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Current Developments in the Commercial Divisions of the
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Posted: June 28, 2015

Liquidating Agreement Claim by Subcontractor Accrues When General Contractor’s Claim Time-Barred

On June 5, 2015, Justice Demarest of the Kings County Commercial Division issued a decision in Rad & D’Aprile Inc. v. Arnell Constr. Corp., 2015 NY Slip Op. 25191, analyzing when a claim for breach of a liquidating agreement accrues.

In Rad & D’Aprile Inc., the plaintiff subcontractor and the defendant contractor entered into a liquidating agreement. As the court explained,

liquidating agreements are a valid mechanism for bridging the privity gap between owners and subcontractors who sustain damages as the result of the others’ actions. 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.

Liquidating agreements need not take any particular form, and may be assembled from several documents executed over a period of years. Such liquidating agreements ordinarily limit the general contractor’s liability to the subcontractor to the amount actually recovered from the owner, but may also require the general contractor to make an additional payment to the subcontractor.

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. There is no requirement that the liquidating agreement must be part of the original subcontract, and the general contractor may assume liability for pass-through claims of the subcontractor by way of a separate liquidating agreement. Furthermore, since a general contractor is not liable to its subcontractors for delays that it did not cause, there also need not be actual contractual liability between the contractor and subcontractor in the subcontract as a prerequisite to the enforceability of a liquidating agreement. However, the general contractor, in entering into a liquidating agreement, must assume such liability in order to pursue a claim against the owner on behalf of the subcontractor.

(Internal quotations and citations omitted). The plaintiff brought an action for, among other things, breach of the liquidating agreement. The defendant moved to dismiss arguing, among other grounds, that the claim was time-barred. The court disagreed, explaining:

In contract actions a claim generally accrues at the time of the breach. In light of the liquidating agreement, it cannot be said, as defendant argues, that the statute of limitations began to run upon plaintiff’s completion of its work on the project in September 2005. Rather, the cause of action accrued when the statute of limitations ran on plaintiff’s claims so that defendant could no longer perform its contractual duty. This action, commenced on March 21, 2014, is not, therefore, barred by the statute of limitations as to the second cause of action.

(Internal quotations and citations omitted).

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