Contract documents

August 28, 2024

Owners can find themselves in a precarious situation when a contractor fails to perform, but nevertheless, still expects payment. Many contracts require owners to make payment to contractors based on the application for payment, work performed, and other factors. When a delay occurs and a dispute over payment arises, it may not be in the parties’ best interest to immediately terminate the relationship. Rather, parties may attempt to remedy the issues to get the project back on track. A recent case out of Rhode Island discusses this situation and specifically, when an owner is justified in refusing payment when a contractor materially breaches the contract.

In Rudrah Darshan, LLC v. Calamar Construction Management, Inc., [1] Rudrah Darshan (RDL), as owner, and Calamar Construction Management (CCM), as construction manager, entered into an older version of AIA Contract Document A133®-2019, Standard Form of Agreement Between Owner and Construction Manager as Constructor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price for the development of a hotel on in Smithfield, Rhode Island.[2] Among other things, CCM was responsible for providing all necessary labor, materials, and services, and RDL was to make progress payments based on CCM’s applications. The contract provided that RDL may terminate the contract if the CCM failed to pay subcontractors in accordance with their respective agreements. CCM was also required to ensure that the property was free of liens and that it provided the necessary materials and services for timely completion of the project.

By May 2018, the project was significantly delayed and multiple mechanic’s liens were recorded against the property.[3] Consequently, RDL stopped paying CCM’s applications for work completed in April and May 2018 and in June, RDL issued a Notice of Default. CCM responded that it would cease operations on the project and requested a release from liability and payment for work completed up to that date. Shortly thereafter, RDL terminated the contract, citing CCM’s material breaches, including delays, unpaid subcontractors, and inadequate manpower.[4]

The parties filed suit against one another. At the core of the dispute, CCM alleged that RDL breached the contract by wrongfully withholding payment for work completed in April and May 2018, and RDL argued that it was justified in withholding payment because CCM was the first party to materially breach the contract.

In awarding RDL summary judgment, the United States District Court for the District of Rhode Island analyzed whether CCM’s actions—specifically, its failure to pay subcontractors, the recording of mechanic’s liens against the property, and project delays —constituted a material breach.[5] The Court found that CCM’s failure to pay subcontractors and to ensure that the property was free of liens was a material breach and justified RDL’s nonperformance. In Rhode Island, “[w]hen a party commits a material breach, the nonbreaching party is justified in its ‘subsequent nonperformance of its contractual obligations’”[6] Thus, RDL showed that there were no issues of material fact that it had a right of nonperformance when it declined to pay the April and May payment applications.[7]

CCM also pursued alternative claims for unjust enrichment and quantum meruit. However, CCM’s claims, by implication, relied on the terms of the parties’ underlying contract and thus, the court granted summary judgment against CCM on these claims.[8]

Finally, RDL sought partial summary judgment on its own breach of contract claim, arguing that CCM also breached by attempting to terminate the contract without cause. The Court stated that, under the contract, “only RDL, as the Owner, has the right to terminate the Contract for convenience… CCM, as the Contractor, may only terminate for cause if certain conditions are met.”[9] CCM did not identify any applicable conditions that were contained in the underlying contract in its termination letter. Thus, the Court found that CCM’s termination was not justified, and granted summary judgment in favor of RDL on its breach of contract claim.

This case shows, under this particular set of facts, an owner was justified in refusing payment after the contractor first materially breached the contract. This result may not be the case under a different set of facts or in a different jurisdiction. Project participants should be aware, however, that in some instances, the payor may have grounds for withholding payment where there is a claim that the payee materially breached the contract. This is a frequent occurrence in construction projects, where claims for materially breaches may coincide and run concurrently for a period of time.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.  

[1] No. CV 18-397 WES, 2024 WL 3728021 (D.R.I. Aug. 8, 2024)

[2] Id. at *1.

[3] Id. at *2.

[4] Id. at *3.

[5] Id. at *4.

[6] Id. at *3.

[7] Id. at *4.

[8] Id. at *5.

[9] Id.