U.W. Marx, Inc. v. Koko Contracting, Inc., No. 518611, 2015 N.Y. App. Div. LEXIS 600 (N.Y. App. Div. Jan. 22, 2015)

The Appellate Division of the Supreme Court of New York affirmed judgment in favor of a subcontractor holding that although the subcontractor failed to comply with a contractual provision requiring it to give timely notice of its intent to stop work due to contractor’s failure to make payment, the contractor’s prior failure to make three consecutive progress payments to subcontractor constituted an uncured, material breach that relieved the subcontractor from performing its remaining obligations under the parties’ contract.

This case arises out a breach of contract dispute on a school construction project.  U.W. Marx (“Marx”), the general contractor on the project, entered into a roofing subcontract with Koko Contracting (“Koko”).  During the course of the project, Marx failed to pay Koko for three months of work despite Koko’s repeated demands for payment.  On October 31, 2007, Koko ceased performing work on the project.  Shortly thereafter, Marx sent a notice to cure to Koko stating, among other things, that Koko was in default for failing to provide an adequate number of workers for the project.  After receiving Marx’s notice to cure, on November 6, 2007, Koko “belatedly provided Marx with the seven days’ notice of its suspension of work based on nonpayment as called for in section 4.7.1 of the [parties’] subcontract.”  Article 4.7.1, a standard AIA clause, states:

“If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may … upon seven additional days’ written notice to the Contractor, stop the [w]ork of this Subcontract until payment of the amount owing has been received.  The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor’s reasonable costs of demobilization, delay and remobilization.”

Obviously, Koko did not comply with Article 4.7.1, as Koko did not provide notice of its intent to suspend its work until a week after it actually stopped working.  However, the Supreme Court held and the Appellate Division confirmed that Marx’s reasons for withholding the three progress payments were “unsubstantiated and unjustified”, and that Marx’s failure to make these payments constituted an uncured, material breach.  Consequently, Koko was relieved from performing its remaining obligations under the contract and entitled to recover for Marx’s material breach.

As the Appellate Division explained, such a determination does not render Article 4.7.1 superfluous or meaningless.  According to the court, Article 4.7.1 is designed to protect the subcontractor and to compensate it in the event it has to stop work due to nonpayment and then remobilize.  Thus, because Koko failed to provide proper notice, it would have been precluded from recovering remobilization charges if it had resumed the work.  Moreover, by failing to provide proper notice to Marx, Koko assumed the risk that if the court had determined Marx’s failure to pay did not constitute a breach, then Koko’s work stoppage would itself have been improper, leaving Koko liable for damages.  Here, however, the Appellate Division found that there was a material breach by Marx and affirmed the judgment in favor of Koko.