Contractor-subcontractor relationship; wrongful termination of subcontractor. Randy Kinder Excavating, Inc. v. J.A. Manning Construction Co., Inc. United States Court of Appeals, Eighth Circuit. (2018), by Hugh Anderson

Summary: Kinder was the general contractor on a $10 million Corps of Engineers pumping station project on the White River in Arkansas. Manning was Kinder’s subcontractor for construction of a mechanically stabilized earth wall (a form of retaining wall). As the U.S. Court of Appeals put it, “As with many large-scale projects, this venture was plagued with delays from its inception.” The delays arose from weather events, scheduling conflicts, and unforeseen conditions.

According to the published decision, during construction the contractor repeatedly threatened its subcontractor, Manning, contending that Manning would be held responsible for Kinder’s demobilization/remobilization costs, winter/spring overhead, liquidated damages, and dewatering costs likely to be incurred as a result of the delays. At the same time that the contractor was negotiating with the Corps for more time based on weather and similar reasons, the contractor was asserting to Manning that the delays were Manning’s fault, and pressing Manning to accelerate (“Clock is ticking and we are burning precious daylight….Tic toc tic toc.”).

After Manning had completed 27 feet of the 40-foot wall, Kinder terminated Manning. Kinder then filed a lawsuit against Manning, based primarily on breach of contract. Manning counterclaimed for wrongful termination.

After a five-day trial featuring extensive testimony regarding the project, including expert testimony, the district court ruled in favor of Manning. The court found that Kinder was the first to materially breach the subcontract; that the termination was not justified and was therefore a material breach of the subcontract by the contractor; and that Manning had substantially performed its obligations. Kinder appealed the decision.

Decision: The U.S. Court of Appeals applied Missouri contract law, based on an agreement between the parties. Missouri has a “first to breach” rule that says that “a party to contract cannot claim its benefit where he is the first to violate it.” Kinder had argued that the first breach was by Manning, because there was evidence that Manning was behind in paying its subs and suppliers. The Court of Appeals concluded that the payment delay did not constitute a “material breach” of the Kinder-Manning subcontract and therefore was not a “first breach” as such was defined by Missouri law. The court noted that the lower-tier goods and services in question had been duly furnished to the project, and that Kinder was not adversely affected by the payment delays. Moreover, the court held that the general contractor’s “incessant threats,” and resulting concerns about getting paid on Manning’s part, were the driving force behind Manning’s delay in paying the subs and suppliers.

As to the wrongful termination issue, the Court of Appeals held that the general contractor failed to present arguments on appeal as to whether Manning’s performance under the subcontract had fallen short, which might perhaps have justified the termination. Instead, Kinder focused its arguments on a theory that Manning’s quest for damages for wrongful termination was in essence an attempted claim against the Corps (which had been tough on Manning regarding workmanship issues concerning the retaining wall), conducted without adherence to the various procedural steps necessary for a subcontractor to obtain recourse in a pass-through claim. The court of appeals saw this as a mistaken line of defense by Kinder.

Comment: The Court of Appeals decision mentions that there was no evidence that the subcontractor (Manning) was “in any way operating in bad faith” and follows up with a veiled inference that the same could not be said for the general contractor. Plainly the district court and Court of Appeals were strongly put off by the general contractor’s handling of its subcontractor.

Whether the facts here were really markedly different from the norm is debatable, up to the point of termination. Subcontractors are often put under heavy pressure, and given limited information, or information that is not consistent with what is being discussed at higher levels of the project. And from the contractors’ perspective, managing and relying on subcontractors can be extremely challenging. EJCDC® C-523 2018, Construction Subcontract, contains terms that are intended to be fair to Contractor and Subcontractor alike, but contracts cannot completely reshape conduct and attitudes.

Termination for cause, whether by an owner against a contractor or by a contractor against a subcontractor, should be viewed as a remedy of last resort. Termination is sometimes a necessity, but its drastic impacts often lead to protracted claims and litigation.

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