Contractor’s Continued Acceptance of Subcontractor’s Performance Waives Right To Terminate

Ed Kimber Heating & Cooling, Inc. v. Travelers Casualty & Surety Co.
No. 3:03cv2111 (SRU), 2006 U.S. Dist. LEXIS 3323 (D. Conn. Jan. 26, 2006)

Trataros Construction, Inc. (“Trataros”), the general contractor on a school addition and renovation project, subcontracted with Ed Kimber Heating & Cooling, Inc. (“Kimber”) for the performance of HVAC and plumbing work. Travelers Casualty & Surety Co. (“Travelers”) issued payment and performance bonds as the surety for Trataros.

Trataros made progress payments to Kimber throughout the project. In January of 2003, however, Trataros made out its progress payment check from an account which required approval by Travelers. Travelers refused to approve this payment. For reasons unstated by the court, Trataros subsequently became unable to complete the job, and Travelers hired a replacement contractor. The replacement contractor in turn employed another HVAC subcontractor, prompting Kimber to cease work on the project.

Kimber sued Travelers on the payment bond. Travelers counterclaimed, seeking the excess cost of completing Kimber’s work with the replacement subcontractor, as well as the cost of correcting certain deficient work by Kimber. Kimber moved for summary judgment on the portion of Travelers’ counterclaim related to the completion costs. Applying New York law as required by the subcontract, the court granted Kimber’s motion.

Kimber argued successfully that Trataros’ and Travelers’ failure to make the January 2003 progress payment constituted a material breach of the subcontract which justified Kimber’s cessation of performance. Travelers put forth several justifications for withholding the January payment, contending that it and Trataros had the right to terminate Kimber before failing to issue the payment. The court rejected each of these contentions.

First, the court found that neither Trataros nor Travelers had complied with the provisions of the subcontract requiring written notice prior to termination for default. The court held that this failure alone defeated Travelers’ claim of justified termination. However, the court addressed Travelers’ other arguments as well, and held that Kimber could not have been terminated even if proper notice were provided.

Travelers had alleged that Kimber committed numerous breaches of the subcontract which would have permitted termination. Among other things, Travelers maintained that Kimber had failed to secure the required license for its work, had failed to pay prevailing wages to its laborers, and had failed to obtain required worker’s compensation insurance. The court held that Trataros’ continual payments to Kimber in spite of these various breaches constituted acceptance of Kimber’s performance and waived any right to rely on these breaches as a ground for termination.

Finally, Travelers had argued that the subcontract allowed Trataros to withhold payment where it would be “reasonable” to do so. Travelers cited Kimber’s overstatement of the percentage of work it had completed to date as such a reason for its refusal to issue the January 2003 progress payment. However, the court noted that Travelers did not discover this overstatement until March of 2003, and thus could not reasonably have relied upon it at the time it withheld the payment.

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