Subcontracting is often the best way to complete a complex project. A subcontractor may have technical expertise, equipment, or human resources that are unavailable to the prime contractor. But assigning work to one or more lower-tier parties carries with it a certain amount of risk. One of the challenges is allocating liability for changes in the scope of work, delays, and other inefficiencies that increase a subcontractor’s cost or time for performance. Today we look at how the allocation of this risk is affected by the Severin doctrine.
The Severin doctrine takes its name from the decision in Severin v. United States, 99 Ct. Cl. 435 (1943). Severin employed a subcontractor on a contract to build a post office in Rochester, New York. As a result of construction delays, Severin sought to recover $702 on behalf of its subcontractor.
The Court of Claims (now the Court of Federal Claims) gave two reasons for rejecting the claim. First, the court held that the subcontractor could not sue on its own because it had no contract directly with the government. The government had waived its sovereign immunity only for its direct contractual agreements.
Second, the court held that Severin could not pursue a claim on the subcontractor’s behalf because Severin itself could not be held liable for the same damages under its subcontract agreement.
A strict application of the Severin doctrine would increase risks for both prime contractors and subcontractors and would hamper the efficient resolution of claims. It would restrict the use of no-damage-for-delay clauses and other risk-shifting clauses that have widely been seen as effective. But in practice, the Severin doctrine has not been strictly enforced.
Permissible release terms
Cases applying the Severin doctrine in federal contract disputes have recognized the use of a “conditional release,” a contractual device that releases a prime contractor from liability to the subcontractor except to the extent damages are recovered from the government.
The use of this approach is recognized in J.L. Simmons Co. v. United States, 304 F.2d 886 (Ct. Cl. 1962). There, the subcontract released prime contractor J.L. Simmons from all claims “with the exception of [a] claim for losses because of engineering errors in design committed by the Veterans Administration.” As to claims for losses caused by the VA, the release stated that a court order rejecting the claim or payment by J.L. Simmons of whatever the court awarded would “completely extinguish all further obligation of J. L. SIMMONS COMPANY, INC. to the [subcontractor] under the subcontract.” The prime contractor’s conditional obligation to pay subcontractors the amount awarded for government-caused losses was enough to avoid the Severin doctrine.
Iron-clad exculpatory clauses
While it is readily addressed with good contract drafting, the Severin doctrine remains an important issue. Parties still find subcontractor claims barred when their subcontracts include an “iron-bound” release of prime-contractor liability or when they agree to a complete release after the claim arises.
A strong no-damage-for-delay clause, for example, barred a landscaping subcontractor’s pass-through delay claim in Harper/Nielsen-Dillingham, Builders, Inc. v. United States, 81 Fed. Cl. 667 (2008) [pdf]. Both the prime contractor and the subcontractor testified that they did not intend the clause to bar claims arising from government delays, but the court read the clause more broadly. Since the clause excused the prime contractor from paying damages for delays of any kind, the prime contractor could not assert the subcontractor’s delay claim.
According to the analysis in Harper, this type of Severin doctrine problem cannot be fixed after the fact. In Harper, the prime contractor agreed to pass through the subcontractor’s delay claim against the government, despite the no-damage-for-delay clause in the subcontract. The court found the later agreement ineffective. Once the prime contractor’s liability has been extinguished, the contractors may not “revive liability by mutual agreement” to save a pass-through claim.
We address other implications of the Severin doctrine in part two of this post.