By Partner Brian C. Padove (Chicago) and Senior Partner John E. Sebastian (Chicago)
On July 15, 2024, the Indiana Court of Appeals issued its decision in B & L Drywall, LLC v. R.L Turner Corporation, 240 N.E.3d 159 (Ind. Ct. App. 2024) emphasizing to contractors and subcontractors the importance of understanding and complying with their contractual obligations. On the one hand, the case provides a stark lesson for subcontractors to provide timely notice for extra costs and time extensions. On the other hand, the case provides an important reminder for contractors in enforcing contractual provisions as it relates to default.
Background
The Subcontract
In March of 2018, R.L. Turner Corporation (“RLTC”) entered into a subcontract agreement (the “Subcontract”) with B & L Drywall, LLC (“B&L”) calling for B&L to perform drywall work on a Project. The Subcontract contained various provisions as it relates to the RLTC’s right to control the scheduling and sequencing of work, B&L’s obligation to provide notice of potential claims for adjustments to the contract time or additional costs, and RLTC’s default rights. Specifically, the Subcontract provided the following relevant language:
- RLTC may delay or interrupt B&L’s work at any time, with or without cause and direct changes to the work; however, prior to commencement of such changed work, B&L is to promptly provide written claims to RLTC for adjustments to the Subcontract Sum or Subcontract time as a result of such change “or the claim is deemed waived.”
- B&L is to make additional costs, extensions of time or damages for delay claims “in no event later than 14 days of the event that gives rise to the claims” and claims not properly submitted by B&L are to be rejected.
- If B&L is in default of the Subcontract, RLTC is to provide 48 hours’ notice to cure, and “after receipt of written notice to commence and continue correction of such default or neglect with diligence and promptness, [RLTC] may supplement [B&L’s] workforce without prejudice to any other remedy, terminate the Subcontract[,] and finish [B&L’s] Work by whatever method [RLTC] may deem expedient.”
- If B&L defaults, RLTC may deduct the cost of remediating such deficiencies from amounts owed to B&L and backcharge B&L, and B&L is to be responsible for attorneys’ fees arising out of such deficiencies.
The Dispute
Following execution of the Subcontract, B&L performed nominal amounts of work prior to December 2018, but could not do any more allegedly due to the work of other subcontractors. In December 2018, RLTC provided notice to B&L to begin the majority of its work on the Project. However, B&L objected and refused to proceed with the drywalling as requested on grounds that mechanical equipment had already been installed before B&L’s drywall work rather than after as had originally been contemplated by B&L. However, B&L did not file a written claim for adjustment to the Subcontract Time or Subcontract Sum. Subsequently, RLTC provided B&L a 48-hour notice to cure the default stating, in relevant part, that if B&L did not rectify the default, RLTC would find an alternate contractor and B&L would be responsible for all costs associated with rectifying the default. B&L took no action as demanded in RLTC’s notice, and RLTC engaged a replacement contractor who completed B&L’s work.
Lawsuit and Trial Court Decision
Less than a year after B&L’s refusal to perform, RLTC brought a cause of action for breach of contract against B&L seeking damages and attorneys’ fees. RLTC specifically sought a damages award of the difference between the price paid to the replacement contractor and the amount of its Subcontract with B&L. Both parties moved for summary judgment – RLTC on its breach of contract claim arguing, in sum, B&L’s refusal to perform was a breach of contract while B&L argued RLTC breached the Subcontract by expanding its scope of work (that doing the drywalling after mechanicals had been installed would have required additional time and expense). The lower court granted RLTC’s motion and denied B&L’s motion. Thereafter, a hearing on damages was held and the Court awarded RLTC $55,590 in damages plus $20,207.50 in legal fees.
Court of Appeals Decision
B&L appealed the lower court’s decision arguing that the lower court erred in denying its motion for summary judgment and granting RLTC’s motion for summary judgment as well as erring in its award of damages to RLTC.
