Subcontractor Not Entitled to Payment after it Refused to Perform Disputed Work

Construction and Procurement Law News, Q4 2015

Client Alert

In yet another case from Massachusetts, the Massachusetts Appeals Court in Acme Abatement Contractor, Inc. v. S&R Corp. found that a general contractor was justified in not paying its subcontractor, even after the subcontractor had performed the majority of its work, because of the subcontractor’s refusal to perform work that it believed fell outside of its scope of work.

The case involved a public project in which S&R Corporation (“S&R”) was awarded a prime demolition contract by the Town of Weymouth (the “Town”). Part of S&R’s scope of work involved the demolition of bleachers at an athletic field. S&R subcontracted the asbestos abatement work to Acme Abatement Contractor, Inc. (“Acme”). Part of Acme’s scope of work included removing paint containing asbestos from the bleachers prior to demolition. After Acme commenced work, it informed S&R that it would not remove the paint from the bleacher risers because it believed that its subcontract only required it to remove materials containing asbestos. Because the paint on the risers did not contain asbestos, Acme believed the work fell outside of its scope. S&R disagreed, taking the position that removing the paint from the risers fell within Acme’s scope of work because the subcontract was based on the assumption that the riser paint contained asbestos. S&R directed Acme to complete the work under protest and to later litigate whether the work was within its scope.

Acme performed all of its obligations under the subcontract except removal of the riser paint. Acme then left the project. In an attempt to avoid falling behind schedule, S&R hired a substitute contractor to remove the riser paint. Although Acme had completed all of what it considered to be its work under the subcontract prior to abandonment (but only 2/3 of the work if its belief was wrong), S&R refused to pay Acme anything, on the basis that Acme had materially breached its subcontract by refusing to remove the riser paint.

In Acme’s ensuing lawsuit, S&R won in the trial court, on the basis that the subcontract required Acme to remove the riser paint, the subcontract required Acme to perform the disputed work under protest, and its failure to do so was a material breach of the subcontract. Acme could not recover for the work it performed under the theory of quantum meruit because it did not substantially complete its subcontract obligations.

The Massachusetts Appeals Court agreed. Instead of addressing Acme’s arguments regarding its scope of work, the Appeals Court held that Acme breached the subcontract by not performing the disputed work as required by the subcontract. The subcontract provision that Acme violated stated:

In the event of any dispute, controversy or claim between [S&R] and [Acme], [Acme] agrees to proceed with the Work or extra work without delay and without regard to such dispute, controversy, claim or the tendency (sic) of any proceeding in relation to the same. The failure of [Acme] to comply with the provisions of this paragraph shall constitute a material breach of this agreement…

Because Acme admitted that it refused to comply with S&R’s direction to remove the paint from the risers, the Court found that it violated this provision and materially breached the Subcontract.

Acme argued that, even if it breached the subcontract, it was still entitled to payment in equity for having substantially performed the requirements of its subcontract. The Appeals Court disagreed, explaining that recovery under the theory of quantum meruit is appropriate when “there is an honest intention to go by the contract, and a substantive execution of it, but some comparatively slight deviations as to some particulars provided for.” Acme, however, intentionally failed to comply with the provision of its Subcontract that required it to perform immediately and argue later. By failing to comply, Acme “intentional[ly] depart[ed] from the contract in a material matter without justification or excuse…” The Appeals Court further found that the value of the disputed work, which Acme did not perform, consisted of up to one-third of Acme’s subcontract price. Accordingly, the Appeals Court held that Acme’s deviation from the subcontract was not slight and that Acme did not substantially perform under the terms of the subcontract. As a result, Acme was not entitled to be paid for the work it performed.

This case demonstrates the importance of the “directive power” in contracts, and of carefully evaluating a disputed directive. It is one thing to refuse to comply with a relatively minor item after substantially completing the work. It is very risky, however, to refuse to comply with a directive when there is a substantial issue as to the work, and the work itself is substantial. Legal counsel can advise whether the facts justify stopping work, abandoning the project, and, in some cases, betting the company