Prior Material Breach May Excuse Performance, but the Factfinder Must Agree It Was a Material Breach

J. David Pugh, Ian P. Faria and Amandeep S. Kahlon | Buildsmart

In most jurisdictions, a party may be excused from any future performance under a contract by the prior material breach of the other party. A “prior material breach” is typically defined as conduct that deprives the injured party of the benefit that it reasonably could have anticipated from the breaching party’s full performance. This excuse may serve as a complete defense in a breach of contract action. It is a potent defense, but the devil is in the details: Was it a “material breach?”

Because determination of whether a breach is material is typically a question for the jury, or judge or arbitrators, depending on the forum, failure properly to raise the issue of “prior material breach” may invalidate an otherwise valid defense to a breach of contract action. A homeowner recently learned this hard lesson from the Texas Court of Appeals’ decision in Earth Power A/C and Heat, Inc. v. Page published on June 23, 2020.

In Earth Power, an HVAC contractor alleged a homeowner breached its contract for installation of a geothermal HVAC system by failing to make multiple progress payments. The homeowner asserted an affirmative defense of “repudiation” arguing that the contractor repudiated the contract by not installing the HVAC system in a workmanlike manner.

At trial, the jury found that both parties breached the contract, but that the contractor breached first. The jury also found that the homeowner’s payment obligations were not excused by any repudiation and awarded the contractor damages for nonpayment. The homeowner did not raise the affirmative defense of “prior material breach” or present to the jury the question of whether the contractor’s breach was material or whether the breach excused the homeowner from paying the contractor.

After the jury verdict, the homeowner moved to set aside the judgment and to enter judgment as a matter of law in its favor. The homeowner argued that the jury’s finding that the contractor breached the agreement first should be treated as a finding of “prior material breach,” and the court should vacate the jury award of damages. The trial judge accepted this argument and amended the final judgment in favor of the homeowner.

On appeal, the contractor argued that the trial court erred because there was no finding of “prior material breach” as that question was never properly raised before the jury. The Texas Court of Appeals agreed. The homeowner “failed to secure findings necessary to support the assertion that his failure to perform was excused” by the contractor’s prior material breach. According to the court, although the jury found that the contractor breached the contract first, it was not asked whether that breach was material, and the homeowner submitted no question or instruction to the jury regarding “prior material breach.” Under Texas law, the failure to request a jury question or instruction on “prior material breach” waived the homeowner’s affirmative defense.

An exception to this waiver rule applies if the affirmative defense is “conclusively established,” but the homeowner did not argue this exception on appeal. Absent a prior material breach, the contractor was entitled to recover damages for the homeowner’s failure to pay amounts due under the contract. The Court of Appeals, therefore, reversed the trial court judgment and ordered the homeowner to pay the contractor the damages awarded by the jury, plus attorneys’ fees.

What is the takeaway from this decision?

As we are sure you’ve heard, “it’s complicated.” Prior material breach is a common affirmative defense in construction contract disputes, but it requires more than a mere showing of which party was the first to breach an agreement. If the homeowner in Earth Power had properly submitted “prior material breach” as a defense for its non-payment to the jury, a finding in its favor would have likely survived appellate scrutiny.

However, when materiality is not proven, the party responsible for the first-in-time breach may still recover for subsequent (material) breaches by the other party to a contract. As stated above, this allegation, like the decision to quit performing a contract, may be a “nuclear option” in construction contracts. It should be approached with solid advice and with caution.

The Impact of COVID-19 on the Construction Industry: Planning for the Inevitable

Neil Keenan, William Abramovicz and Matthew Bedan | Forensic Risk Alliance

The COVID-19 pandemic continues to impact all facets of the global economy, disrupting supply chains and work forces, and straining contractual relationships between businesses. These issues are especially important in the construction industry, which traditionally relies on precise schedules of workers and material, and endeavors to limit potential delay claims in order to ensure profitability. These critical schedules are being impacted in a variety of ways, including changing government executive orders, sick or quarantined workers, and supply chain interruptions. In many cases, COVID-19 orders from public officials impose new job site standards, such as mandatory social distancing, use of personal protective equipment, and quarantine periods for workers crossing state lines. In many areas, projects are shut down completely. For example, 85% of New York City operating sites were on pause by mid-April. As the industry reacts, we can expect an uptick in related litigation in the form of breach of contract actions and force majeure claims.

