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NO. 01-04 ★ MARCH 2001 WEST GROUP © COPYRIGHT 2001 ALL RIGHTS RESERVED 1-787-362-8

IN BRIEF

EXCEPTIONS TO FINAL ACCEPTANCE: LATENT DEFECTS, FRAUD & GROSS MISTAKESAMOUNTING TO FRAUD

By Patricia A. Meagher and Scott M. Rennie

T

PRACTICAL TIGHT-KNIT BRIEFINGS INCLUDING ACTION GUIDELINES ON GOVERNMENT CONTRACT TOPICS

BRIEFINGPAPERS SECOND SERIES

®

Patricia A. Meagher is a member of and Scott M. Rennie is an associate with theSan Francisco law firm of Rogers, Joseph, O’Donnell & Phillips. Both are membersof the firm’s Government Contracts Practice Group.

Latent Defects■ Existence Of A Defect■ Defect Present At Time Of

Acceptance■ Defect Was “Latent”■ Defect Caused Work To Fail

Fraud■ Reliance On The

Misrepresentation■ Misrepresentation Of

Material Fact

■ Intent To Deceive Or Mislead■ Injury From Reliance On

Misrepresentation

Gross Mistakes Amounting ToFraud

■ Fraud vs. Gross MistakeAmounting To Fraud

■ “Gross Mistake Amounting ToFraud” Defined

■ Reliance On Gross Mistake■ Failure To Inspect Or Discover

Not A Defense

he standard “Inspection” clauses incorporated into fixed-price Government contracts for sup-plies, construction work, and research and development provide that acceptance by the Govern-

ment is final and conclusive except for latent defects, fraud, or gross mistakes amounting to fraud.1 If theGovernment accepts the work you perform under a Government contract but subsequently discoversa latent defect, fraud, or a gross mistake amounting to fraud, it has the right to revoke its acceptanceand to demand that you repair or replace the defective work at your own expense. If you refuse to doso, the Government may itself repair or replace the defective work—or contract with a third-party todo so—and then recover from you the reasonable costs of the repair or replacement. The Govern-ment also has the right to terminate the contract for default.2 Alternatively, the Government maydecide to accept the work notwithstanding the defect and issue a modification to the contractreducing the contract price by an amount representing the diminished value of the work.3 Althoughlatent defects, fraud, and gross mistakes amounting to fraud are most commonly used by theGovernment to revoke acceptance of an article or material delivered under a supply contract, theyalso may serve as the basis for revoking acceptance of work performed under a construction contract4

or a research and development contract.

The Government’s right to revoke its final acceptance of your work based on a latent defect, fraud,or a gross mistake amounting to fraud extends indefinitely. The only limit on the Government’s right

to revoke final acceptance is that it must takeaction within a reasonable time after discoveryof the defect.5 It may be months or even yearsafter acceptance before the defect is discovered.In one case, for example, an alleged latent de-fect was discovered more than 10 years afterinstallation of a pipeline.6 In another case, thealleged latent defect arose more than four yearsafter transformers were placed in service.7

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★ MARCH BRIEFING PAPERS 2001 ★

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BRIEFING PAPERS

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This BRIEFING PAPER explores the issues pre-sented when the Government attempts to re-voke its acceptance of your work on the basis oflatent defects, fraud, or gross mistakes amount-ing to fraud. It focuses on the elements the Gov-ernment must prove to establish the existence oflatent defects, fraud, or gross mistakes amount-ing to fraud and discusses situations where theGovernment met its burden as well as situationswhere it did not.

In addition to a claim of latent defects, fraud,or gross mistakes amounting to fraud, the Gov-ernment may invoke its postacceptance rightsunder the contract’s “Warranty” clause. The FederalAcquisition Regulation includes several “Warranty”clauses that may, at the Government’s option,be incorporated into your contract.8 The typesof defects covered by a “Warranty” clause de-pend on the language of the particular clause.The Government’s warranty rights are not dis-cussed in this PAPER.9

Latent Defects

The Government has a heavy burden of prov-ing a latent defect claim.10 The law requiresthat the Government show that four factors ex-ist. First, it must show that there was a defect inyour work. Second, it must show that the defectexisted at the time of acceptance of the work. Third,it must show that the defect was latent.11 Finally,it must show that the defect caused the failure ofthe work to meet contract requirements.12 Ifthe Government fails to prove the existence ofany one of these four factors, it will not be ableto revoke acceptance of your work based on alatent defect.

� Existence Of A Defect

To meet the burden of proving that there wasa defect in your work, the Government mustshow that your work failed to comply with a con-tract requirement. The fact that the Governmentperceives a problem with or deficiency in yourwork is insufficient. It must point to a failure tocomply with a requirement of the contract.

The need for the Government to establish anoncompliance with a contract requirement re-flects the distinction between a latent conditionand a latent defect. A latent condition may beundetectable before acceptance and may causea postacceptance failure, but unless it is theresult of a noncompliance with a contract require-ment, it is not a basis for the Government’srevoking acceptance. This is true no matter howharmful the latent condition is to the perfor-mance or service life of the item. Only a latentdefect entitles the Government to revoke accep-tance of the contract work.13

In establishing whether the work failed tocomply with a contract requirement, it is impor-tant first to determine what the contract re-quired. To make this determination, a court orboard may look to the inspection and performancestandards set forth in the contract. It has beenheld that defects that are not prohibited by theinspection and performance standards set forthin the contract are not grounds for rejection ofperformance under the contract.14 Accordingly,if the deficiency discovered by the Governmentafter acceptance is not prohibited by the inspec-tion and performance standards set forth in thecontract, it is not a defect under the “Inspec-tion” clause. In one case, for example, a heli-copter crash was found to have been caused by


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rotor spindles that, according to the Government’spostcrash data, did not have the requisite fa-tigue life. This deficiency was not a defect, how-ever, because the spindles had the fatigue lifenecessary under the inspection method prescribedby the contract. The Government’s postcrashdata resulted from testing that included “droopstop pounding,” a factor the contract did notrequire the contractor to take into account incalculating fatigue life.15

On the other hand, if the work fails to com-ply with a contractually specified inspection or testprocedure, it is defective. In many cases, suchdefects are discovered before acceptance throughin-process inspections or testing conducted dur-ing the manufacturing process. But in some in-stances, the defect is not discovered before finalacceptance. For example, the Government mayrandomly test delivered units before acceptance,and one or more of the nontested units subse-quently may fail because of a defect. If the Gov-ernment establishes that these units do not passthe contractually specified test, that failure wouldprovide a basis for a subsequent revocation ofacceptance of these units based on latent de-fects, assuming the other requirements are met,including that the random testing was reason-able and that the defect discovered actually causedthe failure.

