Opinion ID: 894515
Heading Depth: 2
Heading Rank: 4

Heading: Recognizing Pass-Through

Text: Claims in Texas We have never addressed whether passthrough claims are permissible under Texas law. In Texas, a subcontractor generally may not recover from an owner without first establishing privity of contract, but instead may recover from the contractor, who in turn can look to the owner. Black Lake Pipe Line, 538 S.W.2d at 87, 91; City of Corpus Christi v. Heldenfels Bros., Inc., 802 S.W.2d 35, 38 (Tex.App.-Corpus Christi 1990), affd on other grounds, 832 S.W.2d 39 (Tex.1992). However, the U.S. Supreme Court, while acknowledging the no-privity bar in Blair, observed: it does not follow that [the contractor] is barred from suing for [subcontracted work]. 321 U.S. at 737, 64 S.Ct. 820. Similarly, several Texas cases have permitted such claims without explicitly adopting the federal approach, and more recently, one court has expressly acknowledged pass-through claims as compatible with Texas law. See Alamo Cmty. Coll. Dist. v. Browning Constr. Co., 131 S.W.3d 146 (Tex.App.-San Antonio 2004, pet. filed). In H.B. Zachry Co. v. Ceco Steel Products Corp., 404 S.W.2d 113, 116 (Tex.Civ. App.-Eastland 1966, writ ref'd n.r.e.), for example, the court noted that, because the two subcontractors had no contractual relationship with the government, neither could present their claims for losses directly to the government. Instead, the contractors had the right and duty to assert the same claims for [the subcontractors] that they would have asserted for themselves had they elected to do the work done by [the subcontractors] and sustained their losses. H.B. Zachry, 404 S.W.2d at 116. Similarly, in Triton Oil & Gas Corp. v. E.W. Moran Drilling Co., 509 S.W.2d 678, 686 (Tex.Civ.App.-Fort Worth 1974, writ ref'd n.r.e.), the court of appeals held that a contractor was entitled to recover damages arising out of collateral contracts, even if the contractor had not paid for the third-party services. See also Taylor v. Mark, 376 S.W.2d 927, 928 (Tex.Civ.App.-Waco 1964, writ ref'd n.r.e.) (allowing a contractor to recover costs of materials without first requiring that the contractor prove that it had actually paid for the materials). The court reasoned that if the general contract contemplates collateral contracts, recovery can be had for damages or losses resulting from collateral contracts affected by the breach of the suit contract. Triton Oil & Gas, 509 S.W.2d at 686 (quoting McGuire v. Osage Oil Corp., 55 S.W.2d 535, 537 (Tex. Comm'n App.1932, holding approved)). The court also explained that the subcontractors on the collateral contracts are not necessary parties to the litigation because the contractor alone had the right to enforce its contract with the owner. Id. at 686. Finally, in North Harris County Junior College District v. Fleetwood Construction Co., 604 S.W.2d 247, 255 (Tex.Civ.App.-Houston [14th Dist.] 1980, writ ref'd n.r.e.), the court of appeals rejected an owner's argument that a subcontractor could not recover damages from the owner on the sole ground that the subcontractor lacked privity with the owner. Because the contractor presented the subcontractor's claims to the owner, the court held that [t]he argument and authorities regarding privity of contract are inapposite. Fleetwood, 604 S.W.2d at 255. These cases advance the same reasoning expressed by the Supreme Court in Blair. A contractor should be allowed to recover costs from the owner regardless of whether the contractor performed the work itself or through a subcontractor. See Blair, 321 U.S. at 737-38, 64 S.Ct. 820. Otherwise, the owner could receive a windfall because the subcontractor lacked privity with the owner and the contractor lacked standing to sue the owner for damages suffered by the subcontractor. Stated appropriately by one court: [t]he holdings [allowing claims for subcontracted work] are soundly based in reason and equity. They recognize that a direct claim by a subcontractor against [an owner] is barred by concepts of privity as well as contractual provisions such as here, and that if the contractor himself is barred from asserting those claims, the [owner] would be in the extraordinary position of being responsible to no one regardless of the nature or extent of its liabilities under its contract. No proper justification exists for such a result. Rather, the principle adopted by the cases is that the [owner] should be responsible to the contractor for costs or damages resulting from the performance or breach of the contract, whether the contractor performed the work himself or sublet it to others. Buckley & Co., 356 A.2d at 73. In this case, ICC contends that it included the pass-through language in its subcontract and then entered into the liquidation agreement in accordance with industry practice shaped by the broad national acceptance of pass-through claims. Amici contend that pass-through claims and liquidating agreements have become standard industry practices and that failure to formally recognize such claims would come as a surprise to parties involved in the industry. After examining the authority from Texas and other jurisdictions, we join the majority view and recognize pass-through claims in Texas.