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Contractor’s $14M claim is forfeited by own breach

kaler-robertA technology company that breached its state contract by falsely certifying it had paid its subcontractors on time could not recover damages from the project owner for allegedly withholding payment for completed work, a Superior Court judge in the Massachusetts Business Litigation Session has ruled.

Plaintiff G4S Technology had sued defendant Massachusetts Technology Park Corp., a state agency, after MTPC withheld millions of dollars amid a dispute over alleged delays and disruptions on a project to build a fiber-optic network.

In moving for summary judgment, the defendant argued that the plaintiff’s false certifications constituted bad faith of the sort that barred it from seeking even a quantum meruit recovery.

Judge Janet L. Sanders agreed.

“The undisputed testimony [shows] that G4S repeatedly withheld past due payments from at least some of its subcontractors at the same time that it sent certifications to MTPC representing and warranting that these subcontractors had been paid all amounts due them,” Sanders wrote.
“Based on this undisputed evidence, this court concludes that G4S’s actions were intentional breaches of the contract, and that its conduct was of the sort that precludes all recovery,” Sanders said.

The 13-page decision is G4S Technology LLC v. Massachusetts Technology Park Corporation.

More than de minimis
Boston attorney Robert J. Kaler, co-counsel for the defendant, said the decision makes clear that if a party intentionally breaches a contract and the breach is substantial enough to be considered more than “de minimis,” that party will be barred from any recovery.

“Although nobody’s perfect, and sometimes people breach, the problem arises where people intentionally breach contracts just to benefit themselves,” Kaler said. “As they say, ‘the law does not countenance that.’”

However, Joel Lewin of Boston, who represented the plaintiff, called the penalty “extremely harsh” given that his client fully completed the design and construction of the network, ultimately paid its subcontractors in full, and caused no loss of money or property to MTPC.

Plus, the breach was unrelated to the physical work or design, Lewin said, pointing out that, under the Restatement (Second) of Contracts, which Massachusetts has adopted, those are the factors to be considered in determining the materiality of a breach.

“The notion that contractors may be subjected to tens of millions of dollars or more in forfeiture penalties without regard to considerations of proportionality will no doubt alienate contractors and sureties who don’t want to take that risk,” Lewin said.

He also noted that the implications of the ruling are not limited to construction contracts.

“The risk of disproportionate penalties by forfeiture poses risks to every industry and every business contract,” he said.

David B. Mack, a business litigator in Burlington, said the judge clearly was troubled by the plaintiff’s bad-faith conduct over an extended period of time and was obviously influenced by the statutory backdrop to the contract, which was awarded pursuant to the American Recovery and Reinvestment Act of 2009.
Still, Mack said, while the judge applied established contract principles, she did so in what some might view as an overly rigid manner by placing such heavy emphasis on contract language that included payment and certification submissions within the definition of “work.”

“That’s not to say that the plaintiff’s conduct was not reprehensible and should be rewarded, but a complete denial was a bit of a surprise,” Mack said.
Kaler, however, insisted that the result was perfectly reasonable.

“The intent of the statute was to inject liquidity into the economy and get it down to the businesses doing the actual work that needed it the most,” he said. “[The payment and certification] provisions were important to the agreement, so viewed in that context, it’s not an unduly harsh result.”

False certifications
In 2010, MTPC received state and federal funding to build a 1,200-mile fiber-optic network in western Massachusetts. Of the funding, $45 million was awarded pursuant to the American Recovery and Reinvestment Act stimulus bill.

After a public bidding process, G4S secured a contract to build the network. In line with ARRA requirements, the contract contained specific provisions to ensure that subcontractors be paid on time.

The provisions included a requirement that G4S, when submitting its own applications for payment, provide a “progress payment release” certifying that all subcontractors had been paid in full any amounts due up to that point.

The submissions of the certifications also were categorized as part of the “work” G4S had agreed to perform under the contract.

As the project moved forward, G4S submitted dozens of applications for payment, each accompanied by the required signed certifications.

Many of the certifications were false, however, and G4S’s own business records and internal correspondence — as well as deposition testimony of G4S employees — demonstrated that G4S submitted false certifications knowingly.

Evidence also indicated that G4S, a public company, delayed payment to its subcontractors in order to make its books appear stronger.
Ultimately, a dispute arose between G4S and MTPC over responsibility for delays and disruptions on the project, and MTPC decided to withhold millions of dollars in payments from the contractor.

In response, G4S sued MTPC in Superior Court in September 2014, alleging that the defendant had wrongfully denied a $10 million “request for adjustment” while withholding another $4.1 million based on unfounded assertions of late delivery and poor work. The plaintiff later added a quantum meruit claim.
MTPC moved for summary judgment, arguing that the plaintiff intentionally breached its own contractual obligations by not paying its subcontractors on time while falsely certifying that it had, thus forfeiting any right to pursue its claims.

Bad faith
In opposing summary judgment, G4S argued that barring its claims would be “grossly disproportionate” to any harm it caused by failing to pay its subcontractors on time. The plaintiff asserted that its breach was “de minimis,” and therefore it should at least be able to pursue quantum meruit recovery.
But Sanders rejected that argument, noting that quantum meruit recovery is allowed only when the contractor has made a good-faith effort to complete the contract in full.

Here, the judge observed, G4S engaged in repeated violations, which it committed solely to show higher cash balances on its periodic financial statements.
Meanwhile, Sanders said, the fact that G4S ultimately cured its breach was of no matter.

“That the subcontractors were eventually paid what they were owed … does not change the fact that G4S made inaccurate representations to MTPC in its certifications,” Sanders said. “In order to cure that breach, G4S would have had to inform MTPC of the error at or near the time the statements were made, before MTPC was induced to make any payment. It did no such thing.”

Sanders similarly rejected G4S’s argument that MTPC was not sufficiently harmed by its breach to justify complete forfeiture of its claims.

“The requirement that payments be timely was an important part of this contract,” Sanders said. “[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. … Read in the context of the ARRA, it is clear that the timely payment and certification requirements were key aspects to G4S’s ‘Work’ under the contract, not some incidental or trivial activity separate and apart from the physical work.”

Accordingly, the judge concluded, MTPC’s motion for summary judgment should be granted.

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