Difference between revisions of "Privity"
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The Armed Service Board of Contract Appeals (ASBCA) dismissed an appeal by Binghamton Simulator Company because they were a subcontractor and did not have privity with the US Government. The appeal must be in the prime contractors name, with the prime contractors consent and cooperation. In this case the prime contractor refused to confirm sponsorship of the appeal to the Board. | The Armed Service Board of Contract Appeals (ASBCA) dismissed an appeal by Binghamton Simulator Company because they were a subcontractor and did not have privity with the US Government. The appeal must be in the prime contractors name, with the prime contractors consent and cooperation. In this case the prime contractor refused to confirm sponsorship of the appeal to the Board. | ||
| + | ===Threshold Technologies, Inc. v. United States, No. 13-599C (Fed. CL Aug. 29, 2014)=== | ||
| + | ===New Hampshire Flight Procurement, LLC v. United States No. 13-567C (Fed Cl. Aug. 29, 2014=== | ||
| + | The two cases, Threshold Technologies, Inc. v. United States, No. 13-599C (Fed. Cl. Aug. 29, 2014) and New Hampshire Flight Procurement, LLC v. United States, No. 13-567C (Fed Cl. Aug. 29, 2014), arose out of a prime contract between the National Aeronautics and Space Administration (NASA) and Flight Test Associates, Inc. (FTA). The purpose of the contract was to conduct “High Ice Water Content” flight research to study the causes of jet engine power-loss events occurring around areas of deep tropical convection at high altitudes. The flight campaign was to be conducted out of Darwin, Australia during the monsoon season. | ||
| + | Both subcontractors filed suit in the U.S. Court of Federal Claims seeking payment from the U.S. Government for services provided under their subcontracts with FTA. Threshold also sought compensation for storing the aircraft after FTA’s prime contract was terminated. The subcontractors claimed that NASA (1) breached express contracts with them and owed payment to the subcontractors as third party beneficiaries to the prime contract, (2) breached implied contracts with the subcontractors, (3) breached the covenant of good faith and fair dealing, and (4) was liable to the subcontractors under a theory of quantum meruit. The United States filed a motion to dismiss seeking dismissal of virtually all of Threshold’s claims and NHFP’s suit in its entirety, for lack of subject matter jurisdiction and failure to state a claim upon which relief may be granted. | ||
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| + | The Court dispatched with the subcontractors’ express contract claims, finding that the subcontractors were not signatories to the prime contract, and NASA was not a party to their subcontracts with FTA. The Court also found no merit to their quantum meruit claims, as the Court does not have jurisdiction over implied-in-law contract claims except under very narrow circumstances not present in these cases. | ||
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| + | The Court devoted most of its attention to grappling with the issue of whether Threshold and NHFP were intended third party beneficiaries to the prime contract between NASA and FTA. In support of their claims, the subcontractors argued that NASA knew they would be heavily involved in contract performance and expressly recognized in the prime contract that Threshold was “critical to the success of the contract.” | ||
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| + | The Court ultimately found that the subcontractors had not shown any intent by the Government to directly benefit them at the time of awarding the prime contract to FTA. The Court noted that there was no clause in the prime contract or the subcontracts granting a remedy or right to payment to the subcontractors, or otherwise guaranteeing them any right to recourse against NASA. Following an extensive discussion of the Federal Circuit’s case law concerning third party beneficiaries, the Court concluded that: | ||
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| + | :''[I]ntent to endow third party beneficiary status requires more than notice to the government; [it] also requires that the government ‘knows of a condition precedent to a third-party’s performance of a subcontractor, and specifically modifies the prime contract so as to ensure the third-party’s continued performance.’(quoting Flexfab, L.L.C. v. United States, 424 F.3d 1254, 1263 (Fed. Cir. 2005)). The Court found that even if NASA was aware in this case that the subcontractors would be involved in contract performance, the Contracting Officer never modified the prime contract in a manner that would assure payment to Threshold and NHFP. As for the clause in the prime contract identifying Threshold as a “critical” subcontractor, the Court found that it was designed to protect the Government’s interests, not confer any right or remedies to Threshold. | ||
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| + | The Court dismissed NHFP’s entire complaint and most Threshold’s claims. The Court found that Threshold had pled sufficient facts to support a claim that an implied-in-fact contract was created when it stored the aircraft for NASA after FTA’s contract was terminated. | ||
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| + | ====Lesson for Subcontractors==== | ||
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| + | These cases reinforce that subcontractors have very limited rights against the Government if their prime contractor does not pay them. Even in Threshold’s case, where the prime contract explicitly recognized its status as a “critical” subcontractor that could not be removed without the Contracting Officer’s written approval, the Court refused to find an obligation on the part of the Government to ensure that Threshold was paid for its work. | ||
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| + | The cases also show, however, that a subcontractor is not without options if it is not being paid by its prime contractor, particularly if it has valuable supplies or services that the Government needs. '''The Court recognized that third party beneficiary status is created where the Contracting Officer amends the prime contract to have payments remitted directly to the subcontractor, or otherwise modifies the prime contract to unambiguously effectuate payment from the government to the subcontractor.''' In that scenario, the subcontractor becomes a third party beneficiary to the prime contract because the Government has specifically modified the contract to ensure the subcontractor’s continued performance. | ||
| + | |||
| + | Not all subcontractors will have the leverage required to force such a significant modification to the prime contract, particularly if the prime contractor is under financial distress. But for those subcontractors providing essential supplies or services that the Government absolutely must have, it may be a way to ensure payment for work performed even if the prime contractor fails to meet its obligations under the subcontract. | ||
==References== | ==References== | ||
Revision as of 13:05, 22 September 2014
Contents |
Privity
The principle of privity in the common law's law of contract dictates that an individual cannot sue on a contract to which he or she was not a party.
