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Refusing to Proceed with Changed Work Can Be Risky Business

  

By Nell M. Hurley of Ernstrom & Dreste LLP

Published Fall 2022

 

 A subcontractor bids a concrete job that requires that the concrete be poured rather than pumped, which is more costly. Part way through the job, the subcontractor is told that the remaining concrete must be pumped instead, and it seeks a price adjustment. The contractor is in general agreement, but the parties have difficulty reaching price terms. Despite the dispute, the contractor orders the subcontractor to proceed with the work, which the subcontractor refuses to do. The contractor terminates the subcontract and completes the work by other means. The parties end up in court, with the subcontractor seeking compensation for materials left on the job and its retainage, claiming wrongful termination. The contractor asserts a breach of contract counterclaim for the additional costs incurred to complete the subcontract work. Who wins?

 

This recent case[1] stems from a large train station construction project in Rensselaer County. Banton Construction Co. (“Banton”) was a subcontractor to the general contractor on the Amtrak job. Banton subcontracted with McCarthy Concrete, Inc. (“McCarthy”) for the concrete work. The unit price subcontract specifically excluded “concrete pumping” and the installation of “tactile warning strips.” McCarthy performed subcontract work in 2015 until an overall work suspension by Amtrak compelled McCarthy to demobilize. McCarthy filed suit against Banton in Connecticut over payment issues. As the project was being remobilized in 2016, the parties reached a settlement in that action. But when McCarthy returned to the job, issues arose as to whether the settlement covered the rebar left at the site, and McCarthy refused to complete the work until it was paid for the rebar.

 

Thereafter, Amtrak issued changes to the concrete work, requiring concrete pumping and the installation of tactile strips. McCarthy provided proposals for the cost of the changes, but Banton did not agree to them, instead stating that it would fund the alleged added costs under a reservation of rights. At an impasse, Banton advised that if McCarthy failed to commence the work within three days, it would terminate the subcontract for default. McCarthy declined to return to work without an agreement on price, and Banton completed the work.

 

In 2018, McCarthy sued Banton in New York for its retainage on the subcontract work and the value of the rebar. Banton asserted a counterclaim for breach of contract, demanding reimbursement for costs to complete the subcontract work. A non-jury trial resulted in a ruling in favor of McCarthy, finding the subcontract changes were material, and dismissing Banton’s counterclaim. Banton appealed.

 

The appellate court reversed, relying on subcontract language that permitted changes in the work but also required performance of the changed work. The court cited the contract provision stating that “[p]ending resolution of any claim, dispute or other controversy, nothing shall excuse [McCarthy] from proceeding with the prosecution of the [w]ork.” With that subcontract language, the court concluded, even if the change to the work was a “material” change, as the trial court found, it was not a “cardinal” change that would relieve McCarthy of its obligation to perform. A cardinal change “affects the essential identity or main purpose of the contract, such that it constitutes a new undertaking,” the court explained. Here, reasoned the court, the main purpose of the subcontract was to complete the concrete work, and the change from pouring to pumping did not alter that.

 

The court noted that McCarthy was “ready, willing and able” to implement the subcontract changes, but only if its price was met. Given that Banton had already agreed to pay for costs of the pump equipment, and at least some of the increased labor costs, there was no breach by Banton for failure to come to full payment terms, the court held, especially in light of the subcontract language requiring work during dispute resolution. The court stated:

 

[McCarthy’s] refusal to perform the changed work without an express agreement as to increased costs has the effect of holding Banton hostage [because] the work, which was part of much larger project, was stalled.

 

Therefore, the court concluded, it was McCarthy that breached the subcontract by refusing to perform the work as required by the subcontract. The court granted Banton’s counterclaim, allowing Banton to set off its completion costs against the subcontract retainage due to McCarthy resulting in an affirmative judgment against McCarthy for over $60,000. The court further held that McCarthy’s claim for the rebar was included in the Connecticut case settlement and was thus released, requiring dismissal of that claim.

 

This decision is a stark reminder that any decision to stop work (or fail to return to it), is fraught with risk, especially related to changed work. Contract language that requires continuation of the work while disputes are resolved means just what it says. Successfully arguing that this obligation is excused will require demonstrating that the nature of changed or extra work alters the main purpose of the contract and constitutes a new undertaking. That can be a herculean task, and should not be undertaken without careful consideration of the risks. In most cases, better advice is to proceed with the work, perhaps under a reservation of rights as to cost (especially if the contractor agrees to fund the work in the first instance), and keep the right to pursue claims later, if necessary.      

 

Nell M. Hurley is Of Counsel to Ernstrom & Dreste, LLP, a surety and construction law practice in Rochester, N.Y. Hurley is an experienced advisor, litigator, and negotiator in all types of surety and construction disputes and risk management situations. Hurley also writes articles on cases, topics, and trends of significance to surety and construction professionals and businesses. She can be reached at nhurley@ed-llp.com or 585-473-3100.

 

 

[1] McCarthy Concrete, Inc. v. Banton Constr. Co., 203 AD3d 1496 (3d Dept 2022).

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