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E. R. Mitchell Construction Co. v. Danzig

May 10, 1999

E. R. MITCHELL CONSTRUCTION CO., APPELLANT,
v.
RICHARD J. DANZIG, SECRETARY OF THE NAVY, APPELLEE.



Before Newman, Michel, and Clevenger, Circuit Judges.

The opinion of the court was delivered by: Clevenger, Circuit Judge.

Appealed from: Armed Services Board of Contract Appeals

This is a government contracts case. The facts are not in dispute, and the only issue for decision is one of law: whether the government is liable for unabsorbed home office overhead costs of a subcontractor, whose work is delayed by the government, when the prime contractor is not delayed in the completion of its contract with the government. The Armed Services Board of Contract Appeals held that the government is only liable for a subcontractor's unabsorbed home office overhead costs when the prime contractor is delayed by the government in performance of its contract. See E.R. Mitchell Constr. Co., ASBCA No. 48745, slip op. at 6 (Mar. 17, 1998).

E. R. Mitchell Construction Co. (Mitchell) brought this suit on behalf of its subcontractor Clontz-Garrison Mechanical Contractors, Inc. (CG), and Mitchell prosecutes this appeal on behalf of CG under our review authority in 41 U.S.C. § 607(g)(1), 28 U.S.C. §§ 1295(a)(10) and 1295(b). We reverse the Board's decision.

I.

Before proceeding to the merits of this appeal, we pause to consider and dispose of an issue that arose during oral argument of this case. The issue is whether this cause of action is barred by a doctrine that emanates from the "hornbook rule that, under ordinary government prime contracts, subcontractors do not have standing to sue the government under the Tucker Act . . . to enforce a claim for equitable adjustment under the Contract Disputes Act of 1978." Erickson Air Crane Co. of Wash. v. United States, 731 F.2d 810, 813 (Fed. Cir. 1984) (citations omitted). The hornbook rule is based on the proposition that the "government consents to be sued only by those with whom it has privity of contract, which it does not have with subcontractors." Id.

The hornbook rule, however, is tempered to permit a prime contractor in certain circumstances to sue the government on behalf of its subcontractor, in the nature of a pass-through suit, for costs incurred by the subcontractor. Id. In Severin v. United States, 99 Ct. Cl. 435 (1943), cert. denied, 322 U.S. 733 (1944), a prime contractor sought to recover from the government for direct field costs incurred by its subcontractor. Our predecessor court held that the prime contractor lacked standing to bring the suit, because the prime contractor could not prove in fact that it was liable to the subcontractor for the costs in suit. See Severin, 99 Ct. Cl. at 443. If the prime contractor proves its liability to the subcontractor for the damages sustained by the latter, then the prime contractor itself can show injury to it from the government's action. Such a showing overcomes the objection to the lack of privity between the government and the subcontractor.

Severin thus limited the government's exposure to such pass-through suits to the situations in which the prime contractor is liable for the subcontractor's costs. Absent such proof of prime contractor responsibility, the government retains its sovereign immunity from suit against it. The gist of these rules is known as the "Severin doctrine." For many years, the burden of proving prime contractor responsibility to a subcontractor, to avoid the defense of sovereign immunity, rested on the prime contractor.

The Court of Claims in time revisited the Severin doctrine and shifted the burden of proof from the prime contractor to the government. Thus, it became, and still is, the burden of the government to prove that the prime contractor is not responsible for the costs incurred by the subcontractor that are at issue in the pass-through suit. See Blount Bros. Constr. Co. v. United States, 346 F.2d 962, 964-65 (Ct. Cl. 1965); John McShain, Inc. v. United States, 412 F.2d 1281, 1283 (Ct. Cl. 1969). In Cross Construction Co. v. United States, 225 Ct. Cl. 616 (1980), the Court of Claims stated:

"This court has refined the Severin doctrine so that it requires an iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub . . . . If the contract is silent as to the prime's ultimate liability to the sub, suit by the former will generally be permitted . . . . Blount Bros. Constr. Co. v. United States, 171 Ct. Cl. 478, 482-84, 346 F.2d 962, 964-65 (1965) . . . . Defendant (on whom the burden rests) has not made the strict kind of case it must if we are to apply the Severin doctrine as it exists in today's world." Id. at 618.

Indeed, this court has confirmed that "application of the Severin doctrine has been narrowly construed." United States v. Johnson Controls, Inc., 713 F.2d 1541, 1552 & n.8 (Fed. Cir. 1983).

The Severin doctrine can only bar the prime contractor's pass- through suit against the government if the government first asserts at trial, and then proves, that the prime contractor is not liable to the subcontractor for the costs in suit. See George Hyman Constr. Co. v. United States, 30 Fed. Cl. 170, 177 (1993), aff'd., 39 F.3d 1197 (Fed. Cir. 1994) (table) (granting government's motion for summary judgment under the Severin doctrine where government asserted and proved lack of prime contractor liability to subcontractor for costs of pouring concrete for a sidewalk four times before government found the work acceptable).

Thus, when the government shoulders its burden of proof under the Severin doctrine, it enjoys immunity, as a matter of law, from the pass- through suit for want of privity in the circumstances. But when the government either fails to raise its Severin/sovereign immunity defense at trial, or raises it and fails to prove it, then the claims of the subcontractor are treated as if they are the claims of the prime contractor, and any further worry about the absence of subcontractor privity with the government is extinguished.

We have reviewed the full record before the Board. No mention is made in the record, or in the decision of the Board, to suggest that the government raised its Severin/sovereign immunity defense in this case. It is thus clear that the government waived that defense. We so hold, and therefore the government cannot raise the defense for the first time on appeal to avoid liability in this ...


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