Navigating Pass-Through Claims: Recent ASBCA Rulings on Settlement Agreements

We often think of a settlement agreement as the final chapter of a lawsuit. However, two recent decisions from the Armed Services Board of Contract Appeals (ASBCA) serve as a reminder that even a “final” agreement can be the prologue to a new dispute.

Understanding Sovereign Immunity and Pass-Through Claims

The federal government, as the largest buyer of goods and services, operates under a principle of sovereign immunity. The right to bring contract claims against the government is limited by the Tucker Act 28 U.S.C. § 1491 and the Contract Disputes Act 41 U.S.C. § 7101 et seq.. Generally, only prime contractors with direct contractual privity with the government can sue. Subcontractors, despite often performing the bulk of the work, typically lack this direct right of action, regardless of the government’s role in causing their losses.

When a claim arises from government actions – such as defective specifications or differing site conditions – a subcontractor must rely on the prime contractor to assert the claim on its behalf. This is known as a “pass-through” claim.

The Severin Doctrine: A Historical Perspective

The Severin v. United States (1943) case established a critical principle. The ASBCA, and subsequently the Court of Federal Claims, will not allow a prime contractor to pursue a pass-through claim if the prime has no actual liability to the subcontractor. If a subcontract contains an exculpatory clause releasing the prime from liability for government-caused losses, the prime has no stake in pursuing a claim against the government. The government will not compensate a prime for damages it isn’t obligated to pass on to the subcontractor, preventing a potential windfall for the prime.

Under the Severin doctrine, a prime contractor can only pursue pass-through claims if they have paid, or remain liable to pay, the subcontractor for damages.

Applying Severin in Practice: The Importance of Release Language

A broad release of all claims by the subcontractor, without specific exceptions, can extinguish a pass-through claim. If the prime is released from all liability, it has no obligation to pay the subcontractor and, no valid claim against the government. However, if the release explicitly states the prime remains liable for amounts recovered from the government, the pass-through claim can be preserved.

Recent ASBCA Decisions: Sauer Incorporated

The ASBCA recently addressed the implications of settlement agreements on pass-through claims in Sauer Incorporated (ASBCA No. 62295, August 13, 2025, and November 18, 2025). Sauer, Inc. Contracted with the Navy, and its painting subcontractor, Tri-State Painting (TSI), encountered unexpected lead paint issues. TSI sued Sauer’s surety under the Miller Act, with a dispute over a Change Order. Rather than proceed to trial, Sauer and TSI settled, with Sauer agreeing to pursue TSI’s claims against the government and pay TSI an additional percentage of any recovery.

The Ruling and its Implications

The Navy argued the pass-through claim was barred by Severin. The ASBCA disagreed, finding that the settlement agreement expressly preserved “all claims and claim rights…including any and all pass-through rights,” although also intending to satisfy the requirements of the Severin doctrine. The Board clarified that conditional liability – paying the subcontractor “as and when” recovery is made from the government – is sufficient.

The Board distinguished the case from George Hyman Construction Co. V. United States (1993), where a subcontractor attempted to “revive” a previously released claim. In Sauer, the underlying validity of the release was contested, meaning the claim had not been fully extinguished. The settlement resolved a live dispute, rather than attempting to resurrect a dead claim.

Key Takeaways for Primes and Subcontractors

• Drafting Matters: Prime contractors should ensure settlement agreements expressly carve out claims against the government from any general release, and explicitly preserve pass-through rights.
• Conditional Liability is Sufficient: An agreement to pay the subcontractor “as and when” the prime recovers is sufficient to satisfy the Severin doctrine.
• Contested Releases: If the validity of a release is disputed, the pass-through claim may not be barred.
• Formalize Arrangements: Primes and subcontractors should formalize pass-through claim arrangements in a claims prosecution or liquidating agreement, outlining control, costs, cooperation, and recovery allocation.

The Sauer decisions confirm that a well-drafted settlement agreement can preserve pass-through claims against the government. Careful planning and legal counsel are essential to navigate these complex issues and protect the rights of both prime contractors and subcontractors.