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A prime contractor failed to timely submit subcontractor change orders to the project owner, thereby depriving subcontractor of compensation for additional work. This constituted a bad faith breach of the prime contractor’s duty to the subcontractor. This entitled the subcontractor to recover directly from the prime contractor for the additional costs it might have recovered if the claim had been timely presented to the government agency. It also entitled recovery for penalties under the prompt payment act. Alonso v. Westcoast Corp., 920 F.3d 878 (5th Cir. 2019).

The prime contractor was found by the jury to have committed a bad-faith breach of contract – apparently because Westcoast failed to submit change orders promptly, which prevented [the subcontractor] from being compensated for additional work it had performed on the project. The jury also found that Westcoast failed to make prompt payments to the subcontractor under the change orders it did submit.” Testimony for the subcontractor was that the prime breached the contract by: “not obtaining change orders, not providing workable plans and specifications, and not providing access to the [U.S. Army Corps of Engineers].”

There was also testimony that “Wescoast falsely informed [subcontractor] in writing that the change orders were approved and told RCS to resume work on the project when the Corps had not yet approved the change orders.”

The court explains that several interruptions slowed completion of the subcontractor’s work and increased the cost of the project. At some point the subcontractor stopped its work without completing its final “punch list.”

In defending against the subcontractor claim, the prime argued that the subcontractor breached the subcontract by not completing its work and by claiming delay damages not allowable under the contract. The court rejected those arguments for both procedural and substantive reasons and found that the prime contractor’s breaches were substantial. In contrast, it found there had been no substantial breach by the subcontractor since the prime’s breaches caused the subcontractor’s refusal to complete the final duties under the contract.

With regard to the transmittal of the subcontractor claims to the government, the decision notes that the prime contractor asserts that there was uncontroverted evidence at trial that any claims from the subcontractor were promptly transmitted to the government for consideration. Apparently, the jury rejected that evidence, and the court didn’t explain this further other than to say that there was sufficient evidence from which the jury could reasonably conclude that Westcoast breached the contract in bad faith.

Comment: This case demonstrates the importance of fulfilling a prime contractor’s obligation to timely submit subcontractor change order requests to the project owner.   Failure to do so can result in forfeiture of the right to have the owner (the government in this case) consider the merits of the change order requests. If that happens, and the subcontractor claim against the government or owner is essentially forfeited, the subcontractor’s only remaining recourse is against the prime contractor who failed to honor its contractual obligation to timely submit the subcontractor changes orders or claims.

 

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 ConstructionRisk 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. 21, No. 8 (Sep 2019).

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