When a subcontractor would like to file suit against the U.S. government, what procedures must the subcontractor follow, and what obstacles will it face?
What follows is Part II of a two part discussion of both the procedural requirements and obstacles a subcontractor must consider when it evaluates a potential suit against the federal government.
In Part I we presented the scenario that you entered into a contract with Contractor X under which you agreed to provide navigation systems for a large fleet of ships Contractor X is building. Contractor X contracted with the U.S. Navy to build the ships. You will be paid out of the funds the government provides to Contractor X in compensation for the project. After you have worked for three months obtaining and installing the navigation systems, Contractor X starts to get behind on its payments to you, and, eventually, its payments stop altogether. You have now installed six navigation systems without being paid. Contractor X has filed for bankruptcy, and you believe that in order to receive payment, you must file suit against the U.S. Navy.
We briefly discussed submission to the contracting officer under the Contract Disputes Act, presenting a claim in the Court of Federal Claims, or filing a claim under the Miller Act.
Assuming none of those avenues are available, a subcontractor may be able to bring a direct action against the U.S. government. To do so, it must prove that it had an express or implied in fact contract with the government or that it was an intended third-party beneficiary of a government contract. A claim of unjust enrichment will not succeed, as such a claim is based on an implied in law contract. See Hercules Inc. v. United States, 516 U.S. 417, 423 (1996).
A subcontractor has a viable claim if it can prove that the parties to the prime contract intended to give the subcontractor a right of direct appeal against the government. See Johnson Controls, 713 F.2d 1541. This must be shown by clear contractual language; ambiguous expressions of intent will not suffice. Id.
It also may be possible for a subcontractor to bring a claim if it shows that the prime contractor was acting as a purchasing agent of the government and the government contractually consented to the agency relationship. See id. at 1551. However, the agency theory is not firmly established, and even if there is an agency relationship, a court will still look for a contractual provision providing that the government is directly liable to the subcontractor for goods or services supplied to the prime contractor before it finds that the subcontractor can bring a claim. See id at 1551-54; see also Lockheed Martin Corp. v. United States, No. 98-468C (Fed. Cl. October 16, 2001).
The general rule is that a subcontractor is only an incidental beneficiary of a contract between a prime contractor and the government. Thus, a subcontractor faces an uphill battle when it attempts to prove it has third-party beneficiary status. To have a claim as an intended third party beneficiary, a subcontractor needs to prove that the contracting parties demonstrated the intent to confer a direct benefit on it. G4S Technology LLC v. United States, 779 F.3d 1337 (Fed. Cir. 2015). It needs clear evidence that an authorized government official approved a contract provision that had the express purpose of effectuating payment from the government to the subcontractor. Id. Alternatively, a court may look to evidence of the dealings between the subcontractor, the contractor, and the government to evaluate whether the subcontractor was an intended third party beneficiary. See id. For example, it will strengthen the subcontractor’s argument if the prime contractor and subcontractor were joint payees on checks from the government agency, or if payments were held in escrow for the subcontractor. In contrast, where the government always made payment to the prime contractor directly, a court is likely to deem the subcontractor an incidental beneficiary. A subcontractor is merely an incidental beneficiary even where the government oversees the subcontractor’s work and the government provides the funds used to pay the subcontractor. Id.
In short, the government’s intent to waive sovereign immunity and consent to suit by a subcontractor needs to have been made clear. Courts strictly construe contractual provisions and look for a specific showing that government intended to be liable to subcontractors. The contractual language will rarely be sufficient. If your action is “little more than a garden-variety lawsuit by a subcontractor lacking privity with the government,” it will be dismissed. See Lockheed Martin, No. 98-468C.
Because there are significant jurisdictional, procedural, and legal hurdles a subcontractor must scale before recovering from the U.S. government, subcontractors must be especially wary of performing services on a government project where the prime contractor may not be financially stable, or where payments are delayed. A subcontractor cannot count on being able to resort to filing a lien or direct claim against the government.