The Severin doctrine restricts the ability of prime contractors to hold the government responsible for costs incurred by subcontractors. It is often of limited practical effect because it can usually be avoided by contract. Liquidation agreements, sponsorship agreements, pass-through agreements, and other similar agreements often include a conditional release that limits the subcontractor’s recovery to the amount that the prime contractor recovers from the government. With this protection, prime contractors are often willing to pursue subcontractor claims on a pass-through basis.

As we discussed in part one of this post, the Severin doctrine is nevertheless a recurring issue in federal contracts. Here we address two recent cases that explore the application of the Severin doctrine when the rights of the prime contractor and subcontractor are not expressed in a written agreement.

No subcontract at all

The decision in Parsons-UXB Joint Venture, ASBCA No. 56481, 13-1 BCA ¶ 35,378 (Aug. 1, 2013) [pdf] addresses the application of the Severin doctrine when there is no written subcontract. Parsons and UXB formed a joint venture to complete a Navy project to restore the Hawaiian island of Kaho’olawe, which had been used as a weapons range. The JV was “unpopulated,” meaning that employees of Parsons and UXB did all the work even though the JV formally held the contract. There were no subcontracts in place between the JV and either Parsons or UXB. When a dispute developed over costs incurred on the project and the JV brought the case to the Armed Services Board, the Navy cited the Severin doctrine. Without a subcontract, the Navy asserted that the JV could not be liable for costs incurred by Parsons or UXB and therefore could not pursue claims on their behalf.

The ASBCA rejected the Navy’s argument. Citing Hawaiian state law, the Board held that the JV was a partnership and therefore “obligated to reimburse or indemnify its partners for payments made, or liabilities incurred, by them in the ordinary course of the partnership’s business, unless the partnership agreement provides otherwise.” The claims were safe from the Severin doctrine because “Hawaii law obligated the JV to reimburse the partners.”

The right to control settlement of a subcontractor claim

There was a subcontract in AM General, LLC, ASBCA No. 57662 (Sept. 17, 2012) [pdf], but it did not address the possibility that the prime contractor might want to settle the subcontractor’s pass-through claim. AM General held an Army contract to produce military vehicles for use in Iraq. BAE produced armor parts that were incorporated into the vehicles. When the Army identified alleged overcharges related to the cost of the armor parts, AM General and BAE collaborated on a non-monetary claim seeking a determination that the Army had based its overcharge decisions on cost and pricing data that the Army had improperly required from BAE. In its capacity as prime contractor, AM General settled with the government. BAE objected to the settlement and opposed the voluntary dismissal of the case at the board. BAE argued that AM General agreed to the Army’s terms only to increase its leverage in state-court litigation between AM General and BAE.

The Armed Services Board of Contract Appeals held that BAE had no right to complain in the board proceedings. As a subcontractor, BAE’s only avenue to dispute the Army’s overcharge claims was a pass-through claim brought by AM General. Even though AM General had agreed to initiate a claim on BAE’s behalf, AM General remained the “contractor” for purposes of the board’s jurisdiction. When AM General agreed to dismiss the board litigation, the board’s jurisdiction came to an end. Even if BAE had been able to negotiate a pass-through agreement that protected its right to approve a settlement with the Army, its remedy would have been a breach claim against AM General.