Contract clauses that attempt to shift the financial risk of a project onto lower-tiered parties are all too common in the construction industry. Many times, these clauses are a direct assault on mechanics lien rights. Other clauses, however, are not specifically related to mechanics liens, and follow a different path toward making recovery of unpaid amounts difficult for subcontractors.While risk-shifting clauses such as pay-if-paid or pay-when-paid can be looked upon with disfavor by courts, they can still be enforceable under certain circumstances. However, courts’ general disfavor regarding these risk-shifting attempts have led top-tier parties to begin using other types of clauses to provide them protection. This type of clause is exemplified by strict notice provisions – which if not followed purport to limit or extinguish other rights. One standard notice provision was recently examined by a New York court, with the subcontractor coming out on top.
Background of the Case
In 2007, U.W. Marx, Inc. (“Marx”) was a general contractor on a school construction project and entered into a subcontract with Koko Contracting, Inc. (“Koko”) for roofing work. Eventually, on October 31, 2007, and pursuant to issues of non-payment, Koko ceased work on the project. The subcontract contained a standard noticing provision, requiring seven days’ notice of suspension of work. The noticing provision was outlined by section 4.7.1 of the subcontract, which reads as follows:
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If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to any other available remedies, upon seven additional days’ written notice to the Contractor, stop the [w]ork of this Subcontract until payment of the amount owing has been received. The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor’s reasonable costs of demobilization, delay and remobilization.
This section of the subcontract is a standard form clause drafted by the American Institute of Architects. Koko provided notice to Marx, but did not provide the notice at least 7 days prior to stopping work as required by the subcontract. Litigation followed, with Marx’s main argument being that was that because of Koko’s violation of the required noticing provision of section 4.7.1 of the subcontract, it should not be entitled to recover.
The Court’s Decision
In the case, U.W. Marx, Inc. v. Koko Contr., Inc., 124 A.D.3d 1121, the court disagreed with Marx’s argument. The court found that, while true that Koko failed to meet the noticing requirements of 4.7.1, the contract had been breached by Marx prior to the time that 4.7.1 came into play. By failing to make progress payments to Koko, Marx breached the contract itself, and that breach relieved Koko of its obligations under the noticing provision. Further, the court noted that the clause at issue inured to the benefit of the subcontractor by working “to protect the subcontractor and to compensate it in the event that it has to stop work for nonpayment and then remobilize.” Koko’s failure to meet the noticing standards, therefore, would have prevented it from “recovering remobilization costs in the event that it resumed work”, and, if the contract was not preemptively breached by Marx, may have resulted in breach of contract damages. The failure to provide notice, however, was not found to excuse the fact that Marx failed to make payments required under the contract that directly led to Koko’s stoppage of work.
So, what’s the take-away of this case? Be fair and fulfill your obligations. It appears that neither party here is blameless. Clearly, not making payments as required by the contract is unfair, and the party doing the work is entitled to be paid for what was done. Neither, really, is the failure to comply with the notice provisions of the contract. As children are told time and again, two wrongs don’t make a right. While, in this particular case, Koko is seemingly not harmed by their failure to provide notice, that is only related to the specific facts at issue here. When parties act fairly, construction payment works. When they don’t expensive and lengthy litigation often follows.