Litigation Defenders

Recently, the Michigan Court of Appeals issued its opinion in Strata Underground, LLC v. OYK Investments, LLC, 2024 WL 4182280 (Mich. Ct. App. Sept. 12, 2024), providing significant insight about when a contractor can suspend its services under a construction contract.

Strata Underground involved a payment dispute between a general contractor and a subcontractor, who primarily agreed to perform underground utilities and grading work for a construction project. Notably, the parties’ contract contained a time is of the essence provision, required the subcontractor to maintain the project schedule, and explicitly stated that the subcontractor would be in default under the contract’s terms if it failed to maintain the project schedule. Additionally, the parties’ contract contained the following claims and dispute provision:

[c]laims by [subcontractor] for an increase to the Subcontract Sum or Subcontract Time, ... or otherwise for damages, losses, or payments, must be submitted by [subcontractor] in writing to [general contractor] within seven days of the condition giving rise to the claim[.] ... If [subcontractor] fails to provide this required written notice, [subcontractor] waives and releases any right to the claim, including all damages, losses, costs, or fees arising in any way out of the claim. In the event of a dispute between [general contractor] and [subcontractor] concerning [subcontractor’s] claim, [subcontractor] agrees to continue performance of its Work during the dispute. (emphasis added).

During the course of the project, the general contractor was “chronically behind” and “persistently late” in making payments to its subcontractor. As such, due to the general contractor’s failure to make timely payment, a payment dispute arose, and the subcontractor ceased its work on the project. 

Eventually, the subcontractor brough suit against the general contractor based upon theories of breach of contract, unjust enrichment, promissory estoppel, and quantum meruit, seeking payment for its contract work.  The general contractor and subcontractor ultimately agreed to arbitrate their dispute, whereby the arbitrator found that the subcontractor was justified for ceasing performance due to the general contractor routinely failing to tender prompt payment to its subcontractor and awarded the subcontractor damages, including lost profits.

After the circuit court affirmed the arbitrator’s award, the general contractor appealed to the Michigan Court of Appeals, which affirmed and reversed in part the arbitrator’s award. The appellate court held that the arbitrator erred as a matter of law because the subcontractor, under the terms of the contract, did not have the ability to suspend performance due to a payment dispute. Instead, the appellate court held that the subcontractor was in default because the subcontractor agreed to continue performance of its work during a payment dispute. As such, despite the general contractor “chronically” and “persistently” failing to make prompt payment to its subcontractor, the appellate court held that the subcontractor was still required to continue its project work and maintain the project schedule.

The appellate court’s decision has significant implications for subcontractors who are not receiving prompt payment and who are considering halting and/or ceasing their project work due to non-payment. The contract provisions at issue in Strata Underground, including time of is of the essence, the need to maintain the project schedule, and agreeing to continue to work during disputes, are routinely found in private and public construction contracts. 

As such, prior to ceasing operations on a construction project due to non-payment, it is imperative that you review your contract and contact legal counsel to avoid potential liability.