Subcontractors on a project can benefit from liquidation agreements, as they reduce legal risks. To craft such an agreement effectively, the parties must include the basic elements and clarify how to otherwise allocate costs, responsibilities, and recoveries.
In the case of a dispute, liquidation agreements are negotiated as a type of settlement agreement. As part of the agreement, the subcontractor and general contractor seeking to avoid unnecessary litigation and inconsistent results and concentrate their efforts on pursuing the final responsible party: the owner. Also, parties can tailor the agreement to address the particular pass-through claim and other circumstances surrounding the dispute (e.g., accounting for the general contractor’s related claims against the owner).
A liquidation agreement is also known as a liquidating agreement and can be included in a subcontract before a dispute occurs. Liquidating agreements are more exculpatory in such situations. There is no guarantee that a subcontract will contain a liquidating agreement, but it will likely be found in the dispute resolution or change provisions if one is included. Such agreements need not be lengthy, provided they include the essential elements.
However, if a dispute arises, augmentation may be required to fine-tune or add specific terms.
When a construction project goes wrong, the parties must determine who will be responsible and how they will be held accountable. It is possible that the party responsible for the issue has no direct contractual obligation to the party who suffered from the issue, and that can stymie an otherwise justified recovery.
Usually, this refers to a subcontractor who was adversely affected by an owner’s actions. Alternatively, the subcontractor can enter into a liquidating agreement with one of its agent firms. The subcontractor will be able to collect, the owner will be compelled to pay, and the agent firm will be able to remain relatively unscathed.
Liquidation agreements should contain the following to clarify each party’s rights and obligations.
The current partnership between the parties is defined. If more than one joint venture exists, it is important to clearly define the partnership. The partnership or venture that is liquidating will be described in detail. Lines similar to the following should be included:
The parties agree to file a statement of dissolution to the Department of Treasury and every county clerk’s office where the company routinely conducted business. Upon the conclusion of the partnership and the cessation of operations, all assets belonging to the partnership shall be accounted for and liquidated according to the description in the agreement.
An accountant will be hired by the parties to take inventory of all assets and liabilities sold under the liquidation agreement. Both parties agree to take the listed actions after receiving an original report copy.
A party will be appointed as the liquidating partner to perform all duties associated with the liquidation agreement. To ensure that the parties comply with all terms and conditions of the agreement, all parties will have the opportunity to review all books and records for the duration of the liquidation agreement.
Any remaining assets will be sold at a public auction at a time and place that is convenient for both parties.
This section states that liquidated assets must be used first to pay off debts related to the business venture. According to the separate partnership agreement, any remaining proceeds will be distributed to the partners.
Liquidation will be governed by local government and state laws. Liquidation proceedings about the agreement will be conducted in the state noted in the agreement.
To facilitate the liquidation of the liquidated assets, the parties agree to supply all documentation needed. The other party may file a lawsuit if the agreement is hindered or obstructed.
Those involved in the liquidation agreement are bound by it, and it is for the benefit of the parties and their heirs. All other provisions of the liquidation agreement shall remain in full force and effect if any provisions are unenforceable. When a provision of the contract is unenforceable, the parties will have the option of replacing that provision with one of similar meaning, as agreed.
The liquidation agreement supersedes all prior agreements, both written and oral. The partnership agreement previously entered into is included.
Any dissolution or liquidation of an account will not affect the warranties or representations included in this section.
Both parties will sign the liquidation agreement. Each party acknowledges that they have read and understood the terms and conditions in the liquidation agreement by signing.
*Please consider that this is a non-exhaustive list but just a few main things this agreement should have.
The liquidation agreement is written using the following components.
Be sure to include your business information and your client’s.
This is where you outline what services and/or supplies you will be providing.
This section includes the location, goods, and services included in the liquidation
This is where you outline how much you will be paid, how your client can pay you, and any additional information (late fees, nonpayment, etc.)
This section includes your timeline for the work specified and a final deadline.
If there are licenses or permits to be included, this is where you specify who is responsible for these.
Include any details regarding safety equipment and who is responsible for this.
This clause should include the outcome of any damages or losses or a denial of responsibility for such instances.
Signatures and dates belong in this section.
Always have a professional lawyer look over your contract prior to having them signed by your client, and then file them with your lawyer for safe recordkeeping.
Creating your own contracts takes a lot of time. Our free contract extension agreement template can be downloaded as a PDF or Word document.
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Frequently Asked Questions
An agreement that liquidates a contractor’s liability to a subcontractor in construction allows the contractor to assume the subcontractor’s claims for payment from the owner only to the extent that the contractor is able to recover those claims. As part of the contract, the contractor agrees to act in good faith and to make all reasonable efforts to recover the monies due from the owner. Liquidating agreements can be a part of the contract or a separate contract between the general contractor and the subcontractor.
Businesses must not only figure out who is responsible when things go wrong but also determine how they are going to hold those parties accountable. If the party who caused the issue does not have a direct contractual responsibility to the party who suffered from the issue, that can impede a recovery that is otherwise justified.
You and your partners can settle things fairly with a Free Liquidation Agreement template. If you wish to end a business partnership, use the structured Liquidation Agreement document.