Interference With A Contract Owner: Be Careful What You Ask For!

By Larry Lubka

            It is not uncommon for an owner to conclude that a particular subcontractor is impairing progress on a construction project or going above and beyond in performing defective work.  The all too common next step is for the owner to direct the prime contractor to “terminate that subcontractor”.  The court in Caliber Paving Company v. Rexford Industrial Reality and Management, Inc. has determined that an owner giving such a direction to a prime contractor to terminate a subcontractor puts itself at risk for an action based on intentional interference with a subcontract.  Of note, in the Caliber case, the direction was an oral, not a written, direction.  While what actually happened is a question of fact for trial, the owner in that case now finds itself embroiled in a lawsuit by a subcontractor.

            Much as many a contractor has taken the position “the problems are not my fault, they are the subcontractor’s fault”, it remains true that a prime contractor is responsible for the actions of its subcontractors.  An owner does not have a direct contract with subcontractors and it technically has no right to directly issue orders to a subcontractor, let alone direct that the subcontractor be terminated.

            What is an owner to do where it believes a particular subcontractor is impairing its project?  An owner can still notify the prime contractor of a subcontractor’s breaches or negligence.  Hopefully, those issues have been raised in a weekly subcontractor meeting and those same minutes also show the failure to promptly address such issues.  If the owner believes the breaches have become material, it should give the prime contractor notice of breach of contract, which notice would include a direction to the prime contractor to address the problem.  It may also be appropriate, depending on the terms of the contract, to withhold funds from the prime contractor for the problematic subcontractor work. 

If funds are withheld due to problems caused by a subcontractor, the prime contractor will almost certainly in turn withhold funds from the subcontractor.  The prime contract and subcontract terms and conditions may contain other tools to address such subcontractor breaches and negligence.  As to termination, the primary question is whether the breach by the subcontractor is sufficient for an owner to send the prime contractor a notice to cure, subject to a termination for default based on a failure of the prime contractor to timely cure.  That notice may complain of the questioned subcontractor work, but it should not direct the prime contractor regarding how to deal with the noticed issues. As owner, you just can’t tell the prime contractor how to fix the problem.  If the prime contractor asks the owner “Do you want us to terminate the subcontractor”, the owner should respond “That’s something you need to decide. You know what the problems are and now you have to figure out how to deal with those problems.”

            The bottom line is that an owner should not direct a prime contractor, directly or indirectly, in writing or orally, to remove a subcontractor.  Just communicate to the prime contractor what the issues are and let the prime contractor determine how much risk it will take on before the prime contractor makes an independent decision to terminate one of its subcontractors. 

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