The Appellate Division, Second Department, recently issued a decision in Rad and D’Aprile, Inc. v. Arnell Construction Corp. where they analyzed the enforceability of liquidating agreements.
What is a liquidating agreement?
A liquidating agreement in construction is an agreement between a contractor and subcontractor where the contractor liquidates its liability to the subcontractor but only to the extent it is able to recover for the subcontractor’s claim from the owner. The contractor agrees to act in good faith and take all reasonable steps to recover the sums due from the owner. The liquidating agreement can be part of the overall contract between the general contractor and subcontractor or it can be a separate document.
What did the Court say about liquidating agreements?
The Second Department’s March 2018 decision stated that a valid and enforceable liquidating agreement required:
- 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;
- a liquidation of liability in the amount of the general contractor’s recovery against the owner; and
- a provision that provides for the ‘pass-through’ of that recovery to the subcontractor
The Court also noted that the implied covenant of good faith and fair dealing, which is exists in all contracts in New York, applies to liquidating agreements. In this context, the covenant requires “take all reasonable steps so that the [subcontractor’s] right to an eventual recovery, if any, from the [owner] will be protected.”