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Agency and Litigation Positions Were Not Substantially Justified

The government's position at the agency level and during litigation was not substantially justified for purposes of the Equal Access to Justice Act, according to the Court of Federal Claims, because the government incorrectly determined the third-party beneficiary status of a subcontractor and improperly offset funds. The EAJA applicant was a subcontractor under a contract to provide hose assemblies for military vehicles. The dispute arose when the prime contractor failed to compensate the subcontractor for manufacturing and delivering the goods. When the subcontractor refused to provide more assemblies, the government and prime contractor entered into an agreement that allowed the subcontractor to access its payments directly through a bank account. At trial (49 CCF ¶78,321), the subcontractor was awarded damages for unpaid invoices because it was a third-party beneficiary to the contract between the prime and the government. The government breached its obligations to the subcontractor when it made payments available to the prime contractor and subsequently offset monies owed by the prime despite the subcontractor being the beneficial owner of the funds.
Support Lacking
In defending against the subcontractor's EAJA application for attorneys fees and expenses, the government contended its positions with respect to the funding agreement with the prime contractor and the offset were substantially justified. However, the record showed that at the agency level the contracting officer knew the purpose of the account set up pursuant to the agreement with the prime contractor was for "monies to be directly sent to or set aside for" the subcontractor. Given that knowledge, the CO's denial of the subcontractor's claim as a third-party beneficiary was not substantially justified. Similarly, the government's offset of the prime contractor's debt against an amount owed the subcontractor was not justified for EAJA purposes. At the agency level, the CO's final decision asserting the offset to debts owed by one contractor against debts owed to a different contractor on an unrelated contract was inconsistent with case law. The lack of case law support also defeated the government's contention that its litigation position on the offset was substantially justified. Policy considerations also cast doubt on the reasonableness of the government's position. Future subcontractors would be reluctant to work on a government contract if they knew full payment for their performance might be subject to an offset for the prime contractor's unrelated debts. (JGB Enterprises, Inc. v. U.S., FedCl, 52 CCF ¶78,983)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

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