In Privity of Contract in Government Procurement

Avoid costly legal mistakes with prime contractor subcontractor in privity of contract relationships in federal procurement.

As a subcontractor to federal government procurement, you may often find yourself wondering what is the lack of privity of contract rule for government relationships with subcontractors and why the Contracting Officer, or even the Small Business Administration (in small business matters), does not intervene when you have a dispute with the prime contractor.

• The general answer that you may hear from any Contracting Officer, and even the SBA, is that there is lack of privity between the government and with subcontractors.
• Companies who file bid protests or submit contract claims to the federal government should understand how to meet the end result even though contract rights of third parties may not immediately apply to government subcontractors.

What is Lack of Privity? 

In federal procurement,  the lack of privity definition refers to the direct legal relationship that exists between the parties to a contract. In government contracting, the owner (government) and the prime contractor enter into a written agreement. This is generated from the solicitation and ultimate award of the contract.

By executing the contract, the parties now have legal privity. Whereas, a party claiming that it has privity (with the government) will more than likely lose the argument without proving that it meets one of the rare exceptions to the rules. Disputes usually occur with contract rights of third parties such as subcontractors. See relevant information about the Severin Doctrine (the government often uses this theory to avoid payment. Have a credible lawyer assess the facts).

Lack of Privity of Contract – Government Relationship with Subcontractors

When problems arise with a government subcontractor, the subcontract governs the available remedies. Under the legal definition and legal review of the agency’s relationship with subcontractors, there is a lack of privity of contract rule between the government and subcontractors. The agency seldom has any leverage to resolve prime and subcontractor disputes due to no contract. 

• You should be aware of pass-through claims where the government attempts to avoid payment because of lack of privity between you and another tiered contractor.
• On the other hand, there are some facts where the government can waive the doctrine of privity of contract defense in your favor.

In government construction contracts, your contract with the prime should allow for the main contractor to address any of your concerns directly with the government. See United States v. Turner Constr. Co., 827 F.2d 1554, 1559-61 (Fed. Cir. 1987). As a prime contractor, damages against you from a subcontractor can be included in your damages claim against the Government.  See Pan Arctic Corp. v. United States, 8 Cl. Ct. 546,548(1985).

Government Subcontractor in Privity of Contract Rule – Lack of Privity Exception

As a subcontractor, you may overcome defenses such as lack of privity with the agency if you can show that there is an explicit or implicit contract with the Government. See Blair, 321 U.S. at 737; Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160-61 (Fed. Cir. 1985); Putnam Mills Corp. v. United States, 479 F.2d 1334, 1337 (Cl. Ct. 1973) (“It is clear that, unless the plaintiff can provide evidence of the existence of some type of contract between it and the United States, it cannot, as a subcontractor, recover directly from the United States for amounts owed to it by the Prime.”).

Application of Law When There is a Subcontracting Plan Requirement?

 This is a common question yet to be answered by the courts.  First, it is important to review the doctrine of privity of contract requirements under the FAR to see whether the SBA or the Contracting Officer has statutory authority to act when considering their authority in federal procurement. These facts usually occur when the prime contractor, a large business, submits a subcontracting plan in accordance with the solicitation terms. The agency then has to monitor the subcontracting requirement despite the fact that there is no traditional privity between the subcontractor and the government. See information about FAR flow down clauses.

• Next, it is important to determine what damages may be available for the contracting officer to enforce. 
• It is also crucial to understand the role the SBA plays in carrying out the small business subcontracting program.

When the named subcontractor becomes injured through some alleged violation by the prime contractor, then the subcontractor may try to alert the contracting officer or the SBA. The common response from both is that the government cannot get involved because the dispute is between the prime and the subcontractor. What is the subcontractor supposed to do when per the “material breach” provision in the FAR, the small business can be looked at as the intended beneficiary of the regulations? Read more about Government Small Business Subcontracting Plan requirements.

Material Breach of Contract in Federal Procurement

After a careful reading of the requirements, when a prime contract that is required to “comply” with the small business subcontracting plan requirement fails to act according to the terms, then the contracting officer can assess liquidated damages for material breach.  When applying the rules governing lack of privity of contract, See FAR 19.702 (Statutory requirements.) which is part states that 

(b) Subcontracting plans (see paragraphs (a)(1) and (2) of this section) are not required–

           (1) From small business concerns;

           (2) For personal services contracts;

           (3) For contracts or contract modifications that will be performed entirely outside of the United States and its outlying areas; or

           (4) For modifications that are within the scope of the contract and the contract does not contain the clause at 52.219-8, Utilization of Small Business Concerns.

      (c) As stated in 15 U.S.C. 637(d)(9), any contractor or subcontractor failing to comply in good faith with the requirements of the subcontracting plan is in material breach of its contract. Further, 15 U.S.C. 637(d)(4)(F) directs that a contractor’s failure to make a good faith effort to comply with the requirements of the subcontracting plan shall result in the imposition of liquidated damages.

It would seem that under these government procurement statutes, the contracting officer would be the only person that does have the authority to act and protect specific contract rights of third parties ( the subcontractor)– hence, the statutory privity of contract definition. 

When prime contractors fail to pay a government subcontractor, an argument can be made that the prime is failing (without valid reason) to comply with the contract. However, under the privity definition, the government generally will suggest that non-payment from primes to subcontractors is a matter between the prime and subcontractor due to lack of privity.

There are other ways to address this problem in federal contracting. Contract privity here would create a statutory obligation for both the Small Business Administration and the Contracting Officer to act.  See also information about affiliation. 

To Avoid Costly Mistakes, Get a Free Government Claims Checklist

For additional assistance, you may want to consult about the doctrine of lack of privity of contract in government procurement, and prime contractor subcontractor relationships.  Contact a government contracts attorney at 1-866-601-5518 for a free initial consultation.