SUBCONTRACTOR PASS-THROUGH CLAIMS AND THE CONTRACT DISPUTES ACT

imagesA prime contractor submitting a subcontractor’s pass-through claim MUST still comply with the certification requirements in the Contract Disputes Act.  And, the prime contractor cannot sponsor a pass-through claim unless it remains liable to the subcontractor for the claim, a doctrine known as the Severin doctrine based on the decision Severin v. U.S., 99 Ct.Cl. 435 (Ct.Cl. 1943).  These are important concepts for a prime contractor and subcontractor to understand and appreciate on federal projects.

 

Certification of Pass-Through Claims

 

For claims of more that $100,000  (including subcontractor pass-through claims) submitted to the federal government, the contractor must certify:

 

(A) the claim is made in good faith;

(B) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief;

(C) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable; and

(D) the certifier is authorized to certify the claim on behalf of the contractor.

40 U.S.C. s. 7103(b).

 

The certification of the claim is defective if it does not include these four elements (set forth in (A) through (D) above).

 

However, if the certification is defective, this can be cured prior to final judgment by a court or a final decision by a federal agency. See M.K. Ferguson Co. v. U.S., 2016 WL 1551650 (Fed.Cl. April 14, 2016).   On the other hand, a failure to certify (versus a defective certification) cannot be cured meaning the contractor has not submitted a proper claim under the Contract Disputes Act. Id.

 

Severin Doctrine

 

According to the Severin doctrine, “a prime contractor may not sponsor a pass-through claim unless it remains liable to its subcontractor on the underlying claim.” M.K. Ferguson, supra, at *13. If the federal government is relying on the Severin doctrine:

 

(1) the burden is on the government to prove that the prime contractor is no longer liable to its subcontractor on the pass-through claim; and

(2) the Severin doctrine generally requires an ‘iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub.

Id. at *14 quoting E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370-71 (Fed.Cir. 1999)

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

FEDERAL GOVERNMENT TERMINATING FOR DEFAULT “SEPARABLE” CONTRACT

UnknownIf a contractor is terminated for default on a federal project (really, any project), the objective for the contractor is to convert that termination for default into a termination for convenience so that the contractor can get paid for work performed and associated profit on that work through the date of the termination. For more information on termination for defaults and convenience, check out this article and this article.

 

The Armed Service Board of Contract Appeals (ASBCA) decision, Nelson, Inc., ASBCA No. 57201, 2015 WL 959241 (ASBCA 2015), provides an example of the government terminating a prime contractor for default where the prime contractor argued the termination was improper.  The prime contract called for the construction of stone dikes at four sites along the Mississippi River.  Each site had separate pricing, separate notices to proceed, and separate performance periods and durations for the construction of the stone dikes. After the prime contractor had started to perform at two of the four sites, the government terminated the prime contractor for default based on the prime contractor’s failure to timely perform in accordance with the schedules for those sites. 

 

The prime contract included the F.A.R. 52.249.10 clause (set forth in full at the bottom of this posting) relating to termination for defaults.   Applicable here, F.A.R. 52.249-10(a) and (c) provide:

 

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

***

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

 

This case focused on the language “separable part” in F.A.R. 52.249-10(a) to determine whether the government properly terminated the prime contractor from ALL four of the sites along the Mississippi River when the termination focused on the prime contractor’s delay at only two of those sites. 

 
The government has the burden of proving that the termination for default was justified.”  Nelson, Inc., supra, citing Libson Contractors, Inc. v. U.S., 828 F.2d 759, 764 (Fed. Cir. 1987).   When a contract is separable, or divisible, “and a contractor is delinquent only as to a separable part of the contract work, it is improper for the contracting officer to terminate for default the entire contract.”  Nelson, Inc., supra, citing Overhead Electric Co., ASBCA No. 25656, 1985 WL 16703 (1985). 

