TLF-Contract-Claims-Insight-6.jpg

Achieving Privity of Contract for Subcontractor Claims

Subcontractors under U.S. federal contracts cannot generally sue the government directly as they lack privity of contract with the government. Privity refers to a legal concept describing a relationship or nexus between contracting parties. The government often utilizes a two-tiered contracting system for procurements where it enters into a contract with the prime contractor that, in turn, contracts with subcontractor(s) to fulfill contractual requirements. Thus, in a federal contract, the government only has a privity of contract with the prime contractor, creating a legal buffer between the government and the subcontractor. Since subcontractors are not in privity with the government, the government does not waive its sovereign immunity, and subcontractors may not bring direct claims against the government.

However, as with most rules in U.S. federal contracting, the no subcontractor privity rule has its exceptions. These exceptions require that subcontractors looking to bring direct claims against the government must first establish a privity of contract with the government. That is, the contractor must successfully demonstrate that it explicitly or implicitly entered into a contract with the government.

o Asserting a Third-Party Beneficiary Claim

Subcontractors may assert claims as third-party beneficiaries of the prime contractor’s agreement with the government, provided they can demonstrate special contract provisions or payment arrangements that require the government to make joint payments to the prime and subcontractor or otherwise make direct payments to the subcontractor. Notably, to qualify as a third-party beneficiary, the subcontractor must be an intended direct beneficiary and not just an incidental or indirect beneficiary to the government contract. For instance, when a contract’s remittance clause is modified to allow the subcontractor control over government payments, the subcontractor qualifies as an intended third-party beneficiary with a right to sue the government directly for recovery. Finally, subcontractors looking to bring third-party beneficiary claims against the government may only do so at the COFC, as the Boards of Contract Appeals do not have jurisdiction over such claims.

o Proving the Existence of a Joint Venture

Contracting firms may also bring claims against the government if they can demonstrate that the relationship between the contractors was, in fact, a joint venture instead of a prime-sub relationship. FAR 9.601 recognizes joint ventures as a valid contractor teaming arrangement where two or more companies join together to create a legal entity that acts as a prime contractor. Since the joint venture contracts with the federal government as the prime contractor, the joint venture may bring its claim against the government as a legal entity. However, individual joint venture members may not generally assert a claim against the government.

o Demonstrating that the Prime Contractor was Acting as an Agent of the Government

Subcontractors can bring direct claims against the government if they can demonstrate that the prime contractor was merely acting as an agent of the government. Subcontractors may also establish privity with the government through the purchasing agent exception of the no subcontractor privity rule by showing the existence of a contracting provision or a formal intention to make the prime contractor the government’s purchasing agent. It should be noted, however, that subcontractors will generally find it challenging to establish privity of contract by showing that direct day-to-day contact with the government was so prevalent and persistent that it made the prime contractor a mere agent of the government.

o Otherwise Establishing Privity of Contract

Subcontractors may establish a direct privity of contract by showing that a contractual relationship exists between the subcontractor and the government. Direct privity may be established by showing an implicit or explicit contractual agreement depending on the specific facts. For instance, the teaming agreement may incorporate the prime contract with a modified disputes clause allowing the subcontractor to bring direct claims against the government, or the Court may otherwise find that the government and the subcontractor entered into an implied contract. It should be noted, however, that FAR 44.203 explicitly limits contracting officers’ ability to consent to subcontracts, obligating them to deal directly with subcontractors.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.