Friend or Foe? Joining With Others on Claims

0519 Legal
Image credit: Shutterstock / Stockillustration

It is not often easy to determine the cause of project disruptions. You know the schedule is in disarray, and other trades are impeding your work. Maybe the general contractor is the culprit, maybe the mason did not finish on time, or maybe the architect’s drawings were constantly revised. You do know you are losing money.

As the project nears completion, you decide to file a claim to recover your losses, but who is your friend and who is your foe? Is it to your benefit to join your claim with another party’s claim?

If your claims are aimed at the general contractor but it later turns out the owner was behind your difficulties, have you made the GC your enemy and harmed your settlement opportunities? What are your options so you do not end up fighting the general as well as the owner?

Many subcontracts, especially ones involving the federal government, contain clauses that require you to submit your claims first to the GC, who will then submit them to the owner. These clauses purport to bind you to the decision the owner makes on your claim. Other contracts have what are known as split-dispute clauses. With these provisions, your claims relating to the owner’s actions must be processed through the GC, and your claims that relate only to the GC go to arbitration. Even when your subcontract contains these provisions, you may want to consider other routes to getting your claim resolved. Here are some more common options.

The pass-through

A typical pass-through (also called a liquidating agreement) offers a number of advantages. With the pass-through, the subcontractor’s claims are tied to the general’s, making each more credible by the joinder. In addition, the cost of pursuing the matter is shared. On the downside, the GC usually reserves the sole right to settle with the owner without your consent. With federal contracts, these deals fall within the Severin Doctrine and are commonplace. In private contracts, not many courts allow the pass-through unless the GC admits to at least some liability to the subcontractor.

The split-dispute clause

If the contract does not have the option for a pass-through, negotiating a splitting of the dispute can be problematic. However, you may be able to get the GC to agree to pass your claims through to the owner while you reserve your rights to a potential claim against the general. The advantage here is you have two possible avenues of recovery.

Partial payments and loans

GCs do not want to be in the middle of disputes in which both the owner and the subcontractor claim the general caused the project’s difficulties. In an effort to buy peace with the sub and establish a united front against the owner, GCs can be induced to pay the sub at least a portion of its claim in exchange for an agreement to join forces.

An alternative to immediate payment is a “loan” by the general to the sub to be later offset by monies the general gets from the owner on the claims. Some types of these deals are known as “Mary Carter Agreements” and are subject to challenge. There are arguments that such an agreement, if kept secret from the other side, may induce biased testimony or hide double recoveries. There are ways to draft these agreements to bypass these challenges, but the drafting can be delicate.

Sponsorship

If a sub has a claim and the general has no independent associated claim, the general may allow the sub to use its name and proceed to the appropriate board or claims court. Sponsorship of a sub’s claim is a subset of the Severin Doctrine and is more typical in federal contracts. As with all federal claims, the general and the sub must certify the claim.

Assignment

Another subcontractor or the owner may have caused your major job disruptions, but the general is not interested in pursuing your claims against either its other subcontractor or against the owner. Because you have not contracted directly with the other subcontractor or the owner, your claims must go through the general. To avoid this problem of who has a contract with whom, the general may be agreeable to an assignment of its rights. Instead of you suing the general and then the general suing the other sub or the owner, the general assigns its rights to you so you can go after the sub or the owner directly. These types of agreements need to be carefully drafted, and the GC may have to remain a party to the lawsuit.

Other remedies and risk factors

Negotiations over whether and how you should join with another can take time. In the interim, you do not want to delay enforcing your lien rights or Miller Act bond rights, or they may be barred by time lapse.

Unless you have, by expressed agreement, waived your lien or bond rights, they continue to be enforceable even if you have a pass-through or other joint-effort agreement. Courts have ruled that lien rights and claims against a payment or performance bond are not waived even if the subcontract states claims must be presented to the general before the owner can consider them.

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