Sponsorship of Subcontractor Claims - A Settlement Opportunity with Pitfalls

When a contractor and its subcontractor each incur increased costs caused by the project owner, the contractor may employ a common settlement tactic with its sub. The contractor agrees to include the sub’s damages in the contractor’s claim against the owner and to pass through the appropriate share of any recovery to the sub.

These “claim sponsorship” or “pass-through” agreements offer advantages to both parties. The subcontractor has no contractual relationship with the project owner and is not allowed to bring a direct contract claim against the owner. The contractor seeks to avoid liability to the sub and place responsibility with the owner. But these agreements raise several questions. In order for the contractor to incur the damages it seeks from the owner on the sub’s behalf, must the contractor first pay the subcontractor on its claim or at least acknowledge liability to the sub? Do the contractor and the sub need to agree to the specific allocation of any recovery? Can the contractor enter into a settlement agreement with the owner over the objection of the subcontractor? Must these agreements be in writing in order to be enforceable?

In a recent case, a subcontractor attempted to recover delay damages on behalf of its lower-tier subcontractor despite the absence of any pass-through agreement. The sub was allowed to proceed with its claim because it had certified that it had already made payment in full. A dissenting opinion argued that the sub should be permitted to pursue only its own delay damages.

I'd like to hear about your policies and practices regarding pass-through agreements, either as the sponsor or the sponsored. What issues and pitfalls have you encountered?

Please feel free to comment below.

In the upcoming issues of Construction Claims Advisor . . . case summaries and articles covering:

• Federal Appeals Court Addresses No-Damage-For-Delay Disclaimer and Delay Damage Sponsorship
• Arbitration of Public Contract Claims Withstands Constitutional Challenge in California
• Subcontractor’s Proposal Modified Price Stated in Contractor’s Form

Bruce Jervis, Esq., Senior Editor

Comments

[me.yahoo.com/a/SWAmkHAFx4mCMtkKCOC4o4PEP3Zm4w--]

My utility has recently changed its construction contract language and now requires that any claim"passed through" from a subcontractor must first(as a condition of submission) be liquidated using a liquidation agreement subject to our exclusive approval that guarantees that the prime contractor will pay the subcontractor a stipulated amount regardless of the outcome of its claim against the utility. The idea is to get the power of the prime contractor mobilized to weed out the trash and junk that often occasions a claim that simply is passed through to the Owner.

[George wolff]

Another concern where the contractor assists in some way in the assertion of pass-through claims against owners on public jobs is potential False Claims Act liability. Indeminification language can help but may not be enough to protect the general contractor.

[Bruce Jervis, Editor, Construction Claims Advisor]

The utility company's contractual mandate of a liquidation agreement meeting the company's approval seems like an excellent practice from a project owner's standpoint. It certainly would cause prime contractors to be more selective when including in their claims costs incurred by subcontractors.

[Bruce Jervis, Editor, Construction Claims Advisor]

I agree that False Claims Act liability exposure is a huge issue for contractors in this situation. It is my understanding that under the federal FCA, the same "good faith" certification standard applies to prime contractor and subcontractor costs. This can give the claim sponsor some comfort. But under state FCAs, there is frequently no guiding precedent whatsoever.

[Jimmy Choo Chaussures]

This article tell the reality of very important organization and clearly gives the reasons that what they are doing. Very information article and actions should be taken against such organizations

[charge off]

If the prime contractor does not oppose the claim but sponsors it in its own claim, absent a well-written liquidating agreement, the prime contractor might be creating admissions that the subcontractor will try to use to recover against the prime contractor or its surety.