Casting the First Stone: Contractors Considering Default Termination Should Examine Which Party Committed First Material Breach

Construction and Procurement Law News, Q3 2018

Firm Alert

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During a construction project, circumstances may arise that lead a general contractor to consider termination of a subcontractor’s right to proceed under the subcontract. The Randy Kinder Excavating v. J.A. Manning Construction opinion recently delivered by the United States Eighth Circuit Court of Appeals, the federal appeals court encompassing federal cases in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota, should provide a cautionary tale to general contractors seeking termination without first examining which party committed the first material breach.

Randy Kinder Excavating, Inc. (“Kinder”) was the general contractor on an Army Corps of Engineers (“COE”) project on the White River in Arkansas (the “Project”). Kinder signed a subcontract with J.A. Manning Construction Co. (“Manning”) to engineer, furnish, and install a mechanically stabilized earth wall (the “MSE wall”) on the Project. Kinder’s initial schedule called for the Project to be completed in 425 days with an original completion date of September 26, 2011. Due to weather delays, scheduling conflicts, and other site conditions, the project schedule was revised multiple times, with an updated completion date of November 1, 2011. When Manning was first able to mobilize to the Project site in August 2011, Manning could not begin its work on the MSE wall due to Kinder’s failure to complete certain predecessor work that needed to be completed prior to construction of the MSE wall.

Due to these delays, Manning was not able to utilize its intended supplier for portions of the MSE wall. Manning retained another supplier, EarthTec, whose materials were rejected by the COE, requiring Manning to retain yet another supplier to help Manning complete its work. Roughly two weeks after Manning began its work, Kinder began to send emails and deficiency notices to Manning claiming that Manning’s inability to complete its work in a timely manner was delaying progress on the project. At the same time, Kinder was representing to the COE that delays on the project were due to weather and other scheduling issues. Despite these issues, Manning continued constructing the MSE wall.

Kinder and/or the COE claimed that Manning was failing to perform by placing panels of the MSE wall with a 0.25-inch variance from the contractually prescribed distance. Kinder and/or the COE claimed that no variance was allowed, and refused to allow Manning to construct the MSE wall with any variance in placement of the panels. Kinder ultimately directed Manning to suspend its work on the project on March 7, 2012, with less than three-quarters of the MSE wall constructed.

Kinder later filed suit against Manning, claiming that Manning had breached the subcontract by failing to pay its suppliers and provide shop drawings in a timely manner. Manning filed a counterclaim against Kinder, asserting that Kinder had wrongfully terminated its right to proceed under the contract. The trial court found that Kinder, rather than Manning, had committed the first material breach of the contract. The trial court also found that Kinder had materially breached the contract by wrongfully terminating Manning’s performance, and awarded Manning damages for unpaid labor and costs incurred prior to termination. In particular, the trial court found that Kinder committed the first material breach of the subcontract “by threatening to assess delay damages against Manning without justification; interfering in the relationship between Manning and EarthTec; and failing to provide adequate assurances that Manning would be paid for its work.” Kinder appealed to the 8th Circuit Court of Appeals.

The 8th Circuit likewise rejected Kinder’s argument that Manning’s failure to pay its suppliers was the first material breach of the subcontract, finding that Manning’s suppliers, not Kinder, were the parties who were harmed by Manning’s failure to pay their invoices in a timely manner. The 8th Circuit also determined that Manning was attempting to perform under the subcontract, and its failure to pay its suppliers was based, in part, on Manning’s belief that Kinder would not pay Manning due to Kinder’s incessant threats to terminate Manning’s right to proceed. Accordingly, the 8th Circuit found that the first material breach of the subcontract was Kinder’s wrongful termination of Manning’s performance. In particular, the Court focused on Manning’s continued performance under the subcontract that was ultimately terminated at Kinder’s election, not Manning’s.

This case serves as a lesson in “contract termination” to contractors or owners considering whether to terminate a party’s right to proceed—remember, termination should be considered and evaluated, if applicable under the terms of the contract, under an assessment of the factual circumstances at the time, including an effort to determine if the terminating party is the first to breach a material term of the contract.