Work Now, Dispute Later
Who doesn’t like a good story? From time to time, I will attempt to teach our readers about risk management using case law. Most court cases start with a story. In the case of litigation involving construction projects, these stories can be quite familiar to us and relatable to our business.
In this month’s issue of Legal Bites, I share a story from a case about a subcontractor who refused to perform work until they received a written change order. Read on to learn how things turned out for both the subcontractor and general contractor.
The backstory
The case of McCarthy Concrete, Inc. v. Banton Construction Company stemmed from a large train station project in Rensselaer County, NY. Banton was the general contractor. McCarthy was a concrete subcontractor. The bid documents for the project required that concrete be poured. McCarthy’s subcontract excluded “concrete pumping”. However, after the project had already started, McCarthy was informed that the remaining concrete on the project had to be pumped (among other changes).
McCarthy informed Banton that the change from poured to pumped concrete would result in a price increase which Banton did not dispute. However, McCarthy and Banton could not agree on the amount of the price increase. Banton issued a 72-hour notice to McCarthy stating that if McCarthy failed to commence the extra work within the 72 hours, Banton would terminate McCarthy for default. McCarthy refused to proceed with the extra work as directed by Banton without an executed change order. As a result, Banton terminated McCarthy’s contract and retained another concrete sub to complete McCarthy’s scope of work.
Here comes the lawsuit
McCarthy sued Banton for additional compensation, including retainage, and claimed that they had been wrongfully terminated by Banton. Banton asserted a counterclaim against McCarthy for breach of contract and recovery of the costs they incurred completing McCarthy’s work.
The trial court ruled in favor of McCarthy on the basis that the increase in McCarthy’s costs as a result of the change in concrete placement on the project was material. The trial court also dismissed Banton’s counterclaim. Unsurprisingly, Banton was unhappy with these results, so they appealed.
Focusing on the following language of the contract between McCarthy and Banton (which is commonly found in most construction contracts), the appellate court reversed the trial court’s decision.
“[p]ending resolution of any claim, dispute or other controversy, nothing shall excuse [McCarthy] from proceeding with the prosecution of the [w]ork.”
The court held that when McCarthy refused to do the extra work once Banton directed them do to it, McCarthy breached the contract and Banton was in the right to terminate them. The court said in its opinion:
“[McCarthy’s] refusal to perform the changed work without an express agreement as to increased costs has the effect of holding Banton hostage [because] the work, which was part of a much larger project, was stalled.”
So, the court held this way in the interest of economy. Delays are costly and it makes little sense to hold up an entire job fighting over the value of a change order.
The court also granted Banton’s counterclaim, allowing Banton to set off its completion costs against the subcontract retainage due to McCarthy.
Key takeaway
The key takeaway from this case for general contractors and subcontractors alike is that contract language requiring continuation of the work while disputes are resolved means just that. The best practice is to proceed with the work and maintain the right to pursue claims later, if necessary. In other words, work now and dispute later.