 

The ASBCA found that the four sites were separable because each site had separate performance periods, notices to proceed, and pricing.  The commencement of the prime contractor’s work at one of the sites was not dependent on or related to its completion of work at another site. (To support the divisibility of the work, the ASCBA stated: “Work at each of the locations did not involve sequential or incremental and interdependent progression of construction, e.g., of one building or levee at one contiguous site.” Nelson, Inc., supra.)   Therefore, the ASBCA found that terminating the prime contractor for default from all four of the sites was improper since the prime contractor’s work was separable (and the government based the termination on delay of two of the four separable sites).

 

Importantly, even when a prime contractor challenges a termination for default claiming it should be converted to a termination for convenience, the prime contractor needs to comply with the Contract Disputes Act.  In other words, the prime contractor needs to submit its termination for convenience costs / claim. For more information on this important issue, check out this article

 

 

F.A.R. 52.249-10 Default (Fixed-Price Construction)

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

(d) The rights and remedies of the Government in this clause are in addition to any other rights and remedies provided by law or under this contract.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

LIQUIDATING AGREEMENTS OR PASS-THROUGH AGREEMENTS

UnknownA liquidating agreement is probably a more popular agreement between a general contractor and subcontractor when it comes to federal construction projects, but it is a type of agreement that can universally apply.   This is the type of agreement that memorializes a subcontractor’s pass-through claim to the owner where the subcontractor’s claim is pursued in the name of the general contractor or by the general contractor.   Because liquidating agreements pertain to a general contractor passing-through a subcontractor’s claim to the owner, they are oftentimes called pass-through agreements.

 

Generally, a liquidating agreement or pass-through agreement grants the general contractor a release of its liability to the subcontractor after the general contractor prosecutes the subcontractor’s pass-through claims against the owner and conveys any recovery to the subcontractor.”  Rad and D’Aprile Inc. v. Arnell Const. Corp., 2015 WL 3619210, *6 (N.Y. 2015).  Specifically, a liquidating agreement between a general contractor and a subcontractor is designed to limit (or liquidate) the general contractor’s liability to the subcontractor to the amount the general contractor recovers from the owner.  See id.

 

 “Liquidation agreements have three basic elements: (1) the imposition of liability upon the general contractor for the subcontractor’s increased costs, thereby providing the general contractor with a basis for legal action against the owner; (2) a liquidation of liability in the amount of the general contractor’s recovery against the owner; and, (3) a provision that provides for the pass-through of that recovery to the subcontractor.Rad and D’Aprile, supra (citation omitted). 

 

The benefit of a liquidating agreement or pass-through agreement is that it limits the general contractor’s liability to the extent the general contractor receives payment from the owner for the subcontractor’s claim. There are considerations that need to be ironed out when entering into a liquidating agreement or pass-through agreement including, without limitation:

 

1)   Attorney’s fees – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor will bear all of the attorney’s fees.  Conversely, if the general contractor pursues the claim, it will likely want the subcontractor to share in attorney’s fees on a pro rata basis of the subcontractor’s recovery, if any, to be reduced by incurred fees.

2)    Cooperation  – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor may need certain cooperation from the general contractor.  If, however, the general contractor pursues such claim, it will want the cooperation of the subcontractor so that the subcontractor is actively involved in proving the pass-through claim.

3)    Settlement – if the general contractor pursues the pas-through claim, it will want complete authority to settle the claim without input from the subcontractor. This means that the subcontractor’s claim would be paid based on a pro rata portion of that settlement.

4)    Role of General Contractor – the agreement should clarify how far the general contractor is willing to pursue the subcontractor’s claim.  In other words, is simply passing-through the claim to the owner good enough such that the parties are bound by the owner’s determination of the claim.  Or, does the general contractor need to continue to pursue the claim through litigation, arbitration, or through a Board of Contract Appeals?  This needs to be ironed out.

5)    Release  – the general contractor will want a complete release from the subcontractor such that the general contractor’s (and its payment bond surety’s) only liability to the subcontractor is the amount recovered from the owner relative to the subcontractor’s pass-through claim.

