For most contracts, a contractor’s application for final payment must be accompanied by final waivers of lien and verified statements that all amounts due are accounted for. Where there are outstanding claims, the request for final payment becomes problematic.
In a recent case, Boro Construction Inc. v. Ridley School District, the contractor argued that the final payment procedures in the contract should be ignored because of threats from the owner.
“Although it is not disputed that Boro failed to comply with these express provisions [of submitting a final waiver], Boro contends that the condition precedent to the [Owner’s] duty to tender final payment was excused. … Boro asserts that the [Owner] committed an anticipatory breach … thereby relieving Boro of its duty to submit the applications for final payment.”
In this lawsuit, it was argued an owner’s “anticipatory breach,” was the statement that it would not make final payment “unless he dropped his claims.” The contractor was unsuccessful because, according to the court, more than a threat of nonpayment was needed to avoid the contract’s close-out procedures. The court held that to constitute anticipatory breach, there must be “an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so.”
The meaning of the term
All contracts involve mutual promises, and a breach occurs where one side does not fulfill its part of the bargain. But do you have to wait for the breach to occur before you are relieved of your part of the bargain when you know there is going to be a breach?
As part of a concept of economic waste, a party should not be required to continue its performance where the other side evidences an absolute intention not to perform its duties—easier said, than applied.
Certainly, a party’s unqualified statement that he will not or cannot perform is an anticipatory repudiation (a breach) of contract. Actions and inaction also can lead to such a breach. For example, a contractor may be said to have breached the contract where the owner is “justifiably insecure” about a contractor’s ability to complete on time. The owner may be justified in issuing a default termination, although the promised completion date is still in the future but is unattainable.
The UCC rules
Under the Uniform Commercial Code (UCC), which, strictly speaking, applies only to the sale of goods, not services such as construction, there is a broader definition than that given by the Boro court. Section 2-610(2) states: “Repudiation includes language that a reasonable person would interpret to mean that the other party will not or cannot make a performance still due under the contract or voluntary, affirmative conduct that would appear to a reasonable person to make a future performance by the other party impossible.”
A similar rule appears in Section 317, Restatement (Second) of Contracts. For this discussion, the differences are not noteworthy.
The saga of Salty Sam
In the old song by The Coasters, “Along Came Jones,” Salty Sam was a bane to the life of Sweet Sue. Among other threats, Sam had a handful of dynamite and said, “If you don’t give me the deed to your ranch, I’ll blow you all to bits.” How real was the threat?
Under the reasoning of Boro, and most other courts, such a threat in a contract context would not justify either retaliation or a right to ignore an agreement. The threat was contingent in the same way that “if you don’t drop your claims, you won’t be paid” is contingent.
Sweet Sue was consistently saved by Jones, so Salty Sam’s threats remained unfulfilled, even though they seemed real. This need for something more definite or absolute may not make sense in an individual case, but it makes sense with regard to preventing a lot of litigation.
For this reason, the UCC refers to circumstances where one party “will not or cannot make a performance” or where one party’s conduct makes future performance “impossible.”
One qualifier needs to be emphasized. Absolute proof that the other party will breach the contract is not required. What is necessary is that a “reasonable person” would interpret the words or deeds to indicate a breach.
These can be puzzling questions. If an owner says, “I don’t care what the problems are, there will be no more time extensions,” is there a breach? This statement appears absolute, but if it is made prior to a written request for a time extension, the threat may not be enough.
The dangers involved
In Boro, the owner’s representative warned “if you don’t drop our claims, you won’t get paid.” The court said this threat was contingent and so was not an absolute threat of nonperformance.
The courts do not want litigation every time one contracting party says “you’ll never get another change order approved,” or “forget about asking for time extensions.” And you, as an electrical contractor, would be taking a dangerous step in abandoning a job because of such threats.
Making the determination that the other party, by words or deeds, is repudiating the contract has associated perils. If you think the other party will not perform, take action under that belief and you are wrong, you have become the breaching party.
How you can clarify the situation
You may have a reasonable belief that the owner may not have the funds to complete a project, or you may have information that one of your suppliers will not be able to deliver contracted materials. Before you take action on these beliefs, it may be worthwhile to seek assurances from the potentially breaching party.
For this purpose, the UCC again offers guidance. Section 2-609 states: “A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired.”
Although the phrasing is awkward, this statement seems to create an implied duty not with regard to performance itself, but with regard to the “expectation” of performance. As a result of this duty, “If reasonable grounds for insecurity arise … The other may demand in a record [in writing] adequate assurances of due performance … .”
In other words, where you have a basis for believing that the other party will not perform, you have a right to ask the other party to reaffirm its commitment to the contract. In addition, you can suspend performance pending receipt of the assurances.
How you go about asking for these assurances is extremely important. If you are too aggressive in your demands, you may cause the other party to equivocate in its response. Worse, you may induce the other party to turn your letter against you, contending that you are threatening to not perform.
It is important to keep in mind that any request for assurances should not make demands that are not part of the contract or which exceed a party’s contractual obligations. Similarly, if such a request is made of your company, your response should be carefully considered.
Threats that some might consider anticipatory repudiation regularly occur in construction projects. It is an area of law that electrical contractors should know about and, where appropriate, use to their advantage.