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Generally, when a prime contractor's action against the government is based on losses allegedly sustained by subcontractors, the possibility of recovery depends not only upon proof that the subcontractors actually sustained the alleged losses but also upon proof that the prime contractor is liable to the subcontractors for the damages sustained by the latter.
In November 1956, plaintiff G. L. Christian and Associates submitted a bid on the construction of the Fort Polk housing project under the Capehart Act. The bid was accepted by the District Engineer. Plaintiff then approached H. B. Zachry Company and endeavored to interest that company in forming a joint venture with them to construct the project. However, the interest of the latter was not in forming a joint venture with the plaintiff, but in obtaining an assignment of the housing project from plaintiff and handling the job in its entirety. After further discussion, the plaintiff granted said company an option to acquire its entire interest in the project. Following these negotiations, the company approached another construction company to enter into a joint venture with it for the construction of the project. After concluding that the project was feasible and potentially profitable, they decided to take over the housing job from plaintiff and construct the project as a joint venture. At a conference, it was agreed that the transfer of the housing job would be accomplished by means of a subcontract from the plaintiff to the joint venture that would cover the entire job. The parties then entered into such an agreement. However, in February 1958, the housing contract was terminated and numerous claims of damages were submitted to the government. In this case, plaintiff’s financial interests were not affected in any way by the termination of the housing contract. As such, the basis of the losses was allegedly sustained by the joint venture, plaintiff's nominal subcontractor, and certain of the joint venture’s subcontractors. Plaintiff then brought an action to recover the losses allegedly sustained by its nominal subcontractor and various other subcontractors after the termination of the military housing project.
Could plaintiff bring an action on behalf of its nominal subcontractor and other subcontractors to recover damages allegedly incurred when the military housing project contract was terminated by the government?
The court ruled that plaintiff was entitled to recover for its subcontractor and various other subcontractors the reasonable expenses incurred in preparation for the housing contract. The court held that reasonable expenses incurred in preparation for work under the military housing contract were recoverable in order to make the injured parties financially whole. However, the court ruled that unearned but anticipated profits were not recoverable since the government did not terminate the contract wrongfully or in breach of contract. The court further added that although the contract did not contain a provision that expressly authorized the government to terminate the contract at its convenience, the contract was read as if it contained such clause based on § 8.703 of the Armed Services Procurement Regulations. The Capehart Act, which authorized the contract affirmatively, recognized that appropriate funds were involved in the project, thereby satisfying the requirements of § 1.102 of the Regulations.