In every construction contract, there exists an implied term that the owner will not obstruct or interfere with the work of the contractor. In the recent case of NYU Hospitals Center v HRH Construction, LLC, the owner terminated the contractor, claiming that it abandoned the project by failing to proceed with the work. The contractor countered that the owner breached the contract by failing to timely pay requisitions and by otherwise interfering with the contractor’s ability to perform the work.
In 2003, NYU retained HRH to renovate NYU’s radiology center. Pursuant to HRH’s contract, it was to submit payment applications on a monthly basis, which NYU was required to act upon within 12 days of receipt. If NYU disapproved a payment application, it was required to provide HRH with a written statement setting forth the items which were not approved. On the other hand, if the application were approved, the contract required payment to HRH within 30 days.
The project, which was phased in order to allow the hospital center to remain operational, encountered delays in 2004 and early 2005. During this same period, NYU failed to remit payments to HRH in a timely manner. In order to overcome these issues and allow the project to move forward, NYU and HRH entered into a Completion Agreement whereby NYU would pay HRH for four outstanding payment requisitions, and HRH would achieve substantial completion of Phases 0 and 1 by June 15, 2005. Substantial completion was ultimately achieved six days after the target date. The Completion Agreement further provided that after substantial completion of Phases 0 and 1 and prior to the start of the work on Phase 2, NYU and HRH were to “meet to negotiate and resolve remaining issues between them, including the schedule for completion of the remaining Work.”
After substantial completion was achieved on Phase 0 and 1, HRH requested the required meeting. However, it was not held. Rather, NYU suggested that HRH “submit something” to identify what it believed the issues were, which HRH did in the form of a change order requesting certain cost adjustments. NYU rejected HRH’s change order and contacted another general contractor, Bovis Lend Lease LMB, Inc., to replace HRH as its contractor. NYU gave Bovis permission to contact HRH’s subcontractors, which Bovis did. In response to the uncertainty caused by being contacted by what appeared to be (and ultimately was) a replacement general contractor, several of HRH’s subcontractors refused to perform any additional work for HRH. NYU terminated HRH’s contract and sued HRH for breach of contract. HRH counterclaimed, stating that NYU breached the contract. Because HRH filed for bankruptcy in September of 2009, the lawsuit was transferred to Bankruptcy Court where the trial was held.
At trial, NYU claimed that HRH abandoned the contract by failing to proceed with Phase 2 of the project. HRH responded that it was NYU that breached the contract by: (1) preventing it from fulfilling its contractual obligations by failing to meet to negotiate outstanding issues, and by failing to finalize a plan for Phase 2 of the project, all as required by the Completion Agreement; (2) failing to make required payments on approved payment requisitions; and (3) allowing Bovis to contact its subcontractors, thus causing them to fail to respond to HRH’s own demands for subcontract performance.
The District Court upheld the factual findings of the Bankruptcy Court holding that NYU both frustrated HRH’s ability to perform the work and itself breached the contract by failing to pay the approved requisitions in a timely manner—which, in turn, prevented HRH from paying its subcontractors. Equally important, the District Court affirmed the Bankruptcy Court’s finding that NYU prevented HRH from performing the work when NYU contacted Bovis and gave Bovis permission to contact HRH’s subcontractors regarding the assignment of their subcontracts. Consequently, the District Court affirmed that NYU interfered with HRH’s ability to perform and, therefore, could not seek to hold HRH in breach of contract for ultimately abandoning the project.
This case relies on a well settled principle of construction contract law that an owner cannot successfully claim that a contractor abandoned its contractual obligations where the owner itself first breached the contract by effectively interfering, disrupting and frustrating the contractor’s ability to perform and complete its work under the contract.