Even where your work passes all of the inspec-tions and tests required by the contract beforeand at the time of final acceptance, it does notnecessarily mean there is no latent defect in thework. The Government may rely on a failure ofa test or inspection other than a contractuallyspecified test or inspection to establish the exist-ence of a latent defect. The law requires, how-ever, that any extracontractual test procedureor standard be no more stringent than the testprocedures or standards specified in the con-tract.16 If a defect in your work is discoverableonly by the use of more stringent test proce-dures or standards than those found in the con-tract, the defect is not a noncompliance withthe contract requirements and the Governmentcannot use it as a basis to revoke its acceptanceof your work.17

There is one situation where a latent defectmay be found notwithstanding your compliance

with the contract specifications. In some instances,a contractor may propose to use its own specifica-tions in place of the Government specificationsoriginally set forth in the contract. If the Gov-ernment accepts this proposal, the contractor’sspecifications become, in effect, the contractspecifications. In this situation, the contractorassumes the risk that its own specifications willwork, and their failure to do so may satisfy therequirement for a latent defects claim of non-compliance with contract specifications.18

� Defect Present At Time Of Acceptance

Not only must the Government establish theexistence of a defect in your work, the Govern-ment must also demonstrate that the defect waspresent at the time the Government acceptedthe work.19 This requirement is often difficultto satisfy, especially where there has been asignificant passage of time between final accep-tance and discovery of the defect. In one case,for example, the Government could not recoveragainst the contractor for a latent defect be-cause the Government did not eliminate thepossibility that the defect could have been theresult of damage to the product caused by im-proper storage after final acceptance.20 In an-other case, the Government’s claim that erodedand cracked mortar joints were latent defectswas rejected because the Government did notprove that the cracks and erosion existed at thetime of final acceptance, and it was possiblethat the cracks and erosion occurred after con-tract performance as a result of continued expo-sure to wind and ocean spray.21

� Defect Was “Latent”

Assuming the Government proves that therewas a defect in your work and that it existed atthe time of final acceptance, it must also estab-lish that the defect was “latent.” A “latent” de-fect is generally defined as a defect that is hid-den from the knowledge as well as from thesight of the Government and that could not bediscovered before acceptance by ordinary andreasonable care or by reasonable inspection.22

Stated somewhat differently, a defect that wasknown to the Government or could have beendiscovered by reasonable means before accep-tance is not a latent defect.23


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A defect is not “latent” if the Governmenthad actual knowledge of the defect at the time offinal acceptance.24 In some cases, the contrac-tor makes a disclosure to the Government re-garding a defect before acceptance. Such a dis-closure will not necessarily mean that the defectwas not “hidden from the knowledge” of theGovernment and thus was not a “latent” defect.Rather, the contractor’s disclosure must be suffi-cient to constitute actual knowledge of the de-fect on the part of the Government. This pointwas illustrated in a case involving the construc-tion of a metrorail station. The contract re-quired supporting pads made of natural rubberor fiberglass. During performance, the contrac-tor disclosed to the Government that it was sub-stituting pads made from polyester. After finalacceptance, the pads failed as a result of hy-drolysis, a condition to which polyester is sus-ceptible. The Corps of Engineers Board of Con-tract Appeals found that the disclosure by thecontractor did not constitute actual knowledgeof a defect on the part of the Government be-cause the disclosure would not have alerted theordinary buyer that the substitute material wasunsuitable because it was susceptible to collapseunder chemical reaction to water.25

A latent defect must also be “hidden from thesight” of the Government. If the defect couldhave been discovered by the Government’s in-spector before final acceptance through a visualinspection, the defect is not latent. In one case,for example, the ENGBCA found that the defec-tive assembly of a water line was not a latentdefect because the Government inspector at theworksite could have easily observed the pipeduring its assembly and seen that the nuts werenot properly tightened on the bolts that heldthe pipe flanges together.26 In another case,the Armed Services Board of Contract Appealsheld that a contractor’s failure to use mahoganywood in performing the contract work was not alatent defect because a visual inspection wouldhave disclosed that the wood being used by thecontractor varied in color, and the variationshould have alerted the Government inspectorthat the wood might not comply with the speci-fications.27 In still another case, the GeneralServices Administration Board of Contract Ap-

peals found that mobile tool cabinets deliveredwith dents, scratches, misaligned drawers, sharpedges, broken or improper welds, defective locks,and rust could not be rejected on the groundthey contained latent defects because the de-fects were readily discernable upon a visual in-spection. The board dismissed the Government’sargument that the defects in the mobile toolcabinets were latent because they were concealedby the shipping crates, commenting “[t]hat dogwon’t hunt.”28

In addition to being hidden from the knowl-edge as well as from the sight of the Govern-ment, to be “latent,” the defect must not havebeen discoverable by ordinary and reasonablecare or by reasonable inspection. Contractors of-ten argue that a defect is not latent because itcould have been discovered had the Govern-ment conducted certain tests or inspections. Butthat argument will prevail only if conductingsuch tests or inspections was reasonable underthe circumstances. Not surprisingly, what is a“reasonable” inspection that would have revealedthe existence of a defect depends on the facts ofthe particular case.29

