THE COMPTROLLER GENERALDECISION DF THE UNITED STATES

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FILEB-187 8 0 6 DATE: JaTnuary 11, 1979

MATTER OFUniversal Aircraft Parts, Inc. rPL6.oO66

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1. Subcontractor who supplied, but was not paidby, prime contractor (currently the subjectof bankruptcy proceedings) with parts andmaterials for use in performing Governmentcontracts may not recover purchase price ofsupplies from United States where subcontrac-tor did not establish privity with Governmentunder recognized theories of agency, implica-tion, or third-party beneficiary.

2. Reporting claim to Congress under MeritoriousClaims Act for relief of Government subcontrac-tor requesting reimbursement for materialssupplied to, but not paid for by, Governmentprime contractor (currently the subject ofbankruptcy proceedings) for use in performingcontracts would not be justified because claimcontains no elements of unusual legal liabilityor equity, and to do so would constitute pref-erential treatment over prime's other unpecuredcreditors who must satisfy their claims(inpending bankruptcy proceeding and over otherunpaid subcontractors in similar circumstances.

~nivirsal Aircraft Parts, inc. (Universal),requests reimbursement from the United States in theamount of $190,753.68 for engine parts and aircraftframes (including attorneys' fees) supplied to Gary_ -Aircraft Corporation (Gary) for use in performing several-United States Air Force contracts (lNos. F41608-71L-D-0666,January 1, 1971; F41608-71-D-0289, December 1, 1971;F41608-72-D-1273, April 28, 1972; F41608-73-D-3000,July 27, 1.973; F41608-74-D-1054, March 29, 1974;F41603-74-1)-1064, April 30, 1974; and F-41608-74-D-1645,September 1, 1974). The claim arises from Gary's fail-ure to pay Universal for approximately $160,000 worthof materials. Universal obtained a judgment against Garyon August 27, 1976, for the claimed amount, but has been

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unable to satisfy the judgment. Alternatively, Universalhas requested that we recommend the claim to Congressfor private relief under the Meritorious Claims Act,31 U.S.C. § 236 (1976).

The record shows that by letter of August 25, 1976,the contracting officer notified the Defense ContractAdministration Service (DCAS) that Gary was presentinginvoices for reimbursement for material it had notpaid for and requested DCAS to investigate the practiceand to provide a remedy if warranted. In an August 31,1976, reply DCAS concurred in the contracting officer'sconclusion and noted that one of the unpaid supplierswas the General Services Administration (GSA), and thatthe amoun GSA was being withheld from monies due*Gary until Gary paid GSA. In a letter of June 2, 1978,Universal asks why the same protection could not havebeen afforded to Universal.

The authority relied upon by DCAS in withholdingamounts due GSA from Gary is not apparent from therecord. Nevertheless, such action was an appropriateexercise of the common law right of all creditors toapply the unappropriated monies of their debtors in theirhands to the extinguishment of debts due. See, UnitedStates v. Munsey Trust Co., 332 U.S. 234 (1947); 49 Comp.Gen. 44 (1969).

On October 28, 1976, Gary filed a petition underchapter XI of the Bankruptcy Act, 11 U.S.C. § 721 (1976),and was continued as a debtor in possession of itsproperty and authorized to operate its business pendingdisposition of the bankruptcy petition. Universal viewsits chances as a creditor to recover any portion of theamount owed as "-extremely dim if not totally hopeless"and has made this claim against the Governmeint on thetheory that Gary acted as an authorized agent of theUnited States in purchasing materials from Universal.The Government has paid Gary for the materials obtainedfrom Universal.

