LIQUIDATING AGREEMENT SURVIVES COURT CHALLENGE

Liquidating agreements between general contractors and their subcontractors are a favored means of reimbursing subcontractors for additional costs incurred as a result of delays caused by owners or other parties not under the control of the general contractor. In a recent case demonstrating the usefulness of liquidating agreements, a New York State appellate court has ruled that such agreements are valid and enforceable even where the subcontract between the parties expressly states that in the event of a delay caused by the owner, the subcontractor is not entitled to claim money damages from the general contractor and that the subcontractor's only remedy is to seek an extension of its time to perform.

As a general rule, unless there is a specific provision to the contrary in the parties' subcontract, a general contractor is not responsible for any damages suffered by its subcontractor as a result of a delay, unless the delay is caused by the general contractor or a party or circumstance under the general contractor's control.

Moreover, because there is generally no contractual relationship between an owner and a subcontractor, where the owner is responsible for the delay, the subcontractor usually has no right to seek damages directly from the owner. Similarly, unless the general contractor has, itself, suffered injury as a result of an owner's delay, it normally cannot sue the owner on behalf of its subcontractors.

Thus, as a means of reimbursing their subcontractors for additional costs incurred as a result of owner caused delays (and to avoid having their subcontractors walk off the job), many general contractors enter into liquidating agreements with their subcontractors which permit them to sue the owner on behalf of their subcontractors. The courts have held that a valid liquidating agreement must contain three essential provisions: (1) a provision making the general contractor liable for its subcontractors' increased costs incurred as a result of delays caused by the owner (this is necessary to provide the general contractor with a basis upon which to sue the owner); (2) a provision limiting the general contractor's liability to the amount it recovers in its claim or lawsuit against the owner (this provision protects the general contractor by ensuring that it will only be required to pay to its subcontractors the amount it actually recovers from the owner); and (3) a provision requiring that any sums recovered by the general contractor from the owner "pass-through" to the subcontractors (this provision protects the subcontractors by ensuring that any and all sums received by the general contractor on its claim against the owner will, in fact, be paid to the subcontractors).

In the recent case, the plaintiff was the general contractor on a public improvement project at Grand Central Station. The owner of the project retained the services of a developer for the project. The developer, in turn, retained the GC.

Pursuant to the terms of its general contract, the GC was responsible for the performance of its subcontractors and the developer had to pre-approve the GC's subcontractors (the developer, however, had no right to pre-approve the actual subcontracts entered into).

After entering into the general contract, the GC retained the services of various subcontractors. The GC's subcontracts with its subcontractors specifically provided that the GC would not be liable for any additional costs incurred by the subcontractors as a result of delays caused by the Owner or developer.

Predictably, delays caused by either the owner or developer forced the GC's subcontractors to incur additional costs. The GC, apparently to avoid a conflict with its subcontractors (none of whom had a right to sue either the owner or developer directly), entered into a liquidating agreement with them. Thereafter, pursuant to the agreement, the GC commenced an action against the owner and developer on behalf of its subcontractors.

The appellate court ruled that since there was nothing prohibiting the GC from entering into the liquidating agreement (including the provision of the original subcontracts relieving the GC from liability for delays caused by the owner or developer), the agreement was valid and would be enforced. Furthermore, the appellate court held that the GC did not need the consent of either the owner or developer prior to entering into the liquidating agreement due to the fact that the general contract only granted the developer the right to pre-approve the subcontractors selected by the GC and did not grant the developer any right to pre-approve the actual subcontracts entered into with such subcontractors.

A&A Notes:

The decision by the appellate court demonstrates the usefulness of liquidating agreements in providing remedies to subcontractors and in maintaining a harmonious general contractor/subcontractor relationship. In this regard, Agovino & Asselta, LLP often recommends liquidating agreements to its clients as a means of settling conflicts between a general contractor and its subcontractors regarding owner caused delays.

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