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Suspension and debarment are actions taken by the government to protect the public from doing business with dishonest or unreliable contractors. Under the Federal Acquisition Regulations (“FAR”), a government contractor may be suspended or debarred for, among other things, committing a fraud or criminal offense in obtaining or performing a public contract, violating certain federal or state statutes, or any other serious cause that affects the government contractor’s “present responsibility.”

Although there is no doubt that suspension and debarment can cause serious financial harm to a government contractor’s business, contractors may not know the extent that suspension and debarment affects companies or organizations affiliated with a suspended or debarred contractor. An affiliate who is innocent of any wrongdoing or improper conduct may nevertheless be suspended or debarred by the government under the FAR.

The suspension or debarment of a contractor constitutes suspension or debarment of “all divisions or other organizational elements of the contractor,” unless the suspension or debarment decision is limited by its terms to specific divisions, organizational elements, or commodities. (FAR 9.406-1(b) and 9.407-1(c).) Also, the suspension or debarment decision may be extended to “affiliates” of the contractor, which is defined as follows:

Business concerns, organizations, or individuals are affiliates of each other if, directly or indirectly, (a) either one controls or has the power to control the other, or (b) a third party controls or has the power to control both. (FAR 9.403.)

The issue of whether a business is an affiliate of a contractor will depend on the contractor’s ability to control, either directly or indirectly, the actions of the business in question. Affiliation has nothing to do with the degree of culpability or involvement with the contractor’s wrongful actions or conduct. Rather, it is the mere status of being an affiliate of a suspended or debarred contractor that exposes an affiliate to potential suspension or debarment.

Affiliation has been found based on a business’ organizational relationship with a suspended or debarred contractor. For example, suspension and debarment have been extended to subsidiaries and sister corporations. Also, businesses may be deemed affiliates of each other if a suspended or debarred contractor holds an ownership interest or a corporate position that enables the contractor to control operations in both businesses, such as a majority stockholder or president.

Even if a suspended or debarred contractor does not hold an official title or employment position, or have an ownership interest, a finding of affiliation may be warranted to the extent the contractor has the ability to control or influence management, whether directly or indirectly. For example, in the case of Alexandria Printing and Photo Services, a company was deemed to be affiliated with a debarred contractor because the contractor had loaned buildings, equipment, and working capital to the company on favorable terms; and former employees of the contractor worked for the company. In the case of Balboa Ambulance, Inc., a company and a debarred contractor were found to be affiliates because, among other things, the company’s owners were family members of the contractor and the company used equipment furnished by the contractor. It was determined that the debarred contractor had the ability to exercise sufficient control over company, despite the fact that the contractor held no stock in the company and was not an officer, director, or employee of the company.

Although the government may extend a decision to suspend or debar a contractor to its affiliates, the suspension or debarment of an affiliate is not automatic. Rather, an affiliate must be: (1) specifically named in the notice of suspension or debarment, and (2) given written notice and an opportunity to respond. (FAR 9.406-1(b) and 9.407-1(c).) Indeed, courts have held that notice and an opportunity to respond to a suspension or debarment is a due process right afforded by the Constitution.

One can take measures to protect an affiliate from the taint associated with a suspended or debarred contractor. These measures may include a transfer of the suspended or debarred contractor’s ownership interest, the removal of the suspended or debarred contractor from managerial positions, and the establishment of comprehensive ethics programs. It must be emphasized, however, that these prophylactic and remedial measures do not guarantee that an affiliate will avoid suspension or debarment. The government is generally given discretion to decide whether these measures sufficiently protect the public from future improper conduct.

The effect of suspension and debarment on a contractor’s affiliates offers yet another reason why contractors should avoid any appearance of impropriety when bidding on or performing government contracts. In light of the federal regulations, the financial death knell of suspension and debarment has the potential of resonating throughout a contractor’s affiliated businesses, even though its affiliates may have been innocent of any wrongdoing.

About the author: Simon Santiago was  an attorney with the law firm of Wickwire Gavin, P.C., 8100 Boone Blvd., Suite 700, Vienna, VA 22182.; when he wrote this article. Published in:  ConstructionRisk.com Report, Vol. 4, No. 6 (Jun 2002)