It is critical for construction firms to plan for this disruption to protect assets, ensure business continuity and renegotiate project planning and financing, with labor shortages among the primary concerns. This may be caused by the illness itself, mandatory state/local government quarantines, or even union guidelines encouraging workers to stay at home. This was the case when the North America’s Building Trades Unions (NABTU) and the Center for Construction Research and Training (CPWR) urged anyone feeling sick to not go to work on March 11 this year. Travel restrictions could similarly limit the availability of high-skilled personnel who are essential for the completion of specific key tasks, like experts traveling from one project to another to help teams on the ground resolving technical issues. In addition, certification visits and inspections may be delayed or canceled, resulting in delays for otherwise functioning construction sites.

The pandemic is squeezing supply chains and creating difficulties including late or canceled deliveries, and price escalation from suppliers. The consequence is that many construction sites have been shut down for an indefinite period of time. On March 27, ABC News reported that Ken Rigmaiden, the general president of the International Union of Painters and Allied Trades, estimated that “half of the construction sites in the country have shut down since the COVID-19 pandemic began.” These closures generate significant unanticipated costs that could grow due to extended periods of storage for some materials and equipment, which were delivered before the shutdown but have not yet been installed. There are also many construction sites with dangerous or valuable materials that must be secured and maintained around the clock, quarantine orders notwithstanding. Finally, late payments from customers may have a significant impact on firms and their capacity to finance the goods and services required to complete a project. As much of the world economy remains locked down, alternative financing sources begin to diminish, further endangering projects.

As COVID-19 testing increases and the required personal protective equipment becomes more readily available, we can expect work to resume on many sites, but not without glitches. In the short term, demand for construction materials and skilled resources likely will remain high. Shortages of key variables combined with cash flow and financing difficulties will result in additional costs and delays, potentially further fueling the litigation wave.

Businesses should remain aware of fraud risks inherent to the unprecedented situation.  The shortage of supplies and materials could lead suppliers to break contractual terms related to pricing so they could sell their goods to other customers willing to pay a higher price. This period of inactivity is also favorable to assets misappropriation. For example, inventory checks should be performed before and after the shutdown, as the risk of materials disappearing or being diverted would increase.

Businesses with ongoing construction projects’ top priority should be to document every event causing a delay or cost increase. Documenting this evidence daily is critical to establishing a potential claim—or defending against one—and later quantifying damages. At FRA, we have experience establishing and supporting—or defending against—such claims, including preparation of economic damages and quantum models, and providing forensic analysis of overcharges, improper payments, questionable or unsupported costs and other allegations. For example, we recently assisted an NYSE-listed real estate development firm with a multi-million dollar dispute involving one of its construction sites in India. This review included key vendor analysis, tax and royalty payments, daily construction reports, actualized project schedules, personnel interviews and onsite visits spanning multiple cities, which resulted in evidences of invoice padding. FRA has also achieved remotely what others could not, by deploying remote data collection, remote transaction testing, remote interviews, and other remote procedures. We plan to continue using these solutions in order to help our clients navigate through this pandemic and beyond.

Contractor’s Claim for Interest on Subcontractor’s Defective Work Claim Gains Mixed Results

John J. Gazzola | ConsensusDocs

Skanska USA Bldg., Inc. v. J.D. Long Masonry, Inc., No. SAG-16-933, 2019 BL 336852, 2019 US Dist Lexis 152787 (D. Md. Sept. 9, 2019)

This case concerns calculation of a damages award to a general contractor, Skanska USA Building, Inc., on its claim for breach of contract against its masonry subcontractor, J.D. Long Masonry, Inc., arising from Long’s faulty construction of a masonry façade at a medical research facility in Baltimore. When the façade collapsed and Long failed to repair it, Skanska hired a replacement subcontractor, C.A. Lindman, to remediate Long’s defective work and filed suit against Long to recover the resulting damages. After the court granted Skanska’s motion for summary judgment as to liability, Skanska moved for summary judgment on the issue of damages, relying on the indemnification provision of the subcontract to seek compensatory damages, pre- and post-judgment interest, and litigation fees. In the subcontract, Long agreed to indemnify and hold Skanska harmless from all claims, losses, costs and expenses, including attorneys’ fees, arising before or after completion of Long’s work, caused by, arising out of, resulting from, or occurring in connection with Long’s performance of the work or breach of the subcontract.

