High “Litigation Impact” Term Number 10 – Pass Through Claims

A fundamental tenant of public contract law is that subcontractors do not have privity of contract with the government. Thus, absent a willingness or contractual obligation for the prime to sponsor a claim by a sub against the government, the sub cannot seek recovery of any damages against the entity that directly caused the harm.

A significant amount of jurisprudence exists on pass-through claims. In federal courts, it is well-settled that a contractor can present a subcontractor’s claim on a pass-through basis. The majority of state courts, including Texas, recognize pass-through claims as well. However, in order to be recognized in a federal or Texas state court, the pass-through arrangement between the parties must be set up in a manner that will survive a lack of standing attack by the government defendant.

What is critically important about these types of clauses (or liquidation agreements) is that the prime must remain liable to the subcontractor for the damages. Complete discharge of prime liability will defeat the prime’s ability to bring a claim against the government for the damages sustained by the subcontractor. Contingent liability, where the sub releases the prime from liability if the prime agrees to bring the action against the government and remit any recovery to the subcontractor, satisfies the legal requirements for a valid pass-through arrangement.

The Take-Away – First, the parties should ensure that a pass-through clause or liquidate agreement is included in the subcontract. Second, the agreement should be carefully drafted to not fully exculpate the prime from liability. Additionally, the parties will want to consider and specifically outline allocation of fees and expenses related to any pass-through action.

FAROur government contracts posts are published by Attorney Kristi Morgan Aronica. She serves as litigation counsel to prime contractors and subcontractors in the government contracts market throughout Texas and nationally.