With the exception of the relief provided subcon-tractors on Government construction contracts under theMiller Act, 40 U.S.C. § 270a (1976), which requires thefurnishing of payment bonds by prime contractors, partiescontracting with prime Government contractors generallyare limited to their remedies at law in any controversy

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arising out of the failure of the prime contractor topay the subcontractor for supplies and services. Insimilar circumstances, we denied a request by a sub-contractor holding a State court judgment against a.prime contractor (whose contract was terminated by theGovernment for convenience) that the Government withholdfrom its payment to the prime contractor the money owedto the subcontractor and require it to be paid directlyto the subcontractor. We held that since there is notprivity of contract between the Government and the sub-contractor under prime Government contracts, there wasno legally permissible way for the Government to enforcethe subcontractor's rights against the prime contractor,or for the subcontractor to make a claim directly againstthe Government. B-160329, November 7, 1966.

However, we have recognized three situations whichwill establish privity between the subcontractor and theGovernment.

1. Agency--There is a contractual relationshipbetween a subcontractor and the Governmentarising from a provision in the prime contractwhich expressly makes the prime contractor theagent of the Government. 21 Comp. Gen. 682(1942).

2. Implication--Privity may be implied where asubcontractor furnishes supplies after receiv-ing the Government's express or implied promiseto make payment. B-171255, January 5, 1972;B-171868, August 20, 1971.

3. Third-Party Beneficiary--A subcontractor mayobtain the benefits of privity as a third-partybeneficiary of a Government prime contract. Cf.B-136469, April 30, 1959; B-78596, May 29, 1950;A-18357, February 11, 1930.

Universal contends that Gary was acting as a dulyauthorized agent for the United States when purchasingthe aircraft engine parts and aircraft frames fromUniversal. We have recognized that where the effect ofprime contractors' transactions legally binds the Govern-ment to make payment directly to a third party for suppliesand services which contractors may order from a third party

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for the account of the Government, such contractorsmay be considered as agents of the Government.21 Comp. Gen., supra. On the other hand, where thelegal effect of the contractors' transactions is tobind themselves, rather than the Government, suchcontractors may not be regarded as agents of the Gov-ernment. See, Alabama v. King and Boozer, 314 U.S. 1(1941), and Curry v. United States, 314 U.S. 14 (1941).

Each of the prime contracts in question is a firm,fixed--price, indefinite-quantity or requirement-typeinstrument which provides for material reimbursement tothe prime contractor. However, the fact that Gary hadcost-reimbursement-type contracts with the Government,alone, does not establish its subcontractor's right topayment by the Government. B-175550, December 19, 1972.Construing a similar Government contract which providedthat the contractor should be reimbursed for any Stateor local taxes paid, expressly designated the contrac-tor as the purchasing agent of the Government, andstated that "the Government shall be directly liableto the vendors for the purchase price," the SupremeCourt found that the United States was itself the pur-chaser of materials procured by the contractor as pur-chasing agent and that no liability of the purchasingagent to the vendor arose from the transaction. Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1953). Inthe Court's view, not only the contractor's designationas purchasing agent but also the provisions appearingon the purchase order clearly identifying the Govern-ment as the actual purchaser were determinative of theGovernment's liability. The Court noted that the pur-chase order provisions were in accordance with thecontract arrangements making the contractors purchasingagents for the Government and that the contract requiredspecific Government approval to the agent for eachpurchase. Such circumstances, the Court'said, clearlygave no rise to legal liability of the contractor-purchasing agent to the seller.

In our view, the facts of the present case aresubstantially different. Universal has not pointed out,nor have we found, any language in the prime contractswhich expressly designates Gary as a Government purchas-ing agent or which can be construed to authorize Garyto hold itself out as such. Neither did the contractsrequire Government approval for Gary's purchases. Further,

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the representative purchase orders here, unlike thoseconsidered in Kern-Limerick, do not contain expressprovisions obligating the Government to the vendor forthe purchase price. Some of Gary's purchase orders docontain language that the supplies are for the "accountof the Government." However, in the absence of an ex-press designation of Gary as purchasing agent, we donot think that the inclusion of such language fellwithin Gary's authority or that it was sufficient topermit Gary to avoid liability for the supplies. ThatGary and not the United States is legally liable forthe purchase price of materials ordered from Universalis made apparent by the judgment obtained by Universalagainst Gary. Accordingly, we must conclude, as appar-ently did Universal in bringing suit against Gary, that*the legal effect of the transactions was to bind Garyto pay for the supplies. Thus, there is no basis onwhich to find that Gary was acting as an agent for theGovernment.

