Background
A.J. Pegno Construction Corp. and Tully Construction Co., Inc. formed a joint venture (the joint venture defendants) and won a City of New York Department of Environmental Protection contract for work at the Newtown Creek Water Pollution Control Plant in Queens. They hired WDF, Inc. as a subcontractor. When the project suffered significant delays, the joint venture defendants brought a claim against the City for delay damages and increased costs.
To coordinate the joint-venture and subcontractor claims against the City, the parties executed a liquidating agreement. That agreement provided, among other things, that the joint venture defendants would prosecute WDF’s delay claim against the City; required both sides to cooperate and share information; set a formula for splitting litigation costs and any recovery; and contained a mutual release of claims arising from “their obligations with respect to the project and their performance of those obligations.”
After the joint venture settled with the City and distributed the recovered amounts under the liquidating agreement, WDF sued the joint venture defendants for breach of the liquidating agreement and breach of the implied covenant of good faith and fair dealing—alleging that the joint venture had improperly calculated claim values, inflated its own damages, and denied WDF the cooperation and information-sharing to which it was entitled. The joint venture defendants counterclaimed, arguing the release barred WDF’s claims. Both sides moved for summary judgment. The Supreme Court, Queens County (Taylor, J.) denied both motions, and both sides appealed.
The Court’s Holding
The Second Department affirmed both orders denying summary judgment, deciding two companion appeals on the same day. On WDF’s appeal (Docket 2022-03700), the court held that WDF failed to establish as a matter of law that the joint venture defendants’ cooperation obligations extended to sharing information necessary for WDF to review the joint venture’s own claim valuations, costs, and disbursement methods. The liquidating agreement’s cooperation provisions were ambiguous as to this scope, and the joint venture defendants raised triable factual issues about whether they had adequately disclosed what the agreement required. WDF also failed to demonstrate prima facie that the joint venture’s claim calculations were improper.
On the joint venture defendants’ appeal (Docket 2022-03701), the court held that the release itself was ambiguous. While the release’s plain language covered claims arising from the parties’ performance of project obligations, it was ambiguous as to whether it also reached claims arising from the post-execution settlement of the City litigation, claims arising from the liquidating agreement itself, or claims that accrued after the release’s execution. Because the release’s reach as to these categories was unclear, the joint venture defendants could not establish on summary judgment that the release barred WDF’s claims. The implied-covenant claim also survived because the defendants failed to show the joint venture’s claim valuation methodology was appropriate.
Key Takeaways
- A release in a construction liquidating agreement that covers claims arising from “obligations with respect to the project” may be ambiguous as to whether it bars post-execution claims arising from the subsequent settlement of pass-through claims against the project owner—a question of fact requiring trial.
- Liquidating agreements should expressly define the scope of mutual releases—particularly whether the release extends to how settlement proceeds are calculated, allocated, and distributed—to avoid later disputes about ambiguity.
- Cooperation and information-sharing obligations in liquidating agreements should specify whether the duty to share information extends beyond prosecuting the pass-through claim to include disclosing claim valuation methodologies and cost calculations after settlement.
- A subcontractor’s claim that the general contractor/joint venture inflated its own damages in a pass-through claim—reducing the subcontractor’s recovery—can constitute a breach of the implied covenant of good faith and fair dealing if the liquidating agreement gave the subcontractor an expectation of accurate valuation.
Why It Matters
Liquidating agreements—contracts in which a general contractor prosecutes a subcontractor’s delay or impact claims against a project owner in exchange for sharing the recovery—are common in large New York public construction projects, particularly at agencies like DEP, DDC, and MTA. This pair of decisions highlights the significant ambiguity risk these agreements carry when their release and cooperation provisions are not carefully drafted to address what happens after the pass-through claim settles.
For New York construction lawyers drafting or litigating liquidating agreements, the key lesson is specificity: the release scope must address the settlement phase, not just the prosecution phase, of pass-through claims. Absent clear language, courts will find ambiguity, and summary judgment will be unavailable to either party. The decisions also illustrate that implied-covenant claims can survive alongside breach-of-contract claims where a subcontractor alleges the general contractor manipulated the claim valuation process to its own advantage—an issue that can arise in virtually any public-works liquidating agreement in New York.