During a construction project, subcontractors may be performing poorly and a general contractor may want to terminate a subcontractor for default.  A recent case out of the Eight Circuit Court of Appeals (overseeing the Midwest) rejected a general contractor’s right to terminate for default because the general contractor, not the subcontractor, was the first one to breach the contract.

The case, Randy Kinder Excavating, Inc. v. JA Manning Construction Company, involved a Corps of Engineers project. Randy Kinder Excavating was the general contractor and J.A. Manning was a subcontractor required to install a retaining wall.  The project was to be completed by November, 2011, but it was hampered by delays, none of which were caused by Manning.  Manning was first able to get to work in August, 2011.  Two weeks after Manning began its work, Kinder’s superintendent started sending Manning e-mails about delays, such as:

Clock is ticking and we are burning precious daylight.  We have 8 weeks to build the walls and backfill or we are dewatering and carrying jobsite overhead all winter and spring. Tic toc tic toc.

The very next day, Kinder sent a deficiency notice, complaining about Manning’s “inability to perform work” and threatening liquidated damages.

Unbeknownst to Manning, Kinder was also complaining to the Corps of Engineers that weather delays were pushing completion of the project back to the summer of 2012.

As Manning continued its work, Kinder and the Corps of Engineers raised issues with the wall placement and refused to allow for industry standard variances.  After completing 27.5 feet of the 40 foot wall, Kinder removed Manning from the project.  Kinder then finished the project and the Corps of Engineers accepted the project, even though it now contained a number of the defects that Kinder and the Corps of Engineers had told Manning were unacceptable.

Kinder ultimately filed a lawsuit against Manning, alleging that Manning breached the subcontract.  Manning responded with its own claims against Kinder, arguing that Kinder was the first to breach the agreement and that Manning was entitled to damages.

The court dug into the underlying situation and found that Kinder, not Manning, first breached the contract. Specifically, the court found that Kinder breached the contract by threatening to assess delay-related damages without any justification; interfering in the relationship between Manning and its vendors; and by failing to provide adequate assurances that Manning would be paid for the work it had preformed. The court ordered Kinder to pay Manning over $200,000.

Take Away: Before exercising the right to terminate for default, general contractors need to make sure that the subcontractor is actually in default.  Otherwise, you too could experience this boomerang effect of paying for your own breach.