Construction at an Akron, Ohio Amazon distribution center has led to a major dispute as project general contractor Intelligrated Systems, LLC sued subcontractor Hy-Tek Material Handling Installation Services on December 31, 2021.
Intelligrated is claiming $3,206,123.36 in damages while alleging charges of breach of contract and fraudulent inducement against Hy-Tek, claiming that the company “materially misrepresented its abilities and did not have the requisite experience to properly perform the Work.”
Hy-Tek was hired to perform an installation of a conveyor belt system at the distribution center, with the company “[assuring] Intelligrated that it had the skill and prior experience necessary to perform the Work.”
Intelligrated is claiming that once the process began, Hy-Tek’s work was full of problems — calling it “deficient…sub-par…defective, and incomplete” — with reportedly thousands of defective components of the conveyor belt system requiring “immediate correction and remediation” after Amazon inspectors verified their lack of quality.
Problems on the project apparently went well beyond defective work, too — Intelligrated additionally claims that Hy-Tek didn’t properly staff the job, and didn’t even complete its work within the project’s schedule.
One of the biggest problems for Intelligrated in this situation is replacing Hy-Tek’s promised production. After sending Hy-Tek a notice of default in January 2021, Intelligrated had to hire other contractors and installers to complete the work and fix any deficient aspects.
Replacing contractors or subcontractors can be a major issue for maintaining profitability and proper payment on a project.
“The cost of replacing a contractor or sub is often always more expensive than the remaining balance of the terminated contractor’s work,” says construction lawyer Alex Benarroche. “This is true even with the standard 10% retention withheld.”
Put simply, replacing contractors already involved in a project can be a mess: “[General contractors] may be liable for lost profits and lose their right to recover payments for work performed by replacement subcontractors, which means you could be paying double to get the work finished.”
“Filing a lawsuit for breach of contract, handing off the debt to a collections agency or even pursuing the money yourself is a lengthy, expensive process,” Benarroche notes.
Project disputes like these are a major reason why pre-qualification is so important for contractors. Intelligrated claims that Hy-Tek led it to believe it could perform the job it was hired to do, and clearly wasn’t able to do this.
As Benarroche points out, there are a number of ways for general contractors to stay on top of what’s going on with subcontractors on a project.
“Good project oversight should be able to identify problems quickly, through regular site assessments and daily reports,” Benarroche says.
There are more paths for contractors to stay on top of these situations, as well. General contractors that want to stay in control of the subcontractors it has hired could explore having a termination for convenience clause in their contracts — a clause that allows a party to terminate contractors without any specific reason to do so.
“Termination for convenience clauses are really common in government construction contracts, but they’ve become increasingly common in the private sector, too,” says construction lawyer Matt Viator. “Without a termination for convenience clause present, the party who terminates the contract can really only terminate the agreement based on default or breach (or some other term in the contract).”
Agreements like these can make it easier for contractors to deal with the other companies they’ve hired, as making sure you have the right reasons to terminate a company can be difficult.
“The first step [in firing a subcontractor] is making sure that there are adequate grounds for termination,” advises Benarroche.
“The subcontract should offer some guidance on this with a list of items that constitute a “material breach”. Contractors should also consult their management team before terminating because the consequences of improper termination are severe.”