Beware of certifications in that contract boilerplate

The U.S. Court of FederalClaims, which hears government contractcases, awarded $435 million indamages to a savings and loan severalyears ago based on the government'sbreach of its contract. Two monthsago, the court of appeals tossed outthe award, ruling that the S&L shouldnot get a single dollar ? all because ofa false certification buried in contractboilerplate language.How did that happen? And does itoffer any lessons for governmentinformation technologycontractors?The case of is one of more than ahundred that grewout of the S&L crisis of the 1980s.Because federal regulators lacked thefunds to shut down all the insolventS&Ls, they resorted to a strategy ofencouraging healthy S&Ls to takethem over. To overcome the deficits ofthe insolvent S&Ls ? some of whichwere hundreds of millions of dollarsunderwater ? federal regulatorspromised potential "white knights"that it would allow them to use favorableaccounting treatment to helprestore their financial health.In some instances, this rescue strategyworked. But the S&L crisis persistedand even grew worse as thedecade wore on.When President George H.W. Bushtook office in 1989, Congress enactedlegislation that not only pulled theplug on this strategy but also disallowedthe acquirers' continued use ofthe promised accounting treatment.Overnight, many S&Ls that had riddento the rescue of the federal governmentfound themselves in deeptrouble. Many of them sued the governmentfor breach of contract. Oneof these was Long Island SavingsBank. But its troubles were not just aresult of the government's suddencourse reversal.When the bank acquired an insolventS&L in 1983, Long Island's chairmanand chief executiveofficer executeda contract thatincluded, in the fineprint, a certificationthat Long Islandwas in compliancewith applicable laws and had not misrepresentedany material facts to theregulators. But as later came to light,the CEO had not disclosed an impermissibleconflict of interest: He wasthe principal owner of a law firm thatderived most of its revenues fromclosing mortgage loans for LongIsland.The CEO ultimately plead guilty to acriminal misdemeanor, was disbarredfrom the practice of law and wasrequired to pay more than $1 millionin restitution. But that was not the endof it, at least not for Long Island.In the breach lawsuit, the governmentinvoked a special anti-fraudstatute and argued that Long Islandshould forfeit its claim because of thefalse certification its CEO had signedyears earlier. The trial court rejectedthis argument, finding that the governmenthad not proven the S&Lshould be held responsible for theCEO's actions. After a lengthy trial,the court awarded the S&L $435 millionin damages.When the appeals court overturnedthe decision, it ruled that becauseLong Island benefited from theCEO's false certification, it wasresponsible for it. Accordingly, theS&L had to forfeit every last penny ofthe $435 million.Although relatively few governmentcontractors sue the government fordamages, this case nonetheless holdslessons for all of them. Chiefly, thegovernment takes representations andcertifications seriously.As one vintage judicial decision putit, when dealing with the government,one must "turn square corners." Goodwords to live by, especially the nexttime you're filling out a CSP-1 orSection K.