A defect is “patent”—not latent—if it was orcould have been discovered by the inspection ortesting procedures specified in the contract.30 Simi-larly, a defect is patent if the defect is readilydiscoverable by an ordinary examination or test,and the Government’s failure to conduct suchan examination or test does not make it la-tent.31 In one case, for example, the Govern-ment argued that the contract required thatintegrated circuit logic gates be furnished withthree circuits and claimed that the integratedcircuit logic gates furnished by the contractorwith only one circuit had latent defects. TheASBCA rejected the Government’s claim becauseit found that the fact that the devices had onlyone circuit rather than three circuits could havebeen determined easily by an energizing test oruse of an ohmmeter.32 But where a contractdoes not provide for Government inspection ortesting of the work in progress but does containthe standard “Inspection” clause requiring thecontractor to maintain an adequate inspection sys-tem and to perform such tests as necessary toensure contract compliance, it has been held


5

that the Government fulfills its obligations toexercise ordinary care in accepting the work byconducting a visual examination of the com-pleted work.33

Where the contract specifically requires thecontractor to conduct a particular test and tocertify the results, the Government may have theright to rely on the contractor’s testing. In onecase, for example, the contract contained a “Con-tractor Quality Control” clause that placed anexplicit, affirmative obligation upon the con-tractor to conduct certain tests and inspectionsduring performance of concrete repair work toensure that the work conformed to the contractrequirements. The clause also required the con-tractor to certify that the work was performedin compliance with the contract plans and speci-fications. The ASBCA held that the Governmenthad no obligation to perform these tests againbut instead could rely on the contractor’s certi-fications that it was abiding by the specifica-tions.34 Other cases also have held that where acontractor submits a certification of complianceto the Government under the contract, it isreasonable for the Government to rely on thecertification and to conduct a more limited in-spection of the goods.35 A different result maybe found, however, where the Government in-spector fails to obtain from the contractor thecertification required by the contract or fails toensure that the contractor in fact performedthe required testing.36 Likewise, if a reasonablereview of the contractor’s certifications wouldhave revealed the alleged defect the Govern-ment now complains of, the defect is not la-tent.37

Note, however, that some cases deal with con-tractor-certified work later found not to complywith the specifications as a gross mistake amountingto fraud rather than as a latent defect.38 Whatthe Government must prove to revoke accep-tance based on a gross mistake amounting tofraud is discussed later in this PAPER.

Some defects may be discoverable only by testsconducted in a laboratory. In one case, for ex-ample, the ASBCA held that a defect was latentbecause the defect could have been discoveredonly by laboratory testing that could not have

been performed at final inspection.39 By con-trast, in another case, the board held that thecontractor’s use of a substitute metal material,confirmed by laboratory testing several monthsafter completion of a contract, was “readily dis-coverable” and thus not a latent defect becausethe tests were “ordinary processes” and the useof the laboratory for such testing was availableto the Government during contract performance.40

� Defect Caused Work To Fail

The fourth factor that must be established bythe Government to prove its latent defect claimis that the defect caused the work to fail. This isthe legal element of “causation.”

In a latent defect claim, the Government mustprove a definite nexus between the latent defectand the product failure. This burden is moredifficult than the burden imposed on the Gov-ernment in a breach of warranty claim wherethe Government is not required to establish pre-cisely what contractor acts or omissions causedthe defect.41 The law is clear that the mere factof a postacceptance failure does not establishthe existence of a latent defect. It has been heldthat “[p]roof of the defect that caused the fail-ure must be direct and not left to inference.”42

Perhaps it is most difficult for the Govern-ment to establish contractor liability based on alatent defect where there is more than one causeof the failure. It is not uncommon for a failureto be a result of several defects, only some ofwhich may be latent. In those cases, theGovernment’s recovery is limited to that por-tion of the damages that it establishes with rea-sonable accuracy resulted from latent defects.43

If the Government fails to establish the dam-ages that resulted from the latent defects inyour contract work, you will be excused fromany liability.44 In one case, for example, therewere defects in a roadway, some of which werelatent, some of which were patent, and some ofwhich were the result of the Government’s faultydesign. The Government’s evidence included theoverall cost of repairing the roadway but didnot provide any basis for making a reasonablyaccurate determination of the amount of thedamages that was a result of latent defects as


6

opposed to patent defects or the Government’sfaulty design. Accordingly, the Government re-covered nothing from the contractor, despitethe latent defects in the roadway work.45 Inanother case, the Government did not prevailin its latent defects claim arising out of theconstruction of a federal office building plazaeven though there were defects in the precastconcrete paving panels furnished by the con-tractor. The board found that other factors con-tributed to the deterioration of the pavement,and the Government did not prove the amountof the replacement costs that were due to thelatent defects.46

Fraud

Fraud is the deliberate making of an untruestatement or the taking of dishonest actionwith intent to deceive another to his detri-ment.47 As with a latent defects claim, the Gov-ernment has the burden of proving its fraudclaim against you. To revoke final acceptanceof your work based on fraud, the Governmentmust prove—by a preponderance of the evi-dence48 —that (1) its acceptance of your workwas induced by reliance on a misrepresentation byyou, (2) the misrepresentation pertained to amaterial fact, (3) the misrepresentation was madewith the intent to deceive or mislead the Govern-ment into relying on the misrepresentation,and (4) as result of relying on your misrepre-sentation, the Government suffered injury.49

Proof need not be established by direct evi-dence but may be based solely on circumstan-tial evidence.50

� Reliance On The Misrepresentation

The Government must prove that it relied onthe alleged misrepresentation in accepting con-tract work and that its reliance was reasonableunder the circumstances. If the Government cannotprove that your alleged misrepresentation causedit to accept your work, or that it was justified inaccepting the work under the circumstances, thenits fraud claim against you will fail.

