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.

A War Risks clause may be added to government contracts if performance is required in regions with a risk of war or war-like events. Such a clause helps allocate responsibility between the government and the contractor for any losses or damages caused by such events. While the Federal Acquisition Regulation (FAR) does not specifically contain a standard war risks clause, the defense supplement to the FAR (DFARS) includes clauses such as DFARS 252.228-7000, “Reimbursement for War-Hazard Losses.” Such a clause addresses the allowability of costs of war-hazard benefits for contractor employees. A War Risks clause can typically be negotiated between the government and the prospective contractor at the time of formation of the contract. As contracts in different regions have varying circumstances, risk allocation for specific events described in the War Risks clause should also be tailored and negotiated for each applicable contract. When disputes between the government and the contractor arise that implicate the War Risks clause, adjudicative forums such as the Boards of Contract Appeals or Federal Courts interpret the language of the War Risks clause to allocate increased costs liability between the parties.

The federal government generally procures software as commercial items. The terms and conditions governing the use of commercial software are contained in the end-user licensing agreement (EULA), which is generally incorporated into the government contract. Since the Federal Acquisition Regulation (FAR) does not provide standard licensing agreements for commercial software, manufacturers or resellers must negotiate the terms of use of such software when the EULA is incorporated into the contract. Depending on the contract, the EULA can be incorporated into an individual order or the master agreement of a government-wide acquisition vehicle, such as a Federal Supply Schedule (FSS) contract.

As relevant to government contracts, the U.S. federal government waives its sovereign immunity for liability arising from contract claims under the Contract Disputes Act (CDA). However, the government may use the Sovereign Acts Doctrine as an affirmative defense against contractor claims. Standard contract provisions within the software manufacturer’s EULA may occasionally conflict with federal laws, including the government’s rights as a sovereign. Contractors must, therefore, review their standard EULA terms and negotiate specific clauses with the software manufacturer, if necessary, before submitting them to the government for incorporation into a government contract. While contractors should review all provisions with sovereign immunity implications, they should pay especially close attention to the following standard clauses before the EULA is submitted to the government for incorporation into a federal contract.

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.