I. BACKGROUND

II. STU GETS A JOB

III. THE PROJECT AND TROUBLE BEGINS

IV. THE TAKEOVER PLAN

V. STU TAKES A CRASH COURSE IN CONTRACT LAW

VI. MATERIAL AND UNEXCUSED BREACH

VII. THE PARTIES MEET

I. BACKGROUND

For 15 years Stu Parker worked for a contracting company founded by his father. Then the family came to a reluctant decision: Stu should go out on his own. He had no trouble getting a contractors license. He could easily show the requisite experience. Although he only had a high school education, he had worked his way up from apprentice carpenter to chief estimator and then vice president in charge of field work. He was a little rusty on some parts of OSHA, labor law, and the mechanics lien law, but he brushed up on those subjects and passed the exam offered by the Contractors State License Board with flying colors. He posted his bond (B&P C §7071.6) and his workers compensation insurance certificate (B&P C §7125) and became the proud possessor of a California contractors license class B (general building contractor) (B&P C §7057).

A contractor friend offered Stu an opportunity to roof a shopping center that was already under construction. Stu was qualified to put the roof on, all right, and he could do it at a fair price, but he turned down the job because his class B license wouldn’t cover roofing unless he was also doing at least one other unrelated trade (B&P C §7057). In order to legally take a contract for roofing work only, Stu would have needed a C-39 (roofing) license (Cal. C. Reg. Title 16 §832.39) and he didn’t have one.

II. STU GETS A JOB
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A better prospect for work was offered by Nicholas Keiko. Nick had graduated from Purdue with a degree in engineering and an MBA. An avid hockey fan, Nick had been romancing a group of NHL players who needed an investment outlet for their ridiculously high salaries. Nick would provide this outlet in the form of limited partnership interests in a 700-unit apartment project that would be built in one of the nearby valleys. Nick knew Stu’s dad and was looking for a contractor.

Nick, a smart, ruthless young guy, had learned a lot about finance and real estate but didn’t know much about construction. He decided to put his faith and confidence in Stu. Nick optioned the land, hired an architect, and worked out his financial projections. On paper it was a good-looking project. The NHL players were enthusiastic. They felt that they were doing the responsible thing: making a wise investment.

To Nick, time was money. All the money that would pour into the land, the plans, the permits, the construction, taxes, insurance, marketing, and everything else would be totally unproductive until the first rent check came in. Nick pushed the architect mercilessly and he showed a special interest in the critical path network (scheduling by computer) that Stu was putting together.

As recommended by the architect, Nick utilized the AIA contract forms in setting up the construction contract with Stu’s newly formed corporation. He agreed to pay a substantial bonus for early completion. As far as Nick was concerned, time was of the essence.

III. THE PROJECT AND TROUBLE BEGINS
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Stu "hit the ground running" as Nick had urged him to do. The project got off to a fast start as soon as permits were issued. Stu decided to do the framing work with his own forces: he knew how to swing a hammer and had spent quite a few years running framing crews.

He subcontracted the concrete work to the low bidder, Patrick Mahoney of Mahoney Concrete. This is where the trouble started. The foundations and slabs for the apartment buildings were, of course, on the critical path of the construction schedule and Mahoney seemed to be shorthanded. He started to fall behind. Nick pushed him mercilessly. Known on the jobsite as "Nick of time", Nick was dealing directly with Patrick rather than going through the prime contractor, Stu, as the protocol of the construction industry would have required.

Under pressure, Patrick hired a new layout man and added three crews to expedite the form work. At the same time, he was pushing the rod busters who were working for him under a separate subcontract. Details on the drawings weren’t clear and it was hard to get information from the architect. Some mistakes were made in the layout and it took time to correct them. What with one thing and another, the job was five weeks behind schedule.

