Federal Court in Pennsylvania Holds That Contractor’s Nominal Underpayment of Progress Payments Does Not Relieve Subcontractor’s Duty to Perform

by Pepper Hamilton LLP
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Butch-Kavitz, Inc. v. Mar-Paul Co., Inc., 2015 U.S. Dist. LEXIS 160652 (M.D. Pa. Dec. 1, 2015)

The United States Army Corps of Engineers (the “Owner”) entered into a contract (the “Contract”) with Mar-Paul Company, Inc. (“Mar-Paul”) for $3,381,000.00, under which Mar-Paul would serve as general contractor on a construction project for renovations to a building at the Tobyhanna Army Depot in Tobyhanna, Pennsylvania (the “Project”).  In turn, Mar-Paul entered into a subcontract (the “Subcontract”) with Butch-Kavitz, Inc. (“Butch-Kavitz”) for $452,000.00, under which Butch-Kavitz would perform the electrical and generator work in connection with the Project.

Shortly after Butch-Kavitz entered into the Subcontract, the Owner made numerous design and engineering changes to the Project.  As a result, Mar-Paul asked Butch-Kavitz to complete additional electrical work in connection with those changes.  The Subcontract limited the amounts of adjustment to the Subcontract price for this additional work to the amount added to the Contract price by the Owner, excluding Mar-Paul’s overhead and profit.  After all changes and additions to the work were executed, the adjusted Subcontract price was $485,004.68.

For more than one year, Butch-Kavitz completed work on the Project and submitted payment applications to Mar-Paul.  Pursuant to the Subcontract, the amount of each progress payment due to Butch-Kavitz was based on the amount of work completed by Butch-Kavitz during a given billing period, subject to approval by Mar-Paul and the Owner.  For each of Butch-Kavitz’s payment applications, Mar-Paul would submit a payment application to the Owner that incorporated the percentage complete for each item of electrical work into the corresponding schedule of values.  The Owner would then inspect the work to verify whether the percentages of completed work were fair and accurate and would approve and pay Mar-Paul’s final application for payment each month.  In turn, Mar-Paul would then pay Butch-Kavitz an amount equal to the percentage of the electrical work approved by the Owner as complete, less the retainage that the Owner withheld from Mar-Paul.

Mar-Paul paid Butch-Kavitz ten progress payments during the course of approximately 13 months.  Of the ten progress payments, Butch-Kavitz was overpaid seven times and underpaid three times, taking into account the Owner’s 10% retainage.  Butch-Kavitz’s largest positive balance (overpayment by Mar-Paul) was $8,678.49 and its largest negative balance (underpayment by Mar-Paul) was $549.84.  Every time Butch-Kavitz was underpaid, Mar-Paul corrected the delinquency by overpaying the following progress payment.  In total, Mar-Paul paid Butch-Kavitz $402,004.68 for work performed on the Project.

However, after February 4, 2013, Butch-Kavitz refused to return to the Project site to complete the remaining electrical and generator work, citing nonpayment as its justification for terminating the Subcontract.[1]  At the time Butch-Kavitz abandoned the Project, much of the work was unfinished.  As a result, Mar-Paul hired various subcontractors to complete Butch-Kavitz’s unfinished work.

Butch-Kavitz brought, inter alia, a breach of contract claim against Mar-Paul and alleged that Mar-Paul failed to pay in excess of $121,080.00 for the material and labor provided in completing the electrical and generator work on the Project.  Mar-Paul counterclaimed for breach of contract in the amount of $17,866.36 for excess costs, expenses and damages for Butch-Kavitz’s abandonment of the Project prior to completing the work.

The United States District Court for the Middle District of Pennsylvania held (1) that Mar-Paul did not breach the Subcontract with respect to its progress payment obligations and (2) that Butch-Kavitz’s abandonment of the Project site on February 4, 2013 was a clear act of default pursuant to the Subcontract.[2]  The court reasoned that Mar-Paul’s negligible underpayments to Butch-Kavitz in the amounts of $192.15 and $549.84 did not constitute breach “so substantial” as to justify Butch-Kavitz’s abandonment of its contractual obligations, especially where Mar-Paul tendered the amount necessary to cure the delinquencies at the time the next progress payment was due.  As Mar-Paul did not materially breach the Subcontract, Butch-Kavitz was not relieved of its duty to perform.  Therefore, pursuant to the Subcontract, Butch-Kavitz’s abandonment of the work constituted an act of default.  The clear language of the Subcontract entitled Mar-Paul to recover the cost of completing the remaining work and any overages incurred.  Accordingly, Butch-Kavitz was not entitled to recover on its breach of contract claim; rather, Mar-Paul was entitled to judgment in its favor on its counterclaim.

The proper measure of damages in a case where a subcontractor walks off the job after completing only a portion of the work required by its agreement is the difference between the contract price and cost of completing the work left undone.  The court found that Mar-Paul clearly established that (1) Butch-Kavitz abandoned the job site on February 4, 2013, and as a result, Mar-Paul was required to hire other companies to complete the work; (2) the amount of work was necessary to complete the Subcontract; and (3) pursuant to the Subcontract, Mar-Paul could deduct from any unpaid balance due to Butch-Kavitz its expenses of completing the work and demand any excess of its expenses of completing the work over any unpaid balance due to Butch-Kavitz.  In fact, Butch-Kavitz offered no proof to counter Mar-Paul’s assessment of the cost of completion nor presented evidence that the invoices submitted by the parties hired to complete the work were unreasonable or that Mar-Paul could have had the work finished at a lower rate.

The unpaid Subcontract price was $82,993.83.  Mar-Paul’s cost to complete the Subcontract plus its contractual 10% overhead and 5% profit markups was $100,423.56.  Therefore, the court found that Butch-Kavitz owed Mar-Paul $17,429.73 in damages for breach of contract.

 

[1] Butch-Kavitz used a ledger that distorted the nature of Mar-Paul’s payment obligations because Butch-Kavitz did not account for the fact that the Owner frequently approved lesser amounts for payment and did not include adjustments to account for the 10% retainage.

[2] If the court had found that Mar-Paul defaulted on its payment obligations, Butch-Kavitz would have been entitled to terminate the remainder of its contractual obligations.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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