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Sub Could Bring Breach Claim as Third-Party Beneficiary

An unpaid subcontractor had standing to sue the government for breach of contract, according to the Court of Federal Claims, because it was an intended third-party beneficiary of a contract modification. After the prime contractor failed to pay the subcontractor for flooring work pursuant to a purchase order, the subcontractor requested the contracting officer's assistance to ensure payment. In an e-mail to the prime, the CO stated "I feel obligated to see [the subcontractor] get paid because I asked them to sub-contract with you. Tell me how this can happen???" The CO and prime executed a modification that substituted a two-party check to the prime and subcontractor for the PO's method of payment, which was direct deposit to the prime's account. The CO commented several times the two-party check would be a means to ensure the subcontractor was paid; however, the modification was disregarded and payment was deposited into the prime's account. On cross-motions for summary judgment, the parties disputed whether the subcontractor had standing to bring its breach claim against the government.

Requisite Intent

The court concluded the two requirements were met for the subcontractor to have standing as an intended third-party beneficiary of the modification. First, the CO expressed the requisite intent to benefit the subcontractor by agreeing to the modification. Second, the modification conferred a direct contractual benefit on the subcontractor by giving it the right to indorse the two-party check and deposit the check into its own account. The government argued the Court of Appeals for the Federal Circuit added a third requirement to the third-party beneficiary test by requiring a modification to be a "condition precedent" to further performance (Flexfab, L.L.C. v. U.S., 51 CCF 78,809). However, this argument contradicted the Federal Circuit's holding in D&H Distributing Co. v. U.S. (41 CCF 77,017) that a modification "is enforceable by the third party where the payment is intended to satisfy a present ... liability."

Release Unavailing

The government also argued a "Contractor's Statement of Release" incorporated into the modification shielded it from contractual liability. Although as a general principle, "a party standing outside of privity by contractual obligation stands in the shoes of the party within privity," the government's position was factually and legally flawed. The government failed to adhere to the conditions of the modification, and the subcontractor's claim rested solely on the fact the modification conferred to it a direct contractual benefit that was lost due to the government's breach. (FloorPro, Inc. v. U.S., FedCl, 55 CCF 79,557)




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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