61553, 19-1 BCA ¶ 37,267 at 181,351 (citing American Boys
Constr. Co., ASBCA No. 61163, 18-1 BCA ¶ 36,949 at 180,051).

        Here, the government moved for summary judgment, arguing that appellant asked
for price escalations due to changes in Korean labor law when the contract did not
contain any clauses requiring or allowing price escalation. The Board has made findings
as to which clauses were contained in the contract and those clauses that were properly
excluded from the contract. (SOF ¶¶ 2-7) Accordingly, we hold that the government has
met its initial burden of establishing that no material facts exists with regard to the
contract clauses.

        In response, appellant, as the non-moving party, was required to set forth
sufficient facts to demonstrate that a genuine issue of material fact exists. Unfortunately,
appellant failed to meet this burden. In fact, appellant did not dispute any of the material
facts the government proposed and agreed with which clauses were and were not
included in the contract (app. resp. at 3). Appellant also did not assert that the CO
promised to pay for increases in Korean labor laws or to pay additional money. Instead,
appellant primarily provided legal arguments, specifically that FAR 52.222-43 should
have been included in the contract as a matter of law under a legal theory of breach of the
covenant of good faith and fair dealing (app. resp. at 1). In its second response, appellant
added DFARS 252.216-7003 to its legal argument as a required clause and argued that
failure to include it was arbitrary and capricious (app. second resp. at 3-4). Appellant
asserted that failing to include the clauses was unfair because the government placed all
of the risk of price escalation on the contractor. However, appellant did not dispute that
escalation clauses were not included in the contract and did not allege that the CO ever
promised to make them part of the contract.

       We cannot decide in favor of appellant even if we consider appellant’s position that
escalation clauses were required in this contract to be factual, review the argument in the
light most favorable to appellant as the non-moving party, and draw all justifiable
inferences in its favor. First, appellant’s main argument was that the government should
have included the escalation clause in the contract because it was unfair for the contractor to
accept all of the risk in this foreign contract. However, it is well-settled that the contractor

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assumes the risk of cost increases in firm, fixed-price contracts, except as specifically
provided for in the contract. All Star/SAB Pacific, J.V., ASBCA No. 50856, 98-2 BCA
¶ 29,958 at 148,234, recon. denied, 99-1 BCA ¶ 30,214. In this firm, fixed-price contract,
appellant assumed the risk of the cost increases and the government did not include
risk-shifting clauses in the contract. Accordingly, appellant’s arguments must fail.

        Next, as to the escalation clauses appellant presented as being required,
FAR 52.222-43 and DFARS 252.216-7003, we have found that they are not actually
required clauses. FAR 52.222-43 is not applicable to foreign contracts (SOF ¶ 6).
DFARS 252.216-7003 is discretionary (SOF ¶ 7). None of the applicable provisions in
the FAR required the government to include either of these price escalation clauses. For
example, with regard to FAR 52.222-43, the applicable provision for use of the clause
states the clause is subject to geographical limits and “does not apply to contracts
performed outside the United States.” FAR 22.1003-2, GEOGRAPHICAL COVERAGE
OF THE SERVICE CONTRACT LABOR STANDARDS STATUTE (APR 2014).
Moreover, with regard to DFARS 252.216-7003, the applicable provision reads as
follows:

             [M]ay be used in fixed-price supply and service solicitations
             and contracts when—(A) The contract is to be performed
             wholly or in part in a foreign country; and (B) A foreign
             government controls wage rates or material prices and may,
             during contract performance, impose a mandatory change in
             wages or prices of material

DFARS 216.203-4-70, ADDITIONAL PROVISIONS AND CLAUSES (JUL 2013).
(Emphasis added)

       Finally, the government’s decision to not include any escalation clauses occurred
during the formation of the contract, not during administration of the contract. “[I]t is
well established that the duty of good faith and fair dealing applies to government
conduct during the performance of the contract, and does not apply to government actions
during the formation of the contract.” Chugach Federal Solutions, Inc., ASBCA
No. 61320, 20-1 BCA ¶ 37,617 at 182,596 (citing Scott Timber Co. v. United States, 692
F.3d 1365, 1372 (Fed. Cir. 2012)). The failure to include any price escalation clauses
occurred prior to award, not during the formation of the contract, so we are unable to
decide the issue in favor of appellant.

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                                  CONCLUSION

      The government’s motion for summary judgment is granted. The appeals are
denied.

      Dated: December 9, 2020

                                              HEIDI L. OSTERHOUT
                                              Administrative Judge
                                              Armed Services Board
                                              of Contract Appeals

I concur                                       I concur

RICHARD SHACKLEFORD                            OWEN C. WILSON
Administrative Judge                           Administrative Judge
Acting Chairman                                Vice Chairman
Armed Services Board                           Armed Services Board
of Contract Appeals                            of Contract Appeals

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     I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA Nos. 62223, 62292, Appeals of
KF&S Corp., rendered in conformance with the Board’s Charter.

      Dated: December 10, 2020

                                              PAULLA K. GATES-LEWIS
                                              Recorder, Armed Services
                                              Board of Contract Appeals

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