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In Re: Regional Building Sys., Inc. v. The Plan Comm., 320 F.3d 482 (4th Cir. 2003), a federal court held that under New York law, absent a contract term to the contrary, a subcontractor cannot recover delay damages from its general contractor when the general contractor is not responsible for the delay.

In the underlying dispute, a contractor entered into a contract with the owner of a tract of real property in Staten Island, New York to manufacture, deliver, and install modular housing units on the property. Shortly thereafter, the contractor subcontracted a portion of its work. Under the terms of the subcontract, the subcontractor was required to pick-up the contractor-built housing units from the contractor, transport the units to the project site, and then erect and complete the structures.

Several months into construction, however, the owner experienced financial difficulties and defaulted on a number of payments. Without these payments, the contractor experienced severe cash flow problems. As a result, the contractor could not meet its subcontract obligation to deliver the requisite number of housing units to the subcontractor.

The contractor suspended work under the subcontract, forcing the subcontractor to bear the expense of supporting idle labor and equipment. Almost a year and a half into the project, the owner ceased paying the contractor altogether. Finally, after the owner defaulted on two consecutive payments, the contractor suspended deliveries and thereafter terminated both its prime contract with the owner and its subcontract with the subcontractor.

The contractor then filed for bankruptcy, and the subcontractor brought claims before the bankruptcy court, seeking to recover not only payment for the work it had performed but also to recover certain other expenses, additional damages, delay damages, and interest. In the middle of the trial the contractor’s bankruptcy trustee agreed to pay the subcontractor $718,128.23, which reflected the undisputed portion of the subcontractor’s claim for work actually performed. As no agreement could be reached as to the remaining claims, however, the parties went to trial. In the end, the bankruptcy court held that the general contractor acted reasonably in suspending the work and ultimately terminating its contracts and that, while the subcontractor could recover a relatively nominal amount for its reimbursable expenses and additional damages, there would be no recovery of delay damages and interest.

The subcontractor appealed the bankruptcy court’s holding that it could not recover delay damages from the general contractor, arguing that the contractor’s financial difficulty did not excuse performance of the subcontract. The United States Court of Appeals for the Fourth Circuit disagreed, finding that under New York law, absent a contractual commitment to the contrary, a contractor cannot be held responsible for delay damages incurred by its subcontractors unless it caused or controlled the delay at issue. In short, unless there is a specific allocation of the risk of delay, a general contractor does not impliedly guarantee that its subcontractors will not be delayed by factors outside its control. Turning to the specific facts at issue, the court noted that the contractor’s suspension of work was caused by the owner’s failure to pay the contractor. As a result, the contractor was not responsible for the delays its subcontractor experienced and was not liable for the subcontractor’s delay damages.

Although the court in Regional Building Systems, Inc. applied principles of New York law, its holding reflects the general tendency of courts to leave the cost of a realized commercial risk where it lies in the absence of an express, agreed-upon allocation of that risk.

About the Author: Gerald I. Katz, Esq., KATZ & STONE, L.L.P., 8230 Leesburg Pike, Suite 600; Vienna, Virginia 22182; phone: 703.761.3000; e-mail: gkatz@katzandstone.com

ConstructionRisk.com Report, Vol. 5, No. 7 (Aug 2003)