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Demolition delays by others for whom the subcontractor was not responsible significantly impeded the subcontractor’s ability to timely perform its work.  Stored equipment and activity of other subcontractors prevented the subcontractor from accessing work areas.  And revisions to plans that were required as a result of design errors required removal and relocation of piping the subcontractor had previously installed.  Although the subcontract contained language stating that the subcontractor acknowledged it had inspected the site and assumed responsibility for completion of the work under the existing conditions, this did not mean it assumed the risk of conditions outside of its control that did not come into existence until after the contract was executed.  Termination of the subcontractor was found to be wrongful under the factual circumstances.  In addition, the termination was also procedurally defective because the subcontractor had been permitted to work at correcting alleged defects after the notice requirement period had elapsed, and the prime contractor failed to provide additional notice that the work continued to be inadequate.  The subsequent partial termination constituted a breach of contract.   Bast Hatfield, Inc. v. Joseph Wunderlich, 78 A.D.3d 1270, 910 N.Y.S.2d 256 (2010).

In this case the subcontract was for the performance of sitework.  The prime contractor was under contract with a developer to construct a Lowe’s Home Improvement store on land owned by the developer.  The prime contract called for the store to be substantially complete by a certain date, after which liquidated damages would be assessed.  The dates were expressly conditioned on timely demolition of several existing buildings on the site by the developer.  As of the date that the prime contract was to be signed, the dates for demolition had already passed and none of the buildings had yet been demolished.  Consequently, the developer and prime contractor executed a separate letter agreement (instead of changing the terms of the actual prime contract itself), providing that no liquidated damages would be assessed until 180 days after the buildings were demolished.

Two months after executing the prime contract and letter agreement modifying the liquidated damages, the contractor executed the sitework subcontract for removal of existing parking lots, and site grading, installation of storm drainage and sewer piping, and placement of underground utilities.  Demolition still had not occurred as of the date the subcontract was executed, and the subcontractor was given a copy of the letter agreement that tied the project completion dates to the dates of demolition.  A “time of the essence” clause in the subcontract required the “project” to be substantially complete by October 31, and further required the subcontractor to “coordinate its work so as to be completed by the date indicated on [prime contractor’s] schedule in support of the overall completion date.”

Due to failure of the developer to get the demolition of the existing store accomplished, the prime contractor was granted a change order extending the substantial completion date by several months.  Demolition work that was originally to have been done by April was not completed until  September – 5  months late.  Meanwhile, the subcontractor started its work in August, a month before the demolition work was completed.  The court does not explain how the subcontractor was able to perform site grading and utilities work before the demolition was completed.  In any event, the subcontractor was delayed in its performance and on October 17, the prime contractor gave a 48-hour written note per the subcontract that the work was inadequate and that a failure to provide additional manpower and equipment within 48 hours along with a plan showing that paving could begin by November 10 would result in termination.

In response to the notice, the subcontractor advised the prime it would get the work done and it proceeded to move forward.  A month later, the prime contractor partially terminated the subcontractor and filed suit seeking damages for default.  The subcontractor countersued for wrongful termination.   As the basis for the prime contractor’s assertion that the subcontractor was in default, it argued that the substantial completion date in the subcontract was not met and that the fact that the prime contractor’s own substantial completion date had been extended by letter agreement due to the late demolition did not apply to change the dates in the subcontract.

In analyzing this, the court held in favor of the subcontractor that the termination was wrongful based on a number of reasons.  First, the subcontract required the sub to comply with the prime contractor’s construction schedule.  Since that schedule had been extended, this meant the specified dates set forth in the subcontract would  also be extended.    Second, the sub was unable to complete the work more quickly because its performance was frustrated by obstacles attributable to the prime contractor and developer – all of which were beyond the subcontractor’s control.  As stated by the court:

“[GC] was properly held accountable insofar as [Subcontractor’s] performance was impeded by [Developer’s] delays. By entering into a contract that required [Sub] to comply with a schedule dependent upon [Developer’s] demolition, [GC] made an implied promise to {Sub] the demolition would be complete in time for [Sub] to perform under the subcontract. [Citation omitted]. We reject [GC’s] argument that [Sub] assumed the risk of delay. [Sub’s] contractual acknowledgement that it had inspected the site and assumed responsibility for completion of the work under the existing conditions cannot be construed to include conditions outside its control that did not come into existence until after the subcontract was executed.”

Even if there had been merit to the general contractor’s reasons for termination, the court found that procedurally the GC failed to follow the termination notice requirements and this resulted in the termination being wrongful regardless of any merits.  The court stated:

“More than a month passed between the date when [GC] sent the 48-hour notice that, pursuant to the subcontract, was a necessary predicate to cancellation and the date that [GC] partially terminated [Sub]. By [GC’s] own admission, some of the items set forth in the notice were incorrect, while [Sub] rectified the others, in whole or in part, during the following weeks. Under such conditions, the subcontract provides that the causes of cancellation set forth in the October notice were waived. By partially terminating [Sub] without additional notice that its work continued to be inadequate—or indeed, any other communication indicating that [Sub’s] performance was unsatisfactory—[GC’s] partial termination of [Sub] breached the subcontract.”

For these reasons, the court found in favor of the subcontractor.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 13, No.7  (July 2011).

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