Some contractors may believe that they canavoid a revocation of acceptance based on fraud

on the ground that the Government’s failure todiscover the noncompliance was due, at least inpart, to the Government’s own lack of diligencein inspecting the contract deliverables. How-ever, faith in such a defense is misplaced. Acontractor that knowingly misleads or deceivesthe Government cannot avoid the consequencesof its intentional misdeeds by asserting that theGovernment should have discovered the fraud.51

Accordingly, the Government’s failure to inspectyour contract deliverables, even when such in-spection is required by regulation or the con-tract, does not render unreasonable theGovernment’s reliance on your representationthat the deliverables conform to the contractnor does it insulate you from liability for fraud.52

If the Government actually knew at the timeit accepted your work of the falsity of the mis-representation, however, then its reliance onthat misrepresentation will be deemed unrea-sonable and cannot be used to prove a fraudclaim against you.53 This point is illustrated by acase in which the Government claimed, amongother things, that a masonry contractor had misledit by surreptitiously buttering over old brick jointsinstead of removing the bricks. However, thecontractor proved that the Government had knowl-edge of the nonconformity by establishing thata Government inspector was present on the jobsiteand observed the performance of the obviouslynonconforming masonry repair work. The De-partment of Transportation Contract AppealsBoard held that the Government was precludedfrom relying on the misleading action since itsonsite inspector observed the masonry work andknew or should have known that the work wasnonconforming. Accordingly, the Governmentcould not revoke its acceptance on the basis offraud (or a gross mistake amounting to fraud).54

� Misrepresentation Of Material Fact

The contractor’s misrepresentation must per-tain to a fact, as opposed to a matter of law oropinion, and the fact must be material.55 Atleast one board has found that a contractormisrepresented a material fact where the con-tractor misstated that an item complied withcontract requirements and was suitable for itsintended use by the Government.56


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The failure to disclose information can be asmuch a misrepresentation as an affirmative mis-statement. For example, in one case, a contractorknew that certain items listed on a DD250 Ac-ceptance Form were nonconforming but failedto disclose the nonconformity to the Govern-ment during acceptance. The Government ar-gued that the nondisclosure was a misrepresen-tation because the DD250 form required thecontractor to identify all nonconformances tocontract specifications and the contractor hadfailed to do so. The Court of Federal Claimsagreed, holding that the contractor had misrep-resented that the items were conforming.57

If you fully inform the Government of a non-conformity before acceptance, however, it willbe difficult for the Government later to claimfraud. In one case, a contractor laying marinecables alerted the Government to its discoveryof unexpected harbor bottom conditions thatprevented the burying of cable to the depthspecified in the contract. The contractor keptthe Government informed of deviations fromthe contract specifications that were required asa result of the unexpected conditions. Four yearslater, Government divers attempted to verify thesite conditions identified by the contractor andto inspect the contractor’s work. The Govern-ment claimed that the divers found conditionsthat differed from those reported by the con-tractor and alleged that the contractor had mis-led it. The evidence established that the bottomconditions had changed dramatically in the in-tervening four years and that the conditionsencountered by the Government divers were notindicative of the conditions at the time the con-tractor performed the work. The DOTCAB foundthat the contractor had truthfully, correctly, andfully informed the Government of what it foundand what it was doing. Accordingly, it held thatthe contractor had not misled the Government,and therefore the Government could not re-voke its acceptance of the contractor’s work basedon fraud.58

� Intent To Deceive Or Mislead

The Government also must prove a contractor’sintent to deceive or mislead, and frequently suchproof must be made without the assistance of

direct evidence. The Government, however, hassuccessfully proven intent to deceive by circum-stantial evidence. In one case, the Governmentestablished that the contractor knew its vendorwas supplying parts that did not conform tocontract requirements, and that the contractorcontinued to incorporate the nonconformingparts in its work without requesting a waiverfrom the Government or taking steps to correctthe nonconformance. The Court of Federal Claimsfound that the contractor had no reasonablebasis to believe that it was complying with thecontract requirements. It also found that thecontractor failed to notify the Government ofthe noncompliance or to correct it. The courtheld that these findings, coupled with thecontractor’s continued delivery of the noncon-forming items to the Government, demonstratedits intent to deceive.59

The failure to notify the Government of a non-conformity, however, does not automatically provethat you intended to deceive the Government.In one case, the contractor’s preproduction ve-hicle body was two inches longer than specifiedand, because of that extra length, would notmount properly on the chassis without the addi-tion of an extra cross-member. The contractoragreed to eliminate the extra body length in theproduction models, but in doing so, the contrac-tor also removed the additional cross-member.Although it was shown that the contractor didnot notify the Government of the removal ofthe additional cross-member, no evidence waspresented that the contractor had reason to be-lieve that removal of the additional cross-mem-ber would adversely affect the vehicle bodies. Inaddition, Government inspectors were presentin the contractor’s plant and could compareproduction models to a preproduction modelretained by the contractor. The ASBCA foundthat the contractor did not act covertly when itremoved the cross-member and, accordingly, didnot intend to mislead the Government.60

� Injury From Reliance On Misrepresentation

The Government must prove not only that itrelied on a contractor’s misrepresentation butthat it was injured by its reliance on the mis-representation.61 The Government can prove


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that it was injured by a misrepresentation byestablishing that it would not have accepted yournonconforming contract work had it known ofthe nonconformity.62 The Government met itsburden in one case where it claimed that itrelied on the contractor’s misrepresentation thatit had fully performed certain metallurgical testingto determine the structural soundness of thetrunnion mounting brackets on howitzers. TheGovernment introduced evidence that a failureof the mounting bracket could cause the howit-zers to explode. It also proved that upon dis-covering the contractor’s misrepresentation, ithad removed the howitzers from use due to thesafety concern. The Court of Federal Claimsheld that the Government would not have ac-cepted the howitzers had it known of thecontractor’s failure to properly inspect the how-itzers. It also held that the Government wasinjured by the contractor’s fraudulent misrep-resentation.63

