OMAHA, NE – When the going gets tough, when can contractors get going? Three non-controversial reasons are: 1) failure to pay undisputed amounts; 2) failure to provide access to the construction project; and 3) insolvency of the owner.
Those types of material breaches are fairly basic, but David A. Hecker, group general counsel, Strategic Resolutions at Omaha-based Kiewit Corp, confirms that it gets a bit trickier when you add variables. Hecker and Carolyn A. Woodson, partner at Los Angeles-based Jones Day discussed many of those factors during a mock hearing at last year’s CSC with additional panelists.
The topic spawned lively debate and the issue remains relevant. Third Thursday sat down with Hecker and Woodson to revisit the conversation and find out when contractors should head for the property line and haul away their equipment.
Third Thursday: What are some of the material breaches that are less clear cut?
David A. Hecker: Late payments and short payments. Payment is always the big thing that contractors are concerned about. You don’t want to spend your own money and then hope in the future to get reimbursed. Most contracts will have a provision that will say something like; In the event of a dispute, the contractors will continue to perform during the pendency of the dispute. Well, if the owner claims that the dispute is, “We don’t owe you any money,” and I have to keep performing—that’s not a good model.
For example, the owner may owe the payment in 30 days, but he goes 60 or 90. Whether that’s material or not is a more subjective standard. It can be. But there’s also scenarios where one might say, “Well, it’s not material. The amount is not so great. There’s a mechanism for you to collect interest. There’s a mechanism for you to get a resolution of your dispute in a prompt way, and you need to follow that.” That’s one example where it’s less clear cut. There are circumstances where it may be a material breach, but other circumstances where it may not be.
Third Thursday: What should contractors be looking for when signing on the dotted line?
Hecker: Contractors want to be cash-positive, which means they’re getting paid for the work and they’re never funding the project. If we ever get into a situation where the owner fails to keep us cash-positive, that’s grounds for a breach. You can have very clear provisions in the contract that state if a certain amount is unpaid, the contractor has a right to stop work.
Third Thursday: When the “judge” turned to the audience at the CSC mock hearing, what was the consensus?
Carolyn A. Woodson: After the hearing before Judge McMillan [Daniel D. McMillan, attorney at Jones Day], we polled the audience on whether the court should grant the owner county’s motion for summary judgment on the contractor’s declaratory relief claim. As votes were submitted and tabulated, the preliminary results were close with the polling teetering back and forth between the owner and contractor.
The results eventually landed on narrow “win” for the contractor, but the results could well have gone to the owner on a different day. Given the allegations and law for the mock hearing, we knew there were arguments on both sides of the issue, so we were not surprised to see the audience split. As Judge McMillan observed when discussing the voting, the results may say as much about the audience and the split between those who represent primarily owners versus contractors.
Third Thursday: What kind of attendee feedback did you hear?
Hecker: People appreciated that we identified the theory that if you can identify a material breach of contract that occurs early enough, you can initiate a disputes process and get a ruling on that. You can rely upon that ruling and, if you’re successful, shut the project down. You have no duty to continue performing in the event that the other side has a material breach. That was a new theory or approach for a number of the lawyers and all the comments I got were appreciative of raising that scenario as a possibility.
Third Thursday: What is “early enough” in your experience?
Hecker: As soon as you can. The problem is if they [owners] breach the contract a month before the end of the work, you’re not going to be able to go into court and get a decision in your favor before the project is done. But if it’s early in the project, say 10% or 20% done on a multi-year project—and the owner has what you’d characterize as a material breach—you have time to go to court.
You must continue to perform, but you can go into court and get a finding of material breach, which allows damages and allows contractors to get paid for the work already performed. It allows them to shut further work down. That’s the reason it’s important to identify these issues as early as possible, because it’s moot if you you’ve already done the work. The threat of stopping is not a motivator at that point.
Third Thursday: Are judges and/or arbitrators sympathetic to these material breach claims?
Hecker: They’re very sympathetic to the situation the contractor is in, particularly where the contractors are being forced to fund. The issue is how can they help in the situation where the contract requires the contractor to perform? We come up with a material breach theory and it gives the arbitrators and the judges an out to allow the contractors to avoid the scenario where they have to spend all their money performing work that they’re not going to get paid for—or at least not paid in a timely manner.
Third Thursday: What merits additional analysis or perhaps even another panel?
Woodson: This panel and the mock hearing addressed contractor abandonment and a resulting dispute between the owner and the contractor. There are a host of other issues that can arise when a contractor seeks to suspend performance, such as subcontractor claims against the owner or owner claims against design professionals.
Third Thursday: What’s an example of that?
Woodson: If the prime contractor stops performance claiming that an owner has failed to pay claims or delayed the project, subcontractors may also assert claims against the owner. Subcontractors might bring their claims indirectly as pass-through claims presented by the prime contractor, or they might try to assert a direct claim against the owner.
Such claims face a number of challenges such as: how and whether a subcontractor that lacks privity with an owner can directly assert a claim against an owner if the prime contractor ceases performance; and whether, when, and how an owner may elect to bring claims against its design professionals. These are topics related to contractor abandonment that could well be their own panel topics on related issues.
Third Thursday: What other issues do you see arising in the future?
Woodson: One of the issues that could arise in the future relates to state statutory laws providing contractors a right to suspend performance on private projects for unpaid claims. How parties address those laws in contact drafting, and how the laws are applied in disputes, could well be a hot topic for the future—especially for newly enacted statutes like California’s recently enacted Private Works Change Order Fair Payment Act (Cal. Civ. Code § 8850).
Third Thursday: What are some specifics of that statute?
Woodson: That California statute applies to most contracts for private works entered after January 1, 2026. It provides specific procedures and timeframes for private construction project claim resolution procedures and payments, and waivers of the law are void. The law confers to contractors a unilateral right to suspend performance for owner’s failure to comply and under certain circumstances—and includes penalties of 2% interest per month. How this and similar statutory laws may change the landscape for contractor’s disputes with owners on private contracts remains to be seen.