Interstate Contracting Corp. v. City of Dallas
135 S.W.3d 605, 25 A.L.R. 6th 729, 47 Tex. Sup. Ct. J. 434 (2004)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
In Texas, a general contractor may assert a pass-through claim against a project owner on behalf of a subcontractor for damages the owner caused, even without privity between the owner and subcontractor, provided the contractor remains liable to the subcontractor for those damages.
Facts:
- The City of Dallas contracted with Interstate Contracting Corporation (ICC) for a construction project involving levees and storm water lakes.
- ICC subcontracted the levee construction and excavation work to Mine Services, Inc. (MSI).
- The contract specified that material excavated from certain borrow sites was to be used to construct the levees.
- MSI discovered that the material in the designated borrow site was unsuitable and did not conform to the contract's specifications.
- Due to the unsuitable material, MSI was forced to manufacture appropriate fill by mixing sand and clay, a process not contemplated by the contract, which substantially increased its costs and decreased productivity.
- The original subcontract between ICC and MSI allowed ICC to initiate claims against the City on MSI's behalf.
- ICC and MSI later entered into a detailed "Claims Presentation and Prosecution Agreement" formalizing that ICC would pursue MSI's claims against the City in ICC's name, with MSI bearing the costs and receiving the recovery.
Procedural Posture:
- Interstate Contracting Corporation (ICC), on behalf of Mine Services, Inc. (MSI), sued the City of Dallas in a federal district court for breach of contract and breach of implied warranty.
- Following an eleven-day trial, a jury found in favor of ICC, concluding that the City had breached its contract and an implied warranty.
- The City of Dallas, as appellant, appealed the judgment to the U.S. Court of Appeals for the Fifth Circuit.
- On appeal, the City argued that the district court erred by allowing ICC to recover damages for MSI because there was no privity of contract between the City and MSI.
- The Fifth Circuit, finding no controlling Texas precedent on the validity of pass-through claims, certified the question to the Supreme Court of Texas.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does Texas law recognize pass-through claims, allowing a contractor to assert a claim against a project owner on a subcontractor’s behalf when there is no privity of contract between the subcontractor and the owner?
Opinions:
Majority - Justice Jefferson
Yes. Texas recognizes pass-through claims, allowing a contractor to sue an owner for a subcontractor's damages. The court adopted the majority rule for three primary reasons: 1) It promotes judicial economy by consolidating what would be two separate lawsuits (subcontractor vs. contractor, and contractor vs. owner) into one. 2) It prevents the owner from receiving a windfall and avoiding liability for its breach simply because it lacks privity with the party that suffered the direct harm (the subcontractor). 3) It aligns Texas law with the prevailing practice in federal courts and most other states, providing consistency and predictability in the construction industry. The court reasoned that the contractor's continuing liability to the subcontractor—even if contingent on recovery from the owner—provides the necessary standing for the contractor, who is in privity with the owner, to bring the suit.
Analysis:
This decision officially establishes the pass-through claim doctrine in Texas construction law, creating a clear procedural path for subcontractors to recover from owners for breaches of the prime contract. It harmonizes Texas law with the prevailing national standard, offering predictability for the construction industry, which widely uses liquidating agreements. The ruling clarifies that traditional privity requirements are not an absolute bar to recovery so long as the general contractor remains liable to the subcontractor, thus giving the contractor standing to sue on the subcontractor's behalf. This precedent streamlines complex construction litigation by avoiding duplicative lawsuits and ensuring that the party ultimately responsible for a breach is held accountable.
