Implied-In-Fact Contracts in Federal Government Subcontracts: A Theory worth Considering.

Government contractors find themselves wearing many hats.  They may serve as a prime contractor on one government contract and as a subcontractor to a prime contractor on another contract.  When bidding as a prime contractor on a government contract, government contractors are keenly aware of their, well, rights.  They know that government agencies must follow procurement regulations, statutes, and court precedent.  They know that the Government Accountability Office (GAO) and the Court of Federal Claims are available forums that will entertain a government contractor’s protest of the award or failure to receive award of a government contract. 

But what about when a government contractor bids as a subcontractor on a Request for Proposals (RFP) issued by a prime contractor on a government contract?  Typically, the contractor submits its proposal, finds out whether it won or lost the award, and that’s it. The losing contractor shakes his head and says, “oh, well, we’ll get the next one.”  But what if the contractor knows that the prime screwed up the award?  What if the prime fails to follow the RFP?  Often, contractors, thinking that since they are bidding as a subcontractor – and, as such, they have no privity of contract with the government agency issuing the controlling contract – believe that there is no avenue of redress to the agency or the GAO, and there’s nothing that can be done.

These questions involve two parties in a private procurement process.  As such, and for the most part, state law and not federal procurement law will likely govern.  And under these facts, State law has not been too kind to disappointed bidders.  State courts recognize that an RFP is not an offer, but a request for offers, and that bidders actually make offers by submitting their bids.  The party soliciting the bid usually “has the freedom to accept or reject it for any reason,” and no contract exists until the offer is accepted.  Thus, contractors think that there’s not a lot they can do when losing a subcontract issued by a government prime contractor.

However, some contractors bidding on subcontracts issued by prime contractors of government contracts have challenged the failure to receive an award under the theory that the RFP for the subcontract created an implied-in-fact contract, which the prime contractor  breached in awarding the subcontract.  An implied-in-fact contract, unlike an express contract, is not generally expressed in writing.  Rather, an implied-in-fact contract is based upon a meeting of the minds that creates an understanding between the parties inferred from the conduct and circumstances of the parties.  Here, the argument goes that an implied-in-fact contract is created based upon the specific representations in the RFP and that damages and remedies, accordingly, are available when such representations are breached.

In Orion Technical Resources, LLC, v. Los Alamos National Security (LANS),  the appellate court, in reversing the district court, held that, under the right circumstances, a firm soliciting bids can create an implied-in-fact contract regarding the solicitation and the award process.  If a bidder relies on the stated process in order to bid, the bidder can claim a breach of the process, file suit, and request and obtain injunctive relief and damages for the firm’s breach thereof.  Orion unsuccessfully bid on an RFP for a subcontract issued by LANS, who held a management and operations contract at Los Alamos National Laboratory.  In its suit against LANS, Orion alleged, among other things, that LANS failed to follow its own RFP in awarding the contract.

The district court, in agreeing with LANS, granted LANS’ motion for judgment on the pleadings for failure to state a claim, dismissed Orion’s claim for breach of an implied-in-fact contract, holding that no such cause of action existed in private procurements under the laws of New Mexico.  Finding otherwise, however, the appellate court held that, as a matter of law and under certain circumstances, an implied-in-fact contract may arise between parties in a private procurement based upon their representations and course of conduct, as well as other factors.   Noting that its view was not widespread, the court mentioned that only one other jurisdiction, Massachusetts, has held similarly.

Thus, although seemingly recognized in only two jurisdictions, the theory that a prime contractor on a government contract, when issuing a RFP for subcontract thereunder, may, in its RFP and by its conduct, create an implied-in-fact contract with bidders, the breach of which damages may be available, certainly deserves attention. To this end, contractors should scrutinize their subcontract RFPs for any clauses, representations, or statements that could form the basis of an implied-in-fact contract, and address them accordingly.  Conversely, bidders on subcontract RFPs should know that it does not simply have to shrug and say “oh well” when it fails to receive award of a subcontract where it suspects irregularities existed in the award process.

[4] Restatement (Second) of Contracts §4.

[5] Id.

[6] Id. at 15.

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