Appellate Court Enforces Constructive Change Directive Provision, Grants Win To Otherwise Breaching Contractor

Construction projects are often expensive undertakings, with the expense increasing with the duration of the project. For that reason, owners and upstream contractors do whatever they can to stave off delays. One way they can stave off such delays is to include a provision requiring downstream contractors involved in a change order dispute to continue working pending the resolution of the dispute. An appellate court, in the recent case of McCarthy Concrete, Inc. v Banton Construction Co., reminded us that the violation of this type of provision constitutes an independent breach of the contract, and supports the imposition of liability the same as a breach of any other substantive provision of the contract.

Background

In the early 2010s, Amtrak undertook to expand its Empire Corridor trackage between its Albany-Rensselaer and Schenectady train stations by adding a fourth track. In April of 2014, Amtrak hired Middlesex Corp. as its general contractor which, in turn, retained Banton Construction Company to perform a specified scope of work in connection with the project. In October of 2014, Banton hired McCarthy Concrete to complete the concrete work for the platform extensions. This work included the structural concrete for the pile caps and inspection pits, and the concrete overlay for the platforms. The lump sum subcontract had certain enumerated exclusions, including concrete pumping and tactile work, and included unit pricing for the actual quantity of concrete used. As to claimed changes, the subcontract also contained a provision requiring McCarthy to “immediately perform the work as changed without delay”, and “pending resolution of any claim, dispute or other controversy, nothing shall excuse McCarthy from proceeding with prosecution of the work”.

In the summer of 2015, Amtrak ordered a suspension of the project, and Banton directed McCarthy to demobilize. Banton and McCarthy worked to resolve some then-outstanding payment issues, which ultimately resulted in a lawsuit in Connecticut. That lawsuit was settled with the understanding that Banton would pay certain of McCarthy’s claims, and McCarthy would return to work when Amtrak lifted the suspension. As a part of the resumption of work, Amtrak changed the plans which, as far as McCarthy was concerned, included the use of concrete pumping and the installation of tactile warning strips. Banton requested proposals for the changed work from McCarthy, and the proposals ultimately provided by McCarthy were not acceptable to Banton. In September of 2016, Banton directed McCarthy to return to work, stating that it was “willing to fund the alleged added costs for concrete pumping and added reinforcing, under a reservation of rights”. Banton also warned McCarthy that if it did not return to work, it would terminate McCarthy and retain a completion contractor. Ultimately, McCarthy never returned to the job, citing the lack of assurances of payment for the new work. Banton followed through on the termination and the hiring of a replacement contractor.

McCarthy sued Banton for some unpaid rebar left at the site, and to recover its unpaid retainage. Importantly, McCarthy also sued for its lost profits; the money it claimed it would have made but for the allegedly improper termination of its contract. Banton asserted a counterclaim, alleging that McCarthy breached the subcontract by failing to return to the job on account of the payment dispute, in violation of the subcontract’s work directive provision. The matter was tried to a judge, who decided in favor of McCarthy on its principal claim. The trial court awarded McCarthy a judgment in the total amount of $92,582.98, which was the value of the unpaid rebar, the retainage, and $28,500 in lost profits. Banton appealed, arguing that McCarthy’s breach of the contract by failing to return to the site, where the contract language required continued performance despite the existence of a payment dispute, excused it from having to pay McCarthy (or, at a bare minimum, was an offset against McCarthy’s claim).

Decision

While the trial court gave short shrift to the “continue working” provision, the appellate court found that the breach of this provision required reversal. The appellate court specifically noted that as “plaintiff had agreed, pursuant to the subcontract, to continue the work while pursing dispute resolution, its failure to perform the work amounted to a breach of the subcontract. Thus, we disagree with Supreme Court that Banton breached the contract based upon terminating the subcontract when plaintiff refused to perform absent an express agreement as to costs for the increased work. * * * Rather, we find that plaintiff breached the subcontract by refusing to perform the work as it was required to do under the subcontract and, as such, grant Banton's counterclaim for breach of contract.” In doing so, the appellate court held that Banton was entitled to an affirmative recovery of $61,986.22 from McCarthy, which was Banton’s $106,068.22 cost to retain the replacement contractor, minus only the $44,081.93 in retainage owed to McCarthy; the appellate court held that McCarthy was not entitled to lost profits since it, not Banton, breached the contract (and also held that McCarthy had previously released the claim for the rebar).

Comment

This case is a reminder that those who live in glass houses should not throw stones; or, in the context of a breach of contract lawsuit, that the plaintiff must not first be in breach of contract itself. While, often, the withholding of work is the only leverage that an unpaid contractor has to ensure full payment, in the face of a prior agreement to continue working notwithstanding the existence of such a payment dispute, the tactic has been analogized to hostage taking—including by the appellate court here, noting that “Plaintiff's refusal to perform the changed work without an express agreement as to increased costs had the effect of holding Banton hostage in that the work”. Accordingly, contractors would be well advised to consult with experienced construction counsel to determine what remedies they truly have, and what actions will only grasp defeat from the jaws of victory.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100