Be Aware: You Might Be Punished for Unwarranted Threats on Your Subcontractor
October 10, 2018
Don’t make unwarranted threats of liquidated damages on your subcontractors, and don’t hold them to unreasonable, unconstructible standards. This might sound obvious, but for some contractors, it’s not. After the Eighth Circuit Court of Appeals’ recent decision in Randy Kinder Excavating, Inc. v. JA Manning Construction Company, Inc., 899 F.3d 511 (8th Cir. 2018), a contractor that doesn’t heed this advice may expose itself to damages for breach of contract.
In Randy Kinder, the U.S. Army Corps of Engineers contracted with a general contractor for the construction of a pumping station to manage the water levels in the White River. The general contractor hired a subcontractor to engineer and construct a mechanically stabilized earth wall. The subcontractor couldn’t begin work until only a short number of days before the project was scheduled to be complete due to numerous weather delays and incomplete predecessor activities. Despite the subcontractor not causing any delays, the general contractor repeatedly threatened the subcontractor with liquidated damages if it didn’t meet the original schedule – all the while telling the government that the schedule needed to be changed because of recurring weather delays.
The general contractor also demanded the subcontractor place its mechanized walls with exactitude and absolutely no variance between the walls. The subcontractor objected, stating industry standards always permitted a minimum variance. The general contractor ultimately terminated the subcontractor because it failed to place the walls with exactitude. When the general contractor attempted to find a replacement subcontractor, no replacement subcontractor would agree to construct the walls without a minimum variance.
The general contractor sued the subcontractor. The Eighth Circuit, however, sided with the subcontractor, awarding it damages. The Court found that the general contractor made unjustified threats to assess liquidated damages after the evidence showed the subcontractor caused none of the project’s delays. The Court also determined that the general contractor wrongfully terminated the subcontract when the general contractor unreasonably and arbitrarily held the subcontractor to an unconstructible standard by requiring exactitude in building the walls. Ultimately, the Court held that the subcontractor was entitled to over $215,000. In the end, reasonableness and fairness won over the judge at trial.
Diplomacy and reasonableness is key when a contractor is under pressure. In Randy Kinder, the general contractor was under substantial time constraints and pressure from the owner, but it attempted to unjustifiably pass along that pressure to its subcontractors. When under fire, contractors must learn to manage both owner expectations and their subcontractors’ work to avoid unwanted consequences. A successful project is only as good as a contractor’s ability to work together with all project participants.
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