July 2003
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
The law is well established that a subcontractor cannot recover delay damages from its contractor where the delays were not caused by the contractor or someone under the contractor's direction or control. In the recent case of Regional Building Systems, Inc., a federal appellate court determined that the contractor, a debtor in a bankruptcy proceeding, was not liable to its subcontractor for delay damages caused by the owner's failure to make timely payments.
Background
Regional Building Systems, Inc., a contractor, entered into a contract with an owner, Aspen Knolls Construction Corp. in December 1991 to manufacture, deliver and install 1,000 housing units on Aspen Knoll's property in Staten Island, NY. The contractor entered into a subcontract with Bedford Construction Corp. in February 1992 under which the subcontractor was responsible for transporting the modular units manufactured by the contractor to the building site and erecting and completing the units.
In late 1992, the owner experienced financial difficulties and defaulted on a number of payments to the contractor. As a result, the contractor experienced a severe cash flow problem. Unable to meet its contractual obligation to deliver the requisite number of housing units to the subcontractor, the contractor suspended its work under the subcontract. The subcontractor was forced to bear the expense of supporting idle labor and equipment, which would otherwise have been devoted to productive work.
In July 1993, the owner ceased paying the contractor altogether. The contractor terminated its contract with the owner and also terminated its subcontract. A few months later, the contractor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. As part of the bankruptcy plan, $5 million received by the contractor from the owner was segregated, to be held in trust for Article 3-A trust beneficiaries. Claimants had to demonstrate that they had a valid claim under Article 3-A of the New York Lien Law, which meant demonstrating that they furnished labor, materials or services for the improvement of the property.
The subcontractor filed an Article 3-A claim for $1,448,226.49. During the hearing to determine the validity of the subcontractor's claim, the subcontractor was paid the undisputed portion of its claim in the amount of $718,128.83. The hearing proceeded for a determination of the subcontractor's additional claims, including a claim for delay damages.
The bankruptcy court held that the subcontractor could not recover for delay damages. The United States District Court affirmed and the subcontractor appealed to the United States Court of Appeals.
Decision
The subcontractor argued that the financial difficulties of the contractor did not excuse its performance under the subcontract. Therefore, according to the subcontractor, the contractor was liable for the costs of the labor and equipment that were idled when the contractor was unable to provide the requisite number of manufactured units and suspended its obligations under the subcontract. The subcontractor also argued that the contractor was undercapitalized, and therefore, was wholly responsible for the delays.
The appellate court disagreed. Relying on the leading case decided by New York State's highest court in Triangle Sheet Metal Works, Inc. v. James H. Merritt and Co., it held that a subcontractor may not recover from a contractor for delays caused by the owner. The court recognized the general rule in New York that, "absent a contractual commitment to the contrary," a contractor is not responsible for delays that its subcontractors may incur unless the delays are caused by some agency or circumstance under the contractor's direction or control.
The appellate court upheld the bankruptcy court's findings that the owner's breach of its payment obligations was the cause of the contractor's suspension of work and that the contractor reasonably suspended deliveries only after the owner defaulted on several payments. The contractor justifiably terminated the contract only after the owner defaulted on two invoices totaling more than $3 million, which severely hampered the contractor's cash flow. The court rejected the subcontractor's argument that the contractor was undercapitalized, and held that the owner was wholly responsible for the delays. Under the general rule, the contractor was not liable for delays caused by the owner.
Conclusion
The appellate court denied the delay claims because the contractor had no control over the circumstances that caused the delay to the subcontractor. The delay resulted from the owner's failure to meet its payment obligations, to the extent that the contractor could not proceed with the contract. The result would have been different if the subcontract contained a provision by which the contractor guaranteed the job's progress or performance. Where there is such a guarantee, the contractor may be liable regardless of the cause of the delay. In the absence of such a contractual guarantee, or control of the circumstances that caused the delay, the contractor is free from liability for delay damages.
About the author: Mr. Miuccio is a partner in the New York City- based law firm Altieri, Kushner & Miuccio, P.C. and legal counsel to the Construction Industry Council of Westchester and Hudson Valley, Inc. Robert Mark Wasko, senior associate with the firm, assisted in the preparation of this article.