YOUR TERMINATION CLAUSE MAY NOT MEAN WHAT YOU THINK
In November 2022, a trial court in New York ruled that although a subcontractor submitted no invoices for its work prior to termination, and may not even have performed any work, it was still entitled to the remaining balance due on the contract after it was terminated by the general contractor. SA-FE Windows, Inc. v. MJM Associates Construction, LLC, 2022 NY Slip Op 33893 (Sup. Ct. Kings County 2022).
In SA-FE, the GC hired a subcontractor to perform certain window work in the amount of 1.7 Million dollars in connection with a project in Brooklyn, New York. After a dispute arose over the quality of the subcontractor’s work, the GC terminated the subcontractor under the contract’s termination provision. The provision stated that upon termination the subcontractor would not be entitled to any further payment until the work was completed. It further stated that any unpaid balance would only be paid to the subcontractor to the extent it did not exceed the GC’s cost to complete.
At the time of termination there was approximately $336,000.00 remaining in the subcontract and the GC only paid $60,000.00 to complete the subcontractor’s work, thereby leaving a balance of $276,000.00 in the subcontract. In ruling that the GC was required to pay the defaulted subcontractor this amount, the court rejected the GC’s argument that the subcontractor (1) was only entitled to these funds where it performed work (2) was previously paid for the work it performed and (3) did not submit any invoices to the GC for its work.
In rejecting these arguments, the court stated that based on the plain language of the termination provision it did not matter whether the subcontractor performed any work prior to termination, but that instead the termination provision triggered payment to the Subcontractor “even where the subcontractor performs no work at all”. The court further opined that there was “no requirement for the subcontractor to engage in some work, even inferior work, in order to be entitled to payment pursuant to” the termination clause.
Many construction contracts have similar termination clauses to the one in this case. They essentially provide that upon termination, the subcontractor will not be entitled to any further payment until the project is complete and then only if there is a balance remaining after the cost to complete is determined will the balance be released to the subcontractor. However, this case raises an interesting point. What if the subcontractor performed no work at all prior to termination? Would it still be entitled to any remaining balance left in the contract? The court here answered that in the affirmative and supported its decision by pointing out that if this was not the case then contractors would be free to terminate subcontractors upon finding a cheaper price to perform their work “without fear of owing the first subcontractor any compensation”.
The bottom line is that contracts will be enforced according to the plain meaning of the language employed, even if it may result in an inequitable result. Accordingly, contractors should carefully craft termination provisions in their subcontracts to specifically identify what compensation, if any, a defaulted subcontractor will be entitled to upon termination.
About the author: George Marco is an attorney practicing in the field of construction law. He also holds a Bachelor of Science in Mechanical Engineering and was previously employed as a Project Manager for a public improvement contractor.
Disclaimer: This article is for informational purposes only and not intended to serve as legal counsel.