- Posted by Masaki J. Yamada
- On November 3, 2016
In a public works dispute in Massachusetts, a Massachusetts Court judge ruled that a general contractor could not recover any of its over $14 million claim against a public owner because it had violated its contract with the Owner by certifying that it had paid its subcontractors in full and on time when in fact it had not.[i] The case involves a contract dispute arising from a state and federally-funded project to design and construct a fiber optic network in western Massachusetts. The Owner was a state development agency established and organized to receive both state and federal funding to build a 1,200-mile fiber optic network known as MassBroadband123 in Western Massachusetts (the Project). Of that amount, $45.4 million was awarded pursuant to the American Recovery and Reinvestment Act of 2009 (ARRA). One of the stated goals of ARRA was (as its title suggests) to create jobs in the wake of the 2008 recession and to provide a direct financial boost to those impacted by the economic crisis. In the context of the instant case, that meant that, if there were to be subcontractors on the job providing labor and materials, they needed to be paid on a timely basis in keeping with the statutory purpose of stimulating the economy.
The GC won the public bid for the design-build contract. In line with federal requirements, the Contract had specific provisions to ensure timely payment of subcontractors. To make sure that the GC honored this obligation, the Contract stated that the GC had to include with its own applications for payment a “progress payment release” (the Certification). The Certification (attached to the Contract as an exhibit) stated that G4S “represents and warrants” … “all subcontractors … have been paid in full all amounts due to them up to the date of this Certification….” The GC submitted dozens of such certifications to the Owner knowing it had not paid its subcontractors as required. The GC, a publicly-traded company, deliberately withheld these payments not for any legitimate reason but instead for the purpose of showing higher cash balances on its periodic financial statements (i.e. for its shareholders or potential investors). The Owner paid the GC in reliance on the false certifications. The delay in payment to the subcontractors resulted in threats of subcontractors to suspend work and stop work completely. At some point, a dispute developed between the parties over which of them was responsible for delays. The GC filed suit against the Owner for breach of contract and quantum meruit for the Owner’s denial of a $10.1 million “request for adjustment” and withholding an additional $4.1 million based on the delay claims and poor quality of work.
The Owner moved for summary judgment that the GC be denied all sums owed for intentionally breaching the contract. There was no dispute that the GC intentionally withheld payment from the subcontractors and filed false certifications. The GC instead attempted to argue the breach on filing certifications was “de minimus,” and at a minimum should not prevent it from recovering in quantum meruit. More specifically, the GC argued it would be unfair to deny payment of $14 million when it completed the Project, eventually paid all of the subcontractors in full, and that late payments never impacted the physical work on the Project or for that matter really harmed MTPC in any material way.
The Court rejected the GC’s arguments, granted the Owner summary judgment and held, in relevant part, the following:
[Harm] is not relevant in determining whether the common law rule bars the [GC]’s claims. Moreover, this Court does not view the [GC]’s conduct to be consistent with the good faith that the doctrine of quantum meruit requires. The reason for delaying payment to the subcontractors was to improve its own financial picture, even if this meant that the subcontractors themselves would suffer. The requirement that payments be timely was an important part of this Contract; a large part of the funding for the Contract was pursuant to a statute intended to improve the lot of everyone hurt by the 2008 financial crisis, not just those at the top. Consistent with this purpose, [the owner] was required, as a condition of the grant, to “make drawdowns from the funds as close as possible to the time of making disbursements” and to “monitor cash draw downs by their subgrantees to assure that they conform substantially to the same standards of timing and amount as apply to advance the grantees.” The Contract reflected these mandates. Read in the context of the ARRA, it is clear that the timely payment and certification requirements were key aspects to [the GC]’s “Work” under the Contract, not some incidental or trivial activity separate and apart from the physical work. And the failure to adhere to these requirements was not confined to a handful of occasions but constituted a continuing course of conduct spanning more than a year.
Comment/Practice Point: This harsh result is not likely to be carried out by every court (or by every arbitrator). However, it should serve as a warning to general contractors and others to take seriously their contract requirements, including the certifications they routinely sign as a part of the payment application process. It goes without stating that intentionally falsifying certifications should be avoided as it could have severe consequences, such as the one suffered by the contractor in this case. Also, contractors performing work on federal projects (i.e. funded by Federal DOT) should be aware that projects like this one are governed by the Federal or state False Claims Act, which have significant penalties for presenting false claims to the government.
[i] See G4S Technology LLC v. Massachusetts Technology Park Corporation, 33 Mass.L.Rptr. 301 (2016).