The court first applied the terms of this provision to award Skanska compensatory damages, holding that Skanska was, as a matter of law, entitled to recover the amount of the Lindman subcontract and general conditions incurred to supervise remediation of Long’s work. The court, however, denied Skanska’s claim for pre-judgment interest on the entirety of these damages. Skanska asserted that it was entitled to pre-judgment interest on the full award, calculated from the date on which it first paid Lindman. The court disagreed, explaining that, under Maryland law, a claimant is entitled to an award of pre-judgment interest as of right only when the amount due is certain, definite and liquidated by a specific date prior to judgment. The court reasoned that, because much of the Lindman subcontract value was composed of later-executed change orders, an award of pre-judgment interest could not be uniformly calculated back to the date of Skanska’s first payment to Lindman. And moreover, because Skanska continued to withhold sums due to Lindman pending resolution of certain issues, awarding Skanska pre-judgment interest on amounts it had not yet paid would result in a “windfall” to Skanska because there was no “use of income” loss to be compensated.

The court also refused to award pre-judgment interest on Skanska’s overhead and supervisory costs, on grounds that there was no fixed, certain date on which Skanska’s claim to them became liquidated and that these damages were actually composed of costs that Skanska would have incurred regardless of Long’s beach. As such, the court awarded Skanska pre-judgment interest only on amounts actually paid to Lindman and on a “check by check” basis, or from the particular date on which each such payment was made.

Next, the court awarded Skanska its attorneys’ fees, concluding that the subcontract’s indemnification provision expressly provided for such an award because it tied payment of such fees to an action for breach and indicated that Long would indemnify Skanska for fees incurred in a suit between them. The court denied Long’s request for a reduction in the award, noting that Long’s complained-of delays arose from Skanska’s need to investigate and repair Long’s defective work in order to quantify its damages, efforts that did not “unreasonably balloon Skanska’s legal fees.”

Finally, applying federal law, the court awarded post-judgment interest on the total judgment entered against Long, calculated from the date the judgment was entered.

Georgia’s Court Of Appeals Holds That Lien Waivers Waive Breach Of Contract Claims

Derek M. Andre, Darren G. Rowles and William E. Burnett | Smith Gambrell & Russell | November 15, 2019

A recent decision by the Georgia Court of Appeals will force most construction professionals to radically change their view of the scope and effect of statutory lien waivers in the state of Georgia. In ALA Construction Services, LLC v. Controlled AccessInc., the Court of Appeals held that a lien claimant’s executed statutory lien waiver waived not only the claimant’s lien right but also rights the claimant may have to bring a related breach of contract action.1

In ALA Construction, ALA Construction Services, LLC (“ALA”), contracted with Controlled Access, Inc. (“Controlled Access”), to provide equipment and other services for a project in Gwinnett County, Georgia. Controlled Access signed two statutory lien waivers with the expectation that it would be paid for its work. However, Controlled Access was never paid, but it did not file either a statutory Affidavit of Nonpayment or a Claim of Lien within 60 days of its execution of the lien waivers, which had the effect of nullifying Controlled Access’ rights to assert a claim of lien. Having waived its lien rights, Controlled Access instead brought a breach of contract action against ALA seeking payment for the work performed by Controlled Access. The trial court held that Controlled Access did not waive its right to assert a breach of contract claim against ALA by executing the lien waivers.

On appeal, the Court of Appeals reversed, holding that Controlled Access’ lien waivers waived not only its lien rights, but also any related claims for breach of contract. The court relied on portions of the lien waiver statute, O.C.G.A. § 44-14-366, which provides that:

“(1) When a waiver and release provided for in this Code section is executed by the claimant, it shall be binding against the claimant for all purposes, subject only to payment in full of the amount set forth in the waiver and release. (2) Such amounts shall conclusively be deemed paid in full upon the earliest to occur of: (A) Actual receipt of funds; (B) Execution by the claimant of a separate written acknowledgment of payment in full; or (C) Sixty days after the date of the execution of the waiver and release, unless prior to the expiration of said 60 day period the claimant files a claim of lien or files in the county in which the property is located an affidavit of nonpayment[.]”2 (emphasis in original).

