On August 16, 2010, the United States District Court for the Eastern District of Virginia declared a HUD 8(a) contract void ab initio (from the beginning) and unenforceable. The Court found the contract to be tainted by fraud and wrongdoing by both the contractor and subcontractor — and ordered the Clerk to send a copy of the court’s Order to the HUD contracting office. Morris-Griffin Corporation v. C & L Service Corporation, 2010 WL 3221975 (E.D.Va.).
The Court was concerned about circumstances where small business concerns enter teaming agreements, with their primary contribution to the team effort being their 8(a) eligibility. In this case, an 8(a) janitorial service firm (C & L) obtained a multi-million dollar contract for mortgage loan servicing.
C & L’s subcontractor MGC in actuality performed more than 50% of the contract work, which violates the requirement that the 8(a) contractor perform at least 50% of the work. MCG wanted to be paid for the work under its subcontract. C & L and MGC wound up in a dispute, with C & L essentially trying to take over the HUD contract and cut its subcontractor out after using the subcontractor’s qualifications to get the contract award. The subcontractor sued C & L to enforce it’s subcontract and the Court refused to enforce it.
The Court found the subcontract unenforceable because it is against public policy – it hindered the 8(a)’s control of its contract and discouraged the development of the 8(a) firm. The Court also found the subcontract unenforceable as an agreement in furtherance of a unlawful purpose – the unlawful performance of a set-aside HUD contract. Finally, the Court found the subcontract unenforceable because under SBA regulations at 13 CFR Section 121, CLS as contractor could not be unduly reliant on its subcontractor. The subcontract yielded joint management to the subcontractor and gave the subcontractor the right to be paid for labor expenses in excess of the 50% limit. The Court quoted Quinn v. Gulf & Western Corp., 644 F.2d 89, 94 (2d Cir. 1981), stating “A court of law will not enforce an agreement which is illegal for the parties to make.”
The Court concluded that both parties contributed to the fraud and wrongdoing of the subcontract and that this tainted the HUD contract, rendering it void from the beginning. The Court declared that both parties had “unclean hands” and refused to enforce the subcontract, declared the HUD contract void, and notified the agency contracting officer of its decision.
Prior to entering its ruling, the Court tried to get the parties to settle their dispute, and expressed its concerns about the contract. The parties failed to resolve their issues and insisted that the Court rule. As a result, both parties lost their contract.
For more information about 8(a) contracts and subcontracts, contact government contract attorney Karen Hindson at Karen S. Hindson PC, government contract lawyers in Charleston and Atlanta.