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Section 4. SUBCONTRACTS

NICKEL v. POLLIA

179 F.2d 160 (10th Cir. 1950)

[Andrew A. Pollia brought suit against E. C. Nickel, the prime contractor, and the Federal Public Housing Authority (FPHA) to recover for work done and materials furnished under a subcontract. Pollia was awarded judgment by the Federal District Court, and the defendants appealed to the United States Court of Appeals.

On 14 June 1946, the United States through the FPHA entered into a CPFF contract with Nickel to move 900 housing units. The contract provided that with the approval of the contracting officer the contractor could employ subcontractors to do part of the work. On 2 September 1946, with the approval of the United States, Nickel entered into a subcontract with Pollia for the removal and reinstallation of the plumbing and heating fixtures on 402 of the units for a total consideration of $89,244. The subcontract provided for monthly partial payments on estimates made by the subcontractor and approved by the contractor. It also incorporated the provisions of the prime contract with respect to labor, wages, and such matters. It provided that except where otherwise specifically provided, whenever the contractor and subcontractor were unable to agree on any question of fact arising under the contract, the dispute should be submitted to the contracting officer who signed the prime contract, or his duly authorized representative, whose decision should be final and conclusive upon the parties. In the interim the subcontractor was required to proceed diligently with the work as directed. The contract also provided that, if a performance bond was required by the Government, the subcontractor was to furnish the same.

On 17 October 1946, the subcontractor submitted to the project engineer for the United States an estimate for work done each in the amount of $17,846.60. The project engineer certified that "20% of the plumbing and heating work *** has been done to this date Oct. 17, 1946." A second estimate for a similar amount was submitted on 4 November 1946. However, these estimates were not accompanied by certified payrolls as required by the contract, and the payrolls, which were subsequently furnished, showed that wages were not being paid in accordance with the terms of the base contract. The

prime contractor then became doubtful of Pollia's credit standing, and on 1 November 1946, Pollia was notified that he must furnish a performance and payment bond as required by the terms of the subcontract, and that no payment would be made until such bond was furnished. An attempt was made to raise money for Pollia, but it failed when it was discovered that items which Pollia claimed had been paid were in fact not paid. On 23 December 1946, Pollia wired the prime contractor that:

"Due to failure on your part after making numerous promises to make payments to us that are past due we have advised the regional office today by wire that we were stopping operation of work covered by our contract." On 30 December 1946, the prime contractor advised Pollia by letter that his subcontract was terminated in accordance with paragraph three thereof because of his continued refusal to diligently prosecute the work in accordance with the terms of the subcontract.]

[1] It must be remembered that there was no privity of contract between Pollia and the F.P.H.A. His contract was with Nickel alone, and it was to Nickel alone that he must look for payment under his subcontract. Under the base contract, the F.P.H.A. agreed to pay Nickel the full consideration for performance of the entire work. When Nickel executed a subcontract with Pollia for performance for part of the work, he alone obligated himself to pay Pollia's consideration under that contract, and the consideration Pollia was entitled to receive from Nickel bore no relationship to the payments in the base contract between F.P.H.A. and Nickel. True, the base contract was a cost plus fixed fee contract. That obligated the Government to pay Nickel a sum sufficient to discharge all of Nickel's obligations under subcontracts executed in conformity with the provisions of the base contract. But the fact that the entire cost of the project came from the Government, did not create a contractual obligation between the Government and the subcontractors under contracts to which the Government was not a party. The subcontractor perforce was required to look to the one who promised to pay him for his work and to him alone. There being no privity of contract between Pollia and the Government, he could not maintain an action against the Government for money due him from Nickel alone. [Citing cases] The motion to dismiss should have been sustained.

[2] The trial court concluded that Pollia's telegram of December 23, 1946, announcing his stoppage of work on account of Nickel's failure to pay the two estimates of October 17 and November 4, 1946, was not a cancellation of his contract but was merely a stoppage of work pending payment of these estimates, and that failing in their payment, Nickel was not warranted in cancelling the contract. That there was a dispute between the contractor and the subcontractor not only as

to these two estimates, but also as to the wages being paid by the subcontractor, his financial standing, and his ability to furnish the required performance bond seems clear. There was also an agreement on his part to continue with the performance of his work pending the adjustment of these matters. The objection to these two estimates, and the payment of wages by him, raised substantial questions and the contractor's objections were not capricious or arbitrary. There is some evidence in the record indicating that the matter had been submitted to the arbitrator for settlement but in any event Pollia was required to seek such settlement and was not warranted in stopping the work to force a settlement of the dispute. This is just what the provision for arbitration intended to avoid. Under these circumstances suspending operations by Pollia constituted a breach of the contract on his part and warranted the contractor in cancelling the

same.

[3] Furthermore, it seems clear to us, that Pollia was not entitled to receive these estimates because they had not been approved by the contractor. Under his subcontract, approval of these estimates was a prerequisite to their payment. It is clear that Cross did not purport to approve them. All he purported to do was to sign a receipt therefor and then forward them to the contractor. He forwarded them to Steele, the contractor's representative, and he, in turn, refused to approve them for the reasons already set out above.