IV. THE TAKEOVER PLAN
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Nick’s owner’s rep, Homer, an old-time construction man from Texas came to believe that Stu and Patrick were just incompetent to handle a large project and keep the job on schedule. Only he, Homer, could save the project. He and Nick laid out a plan to do a takeover. They would remove Stu and Patrick from the job, find a substitute concrete contractor, negotiate a takeover of the other subcontracts, and make Homer the overall construction czar with control of the purse strings and progress payments. Homer, knowing that Stu was going to be thrown off the job anyway, delayed the progress payment that was due on January 20, citing the fact that the concrete work was behind schedule and also quibbling about the paperwork supporting the application for payment. Homer suddenly started rejecting mechanics lien releases with fax signatures, white-outs, erasures, and dates and amounts that failed to match the payment applied for (Civ. C §3262). He had his clerks raise questions about certificates of insurance from subcontractors and other paperwork details.

Stu frantically chased down all the releases and insurance certificates and finally presented an application for payment that was faultless in every detail but still Homer refused to release the check. The morale of the subcontractors and even Stu’s own superintendent and foremans was falling rapidly. Antagonism was building up on the job. Patrick and Stu had done everything they possibly could but they were hampered by lack of information on the drawings and lack of communication from the architect.

Both Patrick and Stu were just about tapped out. For the last several weeks Stu had focused most of his attention on releases and insurance certificates and now it was time to start processing the application for the February 20 payment. In an impassioned phone call Patrick threatened to pull his crews off the job. Stu dipped into his own bank account to make a partial progress payment in return for Patrick’s promise to make up for lost time.

Stu was not being treated fairly. His progress payments weren’t made. His working capital was exhausted. How could he be expected to keep the job on schedule if he couldn’t pay his subcontractors? He wanted to walk off the job, but he kept remembering that his father always boasted that he had never failed to finish a job. He began to suspect that if he didn’t walk off the job Nick would throw him off. That would be even worse! What would his father think?

Stu had been working around the clock for more than a month. He was tired and almost broke. He had to convince Homer to release the January draw! They set up a meeting to have it out. Stu found out that Nick intended to attend the meeting and was also going to bring a lawyer. The job log showed a couple of job visitors with cameras and video equipment. Stu considered this to be an ominous development. He looked over the default provisions of AIA document 201 and sent copies of the contract documents and draw requests to his lawyer.

Stu knew the ethos of the construction industry. If he performed in a workmanlike manner on schedule and on budget with the cooperation of the owner, the architect, the subcontractors, and the building department he got paid. If there were problems, he worked them out. This was something new! He couldn’t pay his bills. He’d been blown out of the water before he had a chance to perform!

V. STU TAKES A CRASH COURSE IN CONTRACT LAW
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Now, with some expensive help from his lawyer, he started to review contract law. A contract, as he knew, was a two-way street. "No money no workee" was his motto. Translated into legal language, this meant that an unexcused material breach of contract was an excuse for nonperformance: in other words, if one party breached the contract the other party had the right to stop performance. Nick was relying on this. He said Stu breached the contract by failing to keep to the schedule, that was a material and unexcused breach and therefore he was excused from making progress payments. But as the owner, Nick impliedly warranted the correctness of the drawings and specifications. Howard Contracting, Inc. v. G.A. MacDonald Construction Co., 71 Cal.App.4th 38, 83 Cal.Rptr.2d 590 (1998).

By now, Nick was throwing in a few other "material breaches" such as lack of compaction, inadequate rebar, and busts in the grades of the streets. These, though, were afterthoughts. Nick’s main thesis was that Patrick was an incompetent concrete contractor, Stu was responsible for the performance of the subcontractor, Stu did not properly schedule the work and was unable to make up the time that had been lost. Patrick, on the other hand, claimed that Homer had refused to make promised payments, that the plans were inadequate, and the architect was not available to answer RFI’s (requests for information). These factors, he contended, excused his failure to keep the job on schedule.

