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.

The U.S. Federal Government often utilizes federal supply schedule (FSS) contracts to purchase commercially available off-the-shelf software (COTS) software from reputable pre-vetted software vendors. These FSS contracts are administered by the General Services Administration (GSA), and they eliminate the need for lengthy open-market solicitations for common COTS software products. FSS contracts permit agencies to purchase COTS software products quickly and efficiently from pre-vetted software vendors using pricing that reflects volume discounts due to GSA’s government-wide purchasing leverage. Generally, the COTS software product manufacturer’s end-user licensing agreement (EULA) is incorporated into the procurement contract and dictates the Government’s use of the COTS software. The term “contractor” has been expressly defined in 41 U.S.C. § 7107(7) as a “party to a Federal Government contract other than the Federal Government.” Therefore, in COTS software product purchases, since the pre-vetted software vendor has the FSS contract with the Government, the COTS software product manufacturer is generally not considered a contractor in the traditional sense because it is not a party to the Government contract. Accordingly, since the CDA does not permit appeals by anyone who is not a party to a Government contract, COTS software product manufacturers are generally unable to bring contract claims against the Government under the CDA. However, subcontractors and certain third parties may achieve privity of contract with the Government under particular circumstances, which allows them to bring claims against the Federal Government under the CDA.

While there are ways in which subcontractors may achieve privity of contract, they may not generally bring direct claims against the Government due to a lack of privity. Therefore, subcontractor claims against the Government are typically asserted by prime contractors as pass-through claims. However, prime contractors may only bring such pass-through claims if they meet the requirements of the Severin Doctrine. First articulated by the Court of Claims in 1943, the Severin Doctrine bars pass-through subcontractor claims unless the prime contractor itself remains liable to claims by the subcontractor. While the Severin Doctrine has evolved through its application to various pass-through claims scenarios, at its outset, it barred the assertion of pass-through claims unless the prime contractor either reimbursed the subcontractor due to the Government’s fault or was at least liable to make such a reimbursement in the future.

Based on the principles of sovereign acts immunity and privity of contract as applied to government contracts, the Severin Doctrine requires the prime contractor to have at least some demonstrable exposure to subcontractor liability. To prevent pass-through claims through this affirmative defense, the Government typically points to any provisions in the subcontract that tend to exculpate the prime contractor from liability to the subcontractor. When entering teaming arrangements, contractors should be aware that if the subcontract agreement contains a clause completely or specifically exonerating a prime contractor from liability to the subcontractor for pertinent damages, then the prime contractor may not assert a related pass-through claim against the Government. Prime contractors are similarly barred from asserting pass-through claims if the subcontract specifically extinguishes prime contractor liability upon the meeting of certain requirements, such as the subcontractor being granted additional time or the acceptance of final payment.

The government may terminate a federal contract if the contractor fails to meet its contractual obligations. The contracting officer (CO), in such cases, issues a final decision terminating the contract for default and outlines the reasons for the default. In the event of a termination for default, the government is only liable to the contractor for the portion of the contract that was already performed. While the CO may exercise discretion to terminate a contract for default, such a decision is appealable to the Board of Contract Appeals or the Court of Federal Claims (COFC) pursuant to the Contract Disputes Act (CDA). The CO’s decision to terminate may be set aside by the adjudicative forum if it is arbitrary, capricious, or constitutes an abuse of the CO’s discretion. For instance, a decision to terminate for default may be arbitrary and capricious if there is a lack of nexus between the CO’s decision to terminate the contract for default and the contractor’s performance on the contract. In such situations, while the concerned adjudicative forum may lack the ability to provide injunctive relief, it may nevertheless convert the CO’s default termination to one for the government’s convenience.