With a liquidation agreement, a contractor will pursue a claim with the project owner on a subcontractor’s behalf, “liquidating” its liability to the subcontractor – but only for as much as it can recover from the owner. Before signing a liquidation agreement, consider all the issues.
1.Are liquidation agreements appropriate in the jurisdiction?
Liquidation agreements vary according to jurisdiction and may not be appropriate in every jurisdiction. This means that it is critical to understand whether liquidation agreements are valid in the jurisdiction where the project is.
2.What are the requirements?
The legal requirements of a liquidation agreement vary. As such, it is important to confirm what those requirements are before proceeding with signing a liquidation agreement. This is important even if there is a draft of an agreement on hand from another project as the requirements could have changed or the jurisdictional requirements could be different.
3.Who is being released? To what extent?
Subcontractors should carefully consider the components of their total project claims and who they are against. For example, a common liquidation agreement is between a general and a subcontractor to pursue to the owner. But a subcontractor could have certain claims against the owner and other claims against the general contractor. As such, it is important to understand and document which project claims are included in the agreement and which are not. The subcontractor should make sure it pursues the general contractor (and potentially the general contractor’s bond) for any project claims against the general contractor to preserve any and all claims that it is not releasing in the liquidation agreement.
4.Benefits
There are numerous benefits of a liquidation agreement. Some of the most common benefits are: one presentation, avoiding multiple cases and inconsistent results, and potentially being engaged in more passive (as compared to active) litigation.
- One presentation. When a subcontractor and a general contractor sign a liquidation agreement, there is one presentation of the claim (usually against the owner). This united front is usually more compelling than pursuing individual claims through separate presentations. One presentation also streamlines witnesses and documents for a more cogent presentation.
- Avoids multiple cases and potentially inconsistent results. Signing a liquidation agreement helps avoid multiple cases. For example, if an owner delays a project that delays the general contractor and four of its subcontractors, there could be a separate case for each piece of litigation. That means that a subcontractor could be subpoenaed in each separate case, be forced to testify and provide documents in each case, and attend multiple trials. Juries on each trial could find either that the owner did or did not delay the project depending on how the case is presented. Usually one presentation, with the benefit of a collective strategy among the multiple parties is more compelling.
- Potentially creates passive litigation. In some cases, the general contractor and many subcontractors will have a similar claim against an owner (i.e. for a delay claim). In many instances, the general contractor’s counsel will do the heavy lifting for most of the litigation and the subcontractor’s role in the litigation becomes more passive, meaning there is more time for it to focus on running its business and less time spent litigating.
5.Understanding recovery
An important feature of a liquidation agreement is how and when a party will get paid. In negating a liquidation agreement, consider: How is recovery being decided? Is it being decided by a government contracting office, an arbitration panel or a jury? Will the several subcontractor claims be decided individually or together as a whole? Is recovery pursuant to a formula? (If a claim is stronger than other parties’ claims, a formula may not make sense). Who has to approve the settlement? Who is the final decision maker? Is there an appeal process? Who has to pay for the appeal? While there is no one right answer that makes sense in every situation, it is important to consider which of these considerations are the most important on the given project when signing a liquidation agreement.
