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Illegal Subcontract


Guest Vern Edwards

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Guest Vern Edwards

Here's an interesting U.S. district court decision about a private dispute between a government 8(a) prime contractor and its subcontractor, which is also an 8(a) firm. The court refused to enforce the subcontract because both parties violated government regulations, which made the subcontract illegal, and because the subcontractor had "unclean hands."

The Court finds that MGC and CLS deliberately procured a government contract that violated applicable federal

regulations, including 13 C.F.R. ? 125.6(a) and 13 C.F.R. ? 121.103. The parties' current dispute is a direct result of

these violations and of CLS' claimed efforts to bring the parties into compliance with applicable federal regulations.

The Court cannot enforce the parties' subcontract, even though CLS through Barbara Moore, its principal officer,

has blatantly violated the terms and conditions of the subcontract with MGC, for it is plainly contrary to law. See

Paul Arpin Van Lines, Inc. v. Universal Transp. Servs., Inc., 988 F.2d 288, 290 (1st Cir.1993); Smithy Braedon Co.

v. Hadid, 825 F.2d 787, 790 (4th Cir.1987). The Court further finds that MGC is barred from injunctive relief by the

doctrine of unclean hands. See Johnson v. Yellow Cab Transit Co., 321 U.S. 383, 387 (1944) ("[A] federal court

should not, in an ordinary case, lend its judicial power to a plaintiff who seeks to invoke that power for the purpose

of consummating a transaction in clear violation of law."); United States v. Felici, 208 F.3d 667, 670-71 (8th

Cir.2000) ("The doctrine of unclean hands is an equitable doctrine that allows a court to withhold equitable relief if

such relief would encourage or reward illegal activity."). Finally, the Court finds that the relief MGC requests goes

beyond a mere injunction to preserve the status quo, and thus is not permitted under Merrill Lynch v. Bradley, 756

F.2d 1048 (4th Cir.1985). For these reasons, MGC's Motion for Temporary Restraining Order and Preliminary Injunction

is hereby DENIED.

http://www.pubklaw.com/rd/courts/10-298.pdf

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Thanks Vern. The decision made interesting reading. I particular liked the Judges style and some of the comments are humorous at profound at the same time.

I edited this from the decision

It has come to the Court's attention that government set-aside contracts are susceptible to finagling..... An individual SBA

officer has little incentive, if any, to question a particular small business' certification. .... The Department of Housing

and Urban Development, in particular, has a reputation as being the "friendliest" cabinet-level agency to small business.....The incentives that this system creates are perverse. Small business concerns enter into teaming agreements where their primary contribution is one thing and one thing only: eligibility for ? 8(a) contracts. This practice is amply demonstrated by the facts of the current case, where a janitorial firm nominally secured a multi-million dollar contract

to perform mortgage loan servicing, despite a complete lack of any prior experience in the industry. Does this truly benefit small businesses? Certainly their owners can profit from this arrangement. But in terms of actually allocating work to the small businesses that are so vital to our nation's economy, the system is hardly ideal.

This case is highly unusual, in that CLS has pursued its right to a larger share of the contract all the way to the

courthouse, despite knowing full well the dangers that a judicial opinion might carry. .... Without an effective

mechanism to verify a small business concern's capability to perform its ? 8(a) contract, the SBA has invited the

very problems that this case presents. This harms not only the public fisc, but also small business owners. .... The problem in the present case is that MGC tried to take the easy way out, and is now paying the consequences as it chose its own partner.

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