August 19, 2019

By: Brian S. Wood, Partner, Smith, Currie & Hancock LLP

At some point, virtually every contractor and subcontractor will face the situation of being directed to proceed with the performance of contract, extra, or corrective work about which there is serious dispute. Most commonly, the dispute is over whether the work is a change to the contract and/or how much the work is worth. The question of whether the contractor or subcontractor should proceed with such work is one fraught with great risk and potential peril.

The Duty to Proceed Typically is Expressly Required By Contract
Whether a contractor has a legal duty to proceed with the performance of work is determined primarily by the terms of the contract. Many, if not most, construction contracts and subcontracts contain a clause requiring the contractor to proceed with work despite, and during the pendency of, a dispute over the very work in question. For example, the ConsensusDocs 200 Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum) contains the following provision:

§12.1 WORK CONTINUANCE AND PAYMENT Constructor shall continue the Work and maintain the Schedule of Work during any dispute mitigation or resolution procedure. If Constructor continues to perform, Owner shall continue to make payments in accordance with the Agreement.

This obligation virtually mirrors the obligation of contractors on projects for the federal government. Federal Acquisition Regulation 52.233-1, the “disputes” clause, dictates that:

(i) The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer

The intent of these clauses is to ensure that projects do not stop while differences between the parties are resolved. Importantly, courts and boards of contract appeals have consistently enforced “duty to proceed” clauses and upheld declarations of default and terminations resulting from a party’s failure or refusal to proceed with work. For this reason, it is almost always prudent for a contractor or subcontractor faced with a dispute, to proceed with the work under protest and file a claim for the extra, changed, or otherwise impacted work.

Saying “No” Brings Significant Risk
The ramifications of refusing to proceed with work are serious. They can include termination for default, liability costs to substitute and complete the work (typically at premium rates), seizure of the contractor’s materials and equipment, delay damages, and, in some cases, consequential damages. Critically, the breach of the duty to proceed can even absolve the terminating party of liability for an incorrect decision or position in the underlying initial dispute. For example, in a case from last year, a Nebraska court upheld the termination of a plumbing subcontractor who stopped work over a dispute about welds in its piping. In the litigation over the termination, the plumbing subcontractor focused its defense solely on challenging the contractor’s determination that the plumbing work was defective, without addressing the issue of continuation of work. The court’s decision, however, turned on the subcontractor’s failure to follow the contractor’s directives to proceed with the repairs and follow the contractual requirements, irrespective of whether the allegations of defective work were correct. The court held:

The contract further set forth the manner in which replacement of allegedly defective work was to be corrected. There is no question that [the subcontractor] failed to abide by these requirements, regardless of whether its work was, in fact, defective.

(emphasis added)

In other words, refusing to proceed with work can bail the other party out of a mistake.

Legitimate Reasons for Stopping
The duty to proceed is not absolute. Courts and boards of contract appeals have recognized exceptions to the duty to proceed where:

  • The party directing the contractor to proceed materially breaches the contract
  • The contract and specifications are so defective that performance will result in failure
  • The contractor requires a clarification or information from the other party in order to proceed

Material breaches can include nonpayment of undisputed amounts without reasonable justification or making changes so substantial in nature and/or magnitude that they fundamentally change the purpose or scope of the contract. These changes are commonly referred to as “cardinal” changes. An example might include being contracted to install driven piles, then being directed to change the foundations to drilled shafts. Most changes, however, are not that clear and obvious.

Because modern construction contracts contemplate and expressly provide for changes to the scope of work, courts and boards of contract appeals have been reluctant to find that a change rises to the level of a cardinal change, excusing the contractor from further performance. That is particularly the case with federal contracts, where an alternate version of the disputes clause requires the contractor to proceed with work pending resolution of disputes not only arising under the contract, but also “relating to” the contract. This version of the duty-to-proceed clause arguably contemplates cardinal changes.

Because the stakes of stopping work are so high, a contractor or subcontractor should consider invoking an exception to the duty to proceed only where the case is virtually indisputable or where the costs of proceeding with work outweigh the risks and costs of termination for default. Such circumstances may include when the existence of the business is put at risk by continuing work.

Be Careful What You Say
Contractors and subcontractors should also be mindful about the language they use during discussions and written exchanges about changes and proceeding with work. While some are inclined to use threats of stopping work as leverage is such negotiations, contractors and subcontractors are cautioned that the threat of stopping work itself may constitute a breach, allowing the owner or contractor to terminate the contract or subcontract. Courts and boards have long held that a “positive, definite, unconditional, and unequivocal manifestation of intent … on the part of a contractor of his intent not to render the promised performance when the time fixed therefor by the contract shall arrive” constitutes a breach of the contract. Cascade Pacific Int’l v. United States, 773 F.2d 287 (Fed.Cir.1985). This breach, commonly referred to as an anticipatory breach or anticipatory repudiation, gives the other party the right to terminate the contract for default. While courts had long required a clear refusal to proceed with work in order to find an anticipatory breach, the court in Cascade Pacific held that a contractor’s statement – that it would be unable to perform if the government did not accept painted in lieu of plated spring hinges – constituted anticipatory repudiation of the contract.

The take-away: a contractor or subcontractor should refuse to proceed with work only when they have a strong legal basis for doing so, and then only as a last resort. In the words of Ralph Waldo Emerson, “[w]hen you strike at a king, you must kill him.”

An original version of this article (since modified for this publication) was published in the May/June 2019 edition of Deep Foundations, the magazine of The Deep Foundations Institute, Reproduced with permission.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.