Is it a good idea for a subcontractor to sue the federal government? A recent case would suggest NO–way too many huge hurdles for the subcontractor to overcome.  No matter how creative the arguments may be, it’s a high mountain to climb.

In Fox Logistics & Construction Co. v. U.S., 2024 WL 2807677 (Fed.Cl. 2024), a subcontractor sued the federal government when it was not paid by the prime contractor.  The subcontractor claimed it was a third-party beneficiary under the government’s modifications to the prime contractor’s payment procedure, or alternatively it had an implied-in-fact contract with the government.  The Court of Federal Claims granted summary judgment in favor of the government. The subcontractor, while creative, struck out in its claims based on the hurdles in a subcontractor suing the federal government.

This case involved upgrading an air force base. The subcontractor performed most of the work. The prime contractor had cash flow problems and did not pay the subcontractor. The government got involved to enforce provisions of its contract to force the prime contractor to pay subcontractors and even modified the payment procedure by having future payments to the prime contractor deposited into a new bank account that government could monitor.  This ultimately did not work, and the prime contractor filed for bankruptcy. The subcontractor claimed it was owed millions–apparently, it was not able to recover the money through the prime contractor’s bankruptcy—and pursued claims against the federal government in an effort to recover money it was owed.

Regarding the subcontractor’s implied-in-fact contract, the Court of Federal Claims explained:

An implied-in-fact contract is one inferred by a court when the surrounding circumstances demonstrate a meeting of the minds between the parties, even if the agreement was never formalized in writing. A subcontractor seeking to establish an implied-in-fact contract must prove the same elements of an express contract: (1) mutuality of intent, (2) consideration, (3) an unambiguous offer and acceptance, and (4) actual authority on the party of the Government’s representative to bind the Government in contract. Thus, a plaintiff must prove by objective evidence, the existence of an offer and a reciprocal acceptance to show the mutuality of intent necessary for the formation of an implied-in-fact contract”

Fox Logistics, supra, at *8 (internal citations and quotations omitted).

Here, the subcontractor did not have evidence to support the elements of an implied-in-fact contract. While the subcontractor demanded payment from the government, the government refused to pay the subcontractor directly or control the payments from the prime contractor to subcontractors.  “In the end, the only evidence that [subcontractor] has put before the court is that it demanded certain things from the Air Force as a condition of returning to work. The fact that [subcontractor] returned to work despite knowing that the Air Force did not agree to [subcontractor’s] demands precludes an implied-in-fact contract based on those demands.”  Fox Logistics, supra, at *10.

Regarding subcontractor’s third-party beneficiary claim, the Court of Federal Claims explained:

[T]hird-party beneficiary status is an exceptional privilege, which should not be granted liberally. In order to prove third party beneficiary status, a party must demonstrate that the contract not only reflects the express or implied intention to benefit the party, but that it reflects an intention to benefit the party directly. In addition, the intent must be fairly attributable to the contracting officer.

[F]or a subcontractor to obtain the status of an intended third-party beneficiary, it must provide clear evidence that an authorized government official approved a contract provision for the express purpose of effectuating payment from the government to the subcontractor(s)… The court will not, however, infer that the government intended to directly benefit the subcontractor merely because an authorized government official (1) oversees the activities of the prime contractor; (2) becomes aware that the prime contractor has failed to timely pay its subcontractors, and/or (3) makes funds available to the prime contractor in order for the prime contractor to pay its subcontractors…

Fox Logistics, supra, at *10 (internal citations and quotations omitted).

Here, the subcontractor could not support that the prime contractor’s failure to pay subcontractors, or any modification to the prime contractor’s payment procedure due to concerns of the prime contractor’s cash flow problems, made the subcontractor a third-party beneficiary of any payment arrangement.  The new payment procedure was merely a means of curing the prime contractor’s default. Moreover, even if the subcontractor was a third-party beneficiary, the government did not breach the new payment procedure – it complied with it faithfully.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.