Contractor’s Repeated Material Breach Excuses Subcontractor From Further Performance

Construction and Procurement Law News, Q2 2015

Client Alert

The Appellate Division of the Supreme Court of New York in U.W. Marx, Inc. v. Koko Contracting, Inc. affirmed judgment in favor of a subcontractor, holding that the general contractor’s failure to make three successive progress payments to the subcontractor resulted in a material breach, thereby relieving the subcontractor from performing its remaining work under the contract.

This case involved a school construction project in which U.W. Marx, Inc., the general contractor, subcontracted with Koko Contracting, Inc. for roofing work. Despite repeated demands for payment, Marx failed to pay Koko for three months of work. As a result, Koko stopped performance and left the site. Koko’s abrupt work stoppage potentially violated a subcontract provision requiring it to give seven days notice of any suspension of work based on nonpayment. The relevant subcontract provision stated:

“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 … upon seven additional days’ written notice to the Contractor, stop the [w]ork 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.”

After Koko left the site, Marx sent Koko a notice to cure, demanding Koko cure its failure to provide workers on site within three days. Koko responded three days later, by providing its seven days’ notice of its suspension of work based on nonpayment. Marx subsequently declared Koko to be in default, terminated Koko’s right to proceed under the subcontract, and sued Koko for damages for its alleged breach of contract based on Koko’s removal of workers.

Although Koko violated the subcontract by providing notice of its intent to suspend work after it had already stopped working, the Supreme Court of New York (New York’s trial courts) found that Marx’s reasons for withholding the three progress payments were “unsubstantiated and unjustified.” As such, the Supreme Court held and the Appellate Division confirmed that “Marx had materially breached the contract and that Marx’s prior breach was an uncured failure of performance that relieved Koko from performing its remaining obligations under the contract.” Thus, Koko’s failure to give notice prior to ceasing performance was not a bar to Koko’s recovery, and the Appellate Division upheld the Supreme Court’s judgment in favor of Koko. In short, Koko’s subsequent breach was excused by the prior material breach by Marx.

Under the facts in U.W. Marx, the subcontractor’s decision to stop work did not cause it to incur any negative repercussions. However, the decision to proceed with a work stoppage should only be done after careful consideration, because an improper stoppage could result in damaging consequences, such as a termination for default. Contact legal counsel prior to stopping work to thoroughly consider the basis for and the potential consequences of making such a decision.