All of the prime contracts between Gary and theAir Force included the payment clause found in ArmedServices Procurement Regulation § 7-103.7 (1958 Jan.)which states that "the Contractor shall be paid, uponthe submission of proper invoices or vouchers, * * *for supplies delivered and accepted or servicesrendered and accepted." Further, contracts -74-D-1054and -1064 each requires that proper invoices or vouchers"be supported by contractor paid invoices at time ofsubmission." Contracts -71-D-0289 and -0666 containlanguage whereby Gary agreed to "support all materialcharges by paid invoices."

We asked the Air Force to explain how, in the faceof the foregoing contract provisions, Gary obtainedpayment without submitting "contractor paid invoices"with vouchers for reimbursement. We also asked the AirForce to comment on the reason for the inclusion in thefour contracts of language requiring submission of "paidinvoices." The Air Force replied, in a letter ofApril 4, 1978, that the additional contract languagerequiring "paid invoices" was inserted in the four con-tracts "to provide for reimbursement in the same manneras a standard cost reimbursement type supply contract."Further, the agency noted that:

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"* * * The standard ASPR 7-203.4payment clause for cost reimbursementtype supply contracts, entitled,'Allowable Cost, Incentive Fee andPayment,' defines 'costs' as thoserecorded costs which have been paid forby cash, check, or other forms of reim-bursement. Under this procedure, Garywas to have paid for the materials priorto submitting a voucher accompanied by astatement of cost. Gary did follow avouchering procedure by which it receivedprovisional payments subject to later audit,but did not always pay its suppliers priorto billing.

* * * * *

"* * * The 'contractor paid invoice'and 'paid invoices' covenants were includedas assurance that Gary Aircraft recognizedthe requirement for direct materials to bepaid for before such costs, would qualify asincurred costs for payment purposes."

In this regard, Universal points out by letter ofJune 2, 1978, that the obligation of Gary to pay forthe material prior to submitting vouchers existed underall the contracts, not only those which contained thespecial provisions regarding "paid" invoices; the re-quirement in ASPR § 7-103.7, supra, for "proper" in-voices or vouchers to be submitted with requests forpayment, imposed a duty upon Gary to support submis-sions by true and accurate invoices and vouchers; andif a voucher falsely indicates that suppliers' costshave been paid, they cannot be deemed as "proper."

The record shows that the procedure under whichGary obtained payment did not require Gary to submitpaid invoices with reimbursement vouchers. An inter-nal Air Force telex dated February 14, 1978, justifiedthe procedure as follows:

"The contracts state that the voucherswill be supported by contractor paid invoicesat time of submission. We interpret this tomean that the vouchered- material costs willbe supported by paid invoices and that these

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invoices will be maintained by GaryAircraft and not submitted with thepublic vouchers.

"The contracts do not requireGary Aircraft to submit paid invoiceswith its public vouchers for materialcosts. Prior to voucher payment bythe finance officer, DCAA reviewsvouchers for material to determineproper billing format, unusual itemsand compliance with specific contractclauses. After this review, thevouchers are provisionally approvedsubject to later audit of detailedsupporting documentation. Therefore,we would not have knowledge at thetime of provisional approval of anydelinquent payments of material vendorinvoices. The audit approval states:'Approved for provisional payment sub-ject to later audit.9'"

Nevertheless, Universal continues to argue thatthe vouchering procedure was improper and that thecontract provisions required Gary to submit paidinvoices as a condition precedent to payment. OurOffice has held on numerous occasions that a Govern-ment contractor is entitled to be paid even thoughthere are unpaid claims for labor and materialoutstanding. 52 Comp. Gen. 377 (1972); 37 id. 115(1957); 23 id. 655 (1944); 10 id. 433 (1931). Evenassuming that the contracts' payment provisions canbe construed to require submission of a paid invoicewith the public voucher, such a construction does notaid 'Universal's claim in the absence of privity withthe United States.

