Posted: February 26th, 2022

42105: Construction Contracts and Law Page 1

42105: Construction Contracts and Law Page 1

Name: STUDENT NAME Date: February 11, XXXX

CMGT 42105: Construction Contracts and Law

CASE BRIEF

Citation: Interstate Contracting Corporation v. City of Dallas, Texas No. 03-0152

Case Facts: On September 14, 1994, the City of Dallas and Interstate Contracting Corporation (ICC)

entered into a fixed sum contract for the construction of levees around a City water treatment plant; the

excavation of two areas to create storm water detention lakes; and miscellaneous work including trash

removal, surveying, and linear depth checking. ICC subcontracted Mine Services, Inc. (MSI) to

excavate the storm water detention lake and construct the levees. If it met the specifications, the

excavated material was to be used to construct the levees. After commencing work, Mine Services, Inc.

discovered that some of the materials in the lakes differed from what it expected and could not be

directly used to construct the levees. MSI was therefore forced to manufacture fill material by mixing

sand with the limited quantities of clay which, in effect, decreased its productivity and increased its

costs. ICC informed the City of MSI’s additional costs but the city refused to pay for MSI’s additional

costs. ICC filed suit on behalf of MSI against the City for breach of contract, quantum meruit, breach

of implied warranty, and fraudulent inducement. The district court allowed ICC to bring these claims

on behalf of MSI and a jury found that the City breached its contract with ICC. The jury also found

that the City breached an implied warranty to provide accurate and suitable plans and specifications

which were inconsistent with the onsite conditions. The City appealed to the Fifth Circuit, arguing that

the district court erred in concluding that ICC could seek and obtain damages on behalf of its

subcontractor because there is a lack of privity of contract between the City and MSI.

Legal Issue (Question): Can 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?

Decision (Answer): Yes.

The Supreme Court held that, similar to other jurisdictions, Texas would permit a contractor to pursue

claims on behalf of its subcontractor, provided the contractor remains liable to the subcontractor.

Practice Notes: A pass-through claim is a claim by a party who has suffered damages against a

responsible party with whom it has no contract. The claim is presented through an intervening party

who has a contractual relationship with both. It is important for the owner to understand that the prime

contractor can obtain damages on behalf of the subcontractor, who is not in privity of contract with the

owner, through pass-through claims. The owner can, as established under the Severin doctrine, defeat

the subcontractor’s pass-through claim if he (the owner) proves that the contractor would “not be liable

to the subcontractor if it refused to present the pass-through claim or to remit the recovery to the

subcontractor.”

Subcontractors must be aware of exculpatory clauses in their contracts with the prime that may deem

pass-through claims unenforceable. Clauses in the contract agreement like the ‘no-damages-for-delays’

clause, though unenforceable in many states may preclude the general contractor from suing the owner

on behalf of the subcontractor. The sub must scrutinize the contract documents and ensure that they

account for the risks that are in the agreement including such exculpatory clauses.