Avoiding a Bermuda Triangle: Preservation of Subcontractor Pass-Through Claims
You can go to heaven if you want. I’d rather stay in Bermuda.
— Mark Twain
Ever since I was a kid, conspiracy theorists and “experts” in the paranormal have alleged the mysterious loss of ships and planes in a triangular area bounded roughly by Bermuda, Florida and Puerto Rico. Could it be they were taken by aliens? Or, perhaps they were sucked into some mysterious vortex? Or, as the more science-oriented folk might suggest, they probably just went down in bad weather. Regardless, it’s relatively simple to avoid your demise: either avoid the triangle or stay away from big storms.
Turning now to the mundane earth of federal contracting, the triangular relationship between the Government, prime contractors, and their subcontractors provides fertile ground for disputes to arise. Sometimes the argument will just be between the prime and the sub; however, there are occasions when the subcontractor will incur losses due to Government acts or omissions without the fault of the prime. For example, the Government might idle a sub by not approving submittals in a timely manner causing it to incur costs to remain ready to proceed (or whatever). This scenario was the subject of a recent case before the Armed Services Board of Contract Appeals (ASBCA). See Appeal of JAAAT Technical Services, LLC, ASBCA No. 62373 (Oct. 26, 2020) (the decision can be found here).
The relevant part of the claim in JAAAT arose due to increased costs incurred by a subcontractor that were caused by delays in obtaining a National Pollutant Discharge Eliminations Systems (NPDES) permit required to proceed with construction of an addition to a facility on a military base. Here, each party tried to shift the cost, blame, or both to another party in the triangle. The sub sued the prime. The prime countersued the sub. The prime and the sub settled their claim. Simultaneously (or perhaps thereafter) the prime filed a claim against the Government part of which was a “sponsored” claim for the losses incurred by the sub based on the Government’s alleged delay in approving the NPDES permit.
When the Government’s misdeeds harm a subcontractor, the sub can’t sue the Government because the sub’s contract is with the prime contractor, not the Government. Prime contractors naturally want to insulate themselves from being on the hook to subs for the Government’s misdeeds; just as naturally, subs want to have a remedy.
Enter the sponsored claim. Because the prime contractor is the only party that has a contractual relationship with the Government, any relief from the Government for subcontractor losses caused by the Government is if that loss is something that the prime contractor is, itself, bound to pay. In other words, if the subcontract contains a provision that the prime contractor will not owe any monies for damages caused by the Government, the subcontractor bears all the risk for Government-caused glitches and the prime contractor will have no contractual basis for seeking compensation on behalf of the sub.
However, a prime and sub can negotiate a disputes clause that provides that the prime is responsible for government-caused damages but only to the extent that the Government pays for those damages via an equitable adjustment or claim “sponsored” by the prime. In this way, the prime contractor’s right to seek subcontractor damages is preserved because the prime will be, in turn, liable to the subcontractor for the losses. Thus, the subcontractor is protected from such losses and the prime is protected because its liability will be limited to the amounts that the Government pays.
These machinations address the decades-old Severin doctrine, which was discussed by the ASBCA in the JAAAT decision. See Decision at 5 (discussing Severin v. United States, 99 Ct. Cl. 435 (1943)). Under the doctrine, “a prime contractor may sue the Government for damages incurred by one of its subcontractors through the fault of the Government . . . only when the prime contractor has reimbursed its subcontractor for the latter’s damages or remains liable for such reimbursement in the future.” Decision at 5 (quoting Blount Bros. Const. v. United States, 348 F.2d 471 (Ct. Cl. 1965)). Now, the JAAAT case was affected by litigation amongst the contractors and the effect of a release adds a layer of confusion that is beyond the scope of this blog. However, the bottom line outcome was that the prime contractor was entitled to pursue a pass-through claim for its sub’s damages that the prime had paid or would be liable to pay.
In many cases, particularly where one or both parties are experienced federal contractors, one or both parties will have boiler plate language that effectively deals with this problem. However, when you enter into a subcontract for the first time with another party, double check to make sure that the rights and liabilities are appropriately accounted for so as to maximize both parties’ right to obtain relief for Government-caused losses.