US District Court for Western District of PA Holds Contractor Owes Properly Terminated Subcontractor Payment for Work Performed Prior to Termination Plus CASPA Interest

U.S. for Use and Benefit of Greenmoor, Inc. v. Travelers Casualty and Surety Co.
2009 U.S. Dist. LEXIS 113153 (W.D. PA 12/04/2009)

The Court held that a properly terminated subcontractor was nevertheless entitled to payment for contract work and extras performed prior to termination, less certain offsets for contractor’s damages. Subcontractor was also entitled to interest at 1% per month under a prompt payment statute, but because it was properly terminated was not entitled to lost profit on the terminated portion of the subcontract.

On March 15, 2004, the United States General Services Administration (“the GSA”) awarded the contract for the renovation of the Moorhead Federal Building in Pittsburgh, Pennsylvania to Burchick Construction Company (“Burchick”). Asbestos abatement was the most critical activity to the project schedule as other work could not proceed until it was completed, and to accommodate this situation, the project was divided into five phases spanning nearly five years. The GSA also retained URS Corporation (“URS”) to act as its agent and construction manager on the project. URS was responsible for the day to day inspection of the asbestos work.

Burchick let a contract for all of the asbestos abatement with Greenmoor, Inc. (“Greenmoor”), a licensed asbestos abatement contractor. The subcontract agreement called for Greenmoor to perform all its work “in a manner consistent with the highest generally accepted level of skill and care,” and to “perform all work…in strict accordance and full compliance with the terms of this Subcontract, and to the satisfaction of the Contractor and Owner.” Because URS was acting as the GSA’s construction manager and agent under GSAR 552.236-71(a), this term obligated Greenmoor to follow URS’s instructions and directives. Furthermore, the contract gave Burchick the right to terminate the agreement “at any time” for failure to “comply with all provisions of the Subcontract” or for default.

Burchick requested that Greenmoor obtain a bond for the entire project, but it was unable to do so. Ultimately, Greenmoor’s surety agreed to bond Phases 1 through 3 at the outset of the project, and to then bond Phases 4 and 5 when the first three phases were complete. As a result, Burchick also required Greenmoor to set up an escrow account to ensure that Greenmoor would eventually produce the requisite bonds. The agreement called for the funds to be released as soon as the bonds were produced. When the bonds were eventually produced, however, Burchick refused to accept them or to pay any monies from the escrow account claiming that the agreement had already been terminated.

Burchick’s refusal arose as a result of a dispute that began at or around the completion of Phase 1. Although Greenmoor’s work passed inspection and was certified by the Allegheny County Health Department, URS observed various deficiencies and it brought these problems to Burchick’s attention. URS discovered additional deficiencies during the attempted clean-up, citing recurring failures to meet the required standards of care, lack of supervision, and failure to follow its directives. Eventually, Burchick lost confidence in Greenmoor’s ability to remedy the defects in its performance, and it exercised its right to terminate the subcontract agreement. Greenmoor was than replaced by another subcontractor, but for a short time when a temporary injunction ordering its reinstatement was granted by the Court of Common Pleas.

After the grant of the preliminary injunction was reversed, Burchick reinstated its earlier termination of Greenmoor. Greenmoor then filed this breach of contract action alleging three general categories of damages: 1) payments it contended it was owed for work completed under the subcontract; 2) lost profits on those portions of the project it contended it was wrongfully precluded from performing; and 3) costs associated with labor inefficiencies allegedly caused by Burchick and URS. The first category of damages was further broken down into three subcategories including: 1) payments due under the Escrow Agreement before it was terminated; 2) payments due on unpaid payment applications; and 3) payments for backcharges and extra work. For each of the damages it claimed, Greenmoor also sought interest under Pennsylvania’s Contract and Subcontractor Payment Act (“CSPA”), which provides for strict payment deadlines and penalties on construction projects.

The Court concluded that Greenmoor failed to perform it obligations in the manner required by the Subcontract Agreement, and it was therefore in material breach. Further, the breach was substantial enough to justify termination, a result that was supported by explicit contract language permitting termination for default if “at any time” Burchick felt that Greenmoor did not comply with the agreement. Nonetheless, the Court also found that Burchick breached the Escrow Agreement by failing to release the escrowed funds to Greenmoor upon timely receipt of the bonds for Phases 4 and 5.

The Court also concluded that Greenmoor was entitled to some of the damages it claimed. Furthermore, even though Greenmoor had been rightfully terminated, it was still entitled to CSPA interest on some of the payments that Burchick wrongfully withheld prior to termination. First, Greenmoor was entitled to the entire escrow balance with CSPA interest accruing from the time the amounts were due and owing. Next, the court awarded damages for unpaid payment application amounts that Burchick admitted were due and owing. CSPA interest was also added to these claims accruing from the time when the applications should have been paid. Finally, the Court awarded damages, including CSPA interest, for change orders and backcharges where it determined that the work done was truly outside Greenmoor’s original scope of work. However, the court refused to award any damages for lost profits or labor inefficiencies because of its determination that the contract was rightfully terminated.

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