By Bruce Jervis
Claim sponsorship and settlement agreements are a vital tool for administering and resolving claims. They facilitate the consolidation of multiple, interrelated claims of a prime contractor and its subcontractors against the project owner. The claims can then be resolved in a single forum. Yet, claim sponsorship agreements can also raise difficult issues.
Under a typical claim sponsorship agreement, the prime contractor prosecutes its own claims and the claims of its subcontractors against the project owner. The prime contractor pays for and controls the prosecution of the consolidated claims, with total discretion to agree on a settlement amount with the owner. The subcontractors agree to accept their portion of the recovery, if any, and nothing more.
Determining a subcontractor’s portion of the recovery can be a challenge. In a recent Tennessee case, a subcontractor was entitled to its “pro rata distribution” of the recovery. This led to questions regarding the total recovery from the owner, the purpose of a prior payment from the contractor to the sub, and calculation of a pro rata share. The claim sponsorship agreement, intended to promote efficient resolution of claims, was the subject of separate litigation long after settlement of the consolidated claim against the project owner.
What has been your experience with claim sponsorship and settlement agreements? Prime contractors seeking to resolve subcontractor claims frequently promote these arrangements. Do they deliver the efficiency and fairness promised? What is the best way to define, in advance, a subcontractor’s share of an eventual recovery? I welcome your comments.