The Court held that the “plain and unambiguous language” of the statute showed that the “[Georgia] General Assembly intended for [the lien waivers] to be binding against the parties for ‘all purposes,’ not just for purposes of preserving the right to file a lien on the property,” reversed the trial court’s decision, and ruled in favor of ALA. In doing so, the Court stated:

“[T]he statute clearly and unambiguously provides that upon signing the Waivers, Controlled Access had a statutorily imposed responsibility to file either a claim of lien or an affidavit of nonpayment if it wished to keep the debt alive beyond 60 days. Controlled Access did neither and the debt is extinguished.”3

The decision in ALA Construction marks a substantial shift in most construction professionals’ understanding of the treatment of lien waivers in the state of Georgia. Previously, most lien claimants and their counsel believed that a statutory lien waiver waived a claimant’s lien rights, but did not affect the claimants’ right to bring a breach of contract action. As a result of this decision, lien claimants who execute lien waivers risk losing their rights to bring breach of contract actions unless they file an Affidavit of Nonpayment or a Claim of Lien within 60 days of execution of a particular lien waiver. Simply put, it makes the timely filing of the foregoing documents more important than ever before. Under the Court’s holding, a party executing a lien waiver without receiving payment that does not subsequently file an Affidavit of Nonpayment or a Claim of Lien risks losing its ability to seek collection of payment for its work even if it can show that it performed the work and was not paid for it.

If you have questions about Georgia’s mechanic’s lien law or this particular case, please contact the construction group at Smith, Gambrell, & Russell, LLP. We can help businesses in the construction industry navigate this recent change to Georgia lien law and provide recommendations on how to protect against the effects of this decision.

Footnotes

1 ALA Constr. Servs., LLC v. Controlled Access, Inc., No. A19A0923, 2019 WL 4463305 at *1 (Ga. Ct. App. Sept. 18, 2019). A copy of the decision can be accessed at https://law.justia.com/cases/georgia/court-of-appeals/2019/a19a0923.html (last visited 10/30/2019).

2 Id.

3 ALA Constr. Servs., LLC, supra.

Sometimes a Reminder is in Order. . .

Christopher G. Hill | Construction Law Musings | November 18, 2019

Recently, I was talking with my friend Matt Hundley about a recent case he had in the Charlottesville, VA Circuit Court.  It was a relatively straightforward (or so he and I would have thought) breach of contract matter involving a fixed price contract between his (and an associate of his Laura Hooe) client James River Stucco and the Montecello Overlook Owners’ Association.  I believe that you will see the reason for the title of the post once you hear the facts and read the opinion.

In James River Stucco, Inc. v. Monticello Overlook Owners’ Ass’n, the Court considered Janes River Stucco’s Motion for Summary Judgment countering two arguments made by the Association.  The first Association argument was that the word “employ” in the contract meant that James River Stucco was required to use its own forces (as opposed to subcontractors) to perform the work.  The second argument was that James River overcharged for the work.  This second argument was made without any allegation of fraud or that the work was not 100% performed.

Needless to say, the Court rejected both arguments.  The Court rejected the first argument stating:

In its plain meaning, “employ” means to hire, use, utilize, or make arrangements for. A plain reading of the contractual provisions cited–“shall employ” and references to “employees”–and relied on by Defendant does not require that the persons performing the labor, arranged by Plaintiff, be actual employees of the company or on the company’s payroll. It did not matter how the plaintiff accomplished the work so long as it was done correctly. The purpose of those provisions was to allocate to Plaintiff responsibility for supplying a sufficient workforce to get the work done, not to impose HR duties or require the company to use only “in house” workers. So I find that use of contracted work does not constitute a breach of the contract or these contractual provisions.

The Court reminds us, and the defendant, that employ in these types of construction contracts does not require use of ones own forces, but simply to use enough resources to get the job done as required by the contract.  The Court also went on to say that because of the fixed price nature of the contract, the Association would have paid the same amount regardless of the method of completion used by James River Stucco so the Defendant could not show any damages from the alleged breach of contract through the use of subcontracted work.

The Court rejected the second out of hand stating that the Defendant had not plead any facts that could lead the Court to conclude that the work was not performed as billed.  The Court pointed out that any alleged poor performance or other issues were more properly defenses to James River’s case in chief and not properly part of a Counterclaim.

In sum, this case is an example of how some of the things that we construction attorneys would think are so obvious are not always as clear as we may think.  We all could use a reminder on occasion.