We have noted above that privity will be impliedwhere a subcontractor furnishes supplies on the basisof an express or implied promise of the Government tomake payment. In an apparent attempt to establish thatthe contract provisions when construed to require sub-mission of "paid invoices" imply the existence ofprivity between the Government and the prime's subcon-tractors, Universal noted that:

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"The Air Force has enjoyed thebenefits of approximately $160,000worth of materials and engine partsat Universal's expense, but throughno fault of Universal. The onlyparty in a position to control thesupposed 'reimbursements' to Garywas the Air Force, and the primecontracts payment provisions providedthe Air Force with authority to requireproof by Gary of the validity of itsalleged costs. There can be no doubtthat the contract clauses requiringmaterial charges to be supported by'paid invoices' (or at least by 'properinvoices') were intended to assure con-trol over the reimbursement procedures,and protection of the supplier interests."

Even assuming that the provisions in question wereintended to protect Gary's suppliers, we cannot say thatthey gave rise to a direct contractual arrangement be-tween the Government and the suppliers. In one case inwhich we found circumstances sufficient to imply privity,the subcontractor had furnished supplies to the primeonly after receiving assurances from the contractingofficer that he would take steps to see that paymentwould be made upon receipt of the supplies. It was alsoshown that the Government had assumed financing of thecontract and established a special account from whichto make payment. B-171868, August 20, 1971. Here, how-ever, there are no facts in the record to indicate thatUniversal received any direct assurances of payment fromthe Government. Further, the record shows that Universaldid not become aware of the prime contract provision uponwhich it now relies until receiving copies of the con-tracts pursuant to a Freedom of Information Act requestmade after the aircraft parts were supplied to Gary.Accordingly, we conclude that the requirement for Garyto submit "proper invoices" prior to payment does notgive rise to an express assurance of payment by whichthe Government induced Universal to furnish Gary withsupplies.

Further, we cannot view the provisions in questionnor the Air Force's use of parts supplied by Universal asan implied promise to pay Gary's. subcontractors. Althoughan implied promise to pay is sufficient to establishprivity between the Governmen-t and a subcontractor, that

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promise, although implied, must still run directly fromthe Government to the subcontractor. Cf., United Statesv. Georgia Marble Co., 106 F.2d 955 (5th Cir. 1939);B-147131, March 2, 1962. The record does not show nordoes Universal contend that it was induced through anycourse of direct dealing with the Government, exceptthrough Gary, to supply the parts required for the per-formance of the prime contracts.

Under certain circumstances, a subcontractor maybe made a third-party beneficiary of a contract betweenthe Government and a prime contractor. Daniel HammDrayage Co. v. Willson, 178 F.2d 633 (8th Cir. 1949);B-136469, April 30, 1959. However, in any third-partybeneficiary case, it must appear that the contractingparties had the interest of the third party in mind when-====they entered into the contract. United States v. Huff,165 F.2d 720 (5th Cir. 1948). Therefore, before theGovernment may be held liable, a claimant must demonstratethat the protection of third parties was contemplated.United States v. Aleutian Homes, Inc., 193 F. Supp. 571(D.C. Alaska 1961).

We believe that the contract provisions relied uponby Universal could be considered protection for Gary'ssuppliers from nonpayment. However, the payment pro-cedure in each of the prime contracts as implemented bythe Air Force included a subsequent audit of Gary'svouchers. Gary's agreement to support material chargeswith paid invoices also served the purpose of providingthe Government protection by insuring that the expendi-tures for which Gary was reimbursed had actually beenmade. Universal has not presented any evidence fromwhich we can conclude that "paid invoice" provisions weremade a part of the prime contracts for the purpose ofprotecting subcontractors rather than, or in additionto, the Government. Further, payment by the UnitedStates to Universal as a third-party beneficiary of theGovernment's prime contracts with Gary would require usto imply from the "paid invoice" requirement authorityfor the Government to have retained a part of the con-tract price and to settle directly with the subcontrac-tors. Cf., B-160329, November 7, 1966.

