Contractors and subcontractors have the right to stop work for nonpayment under the contract. The right to abandon the project for nonpayment is not an absolute right, however. Where a contractor is legally justified in stopping the work depends upon the circumstances.
The factors in deciding whether to stop work are: (1) the amount of the overdue payment; (2) the length of time the payment is overdue; (3) whether there is any legal justification for withholding payment; (4) whether prior contractual notice is required; (5) the amount of work remaining to be performed; and (6) whether there are contract provisions that apply to the situation.
The recent case of Kleinberg Electric, Inc., v E-J Electric Installation Co. demonstrates the pitfalls of stopping work for nonpayment.
Kleinberg Electric was a subcontractor to E-J Electric Installation Co., the general contractor on a project for the New York City Department of Environmental Protection in Queens. The subcontract provided that the owner was the arbiter as to the extent and value of work performed by Kleinberg, and that in the event of a dispute as to whether directed work was extra work or base contract work, Kleinberg was to perform the work promptly. The subcontract also provided that no change orders would be paid unless those change orders were approved in advance.
During the course of the project, Kleinberg was directed to perform certain work relating to the installation of certain cables and conduits. Kleinberg claimed that this was extra work and prepared a change order seeking to be paid for this work. E-J responded by advising Kleinberg that it was authorized to proceed with the work set forth on the change order, and noted that this work would allow Kleinberg to complete its contract work. E-J also required that all of the foregoing work be completed by a certain date. On the specified completion date, Kleinberg was only 50% complete with the claimed change order work. Accordingly, E-J advised Kleinberg that it would perform the remainder of that work with its own forces.
When Kleinberg requested that E-J execute the change order for the above work, E-J responded that no such change order would be forthcoming. Kleinberg then prepared an invoice to bill E-J for the actual work it performed relating to the claimed change order. At the same time, E-J directed Kleinberg to perform certain lighting work. Kleinberg prepared a change order for the work, which E-J refused to sign on the grounds that the work was base contract work.
The problems between E-J and Kleinberg continued to escalate when E-J provided Kleinberg with a list of incomplete work. Kleinberg claimed that these lists were punchlists, and that it was 99% complete with its scope of the work. E-J advised Kleinberg that its work was not complete, contrary to Kleinberg's claims. Kleinberg refused to return to the worksite, despite numerous notices from E-J that if it did not complete its work E-J would be forced to complete Kleinberg's work and back charge Kleinberg for the cost to complete. Ultimately, the owner determined that Kleinberg had completed only 73.49% of its work.
Kleinberg sued E-J to recover both the balance of its contract and the change order work. E-J counterclaimed to recover the cost of completing Kleinberg's work. At trial, Kleinberg argued that E-J breached the contract by failing to pay Kleinberg for the change order work, and that to the extent that there may have been outstanding work, it was justified in suspending performance based on E-J's nonpayment. E-J argued that the contract provided that Kleinberg could not suspend its work in the face of a dispute over an extra work claim, and that its walking off the job while disputing a change order claim was a material breach of the contract.
The trial court, after noting the general principle that an unpaid contractor may suspend performance when it remains unpaid, stated that the party seeking to suspend performance must nevertheless comport with standards of good faith and fair dealing. The court held that in light of the contractual language which required Kleinberg to continue to perform its work even where it disagreed with E-J as to whether certain work was contract work or extra work, its suspension of work constituted a material breach of the contract for which E-J was entitled to recover its cost to complete damages.
On appeal, the appellate court affirmed the lower court's decision, pointing out that the subcontract provides that time is of the essence, that Kleinberg's delay warrants termination, and that Kleinberg must perform the work even if the parties dispute that work's characterization. The court noted that Kleinberg repeatedly failed to perform and complete the work, despite E-J's repeated demands.
Contractors are cautioned to proceed carefully before deciding to stop work based on non-payment. While suspension of work may be justified in some circumstances, the contractor must be certain that it has complied with the work stoppage provisions of the contract or else its decision to "walk off the job" may constitute a breach of contract, exposing itself to liability for consequent completion costs.
About the author: Mr. Miuccio is a partner of the law firm of Welby, Brady & Greenblatt, LLP and General Counsel to the Construction Industry Council of Westchester & Hudson Valley, Inc. Gregory J. Spaun, a Partner with the firm, assisted with the preparation of this article.