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Voiding a Subcontract Term Because It Violates a Procurement Statute

One of the key dynamics in the relationship between primes and subs is the interplay among the prime contract and the subcontract. One prevalent example of such is the incorporation of prime contract provisions into the subcontract agreement, commonly known as flow-down clauses. Another example appears in situations where a party claims a provision in the subcontract is void and unenforceable because it violates a federal procurement statute applicable to the government contract.

In Texas, a contract made in violation of a statute is illegal, meaning courts will not allow a party to enforce it or any of its terms (absent limited exceptions). The same is true for individual provisions of an agreement. Generally, though, when a particular clause is void as a result of being in contravention of a statute, it may be severed and the contract as a whole remain in place so long as the illegal provision does not constitute an essential purpose of the agreement. Thus, if the parties would have entered into the agreement irrespective of the unenforceable provision, then the contract is likely to survive. Still, the provision – the one that violates the statute – could be severed from the subcontract as unenforceable.

Moreover, ratification doctrines will not make an otherwise void contract or provision enforceable. For instance, a prime and a sub enter into an agreement with subcontracting allocations defined by statute and applicable to the prime contract and later modify the contract to change those allocations in violation of the statute and undertake performance under the new percentages. A year later, the prime desires to revert to the former allocations because it realized it violated the applicable statute. But, the subcontractor refuses to do so on the basis the parties entered into a valid amendment that outlines the governing terms and their conduct additionally ratified that modification. The prime, however, only allows the subcontractor to perform work or only pays for work based on the allocations in the original agreement, and the subcontractor sues for breach of contract. In this case, the prime may argue that the amendment is void, notwithstanding the parties’ conduct because it is illegal and therefore unenforceable.

The takeaway here is two-fold. First, on the front end and for any changes, primes and subs need to ensure that the terms of their commercial agreement do not violate any applicable governing federal statutes derived from the prime contract, particularly material terms. Second, before moving forward on a breach of contract claim for non-payment (as in the example above), the party considering litigation will want to ensure that the provision on which it bases its action does not violate a statute and thereby possibly foreclose enforcement.

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