Contractor tries to prevail in pass-through case

Blog Entry June 07, 2012

Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.

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Most heavy-highway projects, by necessity, are constructed by teams of contractors that specialize in the various disciplines, with the prime contractor having ultimate responsibility to the owner to complete the project in accordance with the contract requirements.

In Worth Constr. Co. v. State of Connecticut Dept. of Public Works, 2010 WL 4884266 (Conn.Super.), the prime contractor performing a renovation project at a state university asserted claims against Connecticut for itself and on behalf of two subcontractors. Prior to litigation, the prime executed claims liquidation agreements with each subcontractor, which, among other things, set out the terms of how a settlement or judgment amount would be paid out to the subcontractor. The state filed a motion to dismiss the subcontractor claims on the grounds of sovereign immunity and, in particular, because the prime contractor itself had incurred no loss.

At issue in the case was a statute passed by the legislature that waived sovereign immunity for claims under contracts with the state. The relevant language of the statute provides that contractors may bring an action against the state for “disputed claims under such contracts.” The state argued that since the prime contractor had limited its liability to the subcontractors under the claims liquidation agreements, the subcontractor claims arose under the respective subcontracts and not under the prime contract. In other words, the state contended that the term “under such contracts” should be read narrowly and does not include subcontractor pass-through claims unless the prime actually paid the subcontractor in advance the full amount of the claim or unconditionally obligated itself to do so.

The Superior Court of Connecticut summarized several similar cases decided in the state and determined that none was precisely on point. Thus, the case was one of first impression.

The court first took note of the Severin Doctrine, applicable to federal contracts, and the erosion of that doctrine over the years. The current law expressly allows contractors to bring subcontractor pass-through claims against the federal government so long as the prime has contingent liability to the subcontractor—that is, so long as the prime commits to pay to the subcontractor that which the prime recovers on the subcontractor’s behalf. Many states similarly allow suits on pass-through claims following the same rules as the feds.  
However, the court was constrained by the long-standing requirement in Connecticut of construing narrowly any statute that waives sovereign immunity and, in this case, agreed that the term “under such contract” was intended by the legislature to apply to losses that the prime contractor itself has incurred. The court specifically rejected contingent liability as qualifying and proclaimed that in order for a pass-through claim to be the subject of a lawsuit against the state, the prime must have either paid the subcontractor or committed to pay a liquidated (i.e., sum certain) amount.

As it turned out, only one of the subcontractor claims was dismissed as the court determined that the prime had, in fact, committed itself to pay one subcontractor the full amount of its claim regardless of the outcome of a negotiated settlement of a court-imposed judgment.

Prime contractors and subcontractors should be keenly aware of the laws regarding subcontractor pass-through claims in the states in which they work. A subcontractor that signs a prime contract waiving its right to assert claims against the prime contractor for owner-caused changes and delays may very well be out of luck in Connecticut. On the other hand, an unsuspecting prime contractor with a similar waiver in its subcontract may have to argue to a sympathetic court why the waiver should nevertheless be enforced even though there is no means of litigating a pass-through claim with the public owner. R&B

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