The Government can also prove that it wasinjured by a misrepresentation by establishingthat the finished work is degraded by the noncom-pliance. In one case, the contractor misrepre-sented to the Government that it was proceed-ing with the installation of roof trusses “as perplan,” which in context meant in accordancewith the Government drawings.64 The Govern-ment drawings required that the trusses be of acertain dimension and that wood blocking beused between the truss and the wall. The trussesinstalled by the contractor did not meet thedimensions and did not incorporate the requiredblocking. The ASBCA held that the misrepre-sentation injured the Government because itcaused the Government to accept noncomplianttrusses and blocking that would potentially causedifferential settlement of the exterior and inte-rior walls and unacceptable overloading of sometrusses.65

Gross Mistakes Amounting To Fraud

� Fraud vs. Gross Mistake Amounting ToFraud

Claims of fraud and gross mistakes amount-ing to fraud both require that the Government

prove a misrepresentation by the contractor ofa material fact and reliance on the misrepre-sentation by the Government to its detriment.To establish a gross mistake amounting to fraud,however, the Government need not prove anintent to deceive.66 In addition, whereas fraudconnotes a deliberate untrue statement or a dis-honest action, mistake connotes an unintentionalmisstatement or action that produces an unin-tended and undesirable result.67 You shouldnote that not all mistakes rise to the level ofgross mistakes amounting to fraud, however,since there must be proof of recklessness orconduct inconsistent with good faith, as dis-cussed below.

A gross mistake amounting to fraud has thesame effect as fraud—the Government has beeninduced by contractor action to accept workthat does not conform to contract require-ments. Thus, even though the gross mistakewas made without intent to deceive, the resultis the same: the Government is permitted torevoke acceptance of your work, assuming itproves injury.68

� “Gross Mistake Amounting To Fraud”Defined

Not every mistake is a “gross mistake,” andnot every gross mistake amounts to fraud.69 A“gross mistake” has been described as a mistakethat “a reasonable contractor acting honestlywould not reasonably be supposed to make.”70

A gross mistake can take the form of words,actions, or failure to disclose material facts.71

In addition, your gross mistake must be suchthat it cannot be reconciled with good faith.72 Butit has been held that the Government does nothave to prove that you acted in bad faith toestablish a gross mistake amounting to fraud,and your proving that you acted in good faithis not a defense.73

Whether your mistake rises to the level of agross mistake amounting to fraud will dependon the circumstances. For example, in the casediscussed above where the contractor’spreproduction vehicle body was two inches toolong and required an extra cross-member tomount on the chassis, the ASBCA held that


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the contractor’s failure to notify the CO ofthe removal of the additional cross-memberwas not irreconcilable with good faith, andthus, was not a gross mistake amounting tofraud.74

In another case, the ASBCA found that thecontractor had no reasonable basis to believethat material it substituted without theGovernment’s knowledge was suitable for usein the device in which it was incorporated,and that the contractor knew that the devicewould be used in the pneumatic systems ofhigh performance military aircraft.75 Accord-ingly, the board held that the substitution ofmaterial was a gross mistake “out of all mea-sure, beyond allowance, and not to be ex-cused.”76

� Reliance On Gross Mistake

As with fraud, to revoke acceptance on thebasis of a gross mistake amounting to fraud,the Government must prove that it relied onyour gross mistake in accepting your work orsupplies.77 Thus, the Government is not en-titled to revoke acceptance of nonconformingcontract work when a Government inspectorhad full knowledge of the nonconformance atthe time of acceptance.78 In one case, the con-tract required that a part be a single piece offorged metal. The contractor, however, manu-factured the part from three pieces using ascrew machine and furnace brazing to attachthe pieces. The Government inspector acceptedthe first lot of parts and authorized future ship-ments with full knowledge of the contractor’smanufacturing method and its nonconformancewith contract drawings. The ASBCA held thatbecause the Government inspector knew of thedeviation and accepted the parts, the Govern-ment could not revoke acceptance on the basisof a gross mistake amounting to fraud.79

� Failure To Inspect Or Discover Not ADefense

You cannot use the Government’s failure toinspect your work before acceptance80 or its fail-ure to discover readily apparent defects in yourwork81 as a defense to the Government’s claim

of a gross mistake amounting to fraud. Boardshave found that a contractor’s failure to dis-close noncompliance with a material require-ment of the contract—whether or not the non-compliance was readily apparent at the time ofacceptance—is a gross mistake amounting tofraud.82

In one case, the contract required that air-craft bolts be heat treated to obtain a highlevel of strength and that the contractor cer-tify that its bolts met the contract requirements.The contractor presented untreated bolts tothe Government inspector and misrepresentedto the inspector that it had been advised bytelephone that no heat treatment was required.The ASBCA held that the contractor’s misrep-resentation, combined with its failure to heattreat the bolts, was a gross mistake amountingto fraud that allowed the Government to re-voke its acceptance, despite the Government’sfailure to perform an inspection that wouldhave revealed that the bolts did not have therequired strength.83

In another case, the contractor’s certifica-tion misrepresented that items presented foracceptance testing were identical to previouslytested and approved conforming items, induc-ing the Government inspector to forgo com-plete acceptance testing. The GSBCA held thatthis misrepresentation was a gross mistake amount-ing to fraud.84 In a third case, a contractor,while providing the Government inspector withrevised drawings incorporating polystyrene endpieces, failed to inform the Government in-spector that an earlier drawing of the item tobe inspected incorporated polyvinyl chlorideend pieces. The ASBCA held that the contractor’sfailure to disclose the earlier drawing inducedthe Government to accept and pay for itemswith polystyrene end pieces, and therefore wasa gross mistake amounting to fraud, despite thefact that an inspector could have obtained thecorrect drawing from the CO. 85 Where, how-ever, a Government inspector is present andobserving the performance of the work and thedefect in the performance is obvious, the Gov-ernment cannot claim to have reasonably re-lied in accepting the work on the mistake ofthe contractor.86


10

These Guidelines are designed to assist you inunderstanding the scope of the Government’sright to revoke final acceptance of your contractwork on the basis of latent defects, fraud, orgross mistakes amounting to fraud. They are not,however, a substitute for professional representationin any specific situation.

