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