In Court
InCourt
by Brian Morrow
TAKE EXTRA CARE WITH THE
FINE PRINT
Liquidating agreements are enforceable
when properly drafted
I
n a recent Colorado case that involved an
airport runway reconstruction project and a
drilling and blasting subcontractor’s claim for
additional costs due to differing site conditions — R. E. Monks Construction Co., LLC v. Telluride Regional
Airport Authority (May 2, 2012) — the court provided
a roadmap for making “pass-through claims” against
government entities.
It is worthwhile to understand “pass-through
claims” because they are important in government
contracting. A pass-through claim is a claim by a
party who has suffered damages (typically a subcontractor), against a responsible party with whom it has
no contract (typically a governmental entity, i.e., the
owner/government), presented by an intervening
party (typically the prime contractor) who has a contractual relationship with both. In this example, the
claim from the subcontractor “passes-through” the
prime contractor to the owner/government.
Generally, absent “privity of contract,” a subcontractor may not make a claim against or sue the government directly. “Privity of contract” simply means that
parties are in a direct contractual relationship. Absent
legal authority to the contrary, pass-through claims
are not allowed due to subcontractors’ lack of privity
of contract with the government. However, a body
of law has developed in the federal contracting arena,
and many states, allowing pass-through claims against
the government if certain requirements are met.
In the federal contracting arena, the Severin doctrine,
15a July 2012 Better Roads
which developed from the case Severin v. United States, 99
Ct. Cl. 435 (1943), provides for pass-through claims
against the federal government. In the Severin case, the
court held a subcontractor could not recover against
the government in a representative lawsuit if the prime
contractor was not also liable to the subcontractor on
the same claim. This means the prime contractor must
be obligated to pay the subcontractor regardless of
whether the subcontractor claim is ultimately paid by
the government.
Over the past several decades, federal court decisions
have modified the Severin doctrine to limit the harsh
effects from its strict application. For example, the
Severin doctrine does not bar a legal action against the
government if the prime contractor and subcontractor
enter into a “liquidating agreement.” A “liquidating
agreement” is an agreement between the prime contractor and subcontractor which typically provides the
subcontractor will release all claims it may have against
the prime contractor in exchange for the prime contractor’s promise to pursue the subcontractor’s claims
against the government. When properly drafted, liquidating agreements are enforceable. Liquidating agreements do not violate the Severin doctrine unless they
completely and expressly release the prime contractor
from liability to its subcontractor. In other words, a
properly drafted liquidation agreement is a critical to
ensuring that a pass-through claim will be upheld.
In the recent Colorado case, R. E. Monks Construction Co., LLC
v. Telluride Regional Airport Authority, a general contractor, R.
Better Roads February 2012 17