Liquidating Agreements

Andrew Richards
Co-Managing Partner(LI),
Kaufman Dolowich Voluck,
Attorneys at Law
Legal Counsel, STA

It is black letter law that a prime contractor is not liable for damages incurred by a subcontractor for owner driven delays unless the prime contractor agrees to be so liable.  This is because a subcontractor is not in privity with the owner and cannot sue the owner directly.  As a result, the law recognizes liquidating agreements which are executed between the prime contractor and subcontractor.  Pursuant to the liquidating agreement, the prime contractor admits liability for the owner-driven delays, agrees to pursue the delay claim against the owner on behalf of the subcontractor and the subcontractor agrees to accept as full settlement any funds that the prime contractor obtains from the owner on behalf of the subcontractor.  A liquidating agreement may be incorporated into the subcontract or maybe a separate liquidating agreement executed after the work commences when a claim arises.  Whether in the subcontract or in a separate agreement, the language must state that the prime contractor accepts liability for owner driven delays and make it mandatory for the prime contractor to prosecute the claim.  Of course, there will be an accompanying clause that such liability will be limited to what is recovered by the prime contractor from the owner on the subcontractor’s behalf.  In addition, there are pitfalls with respect to liquidating agreements as well.  A prime contractor may require the subcontractor to release all claims against the prime contractor including the extra work claims for which the prime contractor is responsible.  This would be unfair, but the prime contractor will extort the subcontractor because the prime contractor does not have the legal obligation to pursue the subcontractor’s claim without a liquidating agreement.  Second, the prime contractor may require the subcontractor to pay legal bills for not only the subcontractor’s attorney, but a portion of the prime contractor’s fees relating to the prosecution of the claim.  Third, the prime contractor will want authority to settle the subcontractor’s claim because there are likely more subcontractors’ claims being presented to the owner, and the prime contractor will want to settle the whole case.  However, the bottom line is that the subcontractor has no choice and should have the liquidating agreement incorporated into the subcontract with the best terms available.