By: Thomas S. Tripodianos Published: November 2015

Does the Statute of Limitations on Subcontractor's claim under a liquidating agreement begin to run upon General Contractor's failure to timely pursue the claim against the Owner?

Answer. Yes.

On June 22, 2001, the Public Owner awarded a public improvement construction contract (the prime contract) to General Contractor, whereby it agreed to provide general construction services to build two new sanitation garages (the project). In furtherance of the prime contract, General Contractor, on August 22, 2001, entered into a subcontract with Subcontractor, a masonry subcontractor, to perform certain masonry work (the subcontract).

Paragraph 15 of the subcontract, in pertinent part, provided:

The Subcontractor hereby agrees that no work shall be considered as extra hereunder unless, before said work shall have been done, a separate written estimate therefor shall have been submitted to the Contractor in the same manner as is provided in the Principal Agreement. If the Contractor and/or the Owner refuses to approve the estimate for extra work, the Subcontractor shall nevertheless perform expeditiously the work called for, and in that event, should the Owner refuse to give such approval, if the Subcontractor so desires, the Contractor shall institute suit on behalf of the Subcontractor for compensation for such work providing that any and all suit fees and reasonable attorney's fees arising for such suit shall be borne by the Subcontractor. This clause in no way obligates the Contractor to pay the Subcontractor's claim for extra work unless such work was first approved by the Owner.

The bid documents indicated that work on the project was to be completed by General Contractor within a period of 42 months. Subcontractor's masonry work was to be completed by October 21, 2003, a period of 14.5 months, well before the completion of the entire project. Pursuant to the Public Owner-issued notice to proceed, work on the project was to commence on November 1, 2001. However, due to various delays and interferences impacting the project, Subcontractor was allegedly wrongfully denied access to the project site and otherwise prevented from, hindered, and delayed in commencing and performing its work within the scheduled 14.5 months. Subcontractor was unable to commence its masonry work on the project until November 11, 2003, and was unable to complete its work until over two years after the scheduled completion date. Specifically, Subcontractor's final payment applications were for the period through September 30, 2005. Subcontractor claims that, as a result, it incurred extra and additional costs due to, among other things, a late start, denial of access to the project site, revisions to the construction sequence, stop work orders, extra work, contaminated and hazardous soils, and changed conditions. Subcontractor, by various notices dated February 1, 2002 through August 29, 2005, informed General Contractor of the delays, impediments, and interferences that caused it to incur extra and additional work, costs, and losses.

In or about May 2002, Subcontractor hired an outside claims consultant to assist it in preparing a claim for the extra and additional work, costs, and losses arising from the aforementioned delays, impediments, and interferences, so that General Contractor could submit this claim to the Public Owner, pursuant to paragraph 15 of the subcontract. By letter dated June 4, 2002, and a second identical letter dated July 25, 2002, Subcontractor complained to General Contractor that increases in its compensation under the subcontract were necessary due to the delays encountered. By letter dated August 9, 2002, General Contractor responded as follows:

"In response to your 7/25/02 letter requesting an increase to your contract due to delays, we have agreed to the following terms. General Contractor will increase your contract by $100,000 to help offset your increased costs. Your revised contract amount will now be $3,100,000.00. [Subcontractor's] additional costs, due to delays, will be incorporated into [General Contractor's] claims against the owner [i.e., the Public Owner] at the completion of the contract. Any money received in the settlement of the claim (for Subcontractor) over the $100,000.00 will be forwarded to you."

Subcontractor asserts that since, in consideration for Subcontractor's agreement to defer its claims against General Contractor, General Contractor agreed to incorporate Subcontractor's claims into its own claim against the Public Owner and advance $100,000 against any amounts recovered from the Public Owner on its pass-through claims, Subcontractor did not pursue its claims against General Contractor. Subcontractor continued, however, to give General Contractor notice of the delays, impediments, and interferences resulting in extra and additional work, costs, and losses. By letter dated August 20, 2004, Subcontractor informed General Contractor that, because the costs of its materials were increasing rapidly, it would be billing for increases in costs. By letter dated August 23, 2004, General Contractor responded, "whatever information you provide for said increases must become part of our claim against the owner for these added costs."