[4] * * * Having breached his contract, Pollia could, upon termination thereof, recover only the reasonable value of the services rendered and of the material furnished. [Citing cases.] These two estimates did not purport to be final estimates representing the exact amount of work completed. They were only what they purported to be, preliminary estimates to enable the contractor to make partial payments as the work progressed. It was, therefore, necessary to determine the reasonable value of such services based upon the percentage of completion of the contract.

[5] In count three Pollia alleged that subsequent to the date of the second estimate he continued to perform work and furnish material of the reasonable value of $8,276.28. In Finding No. 16, the trial court found that subsequent to November 4, 1946, Pollia continued to perform work and furnish material of the reasonable value of $8,276.28, for which judgment was entered. A consideration of the entire finding indicates that the court considered that all of this work and labor related to the 102 units which were lawfully cancelled. If work and labor was in fact performed in this amount on these 102 units after the date of the last submitted estimate and before they were cancelled from the contract, Pollia would be entitled to recover therefor. But a consideration of Pollia's own testimony compels the conclusion that no additional work or material was performed or

furnished on these units after the date of the second estimate, and that this amount represents the gross profit he would have realized from these units had they not been cancelled. * *This he was not entitled to in any event since they were lawfully cancelled from the contract. Under the provision of the contract providing for an equitable settlement with regard to units cancelled therefrom, Pollia would be limited in any event to a reasonable profit on his part performance prior to the cancellation. ***

The judgment on count four is affirmed. In all other respects the judgment appealed from is reversed and the cause is remanded with directions to dismiss as to the F.P.H.A. and in all other respects proceed in conformity with the views expressed herein.

NOTE

The performance and administration of subcontracts has traditionally been the sole responsibility of the prime contractor. The decision to subcontract is the prime contractor's alone and regardless of that decision the Government looks only to the prime contractor for satisfactory performance. But as subcontracting has become more extensive and complex, the Government has become concerned about its impact on prime contract performance. Accordingly, the Government has gradually increased its supervision of subcontract performance and administration without destroying the lack of contractual privity between the subcontractor and the United States. The extent of the interests that justify this increased control is illustrated by the following questions that a prudent contract administrator might ask.

1) How broad is the definition of "subcontractor"? 2) Is a prospective prime contractor's eligibility for contract award affected by an intention to subcontract? 3) To what extent is the prime contractor's responsibility dependent upon the capacity and credit of the prospective subcontractor? 4) Can the Government rely upon the prime contractor's purchasing system and method of evaluating subcontractor responsibility? 5) What impact will subcontracting have upon the prime contract price? 6) Is the subcontractor manufacturing items that meet Government specifications? 7) To what extent and by what method should the Government furnish property and financial assistance to subcontractors? 8) When should the prime contractor bear the responsibility for a default caused by a subcontractor? 9) What is the most efficient way to process and settle subcontract termination for convenience claims? 10) Under what circumstances should the subcontractor be permitted to pursue administrative and judicial remedies directly against the United States? 11) Finally, to what extent should the subcontractor be required to comply with collateral social policies, such as non-discrimination in employment, fair labor standards and the Buy American Act?

The answers to these troublesome questions involve a curious mixture of policy, administrative feasibility and business practicality. Since the questions cut across every phase of government contract law they will be considered as they arise under particular subject headings rather than in this section.

Section 5. MODIFICATIONS

A) Change Orders

GENERAL CONTRACTING AND CONSTRUCTION
COMPANY, INC. v. THE UNITED STATES
84 Ct. Cl. 570 (1937)

WILLIAMS, JUDGE, delivered the opinion of the court: The plaintiff and the defendant, represented by L. H. Tripp, Chief of the Construction Division of the U.S. Veterans' Bureau, entered into a contract on August 20, 1930, whereby plaintiff agreed to furnish all labor and materials, and perform all work required, for constructing and finishing complete, at U.S. Veterans' Hospital, Somerset Hills, New Jersey, certain buildings, connecting corridors, and roads, walks, grading, and drainage in connection with these buildings, also plumbing, heating, and electrical work; outside sewers, water, steam, and electric distribution systems, and to provide a new water tube boiler and mechanical stoker in the present Boiler House, Building No. 14, for the consideration of $911,376.00. The work was to be performed in accordance with the specifications, schedules, and drawings furnished by the defendant, all of which were made a part of the contract. On September 18, 1930, plaintiff received a letter from the Acting Director of the Veterans' Bureau stating that upon reconsideration it had been decided to omit from the present construction program the Nurses' Quarters Building No. 17, together with the work pertaining to that building as described in Alternate (c) under Item I of plaintiff's proposal, and advised plaintiff that a formal change order would be issued when the execution of the form of contract had been completed. On September 19 plaintiff was notified by the Chief, Construction Division, U.S. Veterans' Bureau, to proceed with the construction of the buildings and utilities contemplated by the contract of August 20, 1930, excepting Nurses' Quarters Building No. 17. Plaintiff was also notified at the same time that its surety bond had been approved and placed on file with the Bureau record of the contract.

On January 13, 1931, the contracting officer issued a formal change order under Article 3 of the contract eliminating from the contract Nurses' Quarters Building No. 17, and by reason of such change decreased the contract price by $99,520.00.

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