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Don’t Water Down Your Claim: What is a liquidating agreement and what do you need to know?

By Gerard W. Ittig | Jan 15, 2025
Don’t Water Down Your Claim: What is a liquidating agreement and what do you need to know?
You’ve had a bad job. There were unexpected delays and accelerations that cost you a lot of money, and you had disputed changes that further ate into your profit margin. Now that the job is winding up, you have some important decisions to make.

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You’ve had a bad job. There were unexpected delays and accelerations that cost you a lot of money, and you had disputed changes that further ate into your profit margin. Now that the job is winding up, you have some important decisions to make.

Decision No. 1: Do you file a lawsuit? Is the claim large enough and contractually strong enough to justify the time and expense of litigation? If you decide to “go legal,” do you file a lien against the property and file a breach of contract action against the general contractor? And what are the chances you will face a counterclaim from the general contractor?

Another option may be available, and it falls under the heading of “liquidating agreement.”

What is a liquidating agreement?

In a commercial setting—that is one not involving personal injury or property damage—you can only sue the party for your losses if you have a contract with them. In construction as an electrical subcontractor, this means you cannot sue another subcontractor even if that company caused the majority of your problems. And, except for mechanic’s liens, you cannot sue the owner.

Under contract law, this restriction on whom you can sue can cause complications. You sue the general contractor and then the general sues and brings the owner and/or the subcontractor into your lawsuit to pass through your claims. Now you have created a multiparty dispute with all the attendant time and expense.

A liquidating agreement allows you to reduce this complexity. You settle your claims with the general contractor and then you and the general jointly sue the owner and/or the subcontractor who caused the problems.

Care is required when you draft this liquidating agreement. Most courts hold that, for a liquidating agreement to be valid, the general contractor must remain liable to you. How do you accomplish this feat of settling your claims with the general but having the general remain liable for your claims? A typical approach is to have the liquidating agreement provide that the general will be liable to you to the extent of the amount the owner and/or subcontractor pays or accepts liability. (Other language may be needed in federal government contracts under the Severin Doctrine. (See “Just Passin’ Through,” in the September 2008 issue of ELECTRICAL CONTRACTOR.)

Contents of a liquidating agreement

One of the main benefits of a liquidating agreement is that it helps avoid in-fighting between you and the general contractor. You are now both on the same side of the dispute and the general will not be raising any defenses that it might otherwise have against you. The downside is that you may have to drop claims relating solely to the actions of the general contractor to induce it to sign the agreement.

Where the general has its own claims against the owner and/or subcontractor, it will not want to have your witnesses testify at trial against the general. To limit testimony to the owner and/or subcontractor’s faults, the general may be willing to make partial payment to you (or a loan against your claims) as an inducement to you to sign a liquidating agreement.

When you join your claims with those of the general contractor, you can share the costs of litigation, especially the high cost of “discovery” (the exchange of documents and depositions of potential witnesses). You can share the costs of experts if needed, for example, scheduling experts. There is also a likelihood that a judge or jury will be more persuaded that the fault was that of the owner and/or other subcontractor when the general contractor and electrical subcontractor are united in presenting their case.

To protect yourself, the liquidating agreement should contain language covering the potential for negotiated settlement with the owner and/or the other subcontractor. You will want the right to approve a settlement with these other parties.

Some of your claims and those of the general contractor may be difficult to prove. If there is a lump sum settlement with the owner and/or other subcontractor, your liquidating agreement should address how a lump sum settlement would be divided between you and the general contractor.

More help is available

Samples of liquidating agreements can be found on the internet. You can review them to see what these agreements look like in general. Because liquidating agreements that were not well-drafted have at times not been accepted by a court, you should consult an experienced attorney before executing any liquidating agreement.

stock.adobe.com / Naypong Studio / Sodapeaw

About The Author

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, [email protected] and www.ittig-ittig.com.

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