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Importance of Written Contracts

Phillips Brothers Electrical Contractors, Inc. v. TJR Enterprises, Inc., 2005 WL 524873 (3d Cir.)

TJR Enterprises, Inc. ("TJR") damaged certain electrical lines while installing sanitary sewers at the VA Medical Center in Coatesville, Pennsylvania.   TJR entered into an oral subcontract with Phillips Brothers Electrical Contractors, Inc. ("Phillips Brothers") for the replacement and repair of the damaged electrical lines.  After Phillips Brothers completed the repairs, it submitted an invoice to TJR that was nearly two-and-a-half times the initial estimate given to TJR.  TJR refused to pay the invoice.  Phillips Brothers then sued TJR for non-payment.  TJR filed a counter-claim seeking to deduct the cost of certain damage to the site caused by Phillips Brothers while repairing the damaged electrical lines.

The District Court found that the oral contract between the parties gave rise to two implied provisions that bore on Phillips Brothers' recovery.  First, the District Court found that there was an implied provision in the agreement that Phillips Brothers would replace the damaged lines by using cable of the same or similar price and quality.  Second, the District Court concluded that Phillips Brothers was responsible for the cost of any damage done to the site while it was performing repairs.  As a result, the District Court reduced Phillips Brothers' recovery.  Phillips Brothers appealed the ruling.  The Third Circuit affirmed.

This case demonstrates the importance of insisting upon written contracts with subcontractors regardless of the dollar value of the contract.   In this case, a simple written agreement could have eliminated the disputes related to work to be performed, materials to be used, amounts to be paid, and liability for any damage to the site.

Jurisdiction Under the Tucker Act

J.G.B. Enterprises, Inc. v. United States, 63 Fed. Cl. 319 (2004) 

Capital City Pipes, Inc. ("Capital City"), an 8(a) contractor, received several sole-source contracts and purchase orders from the Defense Supply Center Columbus (DSCC) for hose assemblies.  Capital City subcontracted out the fabrication and shipment of the hose assemblies to J.G.B. Enterprises, Inc. ("J.G.B.").  J.G.B. became concerned when several checks from Capital City to J.G.B. were returned for insufficient funds.  As a result, J.G.B. informed the Government that it would stop shipment of hose assemblies pending resolution of the payment dispute.  At the urging of the Government, J.G.B. and Capital City entered into an escrow agreement whereby an escrow agent would receive funds directly from the Government and then distribute the funds to J.G.B. and Capital City.  Capital City requested that the Government remit payment to the escrow agent, but the Government nonetheless sent payment directly to Capital City.  J.G.B. subsequently sued the Government seeking damages for unpaid invoices and attorneys' fees and costs incurred.

Subcontractors usually cannot sue the Government directly because of a lack of privity with the United States.   However, intended third-party beneficiaries of a government contract may sue under the Tucker Act (28 U.S.C. §1491(a)(1) (2005).  In this case, the COFC found that in a contract in which the promisee (Capital City) is to provide goods or services to the promisor (Government), a clause providing for the promisor to pay the proceeds of the contract to a third party (J.G.B.) is enforceable by the third party where the payment is intended to satisfy a present or future liability of the promisee to the third party.  As applied here, the COFC found that because the remittance clause in the contract was changed so as to give J.G.B. control over payments under the contract, J.G.B. qualifies as a third-party beneficiary with the right to recover directly against the Government.       

Regulation  - DFARS Amendments Regarding Subcontracting Policies and Procedures          

On April 12, 2005, the Department of Defense published notice in the Federal Register of its proposal to amend DFARS 244.301 in order to clarify Government responsibilities for conducting reviews of contractor purchasing systems.  DFARS 244.301 currently provides that the ACO is responsible for reviewing the contractor's purchasing systems, but members of other organizations may recommend that the ACO initiate a special review.

DOD is proposing to amend DFARS 244.301 so as to provide that the ACO is solely responsible for initiating reviews of the contractor's purchasing systems, but other organizations may request that the ACO initiate such reviews.

OMB Memo - Strategic Sourcing: An Area Of Potential Importance To Small Business

On May 20, 2005, the Office of Management and Budget issued direction to all executive agencies to consider strategic sourcing initiatives.  OMB envisions strategic sourcing as a potential way to save taxpayer dollars and promote efficiency in procurements.  OMB is asking each Executive Branch agency 1) to consider the way in which strategic sourcing can be accomplished and 2) to identify at least three potential products that could be sourced on a consolidated basis.  The effect of a strategic sourcing initiative that consolidated procurements of supplies or services could be the reduction or elimination of both the numbers of contracts and the sources of supplies to meet Federal Government needs.  This area needs to be  watched closely since the potential impact of this initiative on small business and subcontracts could be quite significant.

Michael Tuite contributed to this advisory.