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Eric Frechtel practices in the area of construction and government contracts. He represents general contractors, subcontractors, sureties, and owners, in both the prosecution and defense of claims on large public and private construction projects. He has significant litigation experience before both state and federal courts, including both bench trials and jury trials, and he has considerable experience in construction arbitration as well. View articles by Eric

Two recent decisions – one from the U.S. Civilian Board of Contract Appeals and the other from the U.S. Court of Federal Claims – provide opposing holdings on whether the government can raise a “Severin doctrine” defense to subcontractor “pass-through” claims based on broad language in subcontractor progress payment releases. In light of these different perspectives, contractors should take steps to ensure that such releases do not doom legitimate subcontractor pass-through claims.

Pass-Through Claims and the Severin Doctrine

Subcontractors cannot directly sue the government because they do not contract with the government, i.e., they are not in “privity” of contract. 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.  The Severin doctrine holds generally that a prime contractor presenting a pass-through claim can recover damages only if the prime contractor remains liable to the subcontractor for those damages.

The Board (Turner Construction Co. v. Smithsonian Institution)

Turner, the prime contractor, passed through approximately $7 million in subcontractor delay and disruption claims in a dispute involving the renovation of the National Museum of American History. Each progress payment release stated, in relevant part, 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[;]” and “does hereby forever release, waive, and discharge … any and all … claims and demands … by reason of delivery or material and/or performance of work relating to the project through Application for Payment No. __, except for those items listed under No. 1 above.” 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. Their main purpose was to ensure that subcontractors had paid lower tiers and that the project site remained unencumbered, not to relieve Smithsonian, vis-à-vis releasing Turner, from any liability for overall project delay.

The Court (MW Builders, Inc. v. United States)

The court in MW Builders, on the other hand, broadly applied subcontractor progress payment releases to bar pass-through claims. MW Builders, the prime contractor, passed through approximately $1 million in subcontractor delay claims in a dispute involving the construction of an Army Reserve Center in Sloan, Nevada. 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.

In contrast with the Smithsonian disposition, the court held that the Severin doctrine barred the Bergelectric pass-through claim. Unlike the board’s narrow interpretation of the progress payment releases in Smithsonian, the court declined to consider evidence of the limited intent of the releases. Instead, 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.

Takeaway Points

These two recent decisions involved similar language in progress payment releases but had opposite results. In the board case, the subcontractor claims survived under a narrow interpretation of the progress payment releases, while in the court case, the subcontractor claims fell victim to the government’s Severin doctrine defense based upon a broad interpretation of the release language. Together 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; and they serve as a reminder that contractors must be wary of the Severin doctrine. In anticipation of the government’s defense, contractors should carve out subcontractor pass-through claims from progress payment releases. It is also prudent for prime contractors and subcontractors to enter into “liquidation agreements” to define and preserve subcontractor pass-through claims. Without such vigilance, otherwise meritorious claims could be vulnerable to the government’s Severin doctrine defense.

Broad “Assumption of Liability” Clause in Subcontract Likely Trumps “Waiver of Subrogation” Clause in Prime ContractIn a recent case handled by Bradley, a federal court in Maryland issued a decision attempting to reconcile inconsistent contract provisions.

The general contractor said that its fire sprinkler subcontractor was responsible for the burst sprinkler pipe and the resulting property damage based on the “Assumption of Liability” provision in the subcontract, which stated that the subcontractor “assumes the entire responsibility for any and all actual or potential damage…” and “agrees to indemnify and save harmless [the general contractor]… from and against any and all loss.” The subcontractor said that the general contractor waived its right to hold the subcontractor responsible based on a provision in the form contract between the general contractor and the project owner. Under the boilerplate “Waiver of Subrogation” in the American Institute of Architects (AIA) A201-2007 General Conditions, the owner and general contractor “waive all rights against … each other and any of their subcontractors” for “causes of loss to the extent covered by property insurance obtained pursuant to … Section 11.3 or other property insurance applicable to the Work.” (emphasis added)

Finding “sufficient ambiguity for consideration of extrinsic evidence” as to whether the parties actually intended the Waiver of Subrogation clause to control, the Court denied the parties’ cross-motions for summary judgment.

The Court determined that the subcontractor could invoke the Waiver of Subrogation provision even though that clause resided in a contract to which it was not a party. After all, the subcontract incorporated the general contract by reference, and the phrase “and any of their subcontractors” in the subrogation waiver clause supported the subcontractor’s contention that it was an intended third-party beneficiary of that provision. Moreover, the Court observed that courts in other jurisdictions have permitted subcontractors to invoke prime-contract subrogation waivers.

Next, the Court took up the conflict between the subrogation waiver provision and the Assumption of Liability clause in the subcontract concluding that the general contractor had the better argument.

First, the Court invoked the “well-established canon of contract interpretation” that a “specific” provision takes precedence over a “general” provision holding that the specific Assumption of Liability provision in the subcontract should prevail over the Waiver of Subrogation clause in the general contract, which was merely incorporated into the subcontract by reference.

Next, the Court identified another subcontract provision that favored the general contractor’s interpretation. The subcontract required the subcontractor to maintain commercial general liability insurance and to list both the project owner and the general contractor as additional insureds. The subcontract also stated: “It is expressly agreed … that all insurance … afforded the additional insureds shall be primary insurance … and that any other insurance carried by the additional insureds shall be excess of all other insurance carried by the Subcontractor and shall not contribute with Subcontractor’s insurance.” The Court found it “difficult to square” that provision with a Waiver of Subrogation clause that purported to make the project owner’s property insurance primary.

Third, the Court found yet another subcontract provision in support of the general contractor’s interpretation which said “[i]f … any provision … irreconcilably conflicts with a provision of the General Contract … the provision imposing the greater duty or obligation on the Subcontractor shall govern.” Here, the Assumption of Liability provision imposed the greater obligation on the subcontractor.

Characterizing the Assumption of Liability clause as “breathtaking in scope,” the Court begrudgingly found that the Assumption of Liability clause should prevail over the Waiver of Subrogation provision stating: “The Court thus suspects that this case may be an outlier – a rare case in which the obvious public-policy benefit of orderly and predictable insurance planning at the outset of a venture must yield to the explicit arrangements between a general contractor and the subcontractors with which it chooses to transact.”

This case offers important lessons concerning insurance and indemnification provisions and reinforces familiar rules of contract interpretation. It also serves as a reminder that prime contract language incorporated by reference into subcontracts should be reviewed for consistency with the intent of the subcontract provisions.

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