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What Is a Pass through Agreement

Therefore, the benefits for a general contractor of passing on a subcontractor`s claim with a liquidation agreement are obvious. First, the general contractor may limit its liability to the subcontractor to a certain amount, and in many cases, the general contractor`s liability may be limited to the amount claimed from the owner. The subcontractor`s claim was caused by the owner, so the owner would have to pay the subcontractor`s claim, not the general contractor`s. Second, the general contractor can avoid a two-front war over the subcontractor`s claim and potentially reduce litigation costs (i.e., attorneys` fees). The transmission of a receivable without a liquidation agreement or relying on the “liquidation language” of subcontracts will result in a general contractor being exposed to the subcontractor`s claim after an agreement with the owner. Essentially, the subcontractor can take a second bite of the apple against the general contractor if the subcontractor`s claim is not paid by the owner to the subcontractor`s satisfaction. Enter the rescue claim. A pass-through claim is a claim: the Pass-Through Claims Act and winding-up agreements can vary significantly from state to state and from the federal law that governs federal government contracts. Some states may have no laws or few decisions on these issues. Federal public procurement law, on the other hand, has extensive experience and decisions in the transfer of subcontractors` claims and the requirements of an effective liquidation agreement. As is often the case when it comes to construction or public contracts, state courts will often be guided and adopt the legal principles of federal government contract law. First and foremost, the agreement must be in writing and must clearly express the consent and intent of the parties to “forward” the subcontractor`s claims to the contractor. The contract must also preserve the contractor`s possible liability to the subcontractor with respect to the recovery of the amounts of any claim from the owner.

Otherwise, the claim could be time-barred if the contractor has no liability to the subcontractor whose claim he “forwards” to the owner. Transmission agreements, also known as liquidation contracts, are primarily used in construction disputes between a subcontractor and a general contractor. The applicability of transmission clauses in complex construction contracts often depends on the clarity or ambiguity perceived by the upstream and downstream parties. To avoid unintended legal or financial consequences, the critical design process should be supported by professionals who have experience in business and construction law and who have access to all upstream and downstream documents. Subcontracting must also take into account formal disputes (litigation, arbitration or administrative claims in the case of public contracts) with the owner and link the subcontractor`s claims to this procedure. The subcontract should require the subcontractor to preemptively agree to join a dispute or arbitration against the owner over a dispute regarding the subcontractor`s claim. The general contractor does not want to get stuck in legal proceedings against the owner and have to deal with the subcontractor in another court or arbitration. The liquidation agreement also implies a pact of good faith and fair trade. This Agreement requires the Prime Contractor to take all reasonable steps to protect the Subcontractor`s rights to any recovery, if any, from the Owner.

The courts have interpreted this Agreement in such a way that the Prime Contractor is required to make a good faith effort to present the Subcontractor`s claim in a fair and serious manner. As with a liquidation contract, the typical “liquidation language” in a subcontract is also intended to limit the general contractor`s liability to the subcontractor to the amount it received from the owner for the subcontractor`s claim, and the subcontractor is only entitled to reimbursement of its claim from the general contractor up to the amount received from the owner. The agreement should also specify that either the contractor must pursue the claim on behalf of the subcontractor or vice versa. The issue of control can be dealt with prospectively in the context of subcontracting, but general conditions specific to the transfer agreement should be supplemented. Which party is responsible for pursuing the claim and who will prepare and present the claim? For the same reason, appeal rights should be treated in order to determine who makes the decision to appeal a final decision and who bears the costs of appeal. The example of a “liquidation wording” that allows a general contractor to forward to the owner the request for a change order from its subcontractor is as follows: owners, contractors, subcontractors and lower-level contractors must have a thorough understanding of the operational details and triggers of the “transfer” provisions, as their terms significantly reduce obligations and return risks. for lower-level contractors. can influence. Transmission agreements can be used to facilitate the settlement of construction disputes. They are most often seen in the context of a contractor reviewing their subcontractor`s claim against the owner. From a contractual point of view, the subcontractor may require the subcontractor to submit the claim to the contractor and allow the subcontractor to advance on behalf of the subcontractor. From a practical point of view, the subcontractor may not want to sue his contractor, either because of his business relationship or for reasons of fairness, because the contractor is not responsible for the claim.

The subcontractor may request the support and cooperation of the contractor in order to further substantiate the claim. A well-formulated liquidation agreement provides that the subcontractor releases (liquid) all claims it may have against the prime contractor in exchange for the prime contractor`s promise to sue the subcontractor`s claim against the owner. A well-drafted liquidation agreement will meet many important points, but it must contain three basic elements, as in Rad & D`Aprile, above, as follows: In general, the liquidation language in the subcontract is an important protection and leverage for the general contractor, but a prospective and generic liquidation language may not meet the criterion of an enforceable liquidation agreement on a particular subcontractor claim. This applies in particular to the often imposed requirement that the general contractor incur liability for the subcontractor`s claims. There are certainly reasons why subcontractors do not prefer to enter into a liquidation contract: fear that the general contractor will not adequately represent the subcontractor`s interests in the dispute, possible delays in resolution and payment, complication of the subcontractor`s claim with other claims of the general contractor, and loss of confidence in the general contractor as a result of the project. But despite these potential drawbacks, a liquidation agreement is often the best course of action for a subcontractor for the benefits mentioned in this article, among others. Just as important as the allocation of costs and the right to settlement is how all recoveries are allocated to the transmission debt and when they are paid. This is especially important if the subcontractor`s pass request is made under a number of other direct claims of the main contractor and/or other transmission claims of the subcontractor. From the subcontractor`s point of view, in such a situation, it is important that the supervisor is required to distinguish the subcontractor`s pass-on claim from its own or other passed-on claims of the subcontractor in order to allow a better identification of the recoveries specific to the subcontractor`s claims. In the absence of a judgment or arbitral award that awards claims-based awards, it may be difficult to determine which part of the judgment or award is due to the subcontractor`s claim.

In the event of a relapse in such situations, a recovery ratio based on the percentage of the subcontractor`s claim to the total damage may be an alternative. It is also important to explain when the obligation to pay the prime contractor`s subcontractor arises, whether at the time of judgment or award or only after the funds have actually been recovered from the judgment or award. These issues should also be addressed in the liquidation agreement in order to avoid subsequent disputes over the award and payment of recoveries. .