Pass-Through Claims, The Severin Doctrine & Why You Should Be “in the Know”
In construction, a pass-through claim is when one party makes a claim on a second party’s behalf. In Subcontractor Pass-Through Claims Are Vulnerable to the Severin Doctrine, authors Eric Frechtel and Amy Elizabeth Garber (Authors) define a pass-through claim as:
“A pass-through claim is a subcontractor claim against the government that a prime contractor (who is in privity of contract with the government) brings on behalf of a subcontractor.”
And what is a Severin Doctrine? Attorney Matthew Devries states the Severin Doctrine “[P]rovides that a general contractor cannot sue an owner on behalf of one of its subcontractors to recover monies due to the subcontractor unless the general contractor is itself liable to the subcontractor.”
OK, so What’s the Fuss?
Recently, two conflicting decisions on whether a general contractor could bring a claim on behalf of their subcontractor were released. According to Authors, one decision was handled down from the U.S. Civilian Board of Contract Appeals and the other from the U.S. Court of Federal Claims.
The U.S. Civilian Board of Contract Appeals provided a decision in a case between Turner Construction and the Smithsonian. The subcontractor was owed several million in dispute/delay claims which were passed through via the GC (Turner Construction) and were permitted based on the language within the progress payment releases.
“…that the subcontractor: ‘represents and warrants that there are no outstanding claims by the [subcontractor]… through the date of Application for Payment No. __ except for any retention, pending modifications and changes, or disputed claims for extra work as stated herein’”
Authors explained “The relevant progress payment releases did not list the pass-through delay and disruption claims under No. 1. The board held that even though the progress payment releases did not carve out the pass-through claims, the Severin doctrine did not bar them mainly because the releases were “clearly tied” to each progress payment.”
And in the Case of the Court?
Unlike the Turner case where the releases had language regarding disputes, the releases in the MW Builders, Inc. v. United States case had no such language. In fact, the subcontractor unconditionally waived and released its claims!
“The progress payment releases in question were from one subcontractor, Bergelectric, which stated in relevant part: “[Bergelectric] irrevocably and unconditionally releases and waives … any other claims whatsoever in connection with this Contract … through the end of the period covered by this Application ….” These releases covered the entire period of Bergelectric’s delay claim.”
According to Authors, “…based on the broad language in the releases and the fact that the releases did not expressly reserve Bergelectric’s delay claim, the court determined that the releases barred all claims by the subcontractor.”
The Trap & The Takeaway
This further supports the critical need to carefully review ALL documents before executing them. As a best practice, I would recommend having all contractual documentation reviewed by an experienced attorney.
And, as Authors remind us, recognize that sometimes it’s simply unpredictable.
“…these cases demonstrate the unpredictability of whether a judge will construe broad language in progress payment releases as a bar to subcontractor pass-through claims”