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.
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.