Subcontractors may be protected against damages a property owner is at fault for through an agreement with the contractor.  The contractor and subcontractor may arrange that the contractor will reimburse the subcontractor for damages it sustains at the fault of an owner, but only to the degree that the owner pays damages to the contractor for the subcontractor’s damages.  This type of “liquidated damages” agreement is recognized both in New York and federal claims courts.  [1]

For a liquidating agreement to be valid and recognized by the court, it must contain (1) an imposition of liability upon a party for a third party’s increased costs, thereby providing the first party with a basis for legal action against the party at fault, (2) a liquidation of liability in the amount of the first party’s recovery against the party at fault, and (3) a provision for the pass-through of that recovery to the third party.  [2]

In Bovis Lend Lease LMB Inc. v. GCT Venture, Inc., 285 A.D.2d 687, 28 N.Y.S.2d 25, for example, the court found that the subcontractors, lacking privity of contract, were precluded from bringing suit directly against construction project owners for additional costs caused by owner’s delays.  The liquidating agreement, however, allowed the prime contractor to bring suit against the project owner on behalf of the subcontractor for its injuries sustained as a result of the owner’s actions.  There was no requirement that such an agreement was to be part of the original sub-contract; the prime contractor was permitted to assume such liability by way of a separate liquidating agreement.  Nor did the no-damage-for-delay clause prevent the subcontractor from subsequently entering into the liquidating agreement with the contractor.

In a case where a contractor enters into a liquidating agreement with a subcontractor to liquidate any liability that it might have to the latter for delay damages caused by the owner which could be recovered in lawsuit brought in contractor’s name against owner, admission of liability by the contractor is clearly implicit in the agreement.  Further, suit against the owner may be prosecuted in the contractor’s name, even though no damages have been suffered directly by contractor.  [3]

An implied contractual covenant of good faith and fair dealing exists in all liquidating agreements between a contractor and a subcontractor.  The contractor contracting to such an agreement is required to take all reasonable steps necessary to ensure the subcontractor’s right, if any, to recover from the contractor.  [4]  Therefore the contractor has a duty to the subcontractor to present his claim in a fair manner, and a failure to do so could be considered a breach of contract and may entitle the subcontractor to bring suit against the contractor.