Some of our readers may tire of the saga of First Kuwaiti General Trading & Contracting Co., which has had a controversial part in four State Department embassy construction contracts, but new information keeps coming in - and N&S is determined to follow this story to the end.

The latest development involves allegations - and we stress, they are just allegations - that the State Department went to bat for First Kuwaiti back in 2006, forcing an American construction firm known as Grunley-Walsh International to accept  FKTC as a subcontractor under terms very favorable to First Kuwaiti.

That's the substance of a letter to the State Department from lawyers for Aurora LLC, as Grunley-Walsh was renamed after it was sold (we hear at a bargain basement price) to a trio of investors who included a former top First Kuwaiti employee.

At the time, Grunley-Walsh had won three State Department contracts, to build a U.S. Embassy in Gabon and consulates in Jeddah, Saudi Arabia and Surabaya, Indonesia. (As we've previously reported, Aurora and First Kuwaiti have been kicked off the jobs in Gabon and Saudi Arabia). First Kuwaiti, meanwhile, was building the massive U.S. Embassy in Baghdad, where investigators found numerous, potentially life-threatening flaws in the work.

The April 29, 2010 letter from Aurora's lawyers alleges that the State Department's bureau of Overseas Building Operations  (known by the acronym OBO) knew that the agreement between Aurora and First Kuwaiti actually put the foreign subcontractor, not the U.S. prime contractor, in charge:

Aurora may not coordinate, supervise or control FKTC's work.

Aurora may not stop work at the site regardless what FKTC may have done or failed to do in terms of safety, health or security.

Aurora may not take work away from FKTC when FKTC fails to perform it.

As maintained by FKTC and apparently endorsed by OBO, Aurora must pay FKTC a fixed share of contract receipts regardless whether FKTC has performed well or even performed at all.

The letter then goes on to make a startling charge:

Any prime contractor that willingly entered into such an arrangement would be justly questioned on grounds of sanity. In fact, Aurora's predecessor did not enter into this agreement willingly, but was compelled to do so by the concerted and combined actions of FKTC and OBO.

The letter's author, Richard C. Johnson of the firm Smith Pachter McWhorter declined comment, due to the ongoing contractual/legal dispute.

A State Department official with knowledge of the issue disputed this version of events. "The State Department has not interfered with the subcontracting arrangements of Aurora LLC predecessor Grunley Walsh or those of Aurora LLC," said the official, who was not authorized to speak for the record. "The content of language in a contract between contractors and subcontractors is a matter for discussion and negotiation between those two parties."

The official noted that Aurora was terminated from the Jeddah contract on May 10 this year, after 90 percent of the contract period had expired, with only 54 percent of the work done. (Aurora, according to other letters we obtained, is demanding $10.5 million in breach damages from the government, as well as $5.7 million for work it performed).

To make its case that it shouldn't be held responsible for the failure in Jeddah, Aurora cited an odd series of events it said occurred in November and December 2006, soon after it was awarded the three prime contracts.

The letter alleges that First Kuwaiti made it impossible from the outset to execute the contracts, "linking its further performance to GW's sale of its company to FKTC." Grunley-Walsh notified the State Department of the problem and, in November 2006, "with OBO's help and involvement located and signed up a substitute partner and prepared to go forward."

But, after "secret meetings" between First Kuwaiti and OBO, on November 28, 2006, OBO issued 10-day warnings, known as "cure notices," on all three construction contracts, the letter says. On November 30, it rejected the alternate partner and told Grunley Walsh "it could only go forward with FKTC or face three default terminations that would effectively destroy the company."

"As a direct consequence of OBO's actions, G-W was forced to accept the sale of its international division at a bargain basement price, and to accept the terms of an FKTC-dictated subcontract almost identical to those it had rejected earlier."

Hmmm. Was someone at the State Department working on First Kuwaiti's behalf? And if so, why? the story isn't over...