Burce A. Cohen | Ahlers Cressman & Sleight
Because general contractors have direct contracts with their subcontractors, without proper contract clauses in place in the subcontract itself, general contractors can face unnecessary exposure to their subcontractors for claims that are the result of Owner caused issues. For this reason, a properly drafted subcontract should contain a disputes clause that clearly binds the subcontractor to the process, timing and results of the prime contract’s disputes provision for any subcontractor claim(s) that the general contractor deems to be an owner caused issue (pass-through claims). In this manner, the general contractor protects itself from having to potentially fund out of its own pocket subcontractor claim requests relating to Owner caused issues while the subcontractor’s claims are still pending or being resolved upstream with the Owner.
Subcontractors understandably become impatient waiting for the Owner process to play out and attempt to avoid the Owner disputes process altogether. This is the scenario at issue in a recent Washington Court of Appeals decision from earlier this year, PowerCom Inc. v. Valley Electric Co. of Mt. Vernon, Inc., 29 Wn. App. 2d 506 (Division 1, Jan. 8, 2024). In PowerCom, a second tier electrical subcontractor moved to compel arbitration of all of its claims (both pass through and non pass through) involving a Sea Tac Airport renovation project against the first tier electrical subcontractor (Valley Electric) and the prime contractor (Clark Construction Group) and their respective bonding companies. The lower court, applying the plain language of the PowerCom subcontract which bound PowerCom to the Main Contract’s dispute process, granted PowerCom’s motion as to non-pass through claims- ie claims not involving the Owner, Port of Seattle, but denied the motion as to PowerCom’s $1.3M COVID-19 pass through claim which was being pursued upstream by Clark against the Port. PowerCom appealed and the Washington Court of Appeals once again sided with the upper tier contractors and required that PowerCom stay its COVID 19 pass through claim pending final resolution of Clark’s lawsuit against the Port of Seattle.
Critical to the Court’s decision was language in the Valley subcontract that bound PowerCom to the “procedure and final determination as specified in the Main Contract” and further PowerCom’s agreement in its subcontract that “it will not take, or will suspend, any other action or actions with respect to any such claims and will pursue no independent litigation with respect thereto, pending final determination of any dispute resolution procedure between (the Port) and (Clark).” While PowerCom attempted to avoid this language by claiming that applying the subcontract language “indefinitely postponed” PowerCom’s ability to recover on the upper tier contractors’ “Little Miller Act” payment bonds, the Court rejected this argument as well citing caselaw that a subcontractor may waive its right to immediately sue under the Little Miller Act, and the contract language PowerCom agreed to in this case amounted to just such a waiver.
The PowerCom decision highlights the importance of having proper language relating to pass through claims in subcontracts. Having properly drafted disputes clauses prevented Valley and Clark from facing exposure to PowerCom’s $1.3M COVID claim while Clark was pursuing PowerCom’s claim upstream against the Port.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.