Subcontractor's Breach of Liquidating Agreement Claim Against General Contractor Upheld

On March 28, 2018, the Second Department issued a decision in Rad & D'Aprile, Inc. v. Arnell Construction Corp., 2018 NY Slip Op. 02156, upholding a subcontractor's claim against a general contractor for breach of a liquidating agreement, explaining:

An enforceable liquidating agreement requires (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. Like every contract, the contractual covenant of good faith and fair dealing is implied in a liquidating agreement. The covenant of good faith and fair dealing in this context requires the general contractor to take all reasonable steps so that the subcontractor's right to an eventual recovery, if any, from the owner will be protected.

[G]iving the plaintiff the benefit of every favorable inference, the complaint's allegations, together with the additional evidence the plaintiff submitted in opposition to the motion to dismiss, were sufficient to show that the parties entered into a liquidating agreement independent of the subcontract on which the plaintiff could premise its cause of action for breach of the duty of good faith and fair dealing. Specifically, the complaint indicates that the defendant had agreed to prosecute the plaintiff's claim against the City on the plaintiff's behalf, pass through any recovery it obtained, and assume liability for the plaintiff's damages occasioned by the City's delays to the extent of $100,000 plus any recovery it obtained above that amount. Contrary to the defendant's contention, it was sufficient that the defendant's assumption of liability for the plaintiff's damages was clearly implicit in the express terms of their alleged agreement.

Further, the complaint's allegations and the evidence the plaintiff submitted in opposition to the motion to dismiss stated a cause of action alleging that the defendant breached its implied duty of good faith and fair dealing under the liquidating agreement by failing to commence the underlying action within the time period provided for in the prime contract notwithstanding its notice of the substantial completion date for the project.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: litigation regarding commercial construction and real estate transactions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding litigation over a commercial construction or real estate transaction.