A common example of the principle in operation is that if A (a consumer) buys goods from B (a retailer) which B had originally bought from C (the manufacturer) which turn out to be faulty, A cannot sue C in contract law because A has no contract with C.[1]http://en.wikipedia.org/wiki/Privity
In government contracting, a prime contractor has privity with the US Government. A subcontractor would have privity with the prime contractor. Therefore a subcontractor cannot have a contract dispute with the US Government. The prime contractor must consent, cooperate in any dispute the subcontractor has. In essence, the prime contractor must sponsor the contract dispute, and the contract dispute must be in the prime contractors name.
Case Law
Binghamton Simulator Company
The Armed Service Board of Contract Appeals (ASBCA) dismissed an appeal by Binghamton Simulator Company because they were a subcontractor and did not have privity with the US Government. The appeal must be in the prime contractors name, with the prime contractors consent and cooperation. In this case the prime contractor refused to confirm sponsorship of the appeal to the Board.
Threshold Technologies, Inc. v. United States, No. 13-599C (Fed. CL Aug. 29, 2014)
New Hampshire Flight Procurement, LLC v. United States No. 13-567C (Fed Cl. Aug. 29, 2014
The two cases, Threshold Technologies, Inc. v. United States, No. 13-599C (Fed. Cl. Aug. 29, 2014) and New Hampshire Flight Procurement, LLC v. United States, No. 13-567C (Fed Cl. Aug. 29, 2014), arose out of a prime contract between the National Aeronautics and Space Administration (NASA) and Flight Test Associates, Inc. (FTA). The purpose of the contract was to conduct “High Ice Water Content” flight research to study the causes of jet engine power-loss events occurring around areas of deep tropical convection at high altitudes. The flight campaign was to be conducted out of Darwin, Australia during the monsoon season.
Both subcontractors filed suit in the U.S. Court of Federal Claims seeking payment from the U.S. Government for services provided under their subcontracts with FTA. Threshold also sought compensation for storing the aircraft after FTA’s prime contract was terminated. The subcontractors claimed that NASA (1) breached express contracts with them and owed payment to the subcontractors as third party beneficiaries to the prime contract, (2) breached implied contracts with the subcontractors, (3) breached the covenant of good faith and fair dealing, and (4) was liable to the subcontractors under a theory of quantum meruit. The United States filed a motion to dismiss seeking dismissal of virtually all of Threshold’s claims and NHFP’s suit in its entirety, for lack of subject matter jurisdiction and failure to state a claim upon which relief may be granted.
The Court dispatched with the subcontractors’ express contract claims, finding that the subcontractors were not signatories to the prime contract, and NASA was not a party to their subcontracts with FTA. The Court also found no merit to their quantum meruit claims, as the Court does not have jurisdiction over implied-in-law contract claims except under very narrow circumstances not present in these cases.
The Court devoted most of its attention to grappling with the issue of whether Threshold and NHFP were intended third party beneficiaries to the prime contract between NASA and FTA. In support of their claims, the subcontractors argued that NASA knew they would be heavily involved in contract performance and expressly recognized in the prime contract that Threshold was “critical to the success of the contract.”
The Court ultimately found that the subcontractors had not shown any intent by the Government to directly benefit them at the time of awarding the prime contract to FTA. The Court noted that there was no clause in the prime contract or the subcontracts granting a remedy or right to payment to the subcontractors, or otherwise guaranteeing them any right to recourse against NASA. Following an extensive discussion of the Federal Circuit’s case law concerning third party beneficiaries, the Court concluded that:
- [I]ntent to endow third party beneficiary status requires more than notice to the government; [it] also requires that the government ‘knows of a condition precedent to a third-party’s performance of a subcontractor, and specifically modifies the prime contract so as to ensure the third-party’s continued performance.’(quoting Flexfab, L.L.C. v. United States, 424 F.3d 1254, 1263 (Fed. Cir. 2005)). The Court found that even if NASA was aware in this case that the subcontractors would be involved in contract performance, the Contracting Officer never modified the prime contract in a manner that would assure payment to Threshold and NHFP. As for the clause in the prime contract identifying Threshold as a “critical” subcontractor, the Court found that it was designed to protect the Government’s interests, not confer any right or remedies to Threshold.
The Court dismissed NHFP’s entire complaint and most Threshold’s claims. The Court found that Threshold had pled sufficient facts to support a claim that an implied-in-fact contract was created when it stored the aircraft for NASA after FTA’s contract was terminated.
Lesson for Subcontractors
These cases reinforce that subcontractors have very limited rights against the Government if their prime contractor does not pay them. Even in Threshold’s case, where the prime contract explicitly recognized its status as a “critical” subcontractor that could not be removed without the Contracting Officer’s written approval, the Court refused to find an obligation on the part of the Government to ensure that Threshold was paid for its work.
The cases also show, however, that a subcontractor is not without options if it is not being paid by its prime contractor, particularly if it has valuable supplies or services that the Government needs. The Court recognized that third party beneficiary status is created where the Contracting Officer amends the prime contract to have payments remitted directly to the subcontractor, or otherwise modifies the prime contract to unambiguously effectuate payment from the government to the subcontractor. In that scenario, the subcontractor becomes a third party beneficiary to the prime contract because the Government has specifically modified the contract to ensure the subcontractor’s continued performance.
Not all subcontractors will have the leverage required to force such a significant modification to the prime contract, particularly if the prime contractor is under financial distress. But for those subcontractors providing essential supplies or services that the Government absolutely must have, it may be a way to ensure payment for work performed even if the prime contractor fails to meet its obligations under the subcontract.
