Despite a Strong Subcontract, Navigating Between the Owner and Subcontractors Can be Tricky


By: Kamy Molavi
A few years ago I represented a very reputable general contractor in arbitration against a subcontractor.  The outcome was not as favorable to my client as I would have liked.  Later I asked the arbitrator for his impressions of the case and its key points.  He expressed the impression that the general contractor had been too aggressive in forcing the subcontractor to perform in accordance with the Owner’s mandates.  While I did not feel the arbitrator’s impression was entirely warranted, he correctly observed that the owner was a large company that had been a significant source of business for my client, whereas my client’s relationship with the subcontractor was predictably non-recurring.  Alarmingly, the arbitrator was not swayed by the flow-down clauses in the subcontract.
A recent court decision reminded me of my old case.  In November of 2012, the Georgia Court of Appeals ruled that a jury, not a judge, should have decided whether the subcontractor had “repeatedly” failed or neglected to carry out its work in accordance with the applicable requirements, and failed to cure those defects within ten days of notice.   The general contractor terminated the subcontract after four alleged violations of its terms by the subcontractor.  The subcontract contained a relatively typical clause allowing for termination if “repeated” defaults were not timely cured.  Here is a link to the opinion.
The ultimate outcome seems legally sound because the alleged defaults were fact-specific and were disputed by the subcontractor, and it did appear that the general contractor may not have provided the subcontractor an opportunity to cure each alleged violation, assuming it rose to the level of default.  Those can be jury issues.  What I found troubling, however, is not the legal outcome, but the practical one.
It is clear from the opinion that the owner had choreographed the deterioration and ultimate collapse of the relationship between the contractor and its subcontractor.  All but one of the alleged defaults by the subcontractor were first noted by the owner.  The owner barred the subcontractor from the site, and then demanded that the general contractor remove the subcontractor from the project.  (Interestingly, the clause on which the owner relied did not justify the owner’s demand for the subcontractor’s removal).  Justified or not, clearly the owner was fed up with the subcontractor.
This general contractor in this situation is not presented with attractive option, especially when the owner’s complaints are not indisputably justified or necessarily indicate material defaults: Terminate the subcontractor, and you will be sued for wrongful termination, as in this Georgia case; or stand up to the owner and support the subcontractor, and risk being held in breach by the owner.
On a related subject, the court wrote several paragraphs about the meaning of the term “repeatedly,” noting that it was not defined in the subcontract.  That term appears in many a construction contract, including the AIA forms.  I often delete the word when negotiating a contract on behalf of the owner, on the grounds that I don’t know what it means.  At least one court is as perplexed by the word as I am!
Kamy welcomes your comments.  Send them to [email protected].