Factual Background – Shifting Completion Date(s)

A New York appellate court decision, Bast Hatfield, Inc. v. Joseph R. Wunderlich, Inc., 910 N.Y.S.2d 256, 78 A.D.3d 1270 (N.Y. 2010) (“Hatfield decision”) demonstrates the importance of ensuring that the completion date set forth in a subcontract is coordinated with that in the prime contract and is amended to reflect any changes to the overall project completion date. Failure to do that may negate a prime contractor’s ability to effectively assert that the subcontractor’s performance was not timely.

The Hatfield decision involved a lawsuit filed by the general contractor (Hatfield) against its site work subcontractor, Wunderlich, for damages arising from the latter’s alleged failure to complete its subcontract work by the completion date for the entire project. Under the terms of a May 2003 prime contract with the owner, Hatfield was to complete construction of a new Lowe’s store by October 31, 2003 with liquidated damages accruing thereafter. However, that completion date for the “project” was contingent upon the owner’s demolition of several existing buildings on the site. Since the demolition had not been accomplished at the time of contracting, Hatfield and the owner executed a letter agreement in May 2003 providing that no liquidated damages would be assessed until 180 days after removal of the existing buildings. The parties did not amend the prime contract to reflect that change.

In July of 2003, Hatfield subcontracted with Wunderlich for the removal of existing pavement, grading, and the installation of a storm drain, sewer pipe and underground utilities. The subcontract included a “time is of the essence” clause that required “the project” to be substantially complete no later than October 31, 2003 and set a final “project” completion date of November 15, 2003. The subcontract provided that Wunderlich was to “coordinate its work so as to be completed by the date indicated on Hatfield’s progress schedule in support of the overall completion date.” At the time of subcontract execution, the owner had not yet commenced the required demolition work at the site. On August 15, 2003, Hatfield and the owner executed a change order that altered Wunderlich’s work and extended the project’s substantial completion date - for the owner and Hatfield only - to January 31, 2004. Wunderlich’s subcontract was not amended to reflect the new January 31, 2004 substantial completion date for the entire project.

Subcontract Work Delayed

The owner finally completed demolition of the existing buildings in late September 2003. In addition to demolition-related delays, Wunderlich encountered other obstacles after its site work began in August 2003. Hatfield and Wunderlich disagreed as to the reasons for the delay and on October 17, 2003, Hatfield sent Wunderlich a 48-hour notice warning that it would be terminated unless it accelerated its work by October 20, 2003 and provided a plan to commence paving by November 10, 2003. Wunderlich did not respond to Hatfield’s satisfaction and Hatfield partially terminated the Wunderlich subcontract on November 24, 2003.

In April 2004, Wunderlich and a sub-subcontractor filed liens against the property, prompting Hatfield to commence a lawsuit against Wunderlich seeking damages for default by failing to substantially complete its work on October 31, 2003. Wunderlich, in turn, counterclaimed and the trial court ruled that Wunderlich had been wrongfully terminated and was entitled to damages from Hatfield. Hatfield’s claims were denied in total.

Failure to Coordinate Completion Dates

In reviewing Hatfield’s appeal of the trial court’s adverse ruling, the New York appellate court focused on the language in the subcontract that addressed completion of the “project” as well as the scope of Wunderlich’s work. Specifically, that court noted that the subcontract provided that “the project”, i.e. the entire Lowe’s store, was to be substantially complete by October 31, 2003. The appellate court concluded that the term “project” was defined in a manner which distinguished it from Wunderlich’s site “work” obligations. The court also noted that the subcontract required Wunderlich to “coordinate its work to be completed by the date indicated on [Hatfield’s] project schedule supportive of the overall completion date.” This language, the court explained, did not require Wunderlich’s site work to be concluded on a date specific. Instead, the coordination requirement merely obligated Wunderlich to ensure that its work conformed to dates that were to be separately established between Hatfield and the owner.

Bolstering the appellate court’s view that Wunderlich was not in default on its “work” on October 31, 2003 was the testimony of Hatfield’s project manager that two of the three construction schedules he prepared were rendered obsolete by the owner’s demolition delays. The court also found that although Wunderlich’s subcontract was not amended to reflect the January 31, 2004 substantial completion date, Wunderlich received notice of the amended completion date when its scope of work was amended by the August 15, 2003 change order.

The appellate court affirmed the trial court’s finding that Wunderlich was prevented from performing its work by the owner’s demolition delays and that Hatfield had failed to notify Wunderlich of the accelerated post-demolition schedule. In a key ruling, the appellate court stated that by entering into a subcontract that required Wunderlich to comply with a schedule dependent upon the owner’s timely performance, Hatfield made an implied promise to Wunderlich that the demolition would be complete in time to enable it to perform its subcontract obligations. Concluding that Wunderlich would have timely performed its “work” had it not been partially terminated by Hatfield, the appellate court ruled that Hatfield was not entitled to damages or expenses incurred in completing the site work.

Lessons Learned

As all construction professionals can attest, project delays can come from virtually any source. Although this case above involved a prime-subcontractor dispute, the source of the dispute was an owner failure to complete the demolition necessary to timely commence the new construction. Given the ever-changing demolition dates and the need to coordinate the work of all of its subcontractors, it is somewhat understandable that Hatfield neglected to amend Wunderlich’s subcontract to reflect the amended substantial completion dates. Possibly, the prime contractor assumed that the subcontract “time is of the essence” provision was sufficient, by itself, to ensure that the subcontractor would “coordinate” its performance to ensure timely completion of the site work. Neither the trial nor appellate courts accepted that premise.

In this case, a more precise set of subcontract provisions could have provided a clearer expression of the performance and schedule obligations on a construction project, even if those elements change as the work progresses. In addition, when the actions or inactions of an owner or those higher in the contracting chain impact the timing or scope of work to be performed at the lower tiers, an updated project schedule can effectively communicate those events and the subcontract documents can be reviewed and, if necessary, amended to reflect those changes. An amendment to the subcontract could have clearly stated a revised site work completion date and likely enabled both parties to avoid six years of litigation and subsequent appellate proceedings.