A contractor sought to recover costs incurred from litigation with a local business sponsor in Kuwait. The contractor argued its agreement with the sponsor was merely a local service arrangement required to perform overseas contracts—not a joint venture—and therefore its litigation costs were allowable. The ASBCA disagreed, finding the agreement's plain language created a partnership with shared profits and joint control, making the litigation costs expressly unallowable under FAR 31.205-47(f)(5), which bars reimbursement for legal costs arising from disputes between contractors over joint ventures or similar arrangements of shared interest.
IAP Worldwide Services, Inc., ASBCA Nos. 62638, 63879
- Background - IAP provided logistics and support services to the U.S. military in Kuwait and Iraq under multiple contracts, including cost-plus arrangements. In 2003, IAP entered a "Joint Venture Contract" with Kuwaiti national Adel Al Ghanem to provide local sponsorship and administrative support. After IAP terminated the agreement in 2005, Al Ghanem sued in Kuwait and won a $78 million judgment. IAP incurred millions in legal costs defending itself in Kuwait and Florida courts. When IAP sought to include these costs in its indirect rates, DCMA deemed them expressly unallowable under FAR 31.205-47(f)(5). IAP filed certified claims totaling approximately $13 million. The contracting officer denied both claims, and the parties filed cross-motions for summary judgment.
- Joint Venture Definition - Under FAR 31.205-47(f)(5)(i), costs incurred from litigating a joint venture contract or other similar arrangement are unallowable. IAP argued that its agreement with Al Ghanem was not a "joint venture" or "similar arrangement of shared interest". IAP reasoned it merely adopted Kuwaiti nomenclature when titling the document "Joint Venture Contract" and that the arrangement lacked essential joint venture elements—specifically, no separate legal entity was formed, no joint control existed, and the agreement contained no loss-sharing provisions. The ASBCA rejected these arguments. Drawing on case law and the DCAA Cost Guidebook, the Board found a joint venture is "an association of partners established by contract to carry out a single business activity for joint profit" that is "essentially a partnership created for a limited purpose." The agreement here created exactly that: a partnership between IAP (providing government contracting expertise) and Al Ghanem (providing local Kuwaiti business support) to perform contracts in Kuwait and Iraq. The agreement's plain language established shared ownership, profit-sharing proportional to ownership percentages, joint control over bank accounts requiring both signatures for amendments, and mutual benefit.
- Shared Losses - IAP argued the agreement's silence on losses was fatal to finding a joint venture. The Board acknowledged that while profit-and-loss sharing is typically essential to joint ventures, courts commonly hold that "an agreement to share losses may be implied from an agreement to share profits," particularly where one party furnishes services rather than just capital. The Board noted Al Ghanem risked time, effort, and out-of-pocket expenses that would be lost if the venture failed. Moreover, both U.S. and Kuwaiti law would allocate losses in the same ratio as profit-sharing when an agreement is silent.
- Similar Arrangement Alternative - Even if the agreement didn't constitute a formal joint venture, the ASBCA held it clearly was "a similar arrangement of shared interest" under FAR 31.205-47(f)(5)(i). Applying the interpretive principle of noscitur a sociis—a word is known by the company it keeps—the Board examined the phrase "teaming arrangement, a joint venture, or similar arrangement of shared interest." Since teaming arrangements involve companies pooling complementary capabilities for shared interest in government work, the catchall phrase captures other partnership structures with the same characteristics. The IAP-Al Ghanem agreement perfectly fit this description: two parties with complementary capabilities created a partnership structure to share profits from performing U.S. military contracts in Kuwait and Iraq.
- Contract Compliance Exception - IAP invoked FAR 31.205-47(f)(5)(ii)(A), which makes otherwise unallowable litigation costs allowable if "incurred as a result of compliance with specific terms and conditions of the contract." IAP argued its contracts included FAR 52.236-7 requiring compliance with local laws, and Kuwaiti law mandated foreign companies either invest as minority shareholders in a Kuwaiti company or appoint a Kuwaiti agent—thus, the Al Ghanem agreement was compelled by contract requirements. The ASBCA rejected this argument, holding the exception must be construed narrowly based on its regulatory history and parallel language elsewhere in the FAR. The Board cited precedent interpreting identical exception language in the fines-and-penalties context, where courts held the exception applies only to costs from "particular work directly required by the contract," not broadly to all work within the contract's scope. Here, while IAP's contracts required obtaining permits and complying with local law, they didn't specify how to accomplish this or mandate entering into a joint venture.
The contractor is represented by J. Alex Ward, R. Locke Bell, and Caitlin A. Crujido of Morrison & Foerster LLP. The government is represented by Samuel W. Morris, Amelia R. Lister-Sobotkin, and Adrianne L. Goins of the Defense Contract Management Agency.
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