Opinion ID: 894515
Heading Depth: 2
Heading Rank: 2

Heading: Pass-Through Claims in Federal Courts

Text: In breach of contract actions against the federal government, contractors have long been permitted to present subcontractors' claims on a pass-through basis against the government, even though the no-privity rule would otherwise bar subcontractors from recovering directly against the government. Interstate Contracting, 320 F.3d at 543; see also Severin v. United States, 99 Ct.Cl. 435, 444 (1943) (Whaley, C.J., dissenting), cert. denied, 322 U.S. 733, 64 S.Ct. 1045, 88 L.Ed. 1567 (1944); Mitsui & Co. v. Puerto Rico Water Res. Autk, 528 F.Supp. 768, 779 (D.P.R. 1981). In United States v. Blair, the Supreme Court articulated the policy rationale for allowing pass-through claims, stating that: [I]t does not follow that [the contractor] is barred from suing for this amount. [The contractor] was the only person legally bound to perform his contract with the Government and he had the undoubted right to recover from the Government the contract price for the tile, terrazzo, marble and soapstone work whether that work was performed personally or through another. This necessarily implies the right to recover extra costs and services wrongfully demanded of [the contractor] under the contract, regardless of whether such costs were incurred or such services were performed personally or through a subcontractor. [The contractor's] contract with the Government is thus sufficient to sustain an action for extra costs wrongfully demanded under that contract. 321 U.S. 730, 737-38, 64 S.Ct. 820, 88 L.Ed. 1039 (1944) (citation omitted). The federal pass-through procedure has become the standard method by which such claims are resolved. Owens-Corning Fiberglas Corp. v. United States, 190 Ct.Cl. 211, 419 F.2d 439, 454-55 (1969); Mitsui, 528 F.Supp. at 779; Ardsley Constr. Co. v. Port of N.Y. Autk., 61 A.D.2d 953, 403 N.Y.S.2d 43, 45 (1978). Pass-through claims evolved because, as in Texas, federal law provides that subcontractors under government contracts do not have standing to sue the government without first establishing privity of contract. See W.G. Yates & Sons Constr. Co. v. Caldera, 192 F.3d 987, 990-91 (Fed.Cir.1999); Black Lake Pipe Line Co. v. Union Constr. Co., 538 S.W.2d 80, 91 (Tex. 1976), overruled on other grounds by Sterner v. Marathon Oil Co., 767 S.W.2d 686 (Tex.1989); George v. Hall, 371 S.W.2d 874, 876 (Tex.1963). Under the federal pass-through doctrine, however, as long as the general contractor remains liable to the subcontractor for the subcontractor's damages, the general contractor can bring an action against the government for the subcontractor's damages. W.G. Yates, 192 F.3d at 991 (citing Severin, 99 Ct.Cl. at 443); E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370 (Fed.Cir.1999); Morrison Knudsen Corp. v. Fireman's Fund Ins. Co., 175 F.3d 1221, 1251 (10th Cir.1999); Blount Bros. Constr. Co. v. United States, 171 Ct.Cl. 478, 346 F.2d 962, 965 (1965); J.L. Simmons Co. v. United States, 158 Ct.Cl. 393, 304 F.2d 886, 888-89 (1962); Donovan Constr. Co. v. United States, 138 Ct.Cl. 97, 149 F.Supp. 898, 900 (Ct.C1.1957); Warren Bros. Roads Co. v. United States, 123 Ct.Cl. 48, 105 F.Supp. 826, 831 (1952). Federal courts construe this continued liability to the subcontractor as giving the contractor standing to pass the subcontractor's claims through to the government. See, e.g., W.G. Yates, 192 F.3d at 991. In Severin, however, the United States Court of Claims [4] held that a contractor suing on behalf of its subcontractor could not recover from the government because the subcontract contained a clause that completely exculpated the contractor from liability. See Severin, 99 Ct.Cl. at 442-43. The court reasoned that the contractor was barred from pursuing a claim on its subcontractor's behalf because the exculpatory clause extinguished any claim the contractor could have asserted for damages resulting from the government's breach. Id. at 443-44. This rule has since become known as the Severin doctrine. The exculpatory clause in Severin provided: The Contractor or Subcontractor shall not in any event be held responsible for any loss, damate [sic], detention, or delay caused by the Owner or any other Subcontractor upon the building.... Severin, 99 Ct.Cl. at 443 (emphasis added). The court concluded that this language constituted a complete release of the contractor's liability to the subcontractor. Id. However, the court noted that [i]f plaintiffs had proved that they, in the performance of their contract with the Government became liable to their subcontractor for the damages which the latter suffered, that liability, though not yet satisfied by payment, might well constitute actual damages to plaintiffs, and sustain their suit. Id. Federal courts have modified the Severin doctrine to mitigate the perceived unfairness in its strict application. See, e.g., Donovan Constr. Co., 149 F.Supp. at 900 (holding that Severin and Blair could be reconciled only by holding that a prime contractor could recover damages on the subcontractor's behalf even if the subcontract was silent on the prime contractor's non-liability, as long as the contractor's liability was not expressly negated and that contractor's liability could be conditioned on recovery from the owner); see also W.G. Yates, 192 F.3d at 990-91; J.L. Simmons, 304 F.2d at 888 (acknowledging Severin but holding that it did not bar a contractor from presenting the subcontractor's claims pursuant to a consolidation agreement, implicit in which was the parties' recognition of the contractor's continued liability to the subcontractor). In accordance with the jurisprudence that emerged after Severin, most pass-through arrangements still provide for the subcontractor to release the contractor from liability. However, that release is generally made contingent on the contractor bringing the subcontractor's claims to the owner and remitting to the subcontractor any amounts recovered. Such was the case in Donovan, the first case to hold that contingent liability was sufficient for the contractor to pass through its subcontractor's claim. See Donovan Constr. Co., 149 F.Supp. at 900. More recently, federal courts have expressly limited the Severin doctrine. In E.R. Mitchell Construction Co. v. Danzig , the Federal Circuit Court of Appeals noted that application of the Severin doctrine has been narrowly construed. 175 F.3d at 1371 (quoting United States v. Johnson Controls, Inc., 713 F.2d 1541, 1552 & n. 8 (Fed.Cir.1983)). Another court acknowledged that [c]ourts have strictly limited the Severin doctrine, out of reluctance to leave [subcontractors] with valid claims out in the cold. Morrison Knudsen Corp., 175 F.3d at 1251. That court stated that as a result, post- Severin opinions often interpret releases and contracts generously to let contractors pursue their subcontractors' claims. Id. Thus, federal courts allow the contractor and subcontractor to liquidate the contractor's liability to the amount actually recovered from the owner. In addition to narrowly reading exculpatory provisions in contracts, the Court of Claims shifted the burden of proof on this issue from the contractor to the government. See Blount Bros. Constr. Co., 346 F.2d at 964-65 (holding that to come under the `Severin' doctrine the defendant must show, through some contractual term or a release, that the plaintiff-prime is not liable to the subcontractor) (emphasis added). Federal courts have consistently adhered to this position since that time. See W.G. Yates, 192 F.3d at 991; E.R. Mitchell Constr., 175 F.3d at 1370-71; George Hyman Constr. Co. v. United States, 30 Fed. CI. 170, 177 (1993), affd., 39 F.3d 1197 (Fed.Cir.1994) (table); Cross Constr. Co. v. United States, 1980 WL 13189 (1980); Southern Constr. Co. v. United States, 176 Ct.Cl. 1339, 364 F.2d 439, 447 (1966); Mitsui 528 F.Supp. at 781.