Many construction contracts require a contractor or subcontractor to continue to work during a pending dispute between an owner and a contractor or a contractor and subcontractor. One purpose of requiring continued performance is to ensure that good faith disputes will not prevent the timely completion of a project.

Will a continue-performance-during-disputes clause prevent a contractor from ever stopping work on a project? A recent federal court case illustrates that under some circumstances, a contractor may not be required to continue to build a project even if the contract prohibits the contractor from stopping work.

 In United States ex rel. Sustainable Modular Management, Inc. v. JE Dunn Construction Company, which I have written about previously, a contractor entered into a contract with the federal government to design and construct renovations to a hospital. The contract required the contractor to build a temporary facility (TF) to house hospital departments during the renovation of the project.

The contractor engaged a subcontractor that would design, construct, deliver, and install the TF. The subcontractor was also required to reconstruct the TF between the two phases of work and remove the TF after the renovations were done.

The subcontractor stops working on the project.
After the subcontractor’s work started, there was a delay to completion of phase one of the project. The contractor contended it was the subcontractor’s fault, and the subcontractor disagreed. The parties’ dispute ended with the subcontractor stopping work, and the contractor completed the subcontractor’s work.

Under the subcontract’s dispute resolution procedure, the subcontractor was required to continue working if a dispute arose during performance of the subcontract. That procedure also required the subcontractor to exhaust potential claims through an alternative resolution procedure before stopping work.

The subcontractor sues the contractor, and the contractor asserts a counterclaim against the subcontractor.
The subcontractor sued the contractor to obtain payment for work performed, and the contractor countersued the subcontractor for the cost to complete the subcontractor’s scope of work. The contractor filed a motion for partial summary judgment as to the subcontractor’s breach of contract claim and the contractor’s competing breach of contract claim.

The contractor argued that the subcontractor breached the contract as a matter of law when the subcontractor failed to continue to perform during the parties’ dispute as required under the subcontract. The subcontractor argued that it could not continue to perform because the contractor removed two of the subcontractor’s superintendents and the subcontractor could not continue to perform its work without a superintendent under the subcontract.

The court analyzes the contract’s continue-performance-during-disputes clause.
The court noted that the contract contained a dispute resolution procedure requiring the subcontractor to continue to perform, even if it believed the contractor’s directives were wrong. The court held that it could not grant partial summary judgment in favor of the contractor because there was a genuine issue of material fact as to whether the contractor’s conduct forced the subcontractor into nonperformance.

Unlike in cases where a subcontractor refused instructions and stopped work until certain conditions were met, the court found that the subcontractor did not stop performance and “demand that the contractor acquiesce to its conditions. Instead, the record lends itself to the inference that [the subcontractor] was forced to cease working, and then replaced, because of [the contractor’s] actions.”

The court wrote that when the contractor:

asked whether [the subcontractor] intended to resume work after [the contractor] removed [the subcontractor’s] second superintendent, [the subcontractor] stated that it intended to continue to work and would send a new superintendent to start the following Monday, after the holiday weekend. But despite this information, [the contractor] told [the subcontractor] that it would be taking over [the subcontractor’s] remaining work.

Thus, the court concluded that “[u]nder these conditions, the Court is unable to conclude that the Subcontract’s dispute resolution procedure clause precludes [the subcontractor’s] breach of contract claims.”

The court notes exceptions to the requirement to continue to perform during disputes.
The court then noted other case law indicating the following:

The obligation to continue to perform work pursuant to a dispute resolution procedure may not be binding in all circumstances. Courts have found that subcontractors may be justified in their decision to stop work, despite the clause, if the dispute resolution process fails its purpose because of its futility, unavailability, or the contractor’s lack of justification for terminating the subcontract.

The court went on to write that under the circumstances of the case it was considering:

the dispute resolution procedure has effectively failed in its purpose, and it would be futile to require the subcontractor to continue working and exhaust for two reasons. First, the subcontractor cannot continue working if the contractor has already stopped and prevented it from working. . . . Second, and related to the first, there is no work for the subcontractor to return to if the contractor has replaced the subcontractor. Continued exhaustion of the procedure is futile. In other words, exhaustion of the dispute procedure resolution [sic] is effectively unavailable where the contractor replaces the subcontractor before an appeal can be filed and reviewed.

As such, the court denied the contractor’s motion for partial summary judgment as to the breach of contract claims. This means that at trial, the finder of fact (either a jury or the judge) will decide whether the contractor anticipatorily repudiated the subcontract by acting in such a manner as to make future performance under the subcontract impossible.

Bottom Line: If a contractor’s or subcontractor’s agreement has a continue-performance-during-disputes clause, it will frequently be the right decision to continue to perform while the dispute is ongoing. But the above case shows that in limited circumstances, there may be situations where a contractor or subcontractor can stop work. If you would like to read more about the Sustainable Modular case, click here.

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