As to the motion for summary judgment rulings, the Court of Appeals stated that, when contract terms are clear and unambiguous, Indiana courts will enforce the contract accordingly. From there the Court referenced the above-noted Subcontract provisions in finding that the lower court’s summary judgment findings were proper. Specifically, the Court mentioned (1) the Subcontract terms allowed RLTC to make changes to the work and set the schedule for B&L’s work; (2) if such changes were made that would result in additional costs or the need for additional time to perform B&L’s work, B&L was to promptly submit written claims for adjustments; and (3) if B&L had a claim for “additional costs, extensions of time, and damages for delays or other causes,” it was required to inform RLTC of the same within 14 days. In this case, B&L never submitted any claim for adjustment or any other claim, it simply refused to do the work. Therefore, the Court of Appeals affirmed the lower court’s decision finding that RLTC did not breach the Subcontract by requesting B&L do the drywall work after mechanicals had already been installed, and when those changes were made, that B&L did not comply with the Subcontract requirements to submit a claim in response, and B&L’s refusal to perform was a “breach of the unambiguous terms” of the Subcontract thereby entitling RLTC to judgment as a matter of law.
The Court of Appeals briefly touched on the damages issue likewise affirming the lower court’s finding. In short, the Court of Appeals found that the Subcontract’s clear terms stated (1) upon B&L’s default, RLTC could terminate the Subcontract and finish B&L’s work “by whatever method [RLTC] may deem expedient,” and (2) that B&L “would be back-charged for any additional cost and damages incurred” as a result. Because RLTC followed the proper default procedure set forth in the Subcontract, the Court of Appeals affirmed the decision that B&L owed RLTC its costs and damages, including attorneys’ fees.
Key Takeaways
- Follow Contractual Procedures for Change Orders and Claims: First and foremost, the biggest takeaway from this decision is the importance of complying with contractual claim procedures as the failure to adhere to such procedures may be fatal to a contractor’s position. B&L’s refusal to perform on the basis that performance would necessitate additional time and costs in conjunction with its neglect in not submitting a written claim for additional time or additional cost within the Subcontract’s applicable timeframes made its arguments against RLTC (that delays/cost overruns are due to others’ actions) obsolete. As such, in any project, if there is a change in sequencing or scope that will impact costs and/or time, ensure to document such adjustments and comply with the contract procedures for submitting a claim.
- Importance of Default Notices and Provisions: Upon B&L’s refusal to perform, RLTC sent its contractually required 48-hour cure notice to B&L setting forth its position that B&L was in default, giving 48 hours to commence remediation activities, and providing notice that a failure to do so will, among other things, result in RLTC hiring a replacement contractor and holding B&L responsible for associated costs. Rather than adhere to the notice’s demands, B&L stood firm in its position and refused to do anything. The result – RLTC was entitled not only to the costs incurred through the replacement contractor, but also, RLTC’s attorneys’ fees. Notably, the attorneys’ fees made up approximately 40% of the final damages awarded to RLTC.As such, it is important for both contractors and subcontractors to review their contracts to understand default provisions, and even if there is some dispute as to the propriety of a default notice, demonstrate efforts to meet the contractual requirements.
- Clear Project Sequencing: As a final matter, this decision features the importance of project sequencing. In this regard, parties should work to ensure that the sequence of work is clear from the start and document potential changes that will arise, and to the extent work sequencing impacts a party’s ability to perform (whether an extension of time is needed or additional costs must be incurred), the impacted party should promptly review contract language pertaining to claims and/or change orders. In this case, B&L’s ignoring of the “clear and unambiguous” Subcontract language regarding sequencing and the requirement for B&L to promptly submit is claims relating thereto resulted in substantial loss, and, what the Court found to be a clear breach of contract.
This decision serves as a reminder for Indiana contractors of the importance of contract compliance and certain practices that can be put in place: (1) review contracts carefully, (2) submit formal claims, and (3) comply with default notices. These fundamental practices are essential for keeping projects on track while minimizing potential liability and protecting rights.