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Real Property & Development Review

No Damages For Delay Clause Bars Pass-Through Claim

Posted in Construction

Prime Contractors frequently sponsor “pass-through” claims on behalf of subcontractors against the government .  However, under the Severin Doctrine, the pass-through claim is viable only if the prime contractor has exposure to the subcontractor for the damages sought.

Relatively recently, that requirement for prime contractor liablity to the subcontractor has been softened.  The standard is now that the prime contractor must be at least conditionally liable to the subcontractor (in other words, the prime contractor must be liable to the subcontractor to the extent that the prime recovers from the government.)  See W.G. Yates & Sons Constructio Co., Inc. v. Caldera, 192 F.3d 987, 991 (Fed Cir. 1999), 20 CLR 436 (1999) 

By way of example, the government’s Severin defense would bar a pass-through claim if the government can show a release or other type of prime contractor immunization from subcontractor claims.  Under those circumstances, the prime clearly has no exposure to the sub.

So what about a “no damages for delay” clause in a  subcontract on a public project?  That issue was put to the test in Harper/Nielsen-Dillingham, Builders, Inc.  v. U.S., 81 Fed.Cl. 667 (2008).  Although such clauses are against public policy (and thus unenforceable by statute) on public contracts, the court decided that the subcontract was a private contract governed by California law where courts enforce these clauses.  Much to the subcontractor’s shigrin, the court therefore decided that, for purpose of the pass-through claim:

the ‘no damages for delay’ clause in the subcontract:

  • (1) is enforceable; and
  • (2) bars any subcontractor recovery for delay damages from the prime contractor.

Becuase there was no possiblity of prime contractor exposure, the government prevailed on the Severin defense and the court threw out the pass-through claim.

So to reserve the right to seek damages from the government via a pass through claim, subcontractors working on government contracts might consider striking any no damages for delay clause in the subcontract.    Whether a prime contractor’ would be amenable to this is another story.

It is also a good idea to research whether the state law governing the subcontract permits ‘no damages for delay’ clauses.  Like California, many states (including Oregon) have laws that deem these clauses unenforceable on public contracts.  Whether that public policy extends to “private” subcontracts on public projects may have been determined in California, but is still an open question in other jurisdictions (like Oregon).