The Importance of Strictly Complying with Default Provisions in Your Contract

Construction and Procurement Law News, Q4 2017

Firm Alert

Author(s)

Vast Construction, LLC v. CTC Contractors, LLC reminds contractors and subcontractors of the importance of strictly complying with the default provisions in the contract before deciding to terminate performance of the work for default. Failure to do so can have serious ramifications. Indeed, before terminating the performance of the work, we recommend that you check with your lawyer, who can advise regarding whether a termination is justified and the steps to take to effectuate a legally supported termination.

CTC Contractors, LLC (“CTC”) served as the general contractor for a project in Houston, Texas to construct a HVAC equipment supply store. CTC hired Vast Construction, LLC (“Vast”) to serve as the subcontractor to perform the concrete and asphalt paving, sewer, and storm sewer work on the project. The subcontract included a standard default termination clause which required notice of default and a ten (10) day opportunity to cure before either party could terminate performance of the work for the other party’s default.

The subcontract was silent regarding who was responsible for obtaining required permits. Initially, Vast obtained the excavation permit, the stormwater line system permit, and the sidewalk impairment permit. Vast applied for but was initially denied a lane closure permit by the City of Houston.

In February 2014, Vast, CTC, and the City were in discussions regarding the denied lane closure permit and the associated traffic management plan. At the same time, Vast submitted its first application for payment to CTC, which included a request for a mobilization payment. Vast was never paid on this first application for payment.

In late February, Vast began removing people from the project. Vast did not send a notice of default to CTC relating to the permits or otherwise at this time. Instead, on March 13, Vast contacted the City and canceled all previously-obtained permits.

On March 23, CTC sent Vast a notice of default, alleging that Vast was in breach of the contract for failing to perform in accordance with the subcontract, delay, and abandonment of the work. In April, CTC sued Vast for the costs incurred as a result of Vast’s default.

A jury determined that Vast had breached the contract, and awarded compensatory damages of approximately $90,000, which was the difference between Vast’s initial subcontract value and the subcontract value of the contractor hired to replace Vast. Vast appealed the judgment to the Texas appeals court.

At trial, and on appeal, the parties focused much of their arguments on who was responsible for permitting. However, the appeals court deter-mined that it was unnecessary to decide this issue, because, regardless of who was responsible for permitting, Vast had breached the contract by abandoning the work without first following the contract default termination provisions.

This case is an important reminder to the construction industry of the importance of strictly complying with the default provisions of the contract in the event of default. Vast had a number of factual arguments that might have had merit had it followed the contract default process. For example, in its proposal, Vast had excluded costs for obtaining permits, and the subcontract was silent regarding any obligation to obtain permits. Furthermore, Vast was not paid on its first application for payment even though CTC received payment from the owner (albeit after Vast had started to demobilize from the project). However, Vast’s abandonment of the contract and failure to follow the default provisions of the contract superseded these arguments. Had Vast conferred with a lawyer and issued notice regarding the permit and payment issues, or had it issued a notice of default and opportunity to cure before terminating the performance of the contract, it’s quite possible that its litigation result might have been different.