Prime Contractors are Not Always Liable for Their Subcontractors’ Illegal Acts
Transfair had a contract to deliver humanitarian supplies to Eritrea which included regulations prohibiting doing business with Iran. When the British subcontractor hired an Iranian company to deliver the supplies, the US government refused to pay Transfair asserting the illegal business with Iran made the contract unenforceable and illegal and since Transfair was liable for its subcontractor’s acts, the prime forfeited its right to payment under the contract.
The Court sided with Transfair distinguishing cases where the prime contractor was liable where some analysis showed the prime was either at fault or negligent. Rather, here, the contractor neither had knowledge or involvement in the subcontractor’s illegal performance. The Court concluded it must be asked what Transfair “knew and when it knew it” before holding the prime contractor responsible for their subcontractors’ acts and since there was no evidence Transfair knew of the illegal act, Transfair’s performance was not illegal and hence was entitled to payment (Transfair Intl. Inc. v. U.S. 2002 Wl 31113428).
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