{"id":902722,"date":"2024-05-22T14:45:10","date_gmt":"2024-05-22T20:45:10","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=902722"},"modified":"2024-05-22T14:45:13","modified_gmt":"2024-05-22T20:45:13","slug":"pass-through-claim-resolving-subcontractor-disputes","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/pass-through-claim-resolving-subcontractor-disputes\/","title":{"rendered":"Resolving Subcontractor Disputes with Pass-Through Claims and Liquidation Agreements"},"content":{"rendered":"\n

Stephanie Cooksey | Texas Contractor<\/a><\/p>\n\n\n\n

Imagine a project where you are unable to reach final completion due to an unresolved subcontractor claim. If the project owner is responsible for the claim, and both the owner and subcontractor are entrenched in their positions, how would you resolve this dispute?<\/p>\n\n\n\n

The default option is a three-party lawsuit where the subcontractor sues you in your capacity as general contractor. By denying the claim, you bring the owner into the lawsuit as a liable party to the subcontractor\u2019s claim. This option is efficient from the judicial system\u2019s perspective, as it means one lawsuit instead of two. The subcontractor cannot sue the owner since the two have no contract between them. Thus, the subcontractor\u2019s recourse is limited to suing the contractor. In the three-party lawsuit, you argue that if the subcontractor prevails in its claim against you, the owner is liable. If the owner successfully defends against the claim, the subcontractor takes nothing.<\/p>\n\n\n\n

Putting judicial economy aside, it may not make economic sense for contractors to have a lawyer involved in litigating a case where they have no skin in the game. Fortunately, there is a better option than the three-party lawsuit on multi-party construction projects.<\/p>\n\n\n\n

Understanding Pass-Through Claims<\/strong><\/p>\n\n\n\n

Contractors can minimize their exposure to a subcontractor\u2019s claim by utilizing a pass-through claim<\/a> procedure. Instead of being an active participant in the subcontractor-owner dispute, a pass-through claim permits subcontractors to sue the owner in the contractor\u2019s name, without any involvement (or ongoing legal fees) on the contractor\u2019s part. Fundamentally, a pass-through claim allows contractors to act as a conduit through which claims can be asserted against owners in situations where the subcontractor is barred from seeking recourse against the owner directly.<\/p>\n\n\n\n

When contracting with the federal government, not all claims can be passed through. In 1943, the U.S. Court of Claims ruled in Severin v. United States<\/em> that the federal government was not liable for pass-through claims where the subcontractor had effectively waived its claims against the contractor through an exculpatory clause. Today, pursuant to the Severin<\/em> doctrine, prime contractors seeking damages on behalf of subcontractors must agree that they are liable for the claim. Contractors need not admit that the claim is valid, but they must agree to liability to the extent that the subcontractor proves damages. The Severin<\/em> doctrine has led to the practice of drafting pass-through agreements, which define how the claim will be prosecuted. These agreements will also confirm the contractor\u2019s promise to convey any funds recovered in its name to the subcontractor, less attorneys\u2019 fees and costs incurred by the contractor.<\/p>\n\n\n\n

How does all of this play out in Texas? Much to Texas contractors\u2019 benefit, the Supreme Court of Texas recognized pass-through claims in 2004 and laid out the requirements for asserting them. The Court defined a pass-through claim as a claim by a party that has suffered damages (the subcontractor); against a responsible party with which it has no contract (the owner); and presented through an intervening party (the contractor) that has a contractual relationship with both. The second prong of this definition is crucial. It requires that the contractor is responsible for something. That responsibility is an admission of some liability to the subcontractor, and it creates the basis for a claim from the contractor against the owner (remember the Severin<\/em> doctrine).<\/p>\n\n\n\n

The Crucial Role of Liquidation Agreements<\/strong><\/p>\n\n\n\n

Engaging in the pass-through claim process should not be an informal agreement. Contractors should agree upon a liquidation agreement<\/a> with subcontractors to secure the benefits of a pass-through claim. A liquidation agreement should include the following:<\/p>\n\n\n\n