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In view of the absence of clear evidence as tothe reason for including the "paid invoice" provisionsin the prime contracts and the doubt raised by thenecessity to imply authority for direct settlement withsubcontractors from those provisions in order to payUniversal's claim, we must resolve the doubt in favorof that course which will result-in the conservation ofappropriated funds. Charles v. United States, 19 Ct.Cl. 316 (1884); Longwill v. United States, 17 Ct. C1.288 (1881).

Accordingly, Universal's claim for payment underthe contracts is denied.

Universal has also requested relief under theMeritorious Claims Act in the event our Office concludesthat there is no legal basis to allow reimbursement formaterials supplied to Gary. The Meritorious Claims Actprovides that when a claim is filed in this Office andmay not be lawfully adjusted by use of an appropriationtherefor made, but which claim, in our judgment, containssuch elements of legal liability or equity as to be. de-serving of the consideration of Congress, it shall besubmitted to the Congress with our recommendations. Thisremedy is an extraordinary one and its use is limitedto extraordinary circumstances.

The cases we have reported for the considerationof the Congress generally have involved equitable cir-cumstances of an unusual nature which are unlikely toconstitute a recurring problem, since to report to theCongress a particular case when similar equities existor are likely to arise with respect to other claimantswould constitute preferential treatment over others insimilar circumstances. See, B-175278, April 12, 1972.Subcontractors have on other occasions found themselvesin similar circumstances whereby the prime contractorwas reimbursed for materials supplied by vendors whowere in turn unable to collect from prime contractors.In one case where contract termination charges werecollected from the Government by the prime on behalfof the subcontractor, the subcontractor could not, inthe absence of a contract with the United States, main-tain a suit on the ground that equity and good consciencerequired the Government to make payment a second time.Aerovox Corporation v. United States, 89 F. Supp. 873

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(D.C. Mass. 1950). Likewise, we find no unusualelements of law or equity in the present case suf-ficient to justify a second payment by the Govern-ment, particularly where Universal had no contractwith the Government and could have refused to extendunsecured credit to Gary.

Further, we are advised that Gary's voluntarybankruptcy proceedings are still pending. In Con-gressional Reference Case No. 1-72, Arizona Insuranceand Investment Co. v. United States, October 29, 1976,the Court of Claims responded to the Senate's inquiryas to whether, relative to a proposed private reliefbill, the unliquidated claims of materialmen andlaborers of a certain prime Government contractorcould be brought against the debtor in the bankruptcyproceedings then pending in relation to the primecontractor and whether they constituted a valid legalor equitable claim against the United States bystating:

* * * All the claims made, proven andunproven, could have been brought againstthe debtor in the pending bankruptcyproceedings, and were so brought. * * *

"The United States has not wronged theplaintiff in any way, and plaintiffshave no legal claim against the UnitedStates. There is no equitable groundfor singling these plaintiffs out fromall other suppliers who are excludedfrom any benefits under the Miller Act.Any payment to plaintiffs would be amere gratuity."

In the present circumstances, we cannot concludethat Universal has a basis to recover from the Govern-ment. We have also been informally advised thatUniversal has filed a claim against Gary in the pendingbankruptcy proceeding. In our view, Universal must lookto that proceeding to satisfy its judgment against Gary.Accordingly, we decline to report Universal's claim toCongress since to do so would constitute preferentialtreatment over Gary's other creditors who also seek to

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satisfy claims through the bankruptcy proceedings andother unpaid subcontractors in similar circumstances.

Deputy Comptrol-l-er Generalof the. United States