Construction Contract Termination— Big Risk Or Big Reward?

THE OLDEST LAW JOURNAL IN THE UNITED STATES 1843-2019 PHILADELPHIA, WEDNESDAY, AUGUST 19, 2020 VOL 262 • NO. 35 Construction Contract Termination— Big Risk or Big Reward? BY EDWARD SEGLIAS AND profits can easily total into the ZACHARY D. SANDERS millions. Special to the Legal This very scenario recently played out in favor of Silvi oday’s construction Concrete, a concrete manufacturer projects are larger and and supplier who was wrongfully more complex than ever terminated from the W Hotel T SEGLIAS SANDERS before. If you look across the Project in Philadelphia. The Philadelphia skyline, as in most EDWARD SEGLIAS is vice president of project—a 52-story hotel Cohen Seglias Pallas Greenhall & major cities across the country Furman and a partner in the firm’s con- skyscraper—required a 9-foot and around the globe, you will see struction group. He has successfully tried thick, concrete mat slab numerous multimillion dollar construc- throngs of tower cranes leading tion and commercial litigation cases foundation. Due to a change in the way for multimillion and even nationwide, including many jury trials. the concrete mix design, the Contact him at eseglias@cohenseglias. billion dollar construction com and 267-238-4702. original concrete supplier could projects. In recent years, not supply the concrete necessary Philadelphia has seen the ZACHARY D. SANDERS is an associate to complete the mat slab in a in the firm’s construction group. development of the FMC Tower, Conctact him at zsanders@cohenseg- timely manner. As a result, less the Comcast Technology Center, lias.com and 267-238.-4732. than a day before the pour was set the Pavilion of the Hospital of the to begin, the project’s concrete University of Pennsylvania, and contract. Because it is considered subcontractor, Thomas P. Carney, the W Hotel. But as construction a draconian remedy, contract Inc., contracted with Silvi to projects continue to get larger, so termination will be upheld by a supply not only the mat slab but do the risks. court only upon good cause and all of the concrete necessary for WRONGFUL rock-solid evidence. A wrongful the project. Silvi immediately TERMINATIONS POSE A termination exposes the mobilized, supplying over 600 SERIOUS RISK TO OWNERS terminating party to breach of truckloads of concrete poured in a AND CONTRACTORS contract damages, which may continuous fashion for One such risk arises out of the include lost profits. In today’s approximately 26 consecutive termination of a construction world of construction, those lost hours. Twelve days after the pour, Carney wrongfully terminated its On the other hand, Article 2 of Section 2-708(b) applies to at contract with Silvi without the UCC does not allow for the least two types of sellers who lose explanation or cause. Silvi recovery of lost profits as the profits and volume on a breached subsequently filed suit against primary means of remuneration. contract, manufacturers and lost Carney in the Philadelphia Court Instead, the UCC’s general rule, volume suppliers. A manufacturer of Common Pleas to recover its Section 2-708(a), states that, “the is a person or company who outstanding contract balance and measure of damages for acquires raw materials from which lost profits on the unperformed nonacceptance or repudiation ... is it assembles goods for a buyer. work. the difference between the market When notified of a breach, a One of the major areas of price ... and the unpaid contract manufacturer ordinarily ceases contention during the litigation price[.]” For example, say you fabrication and is left either with was whether Silvi was entitled to have a contract to sell your prized unfinished goods or raw materials recover its lost profits on the 1969 Ford Mustang Mach 1 for because fabrication has not yet unperformed work under the $50,000, but the buyer breaches. commenced. A manufacturer with Uniform Commercial Code You only have one car to sell, so excess capacity loses volume and (UCC), and whether Silvi had you spend $500 to relist your profits because it lacks completed fully mitigated its damages. After Mustang, and eventually sell it for goods that can be resold. Without a six-day trial, the jury returned a $40,000 to another buyer. Your goods to resell, a manufacturer $1.2 million verdict for Silvi, damages are $10,500 or, in other can undertake only minimal which completely compensated words, the difference between the efforts to mitigate. Silvi for its outstanding contract original sales price and the Conversely, a lost volume seller balance and lost profits on the ultimate sales price plus the is a person or company who, after unperformed work. The trial incidental advertising costs. In a buyer has breached a sales court upheld the jury’s verdict, this example, the seller is made contract, resells the same goods to rejecting Carney’s position on