Most subcontracts contain provisions that allow prime contractors to terminate their subcontractors and seek monetary remedies if the subcontractor is deemed to have defaulted on its obligations.
Typically, however, those provisions outline procedures for termination and, as a recent case illustrates, must be strictly followed.
In Toltest, Inc. v. Purcell P&C, L.L.C., 2014 WL 243907 (N.D. Ohio Jan. 22, 2014), a prime contractor performing a contract with the Navy to repair underground fuel tanks at a naval supply base selected the subcontractor in this case to perform a portion of the work.
Unfortunately, the prime eventually terminated the subcontractor by letter on Sept. 19, 2011. The letter stated that the subcontractor failed to prevent smoking by its workers in designated nonsmoking areas and performed an unspecified quantum of “deficient work,” for which the prime believed the subcontractor was financially responsible. The prime hired another subcontractor to complete the work and sued the subcontractor for its damages.
The prime filed a motion for partial summary judgment seeking a ruling that the default termination was proper and, if successful, the trial would be held solely on the issue of damages. The subcontractor opposed the motion and argued that the prime breached the subcontract by failing to identify a specific default and stating that such alleged default could not be cured within two days as referenced in Section 8.2 of the subcontract. That provision states as follows:
In the event that subcontractor’s default under Article 8.1 continues for two (2) Days after written notice thereof by [prime TolTest to PPC], or immediately in the event that such default, in the judgment of TolTest, cannot be cured within a two (2) Day period after notice of default, TolTest may without further notice terminate this Subcontract or any separable part thereof . . .
The prime argued that the subcontractor was aware both the prime contractor and the Navy had serious concerns about the subcontractor’s performance of its contractual responsibilities, and the prime pointed to several e-mails it sent between August and September 2011 “alert[ing] [the subcontractor] to equipment and quality issues” and requesting the subcontractor to take corrective action.
One such e-mail was dated Aug. 11, 2011, and stated that “it [would] be necessary for [the prime] to take contractual action” against subcontractor if it did not address equipment and personnel issues. The prime also pointed to an Aug. 25, 2011, letter, titled “Cure Notice,” from its subcontract administrator describing the prime’s concerns about “manpower, equipment, quality, and schedule issues.” The prime also produced an e-mail dated Sept. 15, 2011, to the subcontractor informing it that the Navy had postponed an inspection undertaken the previous day after discovering unsatisfactory conditions. In that e-mail, the prime requested a meeting with the subcontractor representatives at 1 p.m. on Sept. 15 and a corrective-action plan by the morning of Sept. 16. The prime also argued that in any event the subcontractor is presumed to be familiar with the requirements of the subcontract and thus know when it is in default.
The court denied the prime’s motion. In doing so, it acknowledged that although the subcontractor is indeed presumed to know the terms of the subcontract and what constitutes a default, the contract assigns the responsibility of identifying a default to the prime contractor. The court noted that the Sept. 15 e-mail did not state that the prime considered the subcontractor to be in default under the terms of the subcontract. Further, the Sept. 19 termination letter, which also did not assert a specific default, failed to reference the contents of the Sept. 15 e-mail or even the Aug. 25 cure notice letter. Moreover, the termination letter did not specifically identify a contractual default that the subcontractor could not cure within a two-day cure period specified in the termination provision.
Although the court’s decision did not decide the case, and the prime might still succeed at trial, its probability of success was greatly diminished due to its failure to identify the specific default allegedly committed by the subcontractor and its failure to state that such default could not be cured in two days. Contractors must be intimately familiar with their default termination provisions, and letters they write giving notice of default or terminating a subcontract must be specific and provide whatever opportunity the subcontract might have to cure the default.