Where the federal government contracting officer issued a contract modification to the prime contract to require the government to issue a two-party check jointly to the prime and a subcontractor that had complained about not being paid, the subcontractor had rights against the government as a third party beneficiary when the government failed to issue a two-party check and instead made a direct electronic deposit of all the funds into the prime contractor’s account as had been done prior to the contract modification. The Court of Federal Claims found that the subcontractor was an intended third party beneficiary of the contract modification, and had reasonably relied on the modification to confer a direct contractual benefit. This is a highly unusual decision in finding a subcontractor can recover directly against the government. FloorPro, Inc. v. United States, 2011 WL 1289061 (Fed.Cl. 2011).
In this case, the government (U.S. Department of the Navy) had provided the prime contractor with names and contact information of potential subcontractors that were recommended to perform flooring work. One of these recommended subs was selected by the prime. After completing its flooring work and submitting its invoice, the sub was not paid by the prime, apparently because the prime was having some financial difficulties. As a result of the subcontractor’s call to the contracting officer complaining about not getting paid, the contracting officer emailed to the prime stating, “I feel obligated to see [sub] get paid because I asked them to sub-contract with [prime].” In response, the prime volunteered to enter into a two-party check arrangement and the government issued a contract modification to implement that new payment procedure.
Perhaps due to a clerical error, the government did not honor the contract modification but instead paid the prime directly by way of direct deposit, and the subcontractor never got paid for the work it had successfully performed. The sub filed suit in the U.S. Court of Federal Claims to recover damages pursuant to the contract modification. In response to the suit, the government filed a motion for summary judgment to dismiss the case based on lack of privity of contract between the subcontractor and government. The subcontractor filed a motion for summary judgment to enforce its third party rights under the contract modification.
In analyzing the issues, the court noted, “It is a long standing principle that the United States, as a sovereign, only consents to be sued by those parties ‘with whom it has privity of contract.’” There are exceptions to that rule, however, for plaintiffs who are not named parties to a contract but who are intended third-party beneficiaries of the contract. Quoting one of its previous decisions the court explained, “[F]or third-party beneficiary status to lie, the contracting officer must be put on notice, by either the contract language or the attendant circumstances, of the relationship between the prime contractor and the third-party subcontractor so that an intent to benefit the third party is fairly attributable to the contracting officer.”
In order to grant the relief sought by the subcontract, the court stated, “the Court must be able to answer the following two questions in the affirmative: (1) Did the contracting officer intend to benefit [sub] through the modification? and (2) Did the modification result in a direct benefit to [sub]?”
The exceptional circumstances leading the court to find in favor of the subcontractor in this case are probably best explained by quoting at length from the court’s decision as follows:
After canvassing the record, it is clear to the Court that the contracting officer, and indeed GM & W, intended to benefit FloorPro when negotiating the terms of the contract modification. The Court notes two particularly compelling points in which the contracting officer clearly demonstrates the requisite intent to benefit FloorPro. First, in an e-mail exchange between the contracting officer and a representative of GM & W, the contracting officer stated “I feel obligated to see they get paid because I asked them to sub-contract with you. Tell me how this can happen? ? ?” This sense of obligation, in turn, led to further e-mail exchanges between GM & W and the contracting officer in which the modification was discussed, and negotiated, as a means to directly facilitate payment to FloorPro.
Second, the contracting officer commented several times, via letter and e-mail, that the two-party check would be utilized as a means to ensure that FloorPro was paid for its work. For example, in a sworn declaration, the contracting officer stated, “I thought [the two-party check] might facilitate payment of the subcontractor’s invoice.” (App. 105, ¶ 21.) Furthermore, on July 18, 2002, the contracting officer sent a letter to a FloorPro representative making the following representation:
It is understandable that you would be frustrated with receiving assurances that a joint payment would be made and then it not occur…. Please be assured that there is a continuing effort to see that the quality work performed for MCLB Albany by your company is paid for and that errors like this do not occur in the future.
After examining the record, it is clear to the Court that the modification was entered into with the sole intention of benefiting FloorPro, specifically by providing an assurance that it would be paid for the work it performed. Moreover, the Court notes that the Government has not provided any evidence to support the stance that the contracting officer lacked the requisite intent to benefit FloorPro by agreeing to the contract modification.
In the balance of the decision, the court explained that the subcontractor had reasonably relied on the contract modification to give it a benefit, and the court concluded that a statement of release in the modification had no legal effect since the government had failed to perform its obligations under the modification.
About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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, Vol. 13, No.8 (Aug 2011).
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