Subcontractor pass-through claims against public owners are frequently a subject of litigation because there is no privity of contract between the subcontractor and the public owner. For several years in federal government, contracting such issues have been governed by the doctrine articulated in Severin v. U.S., 99 Ct. Cl. 435 (1943), cert. denied, 322 U.S. 733 (1944), under which the prime contractor must have either paid the subcontractor for its claim or must remain liable to the subcontractor. Since most prime contractors want to be released from liability to the subcontractor, successful navigation of pass-through claims can be tricky.
In a 1998 U.S. Court of Federal Claims case, Kentucky Bridge & Dam Inc. v. U.S., Kentucky Bridge sought damages against the Air Force. In large part, the suit involved damages suffered by Jericho, which stopped work on the project and had given Kentucky Bridge a conditional release.
After stopping work, Jericho had filed a Miller Act payment bond suit against Kentucky Bridge and Fidelity & Deposit Co. of Maryland, alleging breach of contract for alleged differing site conditions, fraud and quantum merit.
In August 1992, Kentucky Bridge and Jericho entered into a settlement agreement to settle the disputes. The settlement agreement provided for a stay of all proceedings until all matters involved with the case had been resolved, and all payments received from the Air Force had been paid into court and disbursed according to the agreement. Jericho was designated the real party in interest and authorized to pursue its and Kentucky Bridge’s claim.
On Dec. 7, 1993, Kentucky Bridge filed the suit against the U.S. The complaint alleged that Jericho had been designated the “real party in interest” as “it suffered the greatest financial harm for which [Kentucky Bridge] could be fully liable as a direct cost” under the contract. The U.S. (defendant) moved to dismiss and moved for summary judgment. One of the bases for summary judgment was the contention that the pass-through claim was precluded under the Severin Doctrine. The U.S. argued that Kentucky Bridge had been absolved from present and future liability for damages to Jericho and, therefore, a subsequent suit by Kentucky Bridge on behalf of Jericho was not viable.
The court had to determine the application of the Severin Doctrine considering the partial release given to Kentucky Bridge by Jericho. When there is a partial release, a suit may be maintained only when the prime contractor has reimbursed its subcontractor for the latter’s damages or remains liable for such reimbursement in the future. There is a difference between an absolute release, (e.g., when the subcontract contains a clause completely exonerating a prime contractor from liability to its subcontractor), and a release that becomes operable only if and when the prime contractor prosecutes the claims against the government to a final judgment and makes actual payment of meritorious claims to the subcontractor. A suit is permissible by a prime contractor on behalf of its subcontractor when a “contractor has agreed to reimburse its subcontractor for damages it has suffered at the hands of the Government, but only as and when it receives payment for them from the Government.”
The court concluded Kentucky Bridge had agreed that it should assist Jericho to litigate against the Air Force. Kentucky Bridge and Jericho also had agreed on the manner and distribution of any monies to be recovered from the government. The settlement agreement imposed obligations and liability upon Kentucky Bridge for the future, and the Severin Doctrine did not apply.