United States: Escrowed Payments May Leave Federal Subcontractors High And Dry

Companies providing products or services as subcontractors to prime federal contractors often struggle with how best to ensure prompt and full payments from primes. Prime contractors, particularly small business concerns, often struggle to manage competing cash flow demands with the result that subcontractors are left paid late or not at all. Including appropriate payment clauses in the subcontract is important but of limited value – ultimately they are enforceable only as contract claims that may need to be resolved in litigation.

Increasingly, subcontractors who are able will attempt to remove the prime contractor from the payment stream by obligating the prime to instruct the Government to pay contract revenues to an escrow agent for appropriate disbursement to the parties, believing this constitutes an enforceable assignment to the agent of the right to make a claim on contract revenues. But, is that the result?

Imagine the following scenario. A Request for Quote ("RFQ") for hose assemblies is issued to Prime Contractor ("Prime") in a sole source solicitation by the United States Defense Logistics Agency ("DLA"). Prime responds to the RFQ with a quote proposing to obtain the hose assemblies from Subcontractor ("Sub"). The quote contains the following "remit to" and "contractor" addresses respectively: (i) Michael Kawa, Esq., 300 Crown Building, 304 S. Franklin St., Syracuse, N.Y. 13202; and (ii) 1872 Mills St., Bldg F, Tallahassee, FL. The contracting officer believes that payment should be remitted to Mr. Kawa at the address in the Purchase Order ("PO") and that he is somehow associated with Prime, most likely as a banker.

In fact, Mr. Kawa is an escrow agent that Sub insisted be included as the remittee in Prime's POs for which Sub is acting as supplier due to Sub's substantial previous difficulty collecting payments from Prime. Mr. Kawa, a lawyer, prepared an escrow agreement for the purpose of ensuring that Sub would get paid in connection with its work performed pursuant to its subcontracts with Prime. Mr. Kawa consented to act as the escrow agent himself, to receive funds payable on Prime's contracts where Sub is supplier to Prime, and to release those funds in accordance with the escrow agreement agreed to by the parties. The escrow agreement requires both Prime and Sub to take all action necessary to ensure that DLA would pay Mr. Kawa rather than Prime. Sub believes that the PO with Mr. Kawa's name in the "remit to" block constituted DLA's acceptance of an assignment of payments from Prime to Sub and controls the payee and method of payment.

Once the PO is issued, contract management responsibilities shift from the pre-award contracting officer to a post-award contracting officer. Sub ships the items ordered in the PO to the Defense Department Depot and issues an invoice to Prime the same day. However, DLA does not send payment for the PO to Mr. Kawa but rather, and without informing Prime or Sub, makes payment via Electronic Funds Transfer ("EFT") to Prime. When Sub attempts to expedite payment with DLA, Sub is informed that payment was already made to Prime. Sub is informed by DLA that in light of the conflicting "remit to" address on the PO and the U.S. Department of Defense directive requiring all payments to be made by EFT, DLA chose to remit payment to Prime via EFT.

Sub telephones Prime who denies receipt of the payment. Sub attempts to collect the money from Prime but Prime declares bankruptcy. The Sub's escrow agent, Mr. Kawa, files a complaint against the United States arguing that as the escrow agent of the Sub designated on the PO as the intended "remittee" the Government should have paid him, not the Prime, because he has been assigned the right to payments under the prime contract. Will the Court be persuaded?

Not a hypothetical, the above scenario describes an actual case ruled on by the U.S. Court of Federal Claims.1 The Court – definitely unpersuaded – dismissed the escrow agent's complaint and, in particular, rejected the claim that the agent had been assigned the right to receive prime contract revenues and to make a claim against the Government for failure to pay those revenues. The Court invoked the Anti-Assignment Acts (the "Acts"),2 which broadly prohibit assignment of claims against the United States unless the Government chooses to waive the Acts and recognize the assignment of a claim. To determine if the Government properly exercised its discretion to waive the Acts, the court must look to "whether: 1) the assignor and/or assignee sent notice of the purported assignment to the Government; 2) the contracting officer signed the notice of assignment; 3) the contracting officer modified the contract according to the assignment; and 4) the Government sent payments to the assignee pursuant to the assignment."3 In the case at hand, no "notice of assignment" was ever sent to DLA, only a request for a name change in the "remit to" address. Moreover, DLA did not sign a notice of assignment and did not make payments according to any purported assignment.

But, the Court could have gone further. Under the Acts, a contractor may only assign moneys due or to become due under a contract if "[t]he assignment is made to a bank, trust company, or other financing institution, including any Federal Lending Agency."4 The escrow agent in the case before the Court of Federal Claims was not a "financing institution." Courts have determined that the term "financing institution" only encompasses an organization whose primary business is the provision of financing and capital.5

While not specifically addressed in the above scenario, additional concerns arise in the case of a traditional escrow arrangement even where there is an assignment to a "financing institution." That is, the government may make a claim for setoff against an assignee "When the assignee has neither made a loan under the assignment nor made a commitment to do so..."6 An escrow account is simply an account for safekeeping and disbursing money that is the property of a third party—it is in no way a loan or financing event. Should the government make a claim for setoff against payments owed to a prime contractor, the subcontractor/assignee may be completely unprotected in the absence of a loan or other financing event. The market has started to respond and at least one specialty finance company now provides "financing escrow accounts" that combine financing with disbursement of monies owed.

The lesson is clear. The only enforceable assignment of claim under a federal government contract is an assignment to a bank, trust company, or other financing institution. Any other arrangement purporting to assign the right to make a claim for revenues under a federal contract is not enforceable against the Government.


1 Kawa v. United States, 86 Fed. Cl. 575 dismissed, 368 F. App's 106 (Fed. Cir. 2009).

2 31 USC § 3727 and 41 USC § 6305.

3 Id. at 591 (citing Tuftco Corp. v. United States, 222 Ct.Cl. 277, 614 F.2d 740 (1980)).

4 FAR § 32.802(b). See FAR § 52.232-33(g) ("[P]ayment to an ultimate recipient other than the Contractor, or a financial institution properly recognized under an assignment of claims pursuant to Subpart 32.8, is not permitted.").

5 Fireman's Fund Ins. Co. v. Eng., 313 F.3d 1344, 1350 (Fed. Cir. 2002) ("A 'financing institution' supplies financing. That is its business. It lends money or provides capital.").

6 FAR § 32.804(c).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.