N.Y APPELLATE COURT SUPPORTS SUBCONTRACTOR "WALKING OFF" FOR NON-PAYMENT

A recent New York appellate court decision took up the age-old question of whether a subcontractor can, with impunity, safely walk off a project when payments are not forthcoming. This has never been an easy issue.

For a number of reasons, the conventional wisdom has been to avoid the complete suspension of services. As a result, subcontractors will often reduce manpower as a clear message, but keep some labor on-site to avoid the appearance (and risk) of abandonment.

Conversely, there is no obligation to continue to work without compensation, as a failure of payment is a material breach by the contractor or owner, excusing continued performance by the subcontractor.

It sounds easy in theory, but, given the dire consequences that could result from a subcontractor’s proceeding to "go nuclear," careful thought is required. Once having left the project and having been replaced by another company whose costs will, almost certainly, exceed the cost to complete for the original subcontractor that walked off the job, the stakes can rise quickly and significantly. So what to do – dig a deeper hole or stop the hemorrhaging? In this case, the appellate court, refreshingly, sided with the subcontractor. Furthermore, it did so even though the subcontractor had clearly not acted properly in giving required notices to the general contractor under the subcontract of its intention to cease performance.

The facts were as follows: a general contractor on a school construction project entered into a subcontract with a roofer. After not being paid for three months, despite repeated demands for payments, the roofer ceased performing any further work. In turn, the general contractor gave the roofer three days’ notice to cure its alleged default of, among other things, failure to provide workers on the job. Unfortunately, the roofer was late in providing the general contractor with the required seven days’ notice of its intent to suspend work for non-payment under Section 4.7.1 of the standard AIA subcontract form. The general contractor declared the roofer in default and terminated the subcontract based on abandonment by the roofer.

At trial, the lower court was clearly sympathetic with the unpaid subcontractor. Furthermore it found the general contractor’s testimony to be "conclusory" and "unsupported by documentary evidence." It determined that the general contractor’s failure to pay was a material breach of the contract, thereby excusing the roofer’s suspension of services

On appeal, the general contractor had little choice but to acknowledge that it materially breached the contract well before the last day the roofer’s forces were on the job. Instead, it argued that the roofer was precluded from recovery because it suspended its work on the project without complying with the above described provisions of the AIA subcontract. This Section 4.7.1 states: "if the contractor does not pay the subcontractor through no fault of the subcontractor, within seven days from the time payment should have been made as provided in the subcontract, the subcontractor may, without prejudice to any other available remedies, upon seven additional days’ written notice to the contractor, stop the work of the subcontract until payment of the amount owing has been received. The subcontract provided it would be "increased" by the amount of the subcontractors’ "reasonable cost of demobilization, delay and remobilization." The roofer, as indicated, was not in compliance with this notice provision.

The appellate court agreed with the trial court which had found that the general contractor’s failure to pay excused the subcontractor with having to comply with the notice provisions of AIA Section 4.7.1. As the appellate court correctly reasoned, the general contractor cannot preclude a subcontractor from recovering for the general contractor’s material breach of the contract by relying on the subcontractor’s subsequent failure to comply with a notice provision that, essentially, was contained in the AIA form for the benefit of the subcontractor. Ironically, it held that the clause had actually been designed to protect the subcontractor by enabling it to be fully compensated in the event it had to stop work and then remobilize. The subcontractor’s failure to comply with the clause would preclude it from recovering remobilization costs in the event it resumed work. However, that was not the same as the subcontractor not being entitled to be paid for three months of work which had been duly earned and approved.

Furthermore, as the appellate court pointed out, the subcontractor put itself at great risk since, if the court had determined that the general contractor’s nonpayment did not breach the contract, a work stoppage without compliance with the notice provision of the contract would then be considered a breach of contract leaving the subcontractor fully liable for all damages.

G&C COMMENTARY

This appellate case is noteworthy for a number of reasons.

  1. It reinforced the established (albeit risky, as the court acknowledged) rule of law that a subcontractor can withdraw in response to a clear material breech by an owner or contractor for nonpayment.
  2. In this age of "notice" hyper-enforcement, it was gratifying to see the appellate court apply common sense and look beyond subcontractor’s technical lack of notice to the general contractor.
  3. For those of you who are regular readers of this column, you will recall our recent discussion about the "new" Prompt Payment Act. It contains a "safe harbor" to enable subcontractors to suspend performance for nonpayment, after twelve days’ notice by a subcontractor. See General Business Law §756-b which sets forth a procedure by which a subcontractor may suspend performance for nonpayment without being considered in breach of contract. The AIA form in this case and the new provisions of the Prompt Payment Act are quite similar. The risk in both remains as to whether the amount unpaid was approved or not.
  4. In addition, it was clear that the appellate court had little use for the general contactor’s transparently pre-textual excuses for nonpayment. Paper-work-driven parties can always allege "reasons" for nonpayment. But in the harsh lights of a courtroom, these excuses better "add up," or the fortitude of the subcontractor which took the risk of suspension will be rewarded, Prompt Payment Act or not.
  5. Finally, so what do we advise? Certainly, you must have a clear, well documented, well established entitlement to the unpaid funds. The work must have been approved, and, yes, you will need the careful advice of counsel weighing the unique factors in each particular instance. However, you can protect your interests, you can stop the hemorrhaging, and you can go on the offensive to collect all of your receivables outstanding. So get up, dust yourself off, and get that money that is due you.

Henry L. Goldberg may be contacted by email, hlgoldberg@goldbergconnolly.com or by telephone, 516-764-2800.

©Goldberg & Connolly 2015

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