Federal Court Rules that Subcontractor Duties Are Not Terminated by Contractor’s Modest Underpayment

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by Stephanie Dodson Dougherty

The Mar-Paul Company, Inc. (“Mar-Paul”) entered into an electrical subcontract with Butch-Kavitz, Inc. (“Butch”) for a renovation project at the Tobyhanna Army Depot in Pennsylvania owned by the United States Army Corps of Engineers. The subcontract amount for electrical and generator work by Butch was $452,000.00. However, the owner of the project called for a variety of expansions to the work that altered the scope of Butch’s involvement on the project. The subcontract amount was increased by over $33,000.00 to correspond to Butch’s additional work, bring the adjusted contract price to $485,004.68.

Throughout the course of the performing work on the Project, Butch submitted pay applications to Mar-Paul. Although Mar-Paul and the project owner approved all ten of the pay apps, Mar-Paul failed to make sufficient progress payments to Butch on three of them. The largest amount Mar-Paul underpaid was $549.84. However, Mar-Paul overpaid by as much as $8,678.49 on the other seven pay apps and remedied each deficiency on their next payment. These discrepancies were due to the ledger used by Butch that did not account for the lesser amounts approved by the owner and failed to include the 10% retainage. Mar-Paul paid Butch a total of $402,004.68 for completed work.

Nonetheless, Butch walked off the job alleging nonpayment. To complete the work, Mar-Paul hired additional subcontracts at a total cost, including overhead and profit, of $100,423.56.

Butch brought a breach of contract suit against Mar-Paul in the U.S. Middle District of Pennsylvania, claiming the contractor failed to pay over $121,000.00 for completed work. Mar-Paul disputed these claims, arguing that they paid Butch for their completed work in accordance with the terms of the subcontract. The subcontract provided that all payments were subject to the approval of the U.S. Army Corps of Engineers. Accordingly, Mar-Paul’s counterclaim sought the additional expense of $17,866.36 incurred as a result of Butch’s abandonment and breach.

After hearing evidence, the court opined on three main issues to be resolved: (i) an ultimate determination of the subcontract price, accounting for the numerous changes to the project by the owner; (ii) whether Mar-Paul defaulted on its payment obligations, which would entitle relieve Butch from completing the remainder of its obligations under the subcontract; and (iii) the amount of damages recoverable pursuant to the subcontract.

When Butch walked off the job, the owner had previously approved $381,206.27 of Butch’s work as complete. However, the owner, withholding $30,702.65 in retainage, only provided Mar-Paul $350,503.63 payable to Butch for the work completed. Nevertheless, Mar-Paul paid Butch a total of $359,182.12, which was $8,678.49 more than Mar-Paul had received from the owner for Butch’s work.

The court found that Butch’s deserting the project was not justified by the negligible underpayments by Mar-Paul, which were found to not be a material breach. As Mar-Paul did not breach the subcontract, Butch was not relieved of its duty to perform. Therefore, the court ruled that Butch materially breached the subcontract by abandoning the job without cause. Accordingly, Butch was not entitled to further payment but, instead, Mar-Paul was entitled to restitution from Butch.

The measure of damages caused by a subcontractor abandoning the job is the difference between the cost to complete incurred by the contractor and the subcontract price. In this case, the unpaid subcontract price, the amount Butch would have been paid if they had finished the job, was $82,993.83. To complete the project after Butch walked off the job, Mar-Paul spent $100,423.56. Therefore, Mar-Paul was entitled to the difference of $17,429.73, plus attorney’s fees.

Case at ButchKavitz, Inc. v. MarPaul Co., Inc., 2015 U.S. Dist. LEXIS 160652 (M.D. Pa. Dec. 1, 2015)

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