Infotech and the Law: Corporate Scandals and a contractor's responsibility

Corporate scandals and a contractor's responsibility

Devon Hewitt

News of a corporate scandal, like the accounting troubles recently disclosed by companies such as Enron Corp. and WorldCom Inc., can significantly affect a company's business in the federal as well as commercial marketplace.

In order to receive a government contract, a contractor must be found to be "responsible." "Responsibility" is a term of art in government contracts and signifies that, among other things, a contractor has adequate financial resources to perform the contract and has a "satisfactory record of integrity and business ethics."

A corporate scandal, therefore, can adversely affect the determination of responsibility of a particular contractor. The most extreme example is the suspension or debarment of the contractor from federal contracting altogether. A suspension or debarment may occur after the government determines that a contractor has committed fraud or other criminal offense, violated anti-trust statutes, or committed "any other offense indicating a lack of business integrity or business honesty."

Once a contractor is suspended or debarred, it is no longer eligible for award of any federal contract by any agency. Because of the drastic effects of a suspension or debarment, the government must clear numerous procedural hurdles in making such a determination and the contractor generally has an opportunity to defend its position.

Even if a contractor is not suspended or debarred, its federal business can be severely affected by reports of poor financial performance because contracting officers must make an affirmative determination of responsibility in connection with each contract award.

Notwithstanding the fact that this type of information may be subject to differing interpretations, the General Accounting Office, the primary arbiter of challenges to procurement actions, rarely disturbs a contracting officer's determination with regard to the responsibility of a prospective contractor. A contracting officer's affirmative determination of responsibility will only be overturned if a protester demonstrates that the determination was made in bad faith.

The GAO has overturned a contracting officer's determination of nonresponsibility, but only where the protester proved that the determination lacked a reasonable basis. In this regard, the GAO has stated that it affords contracting officers considerable discretion in making responsibility determinations because the agency must bear the effects of any difficulties experienced in obtaining the required performance.

Accordingly, the GAO almost always defers to an agency's responsibility determination, considering it a matter of "business judgment."

For example, the GAO recently upheld a finding by the Department of Defense that Global Crossing Telecommunications was nonresponsible for award of a $137 million contract. Global Crossing had been in contention for the contract award until it advised the Defense Department that it was filing for bankruptcy.

The GAO upheld the contracting officer's subsequent determination of nonresponsibility, stating that, while a filing for bankruptcy does not require a finding of nonresponsibility, "a contracting officer may reasonably view bankruptcy as something other than a favorable development."

What makes this case particularly notable was that the agency ultimately awarded the contract to Global Crossing's competitor, WorldCom.

Responsibility determinations, therefore, can be subjective. There are some exceptions. A contractor can successfully reverse a nonresponsibility determination if it demonstrates that the information on which the contracting officer relied was inaccurate.

Challenges to nonresponsibility determinations have also succeeded where the information provided to the contracting officer was not the most current available. Information regarding a contractor's responsibility may be provided or changed any time up to contract award.

Unlike suspension and debarment proceedings where the contractor can vigorously defend against the government's allegations of improper conduct, however, a contractor may only be able to object to a nonresponsibility determination after the fact. And in most cases, the contracting officer's judgment in the matter will be given the benefit of the doubt.

Devon Hewitt is a partner of Government Practices at ShawPittman in McLean, Va. She can be reached at devon.hewitt@shawpittman.com.

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