1. Remember that as a Government contractor,acceptance by the Government of your work affordsyou certain protections. Acceptance is deemedfinal and conclusive except for any continuingwarranty obligation. The only basis on which theGovernment can revoke acceptance is if it canprove a latent defect, fraud, or a gross mistakeamounting to fraud. The Government bears a heavyburden of proof in establishing these claims.

2. Bear in mind that the only time limit onthe Government’s right to revoke acceptance ofyour work on the basis of a latent defect, fraud,or a gross mistake amounting to fraud is that itmust take action within a reasonable time afterdiscovery of a defect in the work. A defect, however,may not be discovered until years after acceptanceof your work. Thus, you should consider retainingyour records for a period of some years after finalacceptance to provide you with the informationyou need to prove that your performanceconformed to the contract requirements.

3. Be aware that in attempting to prove thata defect existed at the time of acceptance, theGovernment may point to alleged deficiencies inthe manufacturing process that could have createdthe defect. Your quality control manuals and yourquality assurance testing records will be importantevidence in responding to such claims.

4. During performance, keep the Governmentfully informed in writing of any deviation fromthe contract requirements and retain a copy ofthe writing. Any oral discussions about the deviationshould be memorialized in a journal noting thedetails of the conversation, including the nameof the Government representative to whom youspoke and the date and place of the conversation.Documentation showing that you were forthcomingand truthful regarding your contract performancewill be important evidence to refute theGovernment’s claim that you failed to disclose

material information regarding nonconformingwork in the event the Government attempts torevoke its acceptance based on fraud or grossmistake amounting to fraud.

5. Recognize that in many latent defect cases,the Government is more interested in havingyou repair or replace the defective work than it isin rejecting the work or terminating your contractfor default. Indeed, you are entitled to repair orreplace the defect. The Government cannot usea latent defect as an excuse to return a deliveredand accepted item it no longer wants or needs.

6. If you cannot resolve a claim of latent defect,fraud, or gross mistake amounting to fraud throughdiscussion or negotiation with the Government,consider mediation. Although the law is clear thatthe Government has the heavy burden of provingthe existence of latent defects, fraud, or grossmistakes amounting to fraud, the consequences ofbearing this burden may not be fully understoodby Government officials more familiar with defendingclaims than prosecuting them.

7. If the claim must be litigated, be preparedto retain outside consultants familiar with thetype of work you did under the contract. Anexpert consultant may be able to explain to theGovernment (or to testify at trial if necessary)(a) why the alleged deficiencies, even if they doexist, could not have resulted in the failure of thecontract deliverables or (b) that the defects theGovernment now complains of would have beendiscovered had the Government conducted areasonable inspection before acceptance.

8. Understand the paperwork you must submitwith your work. Some standard Government forms—such as the DD250—require that you identify allnonconformities in your contract work. If you submitsuch a form without disclosing nonconformitiesknown to you, the Government may have a basis torevoke acceptance of your work on the grounds offraud or gross mistake amounting to fraud. Onthe other hand, if you identify all nonconformitiesand the Government accepts the work, it wouldhave no basis to revoke acceptance of your workbased on any disclosed nonconformity even if theitem later fails.

� GUIDELINES �


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1 / FAR 52.246-2, para. (k) (“Inspectionof Supplies—Fixed-Price” clause),52.246-7, para. (f) (“Inspection ofResearch and Development—Fixed-Price” clause), 52.246-12, para. (i)(“Inspection of Construction” clause).

2/ Sentell Bros., Inc., DOTBCA 1824,89-3 BCA ¶ 21,904; Cross Aero Corp.,ASBCA 14801, 71-2 BCA ¶ 9075, 14GC ¶ 74; see FAR 52.246-2, 52.246-7, 52.246-12.

3/ Munson Hammerhead Boats, ASBCA51377, 00-2 BCA ¶ 31,143; see FAR52.246-2, 52.246-7, 52.246-12.

4 / Roberts v. United States, 357 F.2d 938(Ct. Cl. 1966), 8 GC ¶ 154.

5 / Munson Hammerhead Boats, 00-2 BCA¶ 31,143 (citing Bar Ray Prods., Inc. v.United States, 162 Ct. Cl. 836 (1963),5 GC ¶ 329); Cross Aero Corp., 71-2BCA ¶ 9075.

6/ Peter Kiewit Sons’ Co., IBCA 3535-95et al., 99-2 BCA ¶ 30,401.

7/ General Elec. Co., IBCA 442-6-64,65-2 BCA ¶ 4974.

8/ See, e.g., FAR 52.246-17 (“Warrantyof Supplies of a Noncomplex Nature”clause), 52.246-18 (“Warranty ofSupplies of a Complex Nature” clause),52.46-19 (“Warranty of Systems andEquipment Under Performance Speci-fications or Design Criteria” clause),52.246-20 (“Warranty of Services”clause), 52.246-21 (“Warranty ofConstruction” clause); see FAR subpt.46.6.

9 / See generally Ralph C. Nash, Jr. &John Cibinic, Jr., Administration ofGovernment Contracts 884–99 (3d ed.1995).

10/ Geranco Mfg. Corp., ASBCA 12376,68-1 BCA ¶ 6898, 10 GC ¶ 239.

