A liquidating agreement is probably a more popular agreement between a general contractor and subcontractor when it comes to federal construction projects, but it is a type of agreement that can universally apply. This is the type of agreement that memorializes a subcontractor’s pass-through claim to the owner where the subcontractor’s claim is pursued in the name of the general contractor or by the general contractor. Because liquidating agreements pertain to a general contractor passing-through a subcontractor’s claim to the owner, they are oftentimes called pass-through agreements.
“Generally, a liquidating agreement or pass-through agreement grants the general contractor a release of its liability to the subcontractor after the general contractor prosecutes the subcontractor’s pass-through claims against the owner and conveys any recovery to the subcontractor.” Rad and D’Aprile Inc. v. Arnell Const. Corp., 2015 WL 3619210, *6 (N.Y. 2015). Specifically, a liquidating agreement between a general contractor and a subcontractor is designed to limit (or liquidate) the general contractor’s liability to the subcontractor to the amount the general contractor recovers from the owner. See id.
“Liquidation agreements have three basic elements: (1) the imposition of liability upon the general contractor for the subcontractor’s increased costs, thereby providing the general contractor with a basis for legal action against the owner; (2) a liquidation of liability in the amount of the general contractor’s recovery against the owner; and, (3) a provision that provides for the pass-through of that recovery to the subcontractor.” Rad and D’Aprile, supra (citation omitted).
The benefit of a liquidating agreement or pass-through agreement is that it limits the general contractor’s liability to the extent the general contractor receives payment from the owner for the subcontractor’s claim. There are considerations that need to be ironed out when entering into a liquidating agreement or pass-through agreement including, without limitation:
1) Attorney’s fees – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor will bear all of the attorney’s fees. Conversely, if the general contractor pursues the claim, it will likely want the subcontractor to share in attorney’s fees on a pro rata basis of the subcontractor’s recovery, if any, to be reduced by incurred fees.
2) Cooperation – if the subcontractor pursues the pass-through claim in the name of the general contractor, the subcontractor may need certain cooperation from the general contractor. If, however, the general contractor pursues such claim, it will want the cooperation of the subcontractor so that the subcontractor is actively involved in proving the pass-through claim.
3) Settlement – if the general contractor pursues the pas-through claim, it will want complete authority to settle the claim without input from the subcontractor. This means that the subcontractor’s claim would be paid based on a pro rata portion of that settlement.
4) Role of General Contractor – the agreement should clarify how far the general contractor is willing to pursue the subcontractor’s claim. In other words, is simply passing-through the claim to the owner good enough such that the parties are bound by the owner’s determination of the claim. Or, does the general contractor need to continue to pursue the claim through litigation, arbitration, or through a Board of Contract Appeals? This needs to be ironed out.
5) Release – the general contractor will want a complete release from the subcontractor such that the general contractor’s (and its payment bond surety’s) only liability to the subcontractor is the amount recovered from the owner relative to the subcontractor’s pass-through claim.
Liquidating agreements or pass-through agreements are an efficient vehicle in certain circumstances to resolve disputes between a general contractor and subcontractor where the parties jointly focus on the recovery from the owner. With that said, the parties should work with counsel to ensure the liquidating agreement accurately reflects their interests moving forward with the pass-through claim.
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