In March 2016, a Massachusetts Suffolk Superior Court, applying then-existing law, ruled that a contractor that intentionally breached a design- build contract by not timely paying subcontractors forfeited its unrelated $14 million breach of contract claims against the owner and its recovery of the value of the work performed under quantum meruit on a completed project. This decision created a $14 million windfall for the owner. The Massachusetts Supreme Judicial Court recently reversed that decision, overruled existing law, and held that a party that intentionally breaches a construction contract yet substantially performs a project may still recover the value of work performed under quantum meruit.
Design-Build Project and Litigation: In 2011, G4S Technology LLC (“G4S”) entered a $45.5 million design–build contract with Massachusetts Technology Park Corporation (“MTPC”) for a 1,200- mile fiber optic high-speed internet network in western and north central Massachusetts.
The project was beset by delays, with each side blaming the other. Nevertheless, on March 7, 2014, G4S achieved substantial completion of the project. Shortly thereafter G4S submitted a request for equitable adjustment (“REA”). MTPC objected, and in turn on August 15, 2014, issued a Notice of Withholding of approximately $4 million relating to delays allegedly caused by G4S. In September 2014, G4S amended its REA to include $10 million for extra time and costs that G4S incurred on the project as a result of MTPC’s alleged failure to fulfill its obligations under the contract. MTPC issued a Certificate of Final Completion of the Work on January 20, 2015.
Then in 2015, G4S filed a lawsuit against MTPC alleging breach of contract, breach of warranty and quantum meruit. G4S alleged that MTPC owed over $4 million on the $45.5 million contract price and that MTPC improperly denied G4S’s $10 million REA.
Before there was any trial, MTPC moved for summary judgment on the ground that G4S had intentionally breached the subcontractor payment provisions in the design-build contract and therefore G4S was precluded from pursuing its own unrelated breach of contract claims against MTPC. In the contract, with each payment request on the project, G4S submitted releases that certified that its subcontractors were paid amounts owed as of the date of each release. MTPC alleged that G4S had consistently not paid its subcontractors on time and yet provided inaccurate certifications to the contrary to MTPC. Further MTPC alleged that G4S breached the contract provision that required G4S to timely pay its subcontractors. Despite the evidence of late payments to subcontractors, all subcontractors were paid on the project, no subcontractors demanded direct payment from the owner, and the subcontractors did not shut down or walk off the job.
Nevertheless and applying then-existing law, the Superior Court agreed with MTPC and held that G4S could not pursue it $14 million damages claim under the design-build contract because G4S did not completely and strictly per- form. The Superior Court did not consider whether G4S’s breach of the subcontractor payment provision was a material breach. The Superior Court also held that G4S could not recover under quantum meruit because an intentional breach of the contract precluded a finding that G4S acted in good faith, a necessary element of a quantum meruit claim.
G4S appealed that decision to the Massachusetts Supreme Judicial Court. Several construction industry trade associations filed an amicus brief with the Court to express the view that the Court should overrule existing law to ensure that when a contractor fully performs, that contractor should at least receive fair compensation for the value of work performed.
SJC Decision: On June 12, 2018, the Massachusetts Supreme Judicial Court reinstated G4S’s claim against MTPC for $14 million under quantum meruit. The SJC, however, affirmed the Superior Court’s decision to dismiss G4S’s contract claim.
On the breach of contract claim, the Court affirmed that complete and strict performance is still required under construction contracts. But the Court clarified that that requirement only applies to the “design and construction” terms of the contract. For all other contract terms in a construction contract that are “subsidiary to or supportive of the design and construction” terms, ordinary contract principles apply, including the materiality analysis.
In the G4S case, the Court held that the contract provision requiring G4S to timely pay subcontractors was a subsidiary term and therefore traditional contract analysis of materiality would apply to assess whether the G4S’s alleged breach foreclosed G4S’s right to seek payment from MTPC under the contract. Applying that analysis, the Court held that G4S’s breach was material and therefore G4S was barred from pursuing a breach of contract claim against MTPC.
Despite that, the Court held G4S could recover for the value of the work performed under quantum meruit. Most importantly, the SJC overruled a line of older cases to hold that a party that intentionally breaches a construction contract can still recover the value of work performed under quantum meruit. Previously quantum meruit recovery was available only for a party that substantially per- formed and did so in good faith. The Court ruled in G4S that the good faith obligation applies to the “contract as a whole” so that an intentional breach in bad faith will not foreclose that party’s right to recover under quantum meruit. The SJC held that trial court’s primary focus should be the value of the benefit conferred. The SJC held that when faced with a claim for quantum meruit recovery the trial court must examine: the individual breaches in the context of the contract as a whole; the value of uncompensated work; the damage cause by the intentional breach; the total performance by the parties; and the equities to achieve a just result. With that new guidance, the SJC remanded the G4S case to the trial court and instructed the trial court to conduct further fact finding on G4S’s quantum meruit claim.
Takeaways: The G4S decision significantly impacts future construction project disputes in several ways. First, the Court affirmed and clarified the scope of the strict compliance obligations in construction contracts, which will provide greater certainty to contracting parties. This case also will reduce the risk of unjust and substantial wind- falls. Under the prior law, MTPC was the beneficiary of a $14 million windfall, receiving a completed project that was arguably worth $55 million for the price of $41 million. This decision pre- vents that type of unjust windfall. Most importantly, the SJC decision allows a contractor that substantially performs a construction project to expect to be compensated for the value of that work. By ensuring that the law embodies this common sense principle, the SJC decision in the G4S case will benefit all constituents in the construction industry and help ensure just and equitable dispute outcomes.
Originally published in the June 2018 edition of the Construction Journal.