A recent Armed Services Board of Contract Appeals (ASBCA) decision discusses the Severin doctrine and its impact on subcontractor pass-through claims, confirming that this defense to liability may only be used in very limited circumstances by the Government. As a refresher, in a 1943 decision, Severin v. United States, the Court of Claims held that a prime contractor was barred from recovering on behalf of its subcontractor unless the prime contractor “has reimbursed the subcontractor or is liable to make such reimbursement.”
Despite the potentially far-reaching implications of Severin, courts have generally applied the doctrine narrowly under the holding that “an iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub” is necessary to preclude the prime contractor from submitting a claim for its subcontractor. In its recent decision, BAE Systems San Francisco Ship Repair, the Board confirmed the limited applicability of Severin and that the Government bears the burden of establishing this defense.
The underlying facts relevant to the Board’s decision in BAE Systems are as follows. BAE was awarded a Delivery Order under its existing MATOC contract with the Army in 2006 to perform, among other tasks, removal and replacement of all existing potable water, air-conditioning and gray water drain systems. BAE subcontracted with Custom Ship Interiors, Inc. (“CSI”) to perform the removal and replacement of the piping.
During performance, CSI discovered additional piping systems that were not visible during the site inspection and were not identified on the contract drawings. CSI then submitted 19 change proposals related to the newly-identified piping that totaled approximately $986,000. Unfortunately (but in what will not be a surprise to many contractors), the Contracting Officer failed to negotiate or settle the 19 change orders, yet nonetheless directed BAE to “proceed diligently with the work.” BAE issued purchase orders for the work that stated they were issued pending Government settlement of the additional work. BAE also conditionally advanced $350,000 to CSI for the work.
In BAE’s appeal of the Contracting Officer’s denial of the claim for the 19 change proposals, the Government apparently argued that it was not liable to BAE pursuant to the Severin Doctrine. The Board summarily rejected this argument. Notwithstanding that the $350,000 payment by BAE to CSI was a conditional payment and that BAE was not directly liable to CSI—the Board relied on the fact that BAE agreed that it would be liable to CSI for the amount, if any, recovered from the government and that BAE had advanced $350,000 to CSI, reflecting an acknowledgement that CSI was entitled to payment for the work performed.
BAE Systems does not reflect a change in the law, however it is noteworthy for at least two reasons:
- First, despite the doctrine’s historically narrow application, this case demonstrates that Government attorneys are ready and willing to assert the Severin doctrine as a defense to subcontractor pass-through claims.
- Second, it confirms (or reconfirms) the limited scope of the Severin doctrine and the Board’s consistent holdings rejecting the Severin defense in the absence of iron-clad releases. An example of such a release is when a subcontract releases/excuses the prime contractor for delays of any kind.  In that scenario, a subcontractor may have a difficult time pursuing a claim for delay damages attributable to the Government. Conversely, a “conditional release,” i.e., one that releases a prime contractor from liability to the subcontractor unless damages are recovered from the government, comparable to the apparent agreement between BAE and CSI, should prevail against a Severin defense.
Consistent with the Board’s restrictive application of the Severin doctrine, it has also rejected application of this defense raised by the Government on the basis that there was no formal subcontract between the prime contractor and its subcontractor and therefore no liability by the prime to its sub.
In BearingPoint, the prime contractor and subcontractor executed a letter of intention “to enter into a binding written” agreement yet never executed such agreement. Despite the lack of an agreement, BearingPoint received services from its subcontractor, Custer Battles, and invoiced the Government for these costs. The contracting denied the costs claimed by BearingPoint for Custer Battles’ costs and demanded repayment in a Contracting Officer’s Final Decision. On appeal, the Government moved to dismiss BearingPoint’s claim on the grounds that BearingPoint lacked standing under the Severin doctrine because there was no executed subcontract so BearingPoint was not liable to Custer Battles.
Soundly rejecting this defense, the Board stated that there was no “iron-clad release” or other provision that would limit BearingPoint’s liability to Custer Battles. More importantly, however, the Board stated:
Moreover, we cannot accept the government’s argument that the less formal subcontracting arrangements that were obtained here are necessarily inconsistent with liability from BearingPoint to Custer Battles.”
Thus, the Board confirms that a subcontract does not need to be a formal agreement in order to defeat a Severin defense.
Finally, and as noted previously, establishing that the prime contractor is not liable to the subcontractor is the Government’s burden, thus this defense must be raised and established by the Government.