United States: When Can a Subcontractor Sue? Less Often Than You Would Think

Last Updated: January 25 2006
Article by Gregory S. Jacobs

Many companies are actively involved in government contracting as subcontractors. These subcontractors may sell products and services directly to the government, interact with government personnel on a daily basis, and even sometimes play a major role in drafting a prime contractor’s proposal. Certainly, the government’s actions have a major impact on the business of the subcontractors. However, many subcontractors do not realize a critical aspect of their dealings with the government: they are generally not permitted to sue the government when something in the relationship goes wrong.

The Alpine Computers Case

The Armed Services Board of Contract Appeals ("ASBCA") recently upheld this long-standing rule in the case of Alpine Computers Inc., ASBCA No. 54659, 05-02 BCA ¶ 32,997. In that case, Alpine agreed to serve as a subcontractor to Network Resource Services, Inc. ("NRS") under a time and materials service contract. NRS was to assist the Air Force by providing labor and technical support in moving communication and automation data from one building to another. In performing its prime contract, NRS sought and received permission from the government to acquire telecommunications equipment from Alpine with a value of $26,892. NRS submitted an invoice for the equipment, which the government subsequently paid. The government later terminated NRS for default based on allegations of fraud; at that point, NRS had not paid Alpine for the equipment.

Alpine brought suit against the government after the contracting officer rejected its claim for the outstanding $26,892. The general rule is that, under the Contract Disputes Act ("CDA"), a subcontractor does not have the power to sue the government on a contract-related dispute. This is because only a "contractor" may appeal a contracting officer’s decision under the CDA. The CDA defines "contractor" as "a party to a Government contract other than the Government." 41 U.S.C. § 601(4). Because a subcontractor lacks privity of contract with the government, it is not considered a party to a government contract. United States v. Johnson Controls, Inc., 713 F.2d 1541, 1550-51, 1556 (Fed. Cir. 1983). The most common solution to this lack of privity is for the prime contractor to sponsor a claim for payment on behalf of its subcontractor. Such sponsorship is only permitted in situations where the government may ultimately be responsible for the cost of the claim. But, what happens when the prime contractor will not sponsor a claim on behalf of its subcontractor? What is the subcontractor’s remedy when the prime has "absconded with all the monies," as was the case in Alpine Computers?

Theories of Subcontractor Rights to Sue

The ASBCA addressed each of Alpine’s theories for direct relief from the government, rejecting each as inapplicable in this case. The Board’s analysis of these theories, however, illustrates the situations in which a subcontractor may be able to find that rare exception allowing it to sue the government directly.

  • Prime Contractor as Purchasing Agent: A subcontractor may sue the government directly under the CDA where the prime contractor was acting as a purchasing agent for the government in the transaction. In order to establish such a relationship, the subcontractor must show: (1) the existence of the agency relationship with respect to the purchase; (2) clear contractual consent between the government and the prime to establish such a relationship; and (3) a statement in the contract that the government will be directly liable to vendors for the purchase price. In Alpine Computers, the ASBCA found that NRS was not acting as a purchasing agent for the government and that NRS’s prime contract did not contain the requisite provisions.
  • Direct Right of Appeal: A subcontractor may also have a right to sue the government directly if that right is based in an express contract. This contractual right can be found either in the contract between the prime and the government or in the existence of a contract between the government and the subcontractor. The ASBCA in Alpine Computers found that neither of these scenarios existed. Alpine also attempted to argue that the government had negligently failed to obtain a performance bond from NRS, which Alpine argued was necessary under the Miller Act because NRC had a construction contract with the government. The Board ruled that NRS’s contract was a time and materials, not construction, contract, and thus there was no requirement that the government obtain a Miller Act bond.
  • Third Party Beneficiary: In D&H Distributing Co. v. United States, 102 F.3d 542 (Fed. Cir. 1996), the court found that a subcontractor had the right to sue as a third-party beneficiary where the prime contract was amended to require the government to make payment to the prime contractor and subcontractor jointly. Where the government ignored this provision and made payment solely to the prime, the subcontractor had the right to sue to enforce the amendment as a third-party beneficiary. In Alpine Computers, the invoice submitted by NRS for Alpine’s work states that the billing is "for the benefit of Alpine Computers." However, the ASBCA stated that the mere understanding that the billing was for Alpine’s benefit does not give rise to third-party beneficiary rights. Rather, a subcontractor would have to show a contractual provision that, at least in part, required the government to make payment directly to Alpine.
  • Implied-in-Fact Contract: A party may establish CDA jurisdiction under an implied-in-fact contract, but only where it can prove "a mutual intent to contract, including an offer, an acceptance, and consideration." Trauma Service Group v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997). Alpine argued that it established an implied-in-fact contract with the government based on the government’s actions of inspecting and approving Alpine as a subcontractor to NRS. The ASBCA rejected this theory, noting that, although Alpine did deliver the equipment directly to the government, this alone was not sufficient to establish an implied-in-fact contract between the parties, as the government received no additional consideration for the delivery.

What Can a Subcontractor Do?

As the Alpine case illustrates, subcontractors will only be permitted to pursue direct claims against the government in limited, carefully-defined circumstances. However, a subcontractor can take some steps to avoid the situation in which Alpine found itself:

  • Subcontract Provision Requiring Sponsorship: A subcontractor should always insist on a provision requiring sponsorship of all claims it has against the government by the prime. Such a claim will be made at the subcontractor’s expense and may be subject to the limitation that the prime finds that the claim has merit.
  • Good Due Diligence: A subcontractor should always take time before entering into a subcontract to determine whether the prime contractor has a strong reputation for stability and fair treatment of its subcontractors. Often, subcontractors are left without a remedy vis-a-vis the government when the prime contractor becomes insolvent. Using available resources to investigate before contracting can save a subcontractor money in the long run and help it avoid the Alpine Computers trap.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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