Can A Subcontractor Circumvent the Privity Rule and Sue the Federal Government?

Kristi Morgan Aronica - Weitz Morgan PLLC
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Kristi Morgan Aronica - Weitz Morgan PLLC

Yes, exceptions exist. But successfully utilizing them is challenging. This article will focus on two: third-party beneficiary status and implied-in-fact contracts.

Overview of the Privity Rule & Its Exceptions

Pursuant to the Tucker Act, as interpreted by the Supreme Court, the United States waives a sovereign immunity defense on claims against it derived from an express or implied contract. And the Federal Circuit has made it clear that in order to maintain a cause of action, the contract must be between the claimant and the government. In other words, a concern that is not a party to the government contract lacks privity and is jurisdictionally barred from bringing suit against the government.

Like with most legal principles exceptions to this general rule are available to a potential plaintiff deprived of privity, notably subcontractors. They include suits by intended third-party beneficiaries, by primes through a pass-through claim, and by government contract sureties for funds improperly disbursed to a prime contractor. An implied-in-fact contract is also a substitute for direct privity. The crux of all of these circumventions is that the party without privity stands in the shoes of the party who actually possesses it.

Third-Party Beneficiary Exception

A subcontractor seeking to sidestep the privity rule may be able to do so if it can obtain intended third-party beneficiary status. It would need to prove that the prime contract reflects a clear (and virtually unequivocal) intention to benefit the subcontractor directly. For example, the subcontractor simply appearing in the prime contract or even being labeled as critical to the work would likely be insufficient. Express language, or attendant action, must exist that specifically demonstrates the government and the prime contractor intended to confer a promised benefit in the prime contract directly to the subcontractor.

Implied-In-Fact Exception

For arguments based on implied-in-fact contract, like in commercial settings, the subcontractor would need to demonstrate that the circumstances of its interactions with the government created a contract between them. The elements of proof are the same as for an express contract: mutuality of intent, consideration, an unambiguous offer and acceptance, and authority on the part of the government's representative to bind the government. Before moving forward with litigation, a subcontractor relying on this argument will need to pay special attention to its proof on the mutuality and authority to contract elements. They are the two components most litigated in implied-in-fact situations, with the government typically prevailing.

Conclusion

The reality for subcontractors is that the best chance of being able to bring a claim against the government is through a pass-through sponsored by the prime. Nevertheless, subcontractors should know of the privity-rule exceptions, as they are heavily weighted in facts, and they create options, which are always welcome in litigation. But more importantly subcontractors need to understand that any attempt at seeking redress by way of the prime contract against the government would likely be a losing battle and use this knowledge as a motivating factor to mitigate risk of loss as much as a possible through the subcontract between it and the prime.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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