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Privity of Contract Between the Government and a Subcontractor? Maybe, But Don’t Count on It.

Often in public procurements the government will make an award to a prime contractor and then for various reasons the prime will subcontract portions of the work to other vendors. These subcontracts are governed by common law and the written agreements between the prime and sub.

Even though they are performing work for and getting paid by the government, subcontractors may not directly pursue a claim against the government. Since they are not a party to the prime contract, they do not possess privity. Meaning, because subcontractors do not hold the contract with the government, they are not entitled to enforce any of its obligations.

An exception to this rule appears in a ruling by the United States Court of Appeals for the Federal Circuit in Estes Express Lines v. United States in which the Court in a limited circumstance found privity of contract between the government and a subcontractor.

Estes Express Lines v. United States, 739 F.3d. 689 (Fed. Cir. 2014)

Estes was the result of a years-long dispute between a subcontractor and the government on a contract to provide transportation and freight management services. The government awarded the prime contract to Salem Logistics, Inc. who then subcontracted to Estes Express Lines the pickup, transport, and delivery of products between various military exchanges. The government paid Salem for the work performed by Estes, but Salem did not in turn pay Estes.

Upon discovering Salem was not paying its subcontractor, the government began paying Estes directly for the work performed; however, it would not pay Estes on invoices for which it had already paid Salem. Estes in turn sued the government (and Salem) for these payments under a breach of contract theory with the threshold issue being whether it could do so under the Tucker Act. Originally filed in a local federal district court, the case was removed to the Court of Federal Claims (COFC).

The COFC held that it did not have subject matter jurisdiction because a contract did not exist between Estes as a subcontractor and the government. A contract was the relevant requirement in this case for the court to have jurisdiction under the Tucker Act. On appeal, the United States Court of Appeals for the Federal Circuit reversed and remanded on a finding of privity.

The Federal Circuit held that the bills of lading relied upon by Estes to demonstrate privity were sufficient to create a valid contract. The opinion is straightforward in its reasoning that the government was a party to the bills of lading because it was the bill-to party, the shipper in some instances, and the signatory for delivery and acceptance. As such, the court determined that Estes and the government were parties to contract.

On Remand at the COFC – Privity, but No Breach

Despite the government making a claim that the Federal Circuit’s decision was a jurisdictional ruling, the COFC relied on the Court’s finding that privity of contract existed. However, it did not determine that a breach had occurred, and therefore Estes was not entitled to recover from the government the payments it made to Salem for the work Estes performed but for which Salem never paid Estes.

Privity in Practice

While this case exists, it is narrow in its precedential value. Certainly arguments can be made analogizing similar fact patterns, which provide at least the chance of recovery for a subcontractor. The reality, however, is that the likely outcome would be a finding of no privity, which has been the case for litigants thus far relying on Estes.

Subcontractors in public procurements can find themselves in tough positions because they are subject to aspects of the prime contract and therefore liability, but in general have no recourse against the government. Since any redress will likely come from the prime, subcontractors should therefore take care to ensure that they position themselves as favorably as possible in the commercial arrangement, particularly as it relates to material terms like payment.

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