By: Lester Gulitz Published: May 2015

Failure to Pay Subcontractor Relieves Subcontractor's Performance Of Its Remaining Obligations Under the Contract

A general contractor that expects to hold its subcontractor to the subcontractor’s obligations under the subcontract must be able to demonstrate that it complied with its own obligations under that contract.   Failure to show such compliance can relieve the subcontractor from its remaining obligations under the subcontract. 

In U.W. Marx, Inc. v. Koko Contracting, Inc. (124 AD3d 1121 [3d Dept 2015]), the general trade contractor did not pay its roofing subcontractor for three months, alleging that the subcontractor failed to provide all the necessary documentation required under the terms of the subcontract and a supplementary contract.  After not being paid for July, August and September, on October 31 the subcontractor removed its workers from the project site.  On November 3, the general contractor gave the subcontractor a three-day notice to cure its default. On November 6, the subcontractor belatedly gave the general contractor a seven-day notice of its suspension of work, based upon non-payment, under Section 4.7.1 of the contract.  Section 4.7.1 followed the AIA standard form, which provided:

“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 work 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.”

The general contractor sued the subcontractor for breach of contract based on its failure to perform its work.  The subcontractor commenced a separate suit against the general contractor and its payment bond surety, and the two actions were joined for trial. After that (non-jury) trial, the lower court found that the general contractor’s proffered reasons for withholding payment were unsubstantiated and unjustified and, therefore, the general contractor’s failure to pay was a material breach of the contract.  The general contractor and its bonding company appealed.

Conceding its material breach, the general contractor argued to the appellate court that the subcontractor was precluded from any recovery against the general contractor because the subcontractor suspended its work without complying with the provisions of section 4.7.1. of the contract.

The appellate court was not persuaded by the general contractor’s argument.  While it was clear that the subcontractor did not comply with section 4.7.1, the general contractor’s material breach, said the appellate court, was an uncured failure of performance that relieved the subcontractor from performing its remaining obligations under the contract.

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