Type: Law Bulletins
Date: 09/26/2014

Subcontractors Beware: An Agreement to Sponsor an Appeal May No Longer Be Enough

The Armed Services Board of Contract Appeals’ (“ASBCA”) jurisdiction is limited by law1 to prime contractors.2 For the ASBCA to exercise jurisdiction over a subcontractor’s claim, a subcontractor’s appeal must be sponsored by the party in privity with the United States Government, i.e., the prime contractor.3

Because of this jurisdictional construct, subcontractors often seek to protect themselves by including a provision in the subcontract that commits the prime contractor to sponsor subcontractor claims to the Government. However, these efforts are not always successful. One recent ASBCA decision illustrates the effect of such a provision. In Appeal of Binghamton Simulator Company, ASBCA No. 59117, 21 August 2014, the parties’ subcontract contained the following provision:

[I]f Seller disagrees with any such decision made by the Contracting Officer and Buyer elects not to appeal such decision, Seller shall have the right reserved to Buyer under the Prime Contract with the Government to prosecute a timely appeal in the name of Buyer…

In this case, the government challenged the subcontractor’s assertion of rights and demanded additional information to support those asserted rights. This challenge was addressed to the prime contractor. The contracting officer eventually issued a final decision, also addressed to the prime contractor, denying the subcontractor’s asserted rights. The subcontractor appealed the final decision to the ASBCA. 

The ASBCA asked the prime, Leidos, to provide proof of its sponsorship of the subcontractor’s claim. Leidos responded that it had not been asked to sponsor the appeal and represented numerous times that it was not sponsoring the appeal. The subcontractor, however, pointed to the terms of the subcontract to confirm Leidos’ sponsorship of its subcontractor’s claim(s).

The board took the position that a dispute between a prime and a subcontractor over the terms of the subcontract was not its problem. Without express confirmation of sponsorship by the prime, to allow the subcontractor’s appeal to proceed, the ASBCA had no jurisdiction to take the appeal. The ASBCA dismissed the case for lack of jurisdiction.

What does this mean for subcontractors? Most prime and subcontractors work under the assumption that if a subcontract says that a prime must sponsor a subcontractor’s appeal, it must do so, and subcontractors rely on this commitment. For years, primes and subcontractors have relied upon the language in FAR 44.203(c), which provides that contracting officers should not refuse to consent to a proposed subcontract “merely because it contains a clause giving the subcontractor the right of indirect appeal to an agency board of contract appeals” to confirm that this approach accomplishes the objective. That is, FAR 44.203(c) presupposes the existence of a subcontractor right to indirectly appeal, included as a subcontract term, noting that a subcontract will not “obligate [the Government] to decide questions that do not arise between the Government and prime contract or what are not cognizable under the [Disputes Clause].”  Thus, most primes and subcontractors don’t expect to run into the issue encountered by Binghamton Simulator Company. 

However, according to this decision, subcontractors would be foolish to rely entirely on a subcontract provision providing for the prime to sponsor a subcontractor’s claim to the ASBCA (or the Court of Federal Claims). Provisions in a Dispute clause, while helpful, may no longer be enough. This case demonstrates that something more may be required, some affirmative sponsorship, before the ASBCA will have jurisdiction to hear a subcontractor’s appeal. 

The holding in this case makes clear that a subcontractor, intending to proceed with an appeal, should notify the prime contractor of its decision and obtain evidence of the prime’s affirmative sponsorship. To the extent that a prime declines to sponsor the claim, subcontractors may be forced to litigate a breach of the subcontract terms first, in a state or federal court, before it can bring its appeal to the ASBCA (or the Court of Federal Claims). The path for subcontractors wishing to pursue its claims in the name of the prime just got more difficult.  

1The Contract Disputes Act defines the jurisdiction of the ASBCA.

2This is because the Contract Disputes Act defines “contractor” narrowly as a “party to a Federal Government contract.” In other words, subcontractors are not contractors for purposes of appealing a claim.

3There are limited circumstances in which jurisdiction can be found where the parties are not in privity of contract, but those circumstances have been described as “rare” and “exceptional.” The primary method for asserting jurisdiction is for a prime contractor to sponsor the subcontractor’s appeal.

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