Protect Subcontractors from Bad Project Owners with these Words

It can’t be done, they say. You’re a subcontractor on a project with an owner that has screwed up everything from day one, and you want to sue the owner directly for damages because of project mismanagement so bad it should be criminal, but it can’t be done, they tell you. Filing a mechanic’s lien won’t work. The time to do that has expired. So have your payment bond rights.

You can’t sue the owner because you don’t have a contract with him, they say. You can sue the prime, they say. But she didn’t do anything wrong.

They say there’s this legal concept called “privity of contract” that stands like a brick wall one hundred feet tall between you and your claims against the owner. You can sue the prime contractor because your subcontract is with the prime. You are in “privity” with the prime contractor. (Have you heard this before?)

But this prime contractor suffered severe losses as well because of the owner’s terrible ways. The prime is innocent, and you have a longstanding and profitable relationship with this prime and she has a good reputation. This prime contractor is old school. She takes care of her subs. This project got so bad, though, because of the owner, it became a situation in which every contractor (sub and prime) had to fend for himself or herself.

You have no legal recourse against the owner, they say. Or do you?

There is subcontract language—a provision that your friendly prime contractor might agree-to, that could be your saving grace—that could propel you over that tall wall of privity.

You’re a specialty contractor—you erect steel or excavate underwater and that gives you bargaining power. You can ask to have this provision inserted into your subcontract. The provision allows you, as subcontractor, to recover directly from an owner.

Read on and find a sample of these magic words and a brief explanation of how the provision works. Also, check out the sidebar article to see how the law treats this issue in federal contracts.

The provision is called a “liquidating agreement,” and here is some sample language.

But first—disclaimer: use at your own risk or consult a knowledgeable attorney – different courts have arrived at different conclusions on whether these provisions are enforceable.

“Contractor shall have no liability to Subcontractor in respect of acts, errors, omissions or defaults on the part of Owner or its representatives or in respect of acts, errors, omissions or defaults on the part of Contractor in any way attributable to or arising out of such acts, errors, omissions or defaults of Owner or its representatives (including, without limitation, wrongful termination of the Contract), save insofar as Contractor shall recover from Owner compensation or damages in respect of such acts, errors, omissions or defaults and such compensation or damages shall include a sum in respect of any amounts claimed by Subcontractor and notified to Contractor prior to submission of its claim to Owner, and Contractor will in such event include the amount of such claim in its claim against Owner. Payment of such sum by Contractor to Subcontractor shall be in full and final settlement of any liability of Contractor to Subcontractor in respect to Subcontractor’s claim or of the circumstances giving rise thereto. Contractor undertakes to use its best endeavors to pursue any claim against Owner arising out of any such acts, errors, omissions or defaults, and Subcontractor undertakes to pay to Contractor a proportion of the costs incurred by Contractor in pursuing any such claim equal to the proportion which Subcontractor’s claim bears to the total of Contractor’s claim.”

That’s a mouthful, eh?

The prime contractor is promising to reimburse you for damages due to the owner’s actions, but only if, when, and to the extent that the prime contractor receives payment from the owner for the subcontractor’s damages. The prime functions as a pass-through, that is, money recovered from the owner passes through the prime directly to you the subcontractor.

The prime must acknowledge her liability to you the sub for losses caused by the owner, which then obligates the prime to prosecute the subs claim against the owner and pass any money recovered back to the sub.

Primes usually have to “take all reasonable steps so that the [subcontractor’s] right to an eventual recovery, if any, from the [owner] will be protected.”  If not, the prime could be liable to the sub for breach of the liquidating agreement.

Guess what? If a liquidating agreement isn’t in writing, The New York City Comptroller’s Office won’t pay a subcontractor’s claim.