Pass-through Agreements are contracts agreed upon by a contractor and sub contractor to mutually pass over all the damages claimed by the sub-contractor to the owner. This type of agreement is constantly gaining popularity and is a viable negotiation tool used in both private and public construction disputes.
Purpose and Procedure of Liquidation Agreements
Pass-through agreements, also known as liquidation agreements was initially agreed upon to protect the sub-contractor and help him to receive compensation for the raw materials and labor, in case of any freeze at work or any differences resulting in termination of the sub-contractor’s work mid-project. Typically, the contractor would pass all the monetary claims that the sub-contractor is entitled to, to the owner for reimbursement. The contractor would hand over the recovery amount to the sub-contractor. In case of owner refusing to acknowledge the damages or if he refutes the amount claimed, then the owner can be sued and the charge can be reclaimed as per the court orders or as decided in an out-of-court settlement.
Dichotomy of a pass-through Agreement
Pass-through agreements, however crystal they may seem on paper, are not free from potential legality pitfalls. Some of them arise on the decisional context and some on the dilemma if a general contractor is liable to sponsor the claim on behalf of the sub-contractor. Here are some of the issues that exist on the validity of a pass-through agreement
- There is a discerning doubt about the role of the general contractor acting as a medium between the sub-contractor and the owner. There is no confirmation on the fact whether the contractor is liable to pay, confess or claim negligence on behalf of the contractor when the claim is not met or whether the contractor should merely be aware of the claim issued by the sub-contractor.
- There is a possibility of the claim being a higher quotation than the original damage amount. In this scenario, the general contractor comes under liability as the sponsor of the sub-contractor’s claim.
- There is also no standard division scale to calculate the division of the recovery amount among the sub-contractor and the sponsor contractor. There is no hard and fast rule that claims or refutes the share of the allowance to the contractor, if appropriate from the sub-contractor’s lion share.
- There is no settlement or recovery clause, in lieu of a failed or ambiguous judgment or settlement.
Resolution via Legal Aide
The above issues are pertinent to a pass-through Agreement and can be thoroughly addressed or resolved even before dispute by drawing an issue proof contract that provides a correct and alternative course of action in times of dispute and does not lead to the taking up litigation in case of a dispute. It is in the best interest of both parties to hire a lawyer who excels in dispute litigation and would be able to draw an apt pass-through contract that covers all bases of conflict initially. The lawyer would also be helpful in representing the concerned party justly in court or through a proper mediation or other forms of a favorable resolution.