lost whole. a different buyer who would have profits. In some cases, however, the bought identical goods from the LOST VOLUME SELLERS measure of damages provided by seller’s inventory even if the AND THE MITIGATION OF Section 2-708(a) cannot adequately original buyer had not breached. DAMAGES compensate the seller for its true A lost volume seller differs from a Breach of contract damages are loss. Thus, if a seller’s damages are manufacturer in that he has based on the concepts of reliance undervalued by the difference completed goods, which can be and expectation. It is well- between the contract price and the sold to mitigate his damages. In established that a damage award market price, Section 2-708(b) the case of a lost volume seller, the should place the non-breaching allows the seller to recover its lost seller expects two sales, but when party in the same—or in nearly profits, including reasonable the original buyer breaches, the the same—position that it would overhead, together with any seller is left with only one sale. have occupied had there been no incidental damages less any Because of the inequitable result breach. Under common law, proceeds arising from resale. The that may occur because a lost courts allow for the recovery of express purpose behind Section volume seller theoretically can lost profits for breach of contract 2-708(b) is to put the seller in as mitigate all of its damages simply if such loss is not too remote or good a position as if the buyer had by continuing to sell its goods, a speculative. performed under the contract. number of courts have adopted the lost volume theory. Under this 1992); Unit Vending v. Tobin portion of its work, thereby theory, courts have reasoned that, Enterprises, 168 A.2d 750, 754 (Pa. entitling Silvi to lost profits under even though a lost volume seller Super Ct. 1961). Indeed, after Section 2-708(b). resells the goods that he was to reviewing the history of the lost LESSONS LEARNED supply under the breached volume seller theory in An owner or contractor’s failure contract, it does not necessarily Pennsylvania, the Northeastern to fully evaluate its basis (or lack mean that by doing so the seller Vending court then analyzed thereof) for termination can prove will avoid the loss. In such cases, whether the plaintiff had proven costly, exposing the party the seller’s damages are based on its lost profits claim, ultimately exercising its right to termination the net profit that was lost as a finding that the plaintiff failed to to significant litigation and result of the breach because courts carry its burden of proof. Thus, substantial damage claims, have held that a lost volume seller the court reaffirmed that lost including direct claims for lost has no duty to resell or otherwise volume sellers are not barred from profits and consequential damages attempt to mitigate the loss. recovering lost profits, but instead due to debarment, reduced MANUFACTURERS, LIKE must undertake reasonable steps business capacity, or even loss of SILVI, AND LOST VOLUME to mitigate their damages and business. In deciding whether to SELLERS ARE ENTITLED TO must prove their lost profits with terminate a construction contract, LOST PROFITS UNDER UCC reasonable certainty. owners and contractors would be SECTION 2-708(B) Second, Silvi was not by well served to begin with a In the Silvi case, Carney argued definition a lost volume seller, but properly drafted termination that Silvi was not entitled to was a manufacturer—specifically, clause, consider supplementing recover its lost profits because a manufacturer of concrete. As a the defaulting contractor’s forces, Pennsylvania has not adopted the manufacturer, who ceased follow the contract carefully, lost volume seller theory and Silvi production upon breach, Silvi had mitigate damages, and document, fully mitigated its damages. The no completed product that it document, document. jury and, ultimately, the court could resell to the next customer. Editor’s note: Silvi Concrete was rejected Carney’s position for two Instead, Silvi demonstrated that it represented by the firm in the case reasons. First, Pennsylvania’s had significant capacity to supply referenced in this article. • rejection of the lost volume seller not only the concrete needed for theory is not a blanket prohibition the Project, but also for all other on a lost volume seller’s ability to construction projects on which recover lost profits. Rather, in Silvi was retained in the relevant rejecting the lost volume seller years. Therefore, while Silvi theory, Pennsylvania courts have undertook reasonable steps to held that even a lost volume seller mitigate its losses by, among other www.cohenseglias.com must take reasonable steps to things, reselling or otherwise mitigate its damages. See utilizing its raw materials, Silvi Northeastern Vending v.

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