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A Utah federal court recently held that when negotiating a pass-through settlement agreement, a contractor has a duty to disclose information to its subcontractor regarding the viability of the claims to be passed through. See Ludvik v. Vanderlande, 2023 WL 8789379 (D. Utah, Dec. 19, 2023). If it breaches that duty, the contractor may be held liable notwithstanding release language included in the settlement agreement.

The Ludvik case involved construction work at the Salt Lake City International Airport. The prime contractor subcontracted installation of the bag handling system to Vanderlande, which subcontracted the mechanical and electrical portion to Ludvik. Towards the end of the job, Ludvik notified Vanderlande that it had pass-through claims to assert against the prime contractor for changes in scheduling that caused nearly $10 million in unanticipated losses. Vanderlande and Ludvik subsequently entered a pass-through settlement agreement whereby Vanderlande agreed to pass through Ludvik’s $10 million delay claims to the prime contractor. As is common for such pass-through agreements, Vanderlande would cooperate in presenting Ludvik’s claims to the prime contractor and would pass through any recovery to Ludvik. Ludvik agreed to release Vanderlande of any liability if the pass-through claims were rejected by the prime contractor.

Ludvik subsequently submitted its pass-through claims and, as agreed, Vanderlande passed them upstream. The prime contractor rejected the claims as untimely and waived by a prior change order between itself and Vanderlande. Ludvik filed suit against Vanderlande seeking to recover its $10 million in losses for alleged fraud, negligent misrepresentation, and breach of contract by Vanderlande. Ludvik claimed it was fraudulently induced to enter the pass-through settlement agreement by Vanderlande’s misrepresentation that its pass-through claims were viable when in fact Vanderlande knew they were not. As evidence that Vanderlande knew the claims were not viable, Ludvik pointed to a letter that Vanderlande had received before entering the settlement agreement that made clear that Ludvik’s claim would be rejected. Although the letter was shared with Ludvik, Ludvik argued that Vanderlande’s conduct after sharing the letter led Ludvik to believe that its pass-through claims remained viable and might succeed prior to executing the settlement agreement. 

Vanderlande sought summary judgment on Ludvik’s negligent misrepresentation claim arguing that it did not owe Ludvik a duty to disclose and that its provision of the letter from the prime contractor detailing the basis for the rejection of the Ludvik’s claims satisfied its duty to disclose as a matter of law.  The court disagreed.

Under circumstances where Vandervelde was in a superior position to know material facts regarding the viability of the pass-through claims, the court held that Vanderlande had a duty to disclose such facts to the subcontractor. The court further held that a reasonable jury could find that Vanderlande breached that duty by conduct suggesting those claims remained viable. The court also rejected Vandervelde’s argument that Ludvik’s claims were barred by the release in the settlement agreement, since that release was itself procured by the alleged misrepresentation. The court therefore denied summary judgment on Ludvik’s negligent misrepresentation claim, which remains pending.