By: Alexander A. Miuccio Published: March 2015

Contractor Justified in Stopping Work for Nonpayment

The majority of cases concerning abandonment of work on a project is because of a dispute over nonpayment. A contractor or a subcontractor has the right to stop work for nonpayment if there is a significant delay in making progress payments. Recovery may be denied, however, where the contractor fails to comply with the provision in a contract requiring that the contractor give written notice of its intention to cease performing work on the jobsite

In the recent case of U.W. Marx, Inc. v Koko Contracting, Inc., the court addressed the question of whether a subcontractor is precluded from recovery because it stopped work on the project without complying with the contractual provision regarding notice of its suspension of work for nonpayment.

Background

U.W. Marx, Inc. was the general contractor on a school construction project. Marx entered into a subcontract with Koko Contracting, Inc. for the roofing work. The contract contained the following provision:

"If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to any other available remedies, upon seven additional days' written notice to the Contractor, stop the [w]ork of this Subcontract until payment of the amount owing has been received. The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor's reasonable costs of demobilization, delay and remobilization."

During the project, Koko remained unpaid for three months despite repeated demands for payment. On October 31, 2007, Koko ceased work on the jobsite. On November 3, 2007, Marx sent a letter to Koko giving it three days’ notice to cure its default in, among other things, failing to staff the job. Three days later, Koko belatedly provided Marx with the contractually required seven days’ written notice of its suspension of work based on nonpayment. Marx ultimately declared Koko in default, terminated the contract based on Koko’s removal of its workers and commenced a lawsuit to hold Koko liable for the claimed default. Koko countersued for the amounts which Marx failed to pay under the contract. After a trial, the court found that Marx’s justifications for withholding payment were unsupported, and that Koko was entitled to payment. Marx appealed.

Decision

On appeal, Marx did not argue that it was justified in withholding payment. Rather, Marx argued that the subcontractor was precluded from recovering on its counterclaim because it failed to give the required seven days’ written notice before removing its workers from the project. The court found that Koko indeed failed to comply with the written notice provision. However, in affirming the trial court’s judgment in favor of Koko, the appellate court held that Marx’s own breach of the contract by failing to make three successive progress payments without justification excused Koko’s strict compliance with the notice provision. As stated by the court, “Marx cannot preclude Koko from recovering for Marx’s material breach of the contract by relying on Koko's subsequent failure to comply with a clause that inures to Koko’s benefit.”

As for Marx’s argument that excusing Koko’s compliance with the notice provision based on its own failure to pay would render the notice provision meaningless, the court noted that the language of the notice provision is designed to protect the subcontractor and to compensate it if it has to stop work for nonpayment and then remobilize. In light of the language of the notice provision, however, the court held that Koko’s failure to comply would preclude it from recovering remobilization costs if it resumed work. Nevertheless, because of Marx’s own breach of contract for nonpayment, Marx could not use Koko’s failure to give written notice as a shield to insulate itself from the effects of Marx’s breach of contract.

Comment

The court in this case applied well settled case law to find that Marx’s prior breach of the contract excused Koko from compliance with the notice of suspension of work provisions of the contract.

While no subcontractor can tolerate continuing to work in the absence of payment, the subcontractor would be well advised to nevertheless follow the contractual notice provisions—and be certain that there is no justification for withholding payment before removing its workers from the jobsite. Only then will the court find, as in this case, that the subcontractor was justified in removing its workers from the jobsite for nonpayment.  

  

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