Construction Law Practice - Kevin Hudson, Esq.

Often a general contractor is caught in the middle of a subcontractor claim that is caused by the acts or omissions of the Owner/Designer. In these instances, the general contractor is protected by its conditional payment clause but needs to pursue the legitimate claim of its subcontractor. In a traditional setting, the subcontractor would sue the general contractor who would then file a third party action or a separate suit against the Owner. Thus, there are three sets of lawyers and a general contractor is subject to potentially disparate results. For example, a subcontractor might prove it is entitled to recover on its claim but the general contractor does not prevail in shifting the claim upstream to the owner. A liquidating agreement is one method to avoid this complex fiasco.

It is critical to draft a liquidating agreement, that protects the general contractor and ties the claims of the subcontractor to the resolution achieved with the Owner/Designer. A liquidating agreement typically should state the amount the subcontractor is owed (i.e. liquidating the liability). The liquidating agreement should set forth how the costs of prosecuting the claim will be paid. It should also provide that the subcontractor will only get paid out of the actual recovery. Thus, there is one claim, one lawsuit and the subcontractor and general contractor maintain consistent positions. Consideration of a liquidating agreement must be made in light of default by the subcontractor and/or failure of conditions of preservation of claims by the subcontractor. This balance should be discussed with counsel.

These agreements are generally enforceable and have been used to comply with or dodge the Severin Doctrine since the 1960’s. The Severin Doctrine basically held that liability to a subcontractor must be liquidated before a claim can be recoverable against an owner. While the Severin Doctrine has largely eroded and been relegated to the legal dust-bin, liquidating agreements remain a great tactical tool in dispute resolution. Beware, in some states liquidating agreements can be difficult to draft due to arcane notions that these agreements violate privity of contract requirements (as distinguished from an assignment or subrogation rights).