On September 2, 2005, Claims Consultant (which had also been retained by General Contractor as its claims consultant) finalized Subcontractor's claims for additional compensation and gave them to Subcontractor for review and approval, advising it to submit them to General Contractor and to request that General Contractor submit these claims to the Public Owner on its behalf as soon as possible. By letter dated September 8, 2005, Subcontractor submitted its claims for additional compensation to General Contractor, and requested that it submit these claims to the Public Owner on its behalf as soon as possible.

After reviewing Subcontractor's claims, General Contractor's project manager, requested, on September 15, 2005, that Subcontractor make modifications to that portion of its claim which related to certain steel problems since it could potentially negatively impact General Contractor's claims, and, in further consideration of General Contractor's assuming the obligation to submit Subcontractor's claims to the owner, Subcontractor agreed to drop that part of its claim. General Contractor also requested that Subcontractor revise a schedule of its claim regarding loss of productivity, and Subcontractor revised its claim, as requested, and resubmitted it to General Contractor on October 31, 2005. According to Subcontractor, it was informed that, in January 2006, General Contractor submitted its own claims, which incorporated Subcontractor's claims and those of other subcontractors, to the Public Owner.

Thereafter, Subcontractor, periodically spoke to General Contractor, to inquire as to the status of its claims. Subcontractor claims that General Contractor informed him that Subcontractor would be hearing something regarding its claims shortly and that no further action was necessary.

By letter dated December 23, 2008, Claims Consultant advised Subcontractor that General Contractor had retained an attorney to pursue the claims, who wanted a new claims consultant to become involved with the claims, and that this would probably take considerable time. Claims Consultant further advised Subcontractor, in this letter, that it was already over a year since substantial completion was reached, and that it could not offer any further information as to when General Contractor would be submitting the claims. At the request of General Contractor, Subcontractor forwarded a copy of its delay claims to New Claims Consultant on December 30, 2008.

On August 11, 2010, General Contractor filed a verified notice of claim against the Public Owner, alleging the various delays and interferences by the Public Owner resulting in extra work, incorporating Subcontractor's claims in the amount of $2,099,192. On December 13, 2010, General Contractor commenced an action against the Public Owner seeking $15,092,471.40 on its own behalf and on behalf of Subcontractor and other subcontractors, alleging the delays, interferences, and extra work on the project.

In that action the Court held that article 56 of the prime contract established a statute of limitations period for claims against the Public Owner requiring such claims to be commenced within six months after the date the Commissioner issued a certificate of substantial completion. The Court found that General Contractor had substantially completed its work on December 7, 2007, and that this six-month period was triggered on December 27, 2007, when the Public Owner forwarded to General Contractor notice of substantial completion, requiring it to bring its claims prior to June 27, 2008 in order for those claims to be timely.

On March 21, 2014, Subcontractor filed a separate action against General Contractor. Subcontractor's complaint alleges five causes of action, including a first cause of action for breach of contract related to its contract balance allegedly due on the project, a second cause of action for breach of General Contractor's contractual duty with respect to Subcontractor's pass-through delay claims against the Public Owner, a third cause of action for breach of General Contractor's fiduciary duty to present Subcontractor's claims diligently, a fourth cause of action for breach of contract based upon any delays caused by General Contractor's own acts or omissions, and a fifth cause of action for quantum meruit.

General Contractor argues that Subcontractor's breach of contract claims (in its first and fourth causes of action) are barred by the six-year statute of limitations of CPLR 213 (2). In construction cases a contractors claim accrues upon the substantial completion of its work.

Here, Subcontractors first cause of action for breach of contract seeks recovery of the balance of sums due under the subcontract and accrued against General Contractor upon substantial completion of its work under the subcontract, on September 30, 2005. Moreover, Subcontractors breach of contract claims based upon the subcontract could not have accrued any later than December 27, 2007, when the Public Owner forwarded General Contractor notice of the substantial completion of the entire project. Therefore, since Subcontractor filed this action against General Contractor on March 21, 2014, six and a half years after General Contractors substantial completion of the project and, even more egregiously, eight and a half years after its own substantial completion of the project, its first breach of contract cause of action is time-barred (see CPLR 213 2).

