March 27, 2019

General Contractor’s Unjustified Threats to Assess Delay Damages Against Subcontractor Are a Material Breach of Contract

Randy Kinder Excavating, Inc. v. JA Manning Constr. Co. 2018 U.S. App. LEXIS 21878 (8th Cir. Aug. 7, 2018)

By: Luke N. Eaton, Associate, Pepper Hamilton LLP

This dispute arose from a contract to build a pumping station in Arkansas. In June 2010, the U.S. Army Corps of Engineers (COE) awarded a contract to Randy Kinder Excavating, Inc. to serve as the general contractor on the project. Kinder entered into a subcontract with J.A. Manning Construction Co. to engineer, furnish and install a mechanically stabilized earth (MSE) wall at the project.

The project experienced significant delays, which affected Manning’s initial start date. By the time Manning could begin constructing the MSE wall, only six days remained until the original completion date of the entire project. Unknown to Manning, however, Kinder was telling the COE that weather and other issues were delaying the project, and Kinder represented to the COE that its projected completion date for the MSE wall was in summer 2012. At the same time, Kinder was telling Manning that the MSE wall needed to be completed by November 2011 and repeatedly threatened to assess delay damages against Manning if this did not occur. In addition, during the construction of the MSE wall, Kinder and/or the COE demanded that Manning install the wall panels 0.75 inches apart with absolutely no variance, despite industry standard allowing a 0.25-inch variance. On March 7, 2012, Kinder terminated Manning, at which point Manning had constructed 27.5 feet of the 40-foot MSE wall. The MSE wall was later completed by a replacement contractor, although the wall as accepted by the COE contained a number of defects that Kinder and the COE told Manning were unacceptable.

In October 2012, Kinder filed suit against Manning, alleging breach of contract and tortious interference. Manning counterclaimed, alleging that Kinder had wrongfully terminated the subcontract. The district court conducted a bench trial, after which it decided the matter in favor of Manning. Specifically, the district court concluded that: (1) Kinder committed the first material breach of contract by threatening to assess delay-related damages without any justification; (2) Kinder materially breached the contract by wrongfully terminating Manning; and (3) any of the alleged deficiencies in Manning’s work were not material breaches and Manning had substantially performed its obligations. The district court awarded Manning $215,578.24, which represented Manning’s cost for unpaid labor and materials incurred prior to the date of termination. Kinder appealed.

Kinder’s primary argument on appeal was that the district court erred in concluding that Kinder committed the first material breach, and instead Kinder argued that the first breach occurred when Manning failed to pay its suppliers for the MSE wall.

The subcontract between Kinder and Manning contained a choice-of-law provision requiring the application of Missouri law. In Missouri, under the “first to breach” rule, “a party to a contract cannot claim its benefit where he is the first to violate it, [however] only a material breach may excuse the other party’s performance.” Therefore, in order for Kinder to prevail, it needed to show that Manning committed the first material breach.

To determine whether Manning’s alleged failure in performance was material, the court analyzed the five factors set out in the Restatement (Second) of Contracts section 241. After reviewing these factors, the court determined that, even assuming that Manning’s failure to pay its suppliers occurred before Kinder’s threats, the district court correctly determined that Kinder’s unjustified threats to impose delay-related damages were the first material breach. Specifically, the court noted that the evidence suggested that Kinder’s incessant threats were actually the driving force behind Manning’s failure to pay suppliers and that Manning would have paid its suppliers’ invoices as soon as it received assurances that it would be paid by Kinder.

Kinder also argued that the district court incorrectly determined that Kinder’s threats were a breach of contract. Kinder maintained that these threats were justified because Manning was failing to comply with Kinder’s scheduling demands. The court rejected this argument, noting that Kinder’s claim “completely fails to acknowledge that Manning, through no fault of its own, was prevented from beginning work until more than one year after it was originally supposed to. It therefore would have been impossible for Manning to perform according to the timelines contained in the early schedules.” The court also found that Manning was, in fact, performing in accordance with the timeline contained in the schedule that Kinder sent to the COE, which stated that Manning should be finished with the MSE wall in summer 2012.

Pepper Hamilton’s Construction Practice Group has an unparalleled record of resolving complex construction disputes and winning complex construction trials. Our lawyers counsel clients on some of the biggest, most sophisticated construction projects in the world. Chambers USA named our firm Construction Law Firm of the Year in 2018, and we are nationally ranked in Chambers USA, The Legal 500 United States, and U.S. News / Best Lawyer. With a national network of attorneys across 14 offices, including many with first-chair trial experience, we have the depth and breadth to try cases of any complexity, anywhere at any time. For more information about Pepper’s Construction Practice, visit www.constructlaw.com.

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