Stu’s lawyer contended that Nick had committed a material and unexcused breach of contract by failing to make the January progress payment. He contended that the quibbling about releases and certificates of insurance was just a ruse and that the real objective was to keep Stu working on the job as long as possible for free, and then eject Stu from the job and carry on using Stu’s subcontractors working for Homer as the new construction czar.

VI. MATERIAL AND UNEXCUSED BREACH
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Stu learned that the law gave him some options. He learned that a material and unexcused breach (failure to make progress payment) gave him four choices: 1) continue working, finish the contract, and sue for the contract price (McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 105 Cal.App.3d 946, 164 Cal.Rptr. 751 (1980)); 2) stop the work but keep the contract alive, remaining ready willing and able to continue with the project when the progress payment had been made (B.L. Metcalf General Contractor, Inc. v. Earl Erne, Inc., 212 Cal.App.2d 689, 28 Cal.Rptr. 382 (1963)); 3) terminate performance and sue for money due under the contract plus profits that he could have earned if allowed to finish the project. If withholding the progress payment was wrongful Stu could collect a 2% per month penalty and attorneys fees (Civ. C §3260.1). (McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 105 Cal.App.3d 946, 164 Cal.Rptr. 751 (1980)); and 4) rescind the contract (B.L. Metcalf General Contractor, Inc. v. Earl Erne, Inc., 212 Cal.App.2d 689, 28 Cal.Rptr. 382 (1963); United States for the use of Building Rentals Corp. v. Western Casualty & Surety Co., 498 F.2d 335 (1974); Gray v. Bekins, 186 Cal. 389, 199 P. 767 (1921)).

Whether to rescind, he learned, was a fateful decision. When a contract is rescinded the law treats it as though it had never existed and tries to put the parties back in the position that they occupied before the contract was signed. Normally this meant that the owner had to give back the consideration for the contract, but that was impossible. The streets, curbs, gutters, and foundations were embedded in the ground. Therefore, the owner would have to pay the contractor the reasonable value of the contractor’s performance. Stu was surprised to learn that rescission, if it worked, could turn a losing contract into a winner, because, under a theory called "restitution" the contractor was entitled to reasonable value of the performance even if that was more than the contract price. Boomer v. Muir, 24 P.2d 570 (1933).

VII. THE PARTIES MEET
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Then came the meeting in Nick’s office. After the usual pleasantries, Nick handed Stu a one-page document: a notice of default that ordered Stu to remove his workers and supervision from the jobsite and leave the materials and equipment to be taken over and accounted for by Homer and utilized in the completion of the project. Black v. City of Santa Monica, 13 Cal.App.2d 4, 56 P.2d 256 (1936). The lawyers on both sides made their mouthpiece statements using language that Stu could barely understand. They walked out of the meeting crestfallen and smoldering with anger and a fierce desire for revenge. Stu had never been subjected to anything like this. Never would he be able to say he always finished every job!

Stu did something he never had to do before: he recorded a mechanics lien and gave a stop notice to the construction lender. Stu started getting legal bills monthly and paying out big money. He sued. Nick counter sued. It was a race to the courthouse! Winning this lawsuit had become the most important thing in Stu’s life. He’d been throwed off a job! No matter what the cost, he had to prove it was not his fault and he had to prove it in court.

As he got farther and farther into studying the law, he realized that it was good thing he had not walked off the job. Then he would have to prove that his action was justified by a material and unexcused breach of contract. Whitney Investment Co. v. Westview Development Co., 273 Cal.App.2d 594, 78 Cal.Rptr. 302 (1969). Since Nick had elected to throw Stu off the job, Nick would have the burden of trying to prove legal justification for that action – in other words, that Stu had committed a material and unexcused breach of contract. Under the circumstances, was the fact that the concrete work was a few weeks behind schedule a material breach, and if it was material, wasn’t it excused by the inadequate plans and the architect’s slow responses to RFI’s?

In his heart, Stu knew that he was right. Whether a judge and jury would agree, only time would tell.

YADDA, YADDA, YADDA

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