Subcontractors fourth cause of action for breach of contract seeks recovery for damages for delay resulting from General Contractors own acts and omissions in causing such delays. This claim, based upon the subcontract between Subcontractor and General Contractor, also accrued upon Subcontractors completion of its work on September 30, 2005 and is time-barred.

Subcontractor’s second cause of action has been characterized by General Contractor as a claim, also based upon the subcontract, for the breach of the covenant of good faith and fair dealing in failing to diligently prosecute Subcontractors delay claims against Public Owner and the Public Owner.  General Contractor’s argument is largely founded on the language of paragraph 15 of the subcontract which obligates General Contractor, upon request of the subcontractor, to pursue unapproved extra work claims against the owner, but does not expressly include delay claims. Apart from its argument that paragraph 15 implicitly excludes delay claims and, in any event, Subcontractor failed to meet the condition precedent of submitting a written estimate to General Contractor, General Contractor contends this claim duplicates other breach of contract causes of action and must be dismissed. However, the gravamen of the second cause of action, as reflected in the pleading, is an independent claim based upon General Contractors alleged breach of a liquidating agreement, reflected in the letter of August 9, 2002, by which General Contractor became contractually obligated to pass-through Subcontractors delay and extra work claims against the Public Owner (with which Subcontractor was not in privity and, therefore, could not sue directly), in conjunction with General Contractors own claim for damages for delay and extra work caused by the Public Owners and Public Owners acts and omissions. The allegations regarding General Contractors lack of good faith and diligence in prosecuting these claims are pleaded in the context of a broadly-stated claim for breach of contract and do not constitute a duplicative claim as all contracts contain a covenant of good faith and fair dealing.

In opposition to General Contractors motion to dismiss this claim, Subcontractor contends this claim is not time-barred as suit was timely commenced on March 21, 2014, within six years of June 27, 2008, the date on which the statute of limitations expired on General Contractors claims against the Public Owner. Subcontractor points to the fact that it submitted its revised pass-through claims to General Contractor on or about October 31, 2005, more than two years before the project was deemed substantially completed by the Public Owner on December 7, 2007, and contends that General Contractor could and should have timely filed an action against the Public Owner asserting its claims, but failed to do so. Subcontractor argues that since the statute of limitations for suing the Public Owner expired on General Contractors claim on June 27, 2008, that was the date on which General Contractor breached its agreement to present Subcontractors pass-through claims to the Public Owner by allowing the statute of limitations to expire and that is the date upon which its second cause of action accrued.

In response, General Contractor argues that there was no enforceable liquidating agreement or contractual pass-through agreement by which it assumed liability for Subcontractors delay claims based upon delays caused by the Public Owner and not General Contractor. General Contractor points to the fact that paragraph 15 of the subcontract, which provided that it would institute a lawsuit for compensation against the owner on Subcontractors behalf, only pertained to extra work, as opposed to delay damages, and that Subcontractors claims herein relate solely to its recovery for delay damages and not for extra work.

General Contractor notes that case law has distinguished between recovery sought for extra work versus delay damages. General Contractor argues that the subcontract distinguished between extra work and delay damages since, in contrast to the extra work provision in paragraph 15, paragraph 12 of the subcontract specifically governed delay damages and provided that Subcontractor understands and agrees that the Contractor General Contractor shall not be liable for any damages or loss through any delay…of any other subcontractor and/or other contractors. Such provision does not, however, speak to contractors possible liability for its own conduct in causing delay damages to a subcontractor, nor does paragraph 12 relate to General Contractors liability for delays caused by the owner, and is not, therefore, per se dispositive. General Contractor asserts that since paragraph 15 did not apply to Subcontractors delay claims, as a general contractor, it was not responsible for any delay damages caused by the Public Owner, nor would it be required under the subcontract to institute suit on Subcontractors behalf. While General Contractor would not, in the absence of an express contractual undertaking, normally be responsible for delays caused by the owner unless it shared actual control over the circumstances which created such delay there is such contractual undertaking here. It is unnecessary to determine the factual question as to the nature of the damages for which Subcontractor seeks to recover, whether Subcontractors claim is for extra work or for delay, as Subcontractor relies on a separate agreement which provides an independent basis for Subcontractors second cause of action.

