If an owner or design professional of a building project delays or disrupts its progress, the impact is often felt not only by the general contractor but the subcontractors as well. Such a situation can result in multiple lawsuits or arbitration proceedings.
One device used to rein in the chaos is the liquidating, or pass-through, agreement, in which the general contractor and subcontractors concur that the culprit is the owner. Further, the two parties state that they will sue the owner in the name of the party with the privity of contract with the owner (the general contractor) and that both parties will cooperate with the prosecution of that lawsuit.

Pass-through agreements can be negotiated at the end of work, after delays or disruptions have been encountered. In some instances, pass-through claims arrangements are mandated by subcontracts in clauses that provide that any delay-claim recovery by a subcontractor is limited to the amount ultimately paid by the owner.
Counsel for owners have often made the legal argument that these arrangements do not allow a general contractor to recover for a subcontractor's delay claim because by the terms of the liquidating agreement, the general contractor does not conclusively owe the subcontractor anything. If that be the case, the argument goes, then how can an owner be liable to the general contractor for something the general contractor does not owe?

That type of "Catch 22" legal argument can make doubting the wisdom of placing lawyers on the planet easy. Nevertheless, fear of this argument has caused many subcontractors to be reluctant to enter pass-through agreements with their general contractors.

In the recent case of Interstate Contracting v. City of Dallas, the Texas Supreme Court put an end to those fears. Texas has joined the federal government and many other states as jurisdictions where it is clear that pass-through agreements are valid. Lack of privity of contract, or lack of confirmed liability to the subcontractor on the part of the general contractor, will no longer be treated as preventing a subcontractor's claim from being granted.

General contractors are clearly able to enter agreements to jointly prosecute claims against owners without fear that the subcontractors' claims will thereby be invalidated. This is expected to lead to more orderly presentation of multiparty disputes arising on construction projects.

The case, however, does not solve one of the problems that often occurs in these situations: What can subcontractors do if they believe part of the delay and disruption costs were caused (or may have been caused) by the general contractor?

If that is the case, entering into a standard pass-through arrangement would constitute an implicit election to forgo claims against the general contractor. The subcontractor would also risk the possibility that at trial the owner would successfully defend the action on the basis that it was the general contractor who had caused the problem.

If the facts of a situation indicate that part of the problem was due to mismanagement by the general contractor, it is advisable for a subcontractor to separate damages believed to have been caused by each source and either resolve the claims against the general contractor as a condition of entering a pass-through agreement, reserve rights to pursue claims against the general contractor separately or refrain from entering into a pass-through agreement.

Defense Base Act Aids Companies Rebuilding in Iraq

The U.S. military is continuing to outsource much of the work of rebuilding Iraq. These projects are not only open to large international construction companies but also to smaller firms, particularly at the subcontract level.
While there is much to be wary of before entering the market, companies wanting to put a toe in the water can do so knowing that insurance issues will not be insurmountable.

The Defense Base Act mandates a type of coverage similar to Worker's Compensation. DBA policies are the exclusive remedy for your employees not only while they are in the course of employment (the standard for applicability of Worker's Compensation), but also while in a "zone of danger."

Not only does the DBA coverage provide broad protection from employee suits, the breadth of coverage is strong comfort to general liability carriers, who might otherwise be reluctant to insure war-zone work. Although the insurance is expensive, all companies bidding for such projects are required to have it so its cost should not be a substantial factor in competing for this work. (Source: John S. Parsley, executive vice president of TK-based Capital Risk Inc.)