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  • Writer's pictureDick Lieberman,Consultant

Don't Make the Mistake of Thinking That Partners in a Joint Venture Prime Contractor are in Priv

A recent case at the Armed Services Board of Contract Appeals (“ASBCA”) demonstrates once again that where a joint venture (“JV”) is a prime contractor, the partners in the JV are not in privity with the government. Only the prime (the JV) is in privity with the government, and it is only against the JV entity that the government may assert a claim. WorleyParsons Int’l, Inc., ASBCA No. 57930, Dec. 20, 2013.

The Government sought $7 million from WorleyParsons International (“WPII) for Cost Accounting Standard (“CAS”) violations. Parsons Global Services and WorleyParsons signed an agreement establishing the Parsons Iraq JV (“PIJV”) in order to perform a specific infrastructure contract for the Corps of Engineers in Iraq. Under the JV agreement, the JV would not hire employees of its own but would rely upon its partners, with executed subcontracts, to provide the personnel needed to perform the contract work. Each partner (subcontractor) would invoice PIJV, which in turn would separately invoice the government.

The Defense Contract Audit Agency (“DCAA”) issued an audit report finding that WorleyParsons was not in compliance with CAS with respect to overhead allocation. The report identified WorleyParsons as a partner in PIJV, and PIJV as the entity performing the PIJV contract. When PIJV and WorleyParsons requested a final contracting officer’s determination on the CAS violation, this decision claimed that WorleyParsons owed $7 million. WorleyParsons appealed to the Board, seeking dismissal of the entire appeal because the government had not asserted a claim over which the Board could exercise jurisdiction.

The Board noted that the Contract Disputes Act (“CDA”) requires a contracting officer to issue a written decision “against a contractor relating to a contract.” The CDA defines “contractor” to be “a party to a Federal Government contract other than the Federal Government.” 41 USC Sec. 7107(7). Then the Board pointed out that WorleyParsons is not the named contractor on the PIJV contract—rather, PIJV is the named contractor and WorleyParsons is a partner in PIJV. The Government argued that PIJV is merely an agent of its partners that bound them as parties to the PIJV contract.

The Board concluded that it had no jurisdiction because a Joint Venture is an association of partners established by contract to carry out a single business activity for joint profit—essentially a partnership created for a limited purpose. A JV has no independent existence from its partners, and when the government contracts with a joint venture, the JV is the entity with whom the government is in privity of contract, not its partners. The Board noted that the government “has historically opposed efforts by joint venture partners to claim independent privity on their joint ventures’ government contracts, and attempts by partners to assert claims in their own names against such contracts have been dismissed.

The Board dismissed the case noting that the government has provided no evidence showing that the parties to the PIJV contract manifested any intention that PIJV’s partners be in privity with it. In fact, the evidence, such as audit reports, reflected an understanding that PIJV and not WorleyParsons, was the contractor. Further, the Board noted that WorleyParsons could not be a subcontractor if it was already the prime contractor through PIJV.

The Board concluded that the government’s attempt to pursue a claim against WorleyParsons under the PIJV contract was not a “claim against a contractor relating to a contract.” Therefore the entire case was dismissed.

TIP: If you use the JV form, then the venturers will not be in privity with the government. This cuts both ways—the Government cannot assert a claim against one of the venturers, but neither can the individual venturers assert a claim against the government.

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