11/ United Techs. v. United States, 27 Fed.Cl. 393 (1992); Herley Indus., Inc.,ASBCA 13727, 71-1 BCA ¶ 8888, 13GC ¶ 353; Kaminer Constr. Corp. v.United States, 488 F.2d 980 (Ct. Cl.1973), 16 GC ¶ 46.

12/ M.A. Mortenson Co. v. United States,29 Fed. Cl. 82 (1993), 35 GC ¶ 398.

13/ Jo-Bar Mfg. Corp., ASBCA 18292,73-2 BCA ¶ 10, 353; Santa BarbaraResearch Ctr., ASBCA 27831, 88-3BCA ¶ 21,098, 31 GC ¶ 118.

14/ M.A. Mortenson Co., 29 Fed. Cl. 82.

15/ United Techs., 27 Fed. Cl. 393.

16/ M.A. Mortenson Co., 29 Fed. Cl. 82(citing United Techs., 27 Fed. Cl. 393,and Southwest Welding & Mfg. Co. v.United States, 413 F.2d 1167 (Ct. Cl.1969), 11 GC ¶ 358).

17/ Southwest Welding & Mfg. Co., 413F.2d 1167; M.A. Mortenson Co., 29Fed. Cl. 82; United Techs., 27 Fed. Cl.393.

18/ Norair Eng’g Corp., ENGBCA 5244,92-2 BCA ¶ 25,009.

19/ Santa Barbara Research Ctr., ASBCA27831, 88-3 BCA ¶ 21,098, 31 GC¶ 118.

20/ Ordnance Parts & Eng’g Co., ASBCA40277, 90-3 BCA ¶ 23,142.

21/ Bromley Contracting Co., DOTCAB78-1, 81-2 BCA ¶ 15,191.

22/ Bart Assocs., EBCA C-9211144 et al.,96-2 BCA ¶ 28,479 at 142,235-2; NorairEng’g, Corp., 92-2 BCA at 124,648;Geranco Mfg. Corp., ASBCA 12376,68-1 BCA ¶ 6898 at 31,861, 10 GC¶ 239; see FAR 46.101. See also CrossAero Corp., ASBCA 14801, 71-2 BCA¶ 9075 at 42,085 (citing Herley Indus.,Inc., ASBCA 13727, 71-1 BCA ¶ 8888,13 GC ¶ 353, and cases cited therein),14 GC ¶ 74; Teller Envtl. Sys., Inc.,ASBCA 25550, 85-2 BCA ¶ 18,025 at90,427; Kaminer Constr. Corp. v. UnitedStates, 488 F.2d 980 (Ct. Cl. 1973),16 GC ¶ 46; Royson Eng’g Co., ASBCA15438 et al., 73-2 BCA ¶ 10,229.

23/ M.A. Mortenson Co. v. United States,29 Fed. Cl. 82 (1993), 35 GC ¶ 398;Southwest Welding & Mfg. Co. v. UnitedStates, 413 F.2d 1167 (Ct. Cl. 1969),11 GC ¶ 358; Solid State Elecs. Corp.,ASBCA 23041, 80-2 BCA ¶ 14,702 at72,503, 23 GC ¶ 219.

� REFERENCES �

24/ United Techs. v. United States, 27 Fed.Cl. 393 (1992); Southwest Welding &Mfg. Co., 413 F.2d 1167.

25/ Norair Eng’g, Corp., 92-2 BCA¶ 25,009.

26/ Tricon-Triangle Contractors, ENGBCA5553, 92-1 BCA ¶ 24,667.

27/ Dale Ingram, Inc., ASBCA 12152,74-1 BCA ¶ 10,436.

28/ California Power Sys., Inc., GSBCA7462, 86-1 BCA ¶ 18,598 at 93,367.

29/ See, e.g., Bart Assocs., EBCAC-9211144 et al., 96-2 BCA ¶ 28,479;Tricon-Triangle Contractors, 92-1 BCA¶ 24,667; Jung Ah Indus. Co., ASBCA22632, 79-1 BCA ¶ 13,643, 21 GC ¶ 91;Royson Eng’g Co., ASBCA 15438 etal., 73-2 BCA ¶ 10,229; Herley Indus.,Inc., ASBCA 13727, 71-1 BCA ¶ 8888,13 GC ¶ 353; Solid State Elecs. Corp.,ASBCA 23041, 80-2 BCA ¶ 14,702,23 GC ¶ 219.

30/ ABM/Ansley Bus. Materials, GSBCA9367, 93-1 BCA ¶ 25,246, 34 GC ¶ 595;California Power Sys., Inc., 86-1 BCA¶ 18,598; Stewart Avionics, Inc., ASBCA15512 et al., 75-1 BCA ¶ 11,253; GordonH. Ball, ASBCA 8316, 1963 BCA¶ 3925.

31/ Dale Ingram, Inc., 74-1 BCA at 49,331(citing Herley Indus., Inc., 71-1 BCA¶ 8888); Solid State Elecs. Corp.,80-2 BCA at 72,503.

32/ Solid State Elecs. Corp., 80-2 BCA¶ 14,702.

33/ Munson Hammerhead Boats, ASBCA51377, 00-2 BCA ¶ 31,143; WickhamContracting, Co., ASBCA 32392 et al.,88-2 BCA ¶ 20,559; see FAR 52.246-2, para. (b), 52.246-7, para. (a), 52.247-12, para. (b).

34/ Teller Envtl. Sys., Inc., ASBCA 25550,85-2 BCA ¶ 18,025.

35/ ABM/Ansley Bus. Materials, 93-1 BCAat 125,749 (citing Harrington &Richardson, Inc., ASBCA 9839, 72-2BCA ¶ 9507); see Nash & Cibinic, supranote 9, at 879.


12

36/ Tricon-Triangle Contractors, ENGBCA5553, 92-1 BCA ¶ 24,667.

37/ Royson Eng’g Co., ASBCA 15438,73-2 BCA ¶ 10,229.

