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Subcontractor is not permitted under the Contracts Disputes Act (CDA) to bring an action against the federal government where the prime contractor failed to pay the subcontractor for its work. This is true even though the federal department (U.S. Navy) committed to issuing a two-party check because it knew the subcontractor was having difficulty getting paid by the prime contractor. The Navy subsequently issued the check payable only to the prime contractor who then failed to pay the subcontractor. Even if the subcontractor could argue it was an intended third party beneficiary of the Government’s commitment to issue a two-party check, the Government’s sovereign immunity prohibits a subcontractor from bring suit against the government. Although the CDA waives sovereign immunity for purposes of contractual disputes between the government and contractors, the statute is applied strictly to allow only prime contractors in direct privity of contract with the government to bring such claims. Subcontractors are not provided rights under the CDA.

In Winter v. FloorPro, Inc., 570 F.3d 1367, the U.S. Navy awarded a contract to a minority business enterprise (MBE) under the Small Business Act to install floor coating at a warehouse on a military base. The MBE subcontracted almost 90 percent of the value of its contract to a non-minority owned firm that satisfactorily performed the work. When the prime contractor failed to pay its invoices, the subcontractor notified the Navy. The Navy then decided to issue a two-party check that would have to be countersigned by both the prime contractor and the subcontractor. For reasons unexplained in the decision, the Navy issued the check payable only to the MBE. That firm then cashed the check and failed to pay the subcontractor.

The subcontractor filed a request with the Navy’s Contracting Officer to issue a decision declaring the government owed it the balance of its subcontract amount as an intended third party beneficiary of the Navy’s agreement. When the C.O. didn’t issue a decision, the subcontractor appealed to the Armed Services Board of Contract Appeals. The Board found in favor of the subcontractor, finding it to be entitled to recover from the government. The Navy appealed this to the Court of Appeals for the Federal Circuit, arguing that the CDA does not waive the government’s sovereign immunity to allow claims by anyone other than a prime contractor. The court agreed with the Navy and reversed the decision accordingly – holding that the language of the CDA must be strictly and narrowly interpreted to permit only those in actual privity of contract with the Government to enjoy the rights afforded by the Contracts Disputes Act.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report (2010).