This Wisdom of the Crowd, compiled from questions and responses posted on the New to In-house Law eGroup,* addresses an employer issuing a termination notice for breach of contract based on subcontractors failure to meet construction schedules.
*(Permission was received from the ACC members quoted below prior to publishing their eGroup Comments in this Wisdom of the Crowd resource.)
Question:
For one of our real estate developments (single luxury home), we have over the last six months experienced a problem with our concrete trades:
Work has not commenced in two garages, basement walk-out, and basement outdoor storage room. Workmanship is not per architect's plan/municipal code in outdoor lounge, balcony, screen porch and side porch and there are minor deficiencies throughout basement.
Trades refused to return to rectify problems until we pay and invoiced us for 90% work (which is not possible due to amount of non-performance and deficiencies).
Contract stipulates progress payments: 40% porches, 40% basement, 20% garages. None of these have been completed or performed to workmanlike quality (ie not complying with architect plan/municipal code). Therefore, we have not paid any amount.
Due to construction schedules, we need to terminate this contract and hire a new trade to fix and finish the concrete work.
However, we do not know what the actual compensation should be. My boss wants to pay = contract price minus (–) cost of hiring new trade, while preserving right to claim damages if there are further losses. (I don't think this is the correct method of quantifying existing work as new trades is motivated to charge higher and does not experience economies of scale that existing trade did. I think the correct way is to hire an assessor to determine what compensation should be. But that will take time.)
May we issue a termination notice for breach of contract (we think we have strong grounds) and mention in it that we will separately address compensation in another letter? Perhaps in the separate letter, we may mention my boss' proposal for return acceptance. And if there is a further dispute over compensation, then we hire the assessor. Or must we know the compensation amount before issuing termination letter?
Wisdom of the Crowd:
Response # 1: I work for a General Contractor (GC) and unfortunately terminating non-performing subcontractors is a regular occurrence. If you have provided the contractually required notice, then I would terminate them if there is no way to salvage the relationship. As a practice, if we terminate a subcontractor for cause, we simply hold all payment to the terminated sub pending the completion of that subcontractor's scope of work.
I agree with your boss in terms of what the appropriate damages are. All of our subcontracts are explicit in the termination section that the GC is entitled to recover as damages the delta between the open value of the subcontract and what the GC is forced to pay to the replacement subcontractor to complete the work. We also reserve our right to recover all of our additional costs, including markup on the replacement subcontractor for overhead & profit, plus legal fees, etc.The fact that the replacement subcontractor will charge you more because of (a) the compressed construction schedule and (b) smelling blood in the water is not your problem. If the original subcontractor had adequately preformed you would not have been forced to pay a premium by going to a replacement subcontractor.1Response # 2: I'm also with a GC, and agree with your boss on damages. I tell our folks to factor damages as contract price minus cost of completing the project with a new subcontractor. This includes actual costs, such as materials and labor, plus delay costs. Your subcontractor agreement should specifically outline your damage rights, or at least give an explanation of what is possible.I would also mention that you should, if available, put the subcontractor's bonding company/liability insurance on notice of your claim, and the termination. You'll likely have to make a claim against the performance bond in order to get whole.2Response # 3: Could you provide your "delta" damages language? I think it is a good idea to put this explicitly in contracts.3Response # 4:1. Almost every construction contract I've seen has a methodology akin to what your boss wants, as well as frequently the right not to pay until rework is completed.2. With respect to concrete work that doesn't meet plan or code, the cost to repair it may be excessive if it requires demolition work and additional inspections, not to mention delays.My recommendation to your boss would be to pay nothing until the rework is completed and accepted.4Response # 5: As for timing and a damages claim, it looks like this is going to be long and drawn out. I would just send them a termination letter and hang on to your money. If they threaten to sue, then offer them something.5Response # 6: From what I understand in your post, it seems like they have completed work on the porches, though you believe the work to be defective? This would be my main focus of concern. If work has been completed and this portion of the progress payment has been facially triggered, your refusal to pay this portion may put your client at risk of breaching the agreement and justify the contractor's refusal to preform further, thereby putting you in the defendant's seat of a breach action. Any refusal to pay this portion and substantiate an anticipatory repudiation termination would rely on the contractor's performance of the porches portion of the agreement being found to be materially defective. This can be difficult to prove, but if you have objective standards like building codes that are objectively not met by their work, you may be more confident in classifying the defects as materially defective. It's an exposure you should be fully aware of though and perhaps look into the precedent in your jurisdiction. Defective performance in installment construction contracts is a pretty common issue and there should be sufficient precedent to inform your treatment of this instance.However, if confident in the material nature of the defects/breach, you would be dealing with the anticipatory repudiation, which is an action for total breach- find a suitable contractor to complete performance and the payment to the original contractor would likely be restitution minus any cover for additional costs incurred due to securing the new contractor. It is hard to say what they would be entitled to without that last piece of the puzzle. Explaining how this would play out may help in getting them to settle for a pro-rated value of the original contract in a rescission agreement, especially if you have an idea of cover costs.6
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1Alexander Meszaros, Senior Staff Attorney, Conti Enterprises, New Jersey (Employment & Labor Law, December 20, 2016).
2Jeffrey Taylor, Corporate Counsel, Duit Holdings, Inc., Oklahoma (Employment & Labor Law, December 20, 2016).
3Elizabeth Goldstein, VP & General Counsel, Tranlin Inc., Pennsylvania (Employment & Labor Law, December 21, 2016).
4Michael Kimball, Chief Legal Officer, Krux Digital, Inc., California (Employment & Labor Law, December 20, 2016).
5Timothy Farrell, Corporate Counsel, MBI Health Services, LLC, Washington D.C. (Employment & Labor Law, December 20, 2016).
6Larry Lambert, Associate General Counsel, Missouri Employers Mutual Insurance, Missouri (Employment & Labor Law, December 20, 2016).
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