Must you wait when a sub can't perform?

EVERY ONCE IN a while you may find yourself in a subcontract with someone who shows signs of not being able to perform. Sometimes it's very clear-cut — the firm just disappears or announces that it is closing its doors. Sometimes it's not so clear — the firm is just limping along, making excuses, but still doing something.

In a recent decision, a federal court in New York pointed out the difference between a current breach and an anticipatory breach of contract, and how that difference affects your right to take action.

In United States Fidelity & Guaranty Co. et al. v. Braspetro Oil Services Co. et al. , 369 F.3d 34 (2nd Cir. 2004), the contractor-announced to the owner that it was out of money and would not be able to complete the work without financial assistance from the owner ( a " thinly veiled threat," according to the court). Among many, many other issues, the parties disagreed whether this announcement triggered the sureties' obligation to act, or whether the owner had to wait until the completion date had not been met. The court pointed out that a failure by a contractor to perform at the time indicated in the contract establishes an immediate breach, which allows the owner to declare an immediate default and take action.

An announcement by a contractor that it will not be able to perform in the future is a anticipatory repudiation, and it is up to the other party — the promisee — to decide whether to consider this a breach at the present, or wait until the date performance is due to declare a default. (369 F.3d at 53-54.) The court went on to hold that, in this case, the statement by the contractor that it would not be able to complete without additional money was an immediate breach that entitled the owner to declare a default right away. It did not have to wait until the date of final delivery came and went.

Indeed, to hold otherwise would set a most troubling precedent. To force the owner to wait until the completion date would unfairly place the burden of the contractor's non-performance on the owner, inevitably lead to a greater volume of litigation and inefficiently increase the costs of large-scale construction projects.

In this case, the decision wasn't hard to make since the contractor had gone to the owner and admitted it couldn't go forward without additional money, which the owner was not obligated to advance. In most situations, of course, it isn't so clear.

Far more typical is the situation in which the subcontractor threatens to stop at some point short of completion, or improves a little but still way less than you believe is necessary to stay on schedule.

As the court in the Braspetro case noted, however, that doesn't mean that you can't still do something about it. In the first situation mentioned above, where the other party tells you that at some point it will run out of money/ materials/men, etc., and won't be able to perform as required, its comments could be considered legally as an "anticipatory repudiation" of its contract. This leaves you with the option to declare a default now or wait until the time of this event comes to pass — unless, of course, your contract provides otherwise. Many contracts require a seven-day notice of default and then another seven days of time to cure before termination can occur, and if yours has a provision like this, you need to follow it.

The second situation, where the contractor won't admit default or says that it is performing when in fact you can see that it is not, is difficult but doesn't leave you helpless.

If your contract is written right, you should have the option to declare default for failure to make progress. This is a current default, giving you the right to take the appropriate steps allowed by your contract for default. Of course, you need to have all your facts right and documented in case there is a fight, but you should not be helpless, forced to sit back and wait for the eventual collapse of your job.

As with many areas of law, if you are dealing with a supplier or another contract primarily for materials and not installation, you will be governed by the Uniform Commercial Code as it has been adopted in your state, and the type of action you are allowed to take may be different.

If something as serious as a possible default arises, you should be talking to your lawyer anyway, who will advise you how to document what is happening and what your contract allows you to do about it. It may mean jumping through more hoops than you'd like, but that advice may allow you to get out of a bad situation and move forward to make your customer happy it's dealing with you.

These outcomes in these situations will turn on the very specific facts, so you can't over-generalize here, but there often is a way out of these difficult lack-of-progress cases.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to [email protected].