Contractor’s Withholding of Payments Excuses Sub’s Performance |[OH CT APP]|

A general contractor and subcontractor entered into a contract to perform construction work on a public school building. The sub contracted with the contractor to supply materials and services related to the installation of aluminum window systems, as well as window and door frames. During construction, the sub submitted monthly pay applications. Although an eight percent labor cost retainage provision existed within the contract, the contractor withheld thirty-six percent of payments received from the owner that were designated for the sub. Amidst disputes over work billed for and subsequent payments, the sub walked off the job. To complete the project, the contractor hired a replacement.

The sub brought a breach of contract suit against the contractor claiming failure to pay labor and material costs which included $11,095.01 in custom-made “storefront materials” acquired by the sub. Additionally, the sub asserted a prompt-pay claim for failure to make payments. The contractor counterclaimed arguing that the sub breached by walking off and forcing the contractor to find a replacement. At trial, the court determined that the contractor breached the contract by failing to pay in accordance with the contract and that, following the breach, the sub’s performance was excused.

In H&H GLASS, INC. v. EMPIRE BLDG CO., LLC., 2016-Ohio-3029, 2016 WL 2968071 (1st Dist. Ct. App. May 18, 2016), the court of appeals in Hamilton County upheld the breach of contract ruling and affirmed all of the trial court’s findings. Regarding the material nature of the breach, the court held that the contractor’s consistent withholding of a sum not contractually permitted amounted to a breach in an essential purpose of the agreement. That breach released the sub from any further performance obligation which consequently eliminated the contractor’s set-off damages resulting from rehiring. Also, because of the sub’s custom-made material had no general utility, and therefore could not be repurposed, the court affirmed the trial court’s damages ruling.

Concerning the sub’s prompt-pay claim, the court found the claim inapplicable due to the nature of the dispute. According to R.C.4113.61(A), a contractor shall pay a sub an amount equal to the percentage of the sub’s completion within ten calendar days after receipt of payment from an owner or construction manager. Failure to pay shall result in a prejudgment interest at an annual rate of eighteen percent. However, a prompt-pay prejudgment interest is only warranted when the general withholds payments in bad faith for performance of labor or furnishing of materials. The court held that the contractor withheld money because of contested disputes rather than bad faith and therefore rejected the claim.

Best Practices:

1. Pay applications should be consistent with contract-based retainage – Absent clear and obvious errors in billed work, an owner or general contractor should honor pay applications from sub-contractors in accordance with contract retainage provisions.
2. Consistent conduct not supported by contract can result in a material breach – Wrongfully and consistently withholding a contractor’s payment for labor costs can be characterized as a breach going to the essence of the parties’ agreement.
3. Seek comparable subs to replace walk-offs – But for the contractor’s material breach, the court in H&H would have likely been awarded it set-off damages. However, if regardless of a contractor’s certainty of fault, it should mitigate losses by hiring comparably priced subs to the best of its ability.
4. Be cautious of ten-day prompt pay requirement – Although the Prompt-Pay Act does not apply to disputes over whether a sub had completed work billed for, disputes over materials, or withholding of monies to cover costs to hire another sub, it applies to payments withheld in bad faith. Additionally, the Act removes the contractor’s right to retainage after fifty percent of the project is completed. This can complicate sub-contracts for work only conducted during the front- and back-end of a project (i.e. excavation or flooring subcontracts).
5. Purchase custom-made material from excused sub – If a sub has acquired materials unique to the project and walks off, the contractor should try to purchase those materials to mitigate losses.

– Christian H. Robertson II

All materials have been prepared for general information purposes only to permit you to learn more about construction law. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.