 

Liquidating agreements or pass-through agreements are an efficient vehicle in certain circumstances to resolve disputes between a general contractor and subcontractor where the parties jointly focus on the recovery from the owner.  With that said, the parties should work with counsel to ensure the liquidating agreement accurately reflects their interests moving forward with the pass-through claim.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

RELEASES ON FEDERAL PROJECTS — MAYBE THE RELEASE IS NOT A FINAL RELEASE

imagesExecuting partial releases and a final release in consideration of payment are routine on construction projects.  Counsel will correctly tell you not to sign a release if you don’t intend to release all of your claims through the date of the release.  Counsel will also tell you to be sure to exempt those claims from a release that you do not intend on releasing.  The reason for this is that if you sign a release and then seek damages or costs pre-dating the release, the party you gave the release too will waive it in front of your face and say “tough luck; you released these claims and costs!” 

 

However, the opinion in H.J. Lyness Construction, Inc. v.  U.S., 120 Fed.cl. 1 (Fed.Cl. 2015) gives those contractors (or subcontractors), particularly federal government contractors, that sign a release and do not exempt certain claims or costs from the release some hope that not all is lost.  In this case, the federal government terminated a contractor for convenience.  After the termination for convenience, the contractor submitted a release and was paid in consideration for that release.  The contractor did not exempt or carve out any claims or costs from that release even though the release allowed the contractor to do so.    In other words, the release did not carve out any termination for convenience settlement costs that the contractor would be entitled to.  Notwithstanding, the government and contractor continued to discuss termination for convenience settlement costs and when an agreement could not be reached, the contractor filed suit.

 

The government moved for summary judgment that the contractor released the government for termination for convenience settlement costs because the contractor executed the unambiguous release after the termination for convenience.  The contractor countered that the release did not apply to termination for convenience settlement costs and, to show this, the government continued to entertain discussions regarding these costs after it received the release the government is arguing under.  Furthermore, the contractor argued that it timely and properly submitted its settlement costs in accordance with F.A.R. 52.249-2(e) that provides:

 

(e) After termination, the Contractor shall submit a final termination settlement proposal to the Contracting Officer in the form and with the certification prescribed by the Contracting Officer. The Contractor shall submit the proposal promptly, but no later than 1 year from the effective date of termination, unless extended in writing by the Contracting Officer upon written request of the Contractor within this 1–year period. However, if the Contracting Officer determines that the facts justify it, a termination settlement proposal may be received and acted on after 1 year or any extension. If the Contractor fails to submit the proposal within the time allowed, the Contracting Officer may determine, on the basis of information available, the amount, if any, due the Contractor because of the termination and shall pay the amount determined.

 

Based on these facts and circumstances, the contractor took the position that the  government never intended the release the contractor furnished post-termination for convenience to operate as a final release and release of its termination for convenience costs.  The Court of Federal Claims sided with the contractor:

 

The Court finds that through the affidavit provided by Mr. Lyness [contractor’s representative], the parties’ actions and course of conduct in this case creates a genuine issue of material fact regarding whether the release constituted a full and final release of claims given in exchange for a final payment, or was simply a routine payment application form that was used with respect to all applications for partial payments requested by HJL [contractor].

H.J. Lyness Construction, supra.

 

Now, why is this case helpful?  Because it goes directly to the argument on federal projects that even if a contractor executed an unambiguous release and does not exempt or carve out any claims, there may be an argument that the conduct of the parties reflects that the parties did not intend the release to operate as a final release of all claims.  In H.J. Lyness the argument was that the release was not intended to bar termination for convenience settlement costs even though the release was executed months after the termination for convenience.

 

Regardless of the holding in H.J. Lyness, it is important for contractors to read what they sign and be cognizant of those claims and costs they do not want to release.  This includes executing a release without properly exempting termination for convenience settlement costs if the contractor does not intend its release to be a final release of all claims.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.