Subcontractor Successfully Pleads that It’s a Third Party Beneficiary of Prime’s Contract with Government; Constructora Guzman, S.A. v. United States, COFC No. 19-498C

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Government’s motion to dismiss subcontractor’s suit for failure to state a claim is denied in part. A subcontractor sued the government claiming that it was a third party beneficiary to a contract between the government and the prime contractor, and that the government had breached that contract. Contrary to the government’s contentions, the court found the plaintiff had sufficiently pleaded a third party beneficiary theory. The government had modified the prime contract to retain 10% per invoice in lieu of bonds. The court found that this created an inference that the government intended to benefit subcontractors by paying them in the event the prime contractor did not. The court, however, dismissed the subcontractor’s implied contract theory, finding there had been no meeting of the minds between the government and the subcontractor.

The State Department entered a contract with Enviro-Management & Research, Inc. (EMR) for renovation of an embassy in Guyana. The contract provided that EMR had to provide payment and performance bonds to guarantee payment of subcontractors. But shortly after the contract was executed, the State Department modified the contract stating that the agency would “retain 10% per invoice in lieu of bonds.” EMR then entered into a subcontract with Constructora Guzman for multiple construction services on the embassy project.

Constructora completed its work, but EMR still owed the company $1.4 million. After learning of the government’s arrangement to withhold 10% of payments in lieu of bonds, Constructora sued the government in the Court of Federal Claims. Constructora alleged that it was a third party beneficiary of the EMR’s contract with the government, and that it had an implied in fact contract with the government. The government moved to dismiss the suit, contending that it failed to state a claim.

A plaintiff is a third party beneficiary when a contract reflects an intent to benefit the plaintiff. Here, Constructora argued, when the government modified to the contract to retain 10% per invoice in lieu of bonds, it put itself in the position of protecting—and thereby benefitting— subcontractors. With that modification, Constructora argued, the government effectively proclaimed that it would pay subcontractors if EMR did not. By failing to actually retain 10% of the EMR’s invoices, Constructora alleged, the government breached its obligation to Constructora.

Applying the notice pleading standard, the court found that Constructora had alleged sufficient facts to nudge its third party beneficiary theory across the line from conceivable to plausible. It was unclear to the court why the State Department chose to modify the contract to retain payment rather than adopt an alternative to payment bonds endorsed by the FAR. It was not even clear if the State Department had waived the contract’s bonding requirement. At a minimum, the modification allowed an inference that Constructora was intended to benefit from the government’s retaining of the funds

The court, however, was less enamored with Constructora implied contract theory. The court noted that to prove an implied contract, plaintiff must establish a mutuality of intent to contract. In this case, the State Department modified the prime contract before EMR entered a subcontract with Constructora. Moreover, Constructora acknowledged in its complaint that it performed its work without even knowing about the 10% retainage arrangement. What’s more there were no other facts to indicate that Constructora interacted with the State Department in a way that would indicate a meeting of the minds. The court dismissed the Constructora’s implied contract count.

Constructora is represented by Joseph A. McManus and David J. Butzer. The government is represented by Joseph A. Pixley, Joseph H. Hunt, Robert E. Kirschman, Jr., and Steven J. Gillingham of the U.S. Department of Justice as well as Jeffrey A. Regner of the U.S. Department of State.

COFC – Constructora Guzman