38/ Boston Pneumatics, Inc., GSBCA 3122,72-2 BCA ¶ 9682; Nasatka & Sons,Inc., IBCA 1157-6-77, 79-2 BCA¶ 14,064, 22 GC ¶ 177; Catalytic Eng’g& Mfg. Corp., ASBCA 15257, 72-1 BCA¶ 9342, 14 GC ¶ 202.

39/ Cross Aero Corp., ASBCA 14801,71-2 BCA ¶ 9075, 14 GC ¶ 74.

40/ Herley Indus., Inc., ASBCA 13727,71-1 BCA ¶ 8888, 13 GC ¶ 353.

41/ Bart Assocs., EBCA C-9211144 et al.,96-2 BCA ¶ 28,479 at 142,235.

42/ Id.; see Datamark, Inc., ASBCA 12767,69-1 BCA ¶ 7464.

43/ M.A. Mortenson Co. v. United States,29 Fed. Cl. 82, 105 (1993), 35 GC¶ 398.

44/ Bromley Contracting Co., DOTCAB78-1, 81-2 BCA ¶ 15,191 at 75,197(citing Roberts v. United States, 357F.2d 938 (Ct. Cl. 1966), 8 GC ¶ 154,and Commerce Int’l Co. v. UnitedStates, 167 Ct. Cl. 529 (1964), 6 GC¶ 442).

45/ Roberts, 357 F.2d 938.

46/ Utley-James, Inc., GSBCA 6831, 88-1BCA ¶ 20,518.

47/ Catalytic Eng’g & Mfg. Corp., ASBCA15257, 72-1 BCA ¶ 9342 at 43,364,14 GC ¶ 202.

48/ BMY—Combat Sys. Div. of HarscoCorp. v. United States, 38 Fed. Cl. 109(1997).

49/ Chilstead Bldg. Co., ASBCA 49548,00-2 BCA ¶ 31,097 at 153,575; StewartAvionics, Inc., ASBCA 15512 et al.,75-1 BCA ¶ 11,253 at 53,630.

50/ BMY—Combat Sys. Div. of HarscoCorp, 38 Fed. Cl. 109.

51/ United States v. Aerodex, Inc., 469 F.2d1003 (5th Cir. 1972), 15 GC ¶ 29.

70/ Id. at 43,369.

71/ Hydro Fitting Mfg. Corp., ASBCA 16394,73-2 BCA ¶ 10,081, 15 GC ¶ 264.

72/ Catalytic Eng’g & Mfg. Corp., 72-1 BCAat 43,369; Bromley Contracting Co.,DOTCAB 78-1, 81-2 BCA ¶ 15,191 at75,198.

73/ Catalytic Eng’g & Mfg. Corp., 72-1 BCA¶ 9342.

74/ Stewart Avionics, Inc., ASBCA 15512et al., 75-1 BCA ¶ 11,253.


76/ Id. at 43,369.

77/ Stewart Avionics, Inc., 75-1 BCA¶ 11,253; Hydro Fitting Mfg. Corp.,73-2 BCA ¶ 10,081.

78/ Peters Mach. Co., ASBCA 21857,79-1 BCA ¶ 13649, 21 GC ¶ 160.

79/ Id.

80/ Chilstead Bldg. Co., ASBCA 49548,00-2 BCA ¶ 31,097 at 153,576; seeBar Ray Prods., Inc. v. United States,162 Ct. Cl. 836 (1963), 5 GC ¶ 329;Z.A.N. Co., ASBCA 25488, 86-1 BCA¶ 18,612, 28 GC ¶ 168.

81/ Chilstead Bldg. Co., 00-2 BCA at153,576; see Mason’s Inc., ASBCA27326, 86-3 BCA ¶ 19,250.

82/ E.g., Mason’s, Inc., 86-3 BCA ¶ 19,250.

83/ Jo-Bar Mfg. Corp., ASBCA 17774,73-2 BCA ¶ 10,311, 16 GC ¶ 55.

84/ Boston Pneumatics, Inc., GSBCA 3122,72-2 BCA ¶ 9682, 14 GC ¶ 468.

85/ Catalytic Eng’g & Mfg. Corp., ASBCA15257, 72-1 BCA ¶ 9342, 14 GC ¶ 202.


52/ Id.; see United States v. Kiefer, 228F.2d 448 (D.C. Cir. 1955).

53/ See Kiefer, 228 F.2d 448.


55/ Hydro Fitting Mfg. Corp., ASBCA 16394,73-2 BCA ¶ 10,081, 15 GC ¶ 264;Catalytic Eng’g & Mfg. Corp., ASBCA15257, 72-1 BCA ¶ 9342, 14 GC ¶ 202.


57/ BMY—Combat Sys. Div. of HarscoCorp. v. United States, 38 Fed. Cl. 109(1997).

58/ Warren Beaves, DOTCAB 1160, 84-1BCA ¶ 17,198, 26 GC ¶ 336.

59/ BMY—Combat Sys. Div. of HarscoCorp., 38 Fed. Cl. 109.

60/ Stewart Avionics, Inc., ASBCA 15512et al., 75-1 BCA ¶ 11,253.

61/ BMY—Combat Sys. Div. of HarscoCorp., 38 Fed. Cl. 109.

62/ Id.

63/ Id.

64/ Chilstead Bldg. Co., ASBCA 49548,00-2 BCA ¶ 31,097 at 153,574–75.

65/ Id.

66/ Bar Ray Prods., Inc. v. United States,340 F.2d 351 n.14 (Ct. Cl. 1964), 6 GC¶ 441; Catalytic Eng’g & Mfg. Corp.,ASBCA 15257, 72-1 BCA ¶ 9342 at43,365, 14 GC ¶ 202.

67/ Catalytic Eng’g & Mfg. Corp., 72-1 BCAat 43,365.


69/ Id.

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