April 18, 2011
Third-Party Beneficiary Issue in the Court of Federal Claims
So many cases that end up in litigation begin with parties trying to do their best to fulfill their contractual obligations. So it is with FloorPro, Inc. v. United States. Back in 2002, the Navy awarded a contract to GM&W Construction to install new floor coatings in some warehouse bays. GM&W sub-contracted with FloorPro and the latter was to be paid about ninety percent of the contract price -- $37,500 out of $42,000. FloorPro did the work but was not paid, apparently because GM&W was in financial difficulties. FloorPro wrote to the contracting officer to complain of the non-payment. The contracting officer felt guilty, because s/he had asked FloorPro to work with GM&W.
In order to facilitate payment, the Navy entered into a contract modification which provided for a joint check to be issued to both FloorPro and GM&W and also provided that the government was thereby released from any claim against it by the contractor. Unfortunately, the joint check was not issued. Instead, the government paid GM&W, and FloorPro never got paid. It sued the government on the theory that it was a third-party beneficiary to the contract modification.
The general rule is that subcontractors do not have standing to bring claims against the government for breach of contract when they are not in privity with the government. However, subcontractors will have standing if they can establish that they were intended third-party beneficiaries of a contract with the government. The court applied the following test to determine whether FloorPro had standing as a third-party beneficiary: (1) Did the contracting officer intend to benefit FloorPro through the modification? and (2) Did the modification result in a direct benefit to FloorPro?
The answer to the first question was obviously yes, since the purpose of the contract modification was to help get FloorPro paid. The court likewise had no difficulty in determining that the joint check conferred a benefit on FloorPro because such a check could not be deposited without FloorPro's endorsement.
The court rejected the government's argument that there be a third prong to the third-party beneficiary test, requiring that a contract modification intended to benefit a third party must be a “condition precedent” to further performance. Although there is some language to that effect in Flexfab, L.L.C. v. United States, 424 F.3d 1254, (Fed. Cir. 2005), no court in the Circuit had adopted that language as part of the test for third-party beneficiary standing.
The court accordingly denied the government's motion for summary judgment and granted summary judgment to FloorPro.
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