LAW: The Contractor's Side

Article December 28, 2000
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Over the years, I have met with several contractors who found themselves constructing a project that was going so poorly that t

Over the years, I have met with several contractors who found themselves constructing a project that was going so poorly that they fantasized about walking off the project. In almost every case, the thought has only been a fantasy, but it raises the following question: when can a contractor "walk off" a job due to a breach by the other party?

In Lane Enterprises Inc. vs. L. B. Foster Company, 700 A.2d 465 (Pa. Super. [1997]), a superior court in Pennsylvania dealt with the issue.

The case arose out of an agreement between Foster, a manufacturer of steel bridge components, and Lane Enterprises, a company specializing in the coating of steel materials. The agreement required Lane to coat steel materials for bridge components that were to be delivered in two stages to an Ohio Department of Transportation (ODOT) bridge project. The agreement also required that the components be coated in accordance with ODOT specifications.

On Jan. 5, 1993, Lane wrote a letter to Foster detailing the problems Lane had faced while coating the Stage I components and whether Foster desired Lane to coat the Stage II components. Two days later, an ODOT engineer performed a contamination test at the bridge site. After the test, ODOT rejected the coated components.

During a meeting held on Feb. 5, 1993, a disagreement arose over the specification requirements on the percent of permitted contamination. Lane asserted 10-20% backside contamination of an epoxy chip was acceptable. ODOT insisted that the specification allowed zero percent contamination. Lane then advised those present that it was unable to meet those requirements.

On Feb. 8, 1993, ODOT sent a letter formally rejecting the Stage I components, and stating that if the unacceptable portions underwent certain field repairs, ODOT would then accept them. Lane agreed to assume the cost of the field repairs done by a third party, which was to be deducted from the amount owed. After the repairs were completed, Lane requested payment of $7,082.22, the amount still owed on Stage I.

ODOT eventually permitted Hammond to proceed with erection of the bridge components. Foster sent a letter to Lane advising that the $7,082.22 due for Stage I would not be released until Lane gave assurances concerning its commitment to Stage II. Lane responded it would not discuss Stage II until Foster remitted the money due for Stage I. When it needed to move forward to avoid liquidated damages, Foster hired Encor Coating to complete Stage II at a cost of $99,329.15, $42,055 more than it would have paid Lane.

Not so fast

Needless to say, Lane and Foster ended up in court. After a trial, the trial court ruled in favor of Lane on its counterclaim in the amount of $7,082.22, finding that Foster’s failure to remit the final $7,082.22 on Stage I to Lane amounted to a "material" breach of the agreement, thereby permitting Lane to suspend performance. Foster vehemently disagreed with the trial court’s findings and conclusions.

On appeal, the superior court noted that when performance of a duty under a contract is due, any non-performance is a breach. If the breach is a "material" failure of performance, then the non-breaching parties are discharged from all liability under the contract. If, however, the breach is an "immaterial" failure of performance, and the contract was substantially performed, the contract remains effective.

Clearly, Foster was in breach when it refused to remit the $7,082.22. Thus the question is whether the breach was "material." The court noted that it is a question of degree and must be answered by weighing the consequences in the actual "custom in the industry" in the performance of contracts. The court concluded that Lane was required to perform on Stage II of the agreement because Foster’s actions did not constitute a "material" breach of the agreement. As part of the basis for its conclusion, the court concluded that Foster failed to pay only $7,082.22 out of a $133,922.40 contract. That amounted to a withholding of approximately 5% of the total contract price. Additionally, the court based its conclusion on the uncontradicted fact that Foster planned to remit the money due once it received assurance from Lane that it would perform Stage II of the agreement. On that basis, the court concluded Lane was not entitled to suspend performance under the agreement.

Adding insult to injury, the court held that Lane’s failure to give Foster assurance of performance of Stage II amounted to an anticipatory breach. The court found Foster had reasonable grounds to demand assurance of performance. Lane’s refusal to give such assurances was a material breach of the agreement. Thus, Foster was entitled to recover from Lane the cost of finding another contractor to complete Stage II, offset by the amount Foster withheld from Lane for completion of Stage I.

Contractors are obviously very reluctant to "walk off" a job because of the risk involved in doing so. This case gives some indication of how two courts viewing the same facts can reach the opposite result. In a future column, I will discuss a case where a contractor was found to be justified in walking off a project.

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