SUBCONTRACTOR PASS-THROUGH CLAIMS AND THE CONTRACT DISPUTES ACT

Posted on April 26, 2016April 26, 2016 by Edward Garber

A prime contractor submitting a subcontractor’s pass-through claim MUST still comply with the certification requirements in the Contract Disputes Act. And, the prime contractor cannot sponsor a pass-through claim unless it remains liable to the subcontractor for the claim, a doctrine known as the Severin doctrine based on the decision Severin v. U.S., 99 Ct.Cl. 435 (Ct.Cl. 1943). These are important concepts for a prime contractor and subcontractor to understand and appreciate on federal projects.

Certification of Pass-Through Claims

For claims of more that $100,000 (including subcontractor pass-through claims) submitted to the federal government, the contractor must certify:

(A) the claim is made in good faith;

(B) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief;

(C) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable; and

(D) the certifier is authorized to certify the claim on behalf of the contractor.

40 U.S.C. s. 7103(b).

The certification of the claim is defective if it does not include these four elements (set forth in (A) through (D) above).

However, if the certification is defective, this can be cured prior to final judgment by a court or a final decision by a federal agency. See M.K. Ferguson Co. v. U.S., 2016 WL 1551650 (Fed.Cl. April 14, 2016). On the other hand, a failure to certify (versus a defective certification) cannot be cured meaning the contractor has not submitted a proper claim under the Contract Disputes Act. Id.

Severin Doctrine

According to the Severin doctrine, “a prime contractor may not sponsor a pass-through claim unless it remains liable to its subcontractor on the underlying claim.” M.K. Ferguson, supra, at *13. If the federal government is relying on the Severin doctrine:

(1) the burden is on the government to prove that the prime contractor is no longer liable to its subcontractor on the pass-through claim; and

(2) the Severin doctrine generally requires an ‘iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub.

Id. at *14 quoting E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370-71 (Fed.Cir. 1999)

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LIQUIDATING AGREEMENTS OR PASS-THROUGH AGREEMENTS

Posted on August 9, 2015August 9, 2015 by Edward Garber

A liquidating agreement is probably a more popular agreement between a general contractor and subcontractor when it comes to federal construction projects, but it is a type of agreement that can universally apply. This is the type of agreement that memorializes a subcontractor’s pass-through claim to the owner where the subcontractor’s claim is pursued in the name of the general contractor or by the general contractor. Because liquidating agreements pertain to a general contractor passing-through a subcontractor’s claim to the owner, they are oftentimes called pass-through agreements.

“Generally, a liquidating agreement or pass-through agreement grants the general contractor a release of its liability to the subcontractor after the general contractor prosecutes the subcontractor’s pass-through claims against the owner and conveys any recovery to the subcontractor.” Rad and D’Aprile Inc. v. Arnell Const. Corp., 2015 WL 3619210, *6 (N.Y. 2015). Specifically, a liquidating agreement between a general contractor and a subcontractor is designed to limit (or liquidate) the general contractor’s liability to the subcontractor to the amount the general contractor recovers from the owner. See id.

“Liquidation agreements have three basic elements: (1) the imposition of liability upon the general contractor for the subcontractor’s increased costs, thereby providing the general contractor with a basis for legal action against the owner; (2) a liquidation of liability in the amount of the general contractor’s recovery against the owner; and, (3) a provision that provides for the pass-through of that recovery to the subcontractor.” Rad and D’Aprile, supra (citation omitted).

The benefit of a liquidating agreement or pass-through agreement is that it limits the general contractor’s liability to the extent the general contractor receives payment from the owner for the subcontractor’s claim. There are considerations that need to be ironed out when entering into a liquidating agreement or pass-through agreement including, without limitation:

1) Attorney’s fees – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor will bear all of the attorney’s fees. Conversely, if the general contractor pursues the claim, it will likely want the subcontractor to share in attorney’s fees on a pro rata basis of the subcontractor’s recovery, if any, to be reduced by incurred fees.

2) Cooperation – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor may need certain cooperation from the general contractor. If, however, the general contractor pursues such claim, it will want the cooperation of the subcontractor so that the subcontractor is actively involved in proving the pass-through claim.

3) Settlement – if the general contractor pursues the pas-through claim, it will want complete authority to settle the claim without input from the subcontractor. This means that the subcontractor’s claim would be paid based on a pro rata portion of that settlement.

4) Role of General Contractor – the agreement should clarify how far the general contractor is willing to pursue the subcontractor’s claim. In other words, is simply passing-through the claim to the owner good enough such that the parties are bound by the owner’s determination of the claim. Or, does the general contractor need to continue to pursue the claim through litigation, arbitration, or through a Board of Contract Appeals? This needs to be ironed out.

5) Release – the general contractor will want a complete release from the subcontractor such that the general contractor’s (and its payment bond surety’s) only liability to the subcontractor is the amount recovered from the owner relative to the subcontractor’s pass-through claim.

Liquidating agreements or pass-through agreements are an efficient vehicle in certain circumstances to resolve disputes between a general contractor and subcontractor where the parties jointly focus on the recovery from the owner. With that said, the parties should work with counsel to ensure the liquidating agreement accurately reflects their interests moving forward with the pass-through claim.

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

Posted on November 22, 2014November 22, 2014 by Edward Garber

Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured. Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government? In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor? The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

In this case, the government hired a prime contractor to abate asbestos at a post office. The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project. The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused. The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim. After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee. The thrust of the claim was that the government breached the indemnification provision. The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government. The Court of Federal Claims agreed and dismissed the lawsuit. Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government. While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor. I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.