- Risky Business: Refusal to Proceed
- June 26, 2013 | Author: Alan S. Bishop
- Law Firm: Smith, Currie & Hancock LLP - San Francisco Office
Contractors and subcontractors are frequently expected to perform their scope of work even if the project schedule has suffered serious delays and critical information is late or not completely available. This expectation can be written into contracts in the provisions establishing the procedure for the resolution of disputes regarding extra work. Such provisions can require that the contractor or subcontractor follow directions to “perform the Work which the subcontractor claims will be Extra Work,” and “proceed diligently with the Work” while the payment dispute is still unresolved. Refusing to perform absent immediate compensation and schedule relief may be grounds for termination when the contract has such a provision.
New York: A Case Illustration
A well-intentioned, but perhaps misinformed, subcontractor learned about the enforceability of disputed work provisions in Mometal Structures, Inc. v. T.A. Ahern Contracting Corp., 2013 U.S. Dist. Lexis 27797 (E.D.N.Y. 2013). The subcontractor (Mometal) was tasked with fabricating and erecting the structural steel frame for a public school building in New York. Although the subcontractor had been verbally provided an estimated start date of October 2007, nine months past that date the site was still not ready for the steel frame. In addition, the delays had increased Mometal’s costs and the prime contractor did not respond to the Mometal’s repeated requests for design information necessary to proceed with fabrication of the structural steel.
While proceeding to order materials and complete its shop drawings, the frustrated subcontractor sent an ultimatum to the prime contractor stating that it would only proceed with the start of structural steel if seven demands were complied with. These demands included site availability by a date certain, approval of all shop drawings, modifications to the subcontract terms, and immediate agreement on compensation for the subcontractor’s delay costs and extra work to date. Importantly, the demand letter did not request compliance with the contract; the subcontractor’s demand letter expressly conditioned performance of on-site steel erection on these additional requirements which were not consistent with the terms of the contract. The subcontract was a standard AIA form subcontract agreement, which incorporated the terms of the prime contract. The prime contract contained a disputed work provision obligating the contractor to perform disputed extra work and proceed with the work notwithstanding a failure by the other party to comply with the contract.
The prime contractor responded to the subcontractor’s demands by first threatening to default terminate the subcontractor. The prime contractor asserted multiple breaches by the subcontractor, but most significantly for issuing demands seeking relief beyond the express terms of the subcontract and the contract documents and threatening to cease work on the project. The subcontractor did not withdraw its ultimatum, but advised the contractor it was ready to proceed if its conditions were met. The contractor then proceeded to default the subcontractor.
The court agreed with the subcontractor on all material facts, including the causes of the project delays, lack of timely design information and the failure to approve shop drawings. However, the court held that termination of the subcontractor was proper because the subcontractor demands constituted an anticipatory repudiation of the subcontract.
The court explained that the parties to an enforceable contract are obligated to proceed with the work of the contract under the terms of the contract. Having agreed to those subcontract terms, the subcontractor is not entitled to condition its performance on additional demands. Here, the subcontractor was required to continue performing the work at issue under protest by the disputed work provision of the prime contract that flowed down to the subcontract. The court found that the subcontractor’s demand letter was a clear and unequivocal refusal to perform unless the prime contractor agreed to modify the terms of the subcontract. Consequently, the subcontractor’s demand letter was an anticipatory repudiation of the contract, and thus a contractual breach. Ultimately, the subcontractor was held liable for the increased costs of completion of its subcontract work.
In its opinion, the court appeared somewhat sympathetic to the subcontractor but the case fell on a cold reading of the contract. Disputed work provisions are enforceable and a contracting party, in this case the subcontractor, is required to proceed with work despite disputes over extra work. The same is true between owners and prime contractors. The statement of the facts leaves the clear impression that Mometal had a viable basis to seek additional compensation, but it was also obligated to continue with the work despite any pending dispute regarding additional time or money.
Additionally, a contractor cannot threaten to cease performance based upon extra contractual conditions. If a party seeks justification to cease performance, it needs to read the full contract, including the prime contract if incorporated by a pass-through provision, and rely on conditions already in the contract. To do otherwise may subject a contractor to termination and paying the cost of completion by another contractor.