Subcontractor contends that the subcontract was modified by the August 9, 2002 letter (the agreement), which constituted an enforceable liquidating agreement or pass-through agreement by which General Contractor assumed the duty to assert its delay claims against the Public Owner. It is well-settled that 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 contractors 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 subcontractors 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 contractors 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.

Here, General Contractor argues that there was no liquidating agreement because it never acknowledged liability for Subcontractors increased costs. However, in response to Subcontractors requests for an increase in the amount to be paid to it due to delays, and to dissuade Subcontractor from suing, General Contractor agreed, in the August 9, 2002 letter, to make an additional payment to Subcontractor of $100,000, revising the subcontract to $3,100,000, to incorporate Subcontractors claims for delay costs into its own claims against the Public Owner, and to pay Subcontractor any money that it actually received in the settlement of the claims attributable to Subcontractors claims, above the $100,000 sum paid. The clear implication of this settlement agreement is an acknowledgment by General Contractor of liability to Subcontractor. The arrangement establishes a liquidation of such liability to $100,000, plus whatever additional compensation might be recovered from the Public Owner which would be passed through to Subcontractor.

Subcontractor correctly argues that, by this agreement, General Contractor assumed a duty to prosecute its claims against the Public Owner in good faith, and was required to commence the New York County action asserting those claims before the statute of limitations on its own claims expired. The contractual covenant of good faith and fair dealing, which is implied in every contract, applies to a liquidating agreement, and generally requires the contractor to take all reasonable steps so that the subcontractors right to an eventual recovery, if any, from the owner will be protected. Thus, a general contractor has a duty to make a good faith effort to present the subcontractors claim to the owner in a fair and serious manner. The letter of August 9, 2002, is a classic liquidating agreement, enforceable at law.

The issue remains, however, as to whether Subcontractor’s breach of contract/breach of the covenant of good faith and fair dealing cause of action is viable as having been interposed within the statute of limitations, which is six years from accrual. The liquidating agreement necessarily contemplated that General Contractor’s completion of the entire project would precede any litigation of Subcontractors claims and the contractual statute of limitations applicable to both parties under the agreement was, therefore, the six months after issuance of a Certificate of Substantial Completion as set forth in the Prime Contract. The Certificate of Substantial Completion was issued by notification on December 27, 2007, that being the date the limitations period began to run. June 27, 2008 would, therefore, mark the expiration of the statute of limitations for the claims at issue, including those of Subcontractor. Subcontractor’s breach of contract cause of action, as asserted in the second cause of action, therefore, accrued on June 27, 2008.

It was General Contractor’s failure to timely commence the legal action required under the liquidating agreement that Subcontractor claims constitutes General Contractor’s breach in performance of that contract. Accordingly, the statute of limitations for Subcontractors second cause of action, based upon General Contractor’s breach of its obligations under the liquidating/pass-through agreement, commenced to run on June 27, 2008. Having delegated to General Contractor the authority to prosecute its claims against the owner, and having relied thereon in deferring any attempt to prosecute its claims against General Contractor, it was only when General Contractor failed to act timely in performing its duty to Subcontractor that Subcontractor sustained injury as a result of General Contractors breach. Based upon the liquidating agreement set forth in the letter of August 9, 2002, Subcontractor could not prosecute its own claims sooner as it had agreed to forbear such prosecution in deference to General Contractor’s rights against the owner. The statute of limitations begins to run when a cause of action accrues (see CPLR 203a), that is, when all of the facts necessary to the cause of action have occurred so that the party would be entitled to obtain relief in court. In contract actions a claim generally accrues at the time of the breach. In light of the liquidating agreement, it cannot be said, as General Contractor argues, that the statute of limitations began to run upon Subcontractors completion of its work on the project in September 2005. Rather, the cause of action accrued when the statute of limitations ran on Subcontractors claims so that General Contractor 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.

© Welby, Brady & Greenblatt, LLP.
All Rights Reserved. By visiting this site, you agree to our Terms of Service. For more information please read our Privacy Policy Attorney Advertising