I previously blogged about the rules relating to pass-through claims, where a prime contractor’s recovery from an owner for damages suffered by its subcontractor is limited in certain circumstances. In the post, I talked about a “past-through-plus” claim based upon the Severin doctrine, which provides a prime contractor cannot sue an owner on behalf of one of its subcontractors to recover monies due to the subcontractor unless the prime contractor is itself liable to the subcontractor. Those rules can have an important effect on the time limits of when you pursue a claim against the government, often putting yourself (like the Rolling Stones) between a rock and a hard place.
In Kellogg Brown & Root Servs., Inc. v. Murphy, (May 18, 2016), the Federal Circuit recently held that, for purposes of the six-year limitations period of the Contract Disputes Act (CDA), a contractor’s claim did not accrue when a terminated subcontractor stopped its work. Nor did the period begin to accrue when the prime contractor and subcontractor agreed to cooperate in preparing invoices to submit to the Army. Instead, the Court held, the prime contractor’s claim accrued only once it had resolved subcontractor costs, allowing the prime contractor to request a sum certain from the government. While the facts of the case are complex, here’s the skinny:
- Army and KBR enter cost-plus fee contract construct dining facilities and to provide meal and related services for troops in Iraq;
- KBR subcontracts certain work to KCPC;
- KBR terminates for default KCPC, which disputes the termination;
- KCPC continued performance at the request of KBR until a replacement subcontractor could be found;
- KCPC files suit against KBR for certain costs, and following settlement, KBR pays a “settlement amount” of $17.4 million;
- the parties agree to cooperate on submitting to the Army the subcontractor’s claim for costs and profits relating to the master agreement and the termination;
- KCPC submits its certified claim to KBR, and KBR submits a claim to the Army, but refuses to certify it or comment on its validity;
- the Army refuses to consider the claim and instructs KBR to “settle a claim by sub with its sub, then bill the government”;
- KBR finally “sponsors” the claim, only to withdraw it a few years later, citing to the government that it is a “business dispute” between it and its subcontractor;
- KCPC later files suit against KBR for failing to pursue the subcontractor’s claim and for inexplicable withdrawing the claim;
- the parties settle the second lawsuit and KBR pays KCPC an additional $10.4 million; and
- KBR submits a certified claim with the Army for $10.4 million.
The Army moved to dismiss KBR’s claim, arguing that the six-year statute of limitations under the CDA had run. The Board of Contract Appeals granted the motion, finding that the claim had accrued either on September 12, 2003 when KCPC ended its work or, alternatively, on January 24, 2005 when KBR and KCPC agreed to cooperate and present the cost to the Army.
The Federal Circuit reversed, holding that KBR’s claim was not time barred. The Court concluded that the claim did not accrue when KCPC ended its work on September 12, 203. The Federal Acquisition Regulation (FAR) defines “accrual” as:
the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred.
However, liability was not fixed as of the date KCPC ended its work, and a claim (or written demand) as that term is defined by the CDA had not yet come into existence as of that date.
The Court also rejected the Army’s argument that the Severin doctrine requires a finding that the claim accrued on the September 12, 203 date. As you probably know, Severin v. United States held that “if plaintiffs had proved that they, in the performance of their contract with the Government[,] became liable to their subcontractor for the damages which the latter suffered, that liability, though not yet satisfied by payment, might well constitute actual damages to plaintiffs, and sustain their suit.”
Just as in Severin, the Army argued that KBR became liable to its KCPC for the subcontractor’s damages due to KBR’s termination decision, and KBR’s claim accrued when KCPC’s claim accrued. The Federal Circuit disagreed: “Severin does not so hold.” Under the FAR, accrual does not occur until the contractor requests, or reasonably could have requested, a sum certain from the government. In other words, Contract Disputes Act does not require a general contractor to file “protective claims” while it resolves claims with a subcontractor.
In the end, KBR v. Murphy provides a good overview of the intricacies of pass-through claims and applicable statute of limitation periods. Given the amount of money involved (settling for almost $30 million), it was certainly reasonable for the back-and-forth litigation between the prime contractor and subcontractor. But how those discussions resolved themselves at each stage of the dispute had an effect on the way the government treated the claim. It is important to understand when a claim is ripe, how the claim must be presented to the government, and whether it is properly asserted.