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Click here for the full text of this decision FACTS:This case comes before the court on certified questions from the U.S. 5th Circuit Court of Appeals: 1. Does Texas recognize pass-through claims, i.e., may a contractor assert a claim against an owner on a subcontractor’s behalf when there is no privity of contract between the subcontractor and the owner? If the first question is answered in the negative, then the remaining question need not be reached. However, if the first question is answered in the affirmative, the following question must be reached: 2. What are the requirements, if any, that need to be satisfied for a contractor to assert a claim on behalf of its subcontractor when there is no privity of contract between the subcontractor and the owner, and who holds the appropriate burden of proof? HOLDING:A pass-through claim is a claim 1. by a party who has suffered damages (in this case, a subcontractor); 2. against a responsible party with whom it has no contract (here, the city); and 3. presented through an intervening party (the contractor) who has a contractual relationship with both. Carl A. Calvert, “Pass Through Claims and Liquidation Agreements,” Construction Lawyer, Oct. 18, 1998, at 29; 3 “Bruner and O’Connor on Construction Law” �8:51 (2003). Instead of one suit between a subcontractor and general contractor and another between the general contractor and the owner, pass-through claims permit a contractor to pursue its subcontractor’s claims directly against the owner. Pass-through claims distort litigation to a degree. For the owner to be liable to the subcontractor, the contractor must also be liable to the subcontractor. In a suit by the subcontractor against the contractor, the contractor would ordinarily be inclined to deny liability. In a suit on a pass-through claim, because the contractor asserts that the owner is liable to the subcontractor, the contractor’s position must be that it, too, is liable to the subcontractor. By taking a position contrary to its apparent interest, the contractor’s credibility may be enhanced. In short, pass-through claims put the contractor on the side of the subcontractor and against the owner when otherwise that would often not be in the contractor’s best interest. This distortion of positions is similar to the concern the court raised in State Farm Fire and Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). Nevertheless, for several reasons, the court thinks this concern does not warrant prohibiting pass-through claims. For one thing, the contracting industry has become comfortable with pass-through claims as an efficient means of dispute resolution. Such claims have long been allowed against the federal government and are permitted in every state that has considered the issue but one. Moreover, the allowance of pass-through claims does not make the contractor a mere pawn for the subcontractor. If the contractor disputes the merits of its subcontractor’s claims, it is entitled to 1. refuse to enter into a pass-through arrangement with the subcontractor or 2. refuse to pursue the subcontractor’s claims against the owner. In the latter case, the subcontractor could assert its claims directly against the contractor as the release only applies to claims for which the owner may be responsible and that the contractor actually asserts against the owner. Rather than allowing a party to sue another with whom it has no privity, pass-through claims recognize the continued liability of a contractor to its subcontractor. This liability gives the contractor, who is in privity of contract with an owner, standing to assert the claims of its subcontractor. Three policy justifications shape the court’s decision that Texas recognizes pass-through claims. First, recognition of this practice, common in the construction industry, aligns Texas with federal procedure and with the majority of states that have considered this issue. Second, pass-through claims protect subcontractors against an owner’s breach without undue prejudice to the owner. Finally, pass-through claims promote judicial economy by eliminating unnecessarily duplicative litigation and encouraging full settlement of claims. In accordance with federal practice and the practice in most states recognizing pass-through claims, the court holds that Texas requires that the contractor remain liable to the subcontractor for damages sustained by the subcontractor. If the owner disputes that this requirement has been met, it bears the burden of proving, as an affirmative defense, that the pass-through arrangement negates the contractor’s responsibility for the costs incurred by the subcontractor. OPINION:Jefferson, J., delivered the opinion of the court.

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