Strict Performance and Completion Requirements Upheld In Settlement Agreement
 
January 15, 2003
 
Martin J. Jaron- Northern Virginia

Against claims of unconscionability and public policy, the United States Court of Appeals for the Fourth Circuit recently upheld the default provisions of a settlement agreement requiring strict adherence to the agreement’s performance and completion requirements. In Jeffrey M. Brown Associates, Inc. v. Rockville Center, Inc., 7 Fed. Appx. 197, 2001 WL 320896 (4th Cir. 2001), the Fourth Circuit ruled that certain specific contractual performance and completion requirements that were express conditions precedent to the contractor’s right to payment were valid and enforceable even where enforcement meant that the contractor would not be paid, even for that part of the work actually performed.

The underlying lawsuit arose from a guaranteed-maximum-price, fast-track, construction contract in which the general contractor had agreed to design and construct a two-story, retail pavilion, including a large, underground cinema structure, and a number of required, public improvements. As work on the project progressed, the property owner discovered serious defects and deficiencies in the design and construction work. Ultimately, the property owner filed for arbitration under the construction contract.

In an effort to salvage the project, remedy the defective and incomplete design and construction work, and resolve the arbitration, the parties entered into a settlement agreement pursuant to which the contractor received a chance to remedy its work and complete the project for which it would be paid an additional, agreed and final sum subject to the express condition that the work be fully completed within a specific time. The agreed, final payment amount was placed in escrow. The settlement agreement spelled out specific performance and completion requirements and provided that a failure to achieve completion as specified would constitute a default subjecting the contractor to immediate termination with no opportunity to cure or right to further payment.

When the contractor subsequently failed fully to satisfy the completion requirements within the specified time, the property owner declared a default and terminated the contractor without further payment. The escrowed final payment amount was then returned to the property owner.

The contractor, thereafter, brought suit against the property owner alleging, among other things, breach of contract, and seeking a declaratory judgment that the settlement agreement provision allowing for default without payment for work actually done amounted to an unconscionable forfeiture and penalty in violation of public policy. In its complaint to the United States District Court for the District of Maryland, the contractor conceded its failure to fully satisfy the completion requirements. Relying, in part, on the contractor’s concession, the property owner moved to dismiss. The District Court, finding that the contractor’s concession “fatally contaminated” its breach of contract claim, granted the motion, and the contractor appealed.

On appeal, the Fourth Circuit upheld the trial court’s ruling that the contractor’s admitted failure to meet the express completion requirements of the settlement agreement relieved the property owner of its further payment obligations. The Court rejected the contractor’s forfeiture and penalty arguments finding that, because the contractor had failed to satisfy the conditions precedent to further payment and was, therefore, not entitled to receive such payment, the property owner’s refusal to make that payment could not be a forfeiture. The Court also rejected the contractor’s public policy arguments finding that the contractor had failed to show how the challenged contract provisions offended the public good and failed to identify any constitutional or statutory provision from which the alleged public policy might be deduced.

The Fourth Circuit’s ruling demonstrates that strict performance requirements, at least in a settlement agreement (the court expressed no opinion as to whether the same result would obtain in an action upon an ordinary construction contract) can be enforced even where enforcement means that the contractor may not get paid for work performed. As such, the ruling presents a contrast to the established law allowing quantum meruit payment to a contractor who has failed to fully complete the work but has, nevertheless, achieved substantial performance. Interestingly, the contractor did not raise the concept of substantial performance of the completion requirements until oral argument; nor was the issue addressed in the Fourth Circuit’s opinion. Nevertheless, contractors would be well advised to carefully consider the terms of their agreements whereby payment is made expressly conditioned upon some specific completion requirements.

For more information, contact Martin Jaron or Dennis Southard, toll free, at1-888-688-8500.