Construction projects invariably have disputes/problems. That is in the nature of the process. It can be a wonder that anything ever gets built at all. The ability of the parties to a project to work through the day to day issues confirms the strength of our domestic construction industry.
When it appears that there may be a looming “default” allegation by one party, it is important to first limit the emotion involved. Take a deep breath. Consult more dispassionate individuals in management – or counsel. Then follow deliberate steps.
Step 1 – Are you considering declaring another party in “default?” Do you think your company may be declared in default?
Begin with the notion that “default” is generally just an allegation by one party against another. It can be withdrawn or may just disappear. For the allegation to proceed further it generally must be deemed to be “material.” We have often seen such allegations made just to wake up another party – merely to get attention.
Issues in construction can sound simple, i.e., “you are behind schedule” or they can be vague, i.e., “you have failed to satisfy your obligations under the contract”. However, there is usually a run up to any allegation. Review the history and facts. We once were successful in defeating the default of a contractor for late performance by showing the owner it had simply forgotten its prior grant of an extension of time!
Consider the terms of the construction contract or subcontract. We often find that the contractor or owner has never read the contract. A subcontractor can be told it is to honor provisions of a contract it is not a party to and has never seen. Review of contract language is particularly important in default situations. Do not assume you know the timing and nature of communications required – either by you or to hold you in default. Some private owners write their own contracts, as do large general contractors and construction managers. AIA forms are in common use, i.e., AIA A201. There are many different contract forms and each provides not only scope and price – but also provisions for default/termination. Review and compliance is of paramount importance.[i]
Step 2 – Focus on the notice provisions for various events.
Most are aware of at least some of the notice provisions used in the construction industry. Notice is usually needed for possible work outside the original scope, additional work, extra work, change orders, even when unit price work exceeds contract estimates. Notice is important for interferences, delays, acceleration of work – whether the only remedy is an extension of time or when seeking additional compensation.
Some are aware that particularly in public work there is a requirement for filing/service of a Notice of Claim lest one be cut off from any future rights concerning an event.
When default/termination is the issue, another notice or even set of notices comes into play. Do not assume you know what the contract says. Terms are constantly changing and there are as many different default/termination provisions as there are projects. We have seen contractors ignore notice letters and rue their omission. And, we have seen owners and general contractors misinterpret notice provisions they drafted and included for their own benefit! Wrongful termination, procedural or substantive, can equal a breach of contract by a party rightfully aggrieved by acts or omissions of another.[ii]
Step 3 – Proper issuance of the “Declaration of Default”.
Start by being confident that the allegation made is a material one. Then look carefully at the contract or specifications so that the allegation is clear and as detailed as is warranted and required.
If there are other project parties involved, i.e., an architect or engineer, make sure they are in the loop. That may be required!
Finally, if there is a performance bond review its provisions. Although such bonds generally incorporate language from the construction contract, there also may be specific language regarding notice to and rights of the surety. Moreover, bonding companies can be helpful in mediating disputes or in promptly addressing your project needs.
Step 4 – The forum for resolution.
The parties may later need to find the proper forum for resolution. Courts tend to be stricter than others on contract language. You do not wish to find out later that due to an oversight, i.e., lack of involvement by the architect, or confusion, i.e., notice to the general contractor but not the bonding company, rights have been partially or completely forfeited. You may prefer to avoid a split forum.
Dispute Resolution now comes in different flavors, litigation [lawsuit], alternate dispute resolution (ADR), i.e., arbitration or mediation, or the time-honored approach of sitting down and talking.
First Warning: In all instances consider privity. A contractor who is annoyed with the architect or engineer may have no direct rights. In multi-layer projects a large subcontractor may have no way to reach the owner or construction manager.
Second Warning: The distinction between “default” and “termination” must be considered. A default can often be worked out. If you are at “termination”, time may have already run!
Third Warning: The distinction between a “suspension” and a “termination” must be considered. We have seen owners take advantage of “time out” provisions providing for a suspension of work – especially when the design team needs a chance to re-evaluate.
Fourth Warning: The distinction between a “termination for cause” and a “termination for convenience” may come into play.
It has become more common for a party to issue a termination that may be unwarranted and even very unspecific. Many contracts now provide that the termination can become one “for convenience” at the option of the declaring party.
Disclaimer: This Blog should not be construed as legal advice or the formation of an attorney-client relationship. Do not rely solely on this information on making decisions for your firm. Prior results do not guarantee a similar outcome.
[i] The law on conditions precedent to termination is well settled. In Mike Bldg. & Contr., Inc. v Just Homes, LLC, 27 Misc. 3d 833, 901 N.Y.S.2d 458, 2010 N.Y. Misc. LEXIS 241, 2010 NY Slip Op 2004, 243 N.Y.L.J. 41 (Sup.Ct. Kings Co. 2010), the Court repeated the well accepted rule. “Where a contract provides that a party must fulfill specific conditions precedent before it can terminate the agreement, those conditions are enforced as written and the party must comply with them” citing Gulf Ins. Co. v. Fidelity & Deposit Co. of Md., 16 Misc. 3d 1116[A], 847 N.Y.S.2d 896, 2007 NY Slip Op 51440[U] (Sup. Ct. NY Co. 2007); A.S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369, 381-382, 144 N.E.2d 371, 165 N.Y.S.2d 475 (1957). See also, Paragon Restoration Group, Inc. v. Cambridge Sq. Condominiums, 14 Misc. 3d 1236[A], 836 N.Y.S.2d 501, 2006 NY Slip Op 52579[U] (Sup. Ct. Erie Co. 2006), affd in part, mod in part, 42 A.D.3d 905, 839 N.Y.S.2d 658 (4th Dept. 2007) (owner breached article 14.2.2 of a standard AIA construction contract because the appropriate certification, notice and time to cure were conditions precedent to owner’s right to terminate for cause, which it failed to fulfill).
[ii] See, e.g., General Supply & Constr. Co. v. Goelet, 241 N.Y. 28, 148 N.E. 778 (1925); MCK Bldg. Assocs. v. St. Lawrence Univ., 301 A.D.2d 726, 754 N.Y.S.2d 397, 2003 N.Y. App. Div. LEXIS 8 (3d Dept. 2003); Sheraton Operating Corp. v. Castillo Grand, LLC, 34 Misc. 3d 1207(A), 943 N.Y.S.2d 794, 2011 N.Y. Misc. LEXIS 6423, 2011 NY Slip Op 52438(U) (Sup.Ct. Westchester Co. 2011).