Government Contracts Court Should Have Reviewed Merit of Claim Before Allowing Offset
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Monday, September 14, 2020

Court Should Have Reviewed Merit of Claim Before Allowing Offset

By Government Contracts Editorial Staff

The Court of Appeals for the Federal Circuit vacated and remanded the Court of Federal Claims’ determination the government’s offset of contract payments was valid because the court did not evaluate the merits of the government’s offset determination and whether the government complied with the Debt Collection Act’s procedures. The contractor contested the government’s withholding of approximately $17 million in payments due under a contract to operate a distribution depot in Kuwait. The government withheld the payments to offset a nearly $81 million debt the contractor allegedly owed due to overpayments of U.S. funds under a separate contract awarded by the Coalition Provisional Authority of Iraq. The CFC determined the government was owed the alleged overpayment and the Debt Collection Act authorized the government to offset the alleged overpayment (63 CCF ¶81,662). There was no merit to the contractor’s argument any overpayment of U.S. funds was owed to Iraq, because the government made the alleged overpayments while acting as Iraq’s agent after the interim Iraqi Governing Council assumed the contract. Congress appropriated the funds to assist in reconstructing Iraq, and the government had an independent and inherent right to offset any overpayment of U.S. funds, notwithstanding its role as a contract administrator.

Validity of Debt. However, the DCA provides only a mechanism to offset a preexisting, valid debt and does not shield from judicial review the government’s determination that a preexisting debt is owed. For the offset to be valid, the government must have actually overpaid the contractor. Here, the contractor disputed the government’s overpayment determination, but the CFC denied judicial review of the substantive validity of the government’s overpayment determination. It reasoned the contracting officer’s overpayment determination was sufficient to establish a valid “claim” under the DCA and the court was “powerless” to determine otherwise. This was legal error. The appeal was remanded for the CFC to review the merits of the government’s overpayment determination and to determine whether the government followed the required DCA procedures. (Agility Public Warehousing Co. v. U.S., CA-FC, 64 CCF ¶81,974)

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