Expert Commentary

Whistleblower Construction Defect Lawsuit Fails for Lack of Evidence

The US Code makes it possible for an individual to file a suit against a person or entity the plaintiff contends has defrauded the United States. If judgment is rendered against the fraud perpetrator, the whistleblower may share in the judgment. The law has a specific purpose and requires actual evidence of fraud to succeed. Whistleblower or qui tam lawsuits are becoming one of the most popular and profitable lawsuits filed in federal courts.


Claims Practices
October 2010

Contractors working for the United States may successfully defend against a charge of fraud when the charge is not based on convincing evidence. A suit in search of a wrong is not proper. Litigation, regardless of the damages perceived, must be due to an actual wrong, and must not used as a method to find a wrong.

United States Ex Rel Owens v. First Kuwaiti Gen. Trading & Contracting Co.

Every litigant, and their insurers, involved in any aspect of construction defect must be aware that there is a difference between a false statement sufficient to support a claim of fraud, on the one hand, and honest disagreements, routine adjustments and corrections, and sincere and comparatively minor oversights on the other. For that reason, the case brought by John Owens was dismissed on summary judgment because, although he made many serious charges, he was unable to back up those charges with evidence, and on appeal, the judgment was affirmed in United States ex rel Owens v. First Kuwaiti Gen. Trading & Contracting Co., 612 F.3d 724 (4th Cir. July 16, 2010).

The Facts of the Case

John Owens brought a qui tam suit under the False Claims Act (FCA), 31 U.S.C. §§ 3729, et seq., against First Kuwaiti, a construction firm and his former employer. He alleged that the firm billed falsely for deficient work in connection with construction of the US embassy in Baghdad and that it retaliated against him for actions taken in furtherance of his FCA contentions. The district court granted summary judgment to First Kuwaiti.

The essence of Owens's claim was that First Kuwaiti failed to live up to its contractual obligations. The court concluded that Owens produced no evidence either of knowing misrepresentations on First Kuwaiti's part or of having been mistreated for any actions taken on behalf of his FCA claims. The court affirmed the district court's judgment. Congress crafted the FCA to deal with fraud, not ordinary contractual disputes. The FCA plays an important role in safeguarding the integrity of federal contracting, administering strong medicine in situations where strong remedies are needed. Allowing it to be used in run-of-the-mill contract disagreements and employee grievances would burden, not help, the contracting process, thereby driving up costs for the government and, by extension, the insurers called upon to defend the accused and the public at large.

First Kuwaiti hired John Owens as a general construction foreman in November 2005, shortly after work had begun under contract with the United States. Owens' primary responsibility, however, was to supervise the construction of an office building. Almost immediately, Owens says, he was treated rudely by various people he encountered and "got disrespected a lot." By June 2006, Owens had evidently grown dissatisfied with the job and sent an email resigning his position. He says he did so because of the lack of respect shown toward him and because of his objection to the way the company treated its third-country national workers.

In December 2006, Owens filed an FCA qui tam suit against First Kuwaiti, alleging that the company had defrauded the government by billing for defective work and that it retaliated against him for investigating possible FCA wrongdoing. He claimed that he had witnessed a number of "construction mistakes" at the embassy site, which he had brought to the attention of First Kuwaiti employees. He also included a breach of contract claim in which he alleged that First Kuwaiti had wrongfully withheld pay from him.

The Collins Report

Owens's fraud allegations triggered the US government's obligation to investigate his claims and to determine whether to intervene in the case. The government commissioned an independent expert to look into the matter, resulting in a document known as the Collins Report. The Collins Report concluded that "the quality of workmanship at the NEC Baghdad site is comparable to that found in the United States for a similar size and type of project. Defects found in the structure were minor and not unexpected for a project of this size and they have been repaired."

The Collins Report also concluded work on the Baghdad site "was comparable to work performed in the United States for typical similar type concrete structures," and any problems with the concrete work were "minor and not unexpected." It would be remarkable if, on a project of this magnitude and scale, there were not some issues that quality control personnel would want to bring to supervisors' attention. That is, after all, what a quality control department exists to do. It would be no less remarkable—on a $600 million war-zone project which called for First Kuwaiti to pour an estimated 130,000 cubic meters of concrete—if there were not some construction work that required subsequent remediation. In fact, the embassy contracts anticipated the need to repair concrete problems and provided a mechanism for doing so.

Owens alleged that First Kuwaiti supplied items that were the wrong brand or poor quality. First Kuwaiti, however, offered uncontradicted evidence that it obtained permission from the government to provide the equipment that it did.

The Ruling

The court concluded that there is a difference between a false statement sufficient to support a claim of fraud, on the one hand, and honest disagreements, routine adjustments and corrections, and sincere and comparatively minor oversights, on the other. "Bad math is not fraud, proof of mistakes is not evidence that one is a cheat, and the common failings of engineers and other scientists are not culpable under the Act."

The court found that there was only a suit in search of a wrong rather than a wrong in search of a verdict. Whistleblowing in response to possible fraud, like fraud itself, is a serious matter. In the case before the court, the hallmarks of whistleblowing activity were missing. Owens evidently was an employee with complaints—perhaps legitimate, perhaps not—about the way he was treated at a construction site where all involved were working under difficult conditions to accomplish difficult goals.

Conclusion

When an insured is sued in a qui tam suit and there is a potential for a part of the action to be covered by an insurance policy, the insurer will defend under a reservation of rights. It is imperative that the insurer conduct a thorough investigation and, in a case like this one, if it determines that there was no fraud but merely a suit in search of a wrong, it must instruct counsel to defend and move for summary judgment as did counsel for First Kuwaiti. Insurers are often called on to defend false and fraudulent claims—which they specifically insure—and must do so aggressively to protect the insured and should not fall into a trap of denying coverage because of a false allegation of fraud.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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