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June 18, 2018

Legal Update
John G. O'Neill, Kenneth N. Thayer

Intentional contract violation does not necessarily bar recovery in quantum meruit

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In a decision that significantly alters the legal landscape for contractors and property owners alike, the Massachusetts Supreme Judicial Court ruled that a party’s intentional breach of its obligations under a construction contract will no longer automatically prevent it from pursuing a claim in ‘quantum meruit’ to recover for unpaid work. The decision, G4S Tech. LLC v. Massachusetts Tech. Park Corp., 2018 WL 2945650 (Mass. June 13, 2018), overturns more than a century of prior case law, which had held that intentional breaches automatically preclude recovery under quantum meruit.

The dispute in G4S Tech. arose out of a $45 million design-build contract under which G4S Technology LLC (“G4S”) agreed to construct a fiber optic network for Massachusetts Technology Park Corporation (“MTPC”). The project suffered from numerous delays, which each side blamed on the other. Ultimately, G4S delivered the project almost a year after the scheduled completion date, and MTPC withheld roughly $4 million in payments under a liquidated damages provision. G4S, in turn, submitted a request for equitable adjustment, claiming $10 million in extra costs due to MTPC’s alleged failure to adequately perform “make-ready” work to prepare for the project.

G4S filed suit seeking recovery of the $4 million withheld and the $10 million in excess costs under theories of breach of contract and quantum meruit. During discovery, it was revealed that G4S had repeatedly made false certifications that it had complied with its contractual obligation to timely pay its subcontractors when, in fact, it had improperly delayed those payments to bolster its financial statements. The trial court dismissed G4S’s claims at summary judgment, ruling that G4S’s intentional breaches of the payment provision precluded a finding that G4S made a good faith effort to fully perform, a necessary element of its quantum meruit claim, and also prevented it from establishing the requisite “strict performance” with its obligations to pursue recovery on its contract claim.

Reversing a series of prior decisions holding that an intentional breach of contract precludes recovery in quantum meruit, the SJC overturned that aspect of the trial court’s decision and announced a significant change to the doctrine of quantum meruit. Specifically, the court ruled that intentional breaches—such as G4S’s false payment certifications—should not be viewed in isolation and do not automatically constitute bad faith. Rather, courts must consider “the contract performance as a whole, taking into account both parties’ actions, the different contractual breaches and the damages they caused, and most importantly the value of the project provided as compared to the amount paid for that work” in order to achieve an equitable result. In the case at hand, the court found that summary judgment was inappropriate on the quantum meruit claim because questions remained as to which party was responsible for delays and whether G4S’s conduct caused MTPC to incur any damages.

Turning to G4S’s contract claim, the SJC declined G4S’s invitation to abandon the so-called “strict performance” rule, which requires contractors to strictly and completely perform all obligations under a construction contract before seeking recovery for a breach. However, the court “clarified” that the rule applies only to the design and construction work itself, and not to other subsidiary or supporting provisions, which are to be analyzed under ordinary contract principles, including the more traditional “materiality” standard under which recovery would only be precluded for a substantial and material breach by the contractor. Because G4S’s breach, the false certifications, did not concern the actual design or construction of the project, its contract claim was not subject to the strict performance rule. Even so, the SJC ultimately upheld the trial court’s dismissal of the claim, ruling that the false certifications and intentional payment delays constituted material breaches on the part of G4S that barred any recovery under the contract. Notably, the court did not reach the issue of whether the year-long delay in delivering the project should be analyzed under the strict performance rule or the more lenient materiality standard.

The G4S Tech. decision is clearly good news for contractors (and others) seeking to recover in quantum meruit. It is no longer the case that an intentional breach bars recovery, and  the heavily fact-dependent analysis now applicable significantly increases the odds that such claims will be decided by a jury. Likewise, the limitation of the strict performance rule to actual design and construction work will make it easier for contractors to pursue recovery on the contract.

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