Gibson Contractors v. Church of God in Christ, (N.C. App. 2004)
Background. Can a church refuse to pay the balance due under a construction contract because the contractor failed to fully complete the project to the church’s satisfaction? Not if the contractor has “substantially completed” the contract, ruled a North Carolina court.
A church entered a contract with a construction company for the construction of a learning center for a fixed price of $144,000 plus extras. The church paid all but $33,000 of the contract price during the course of the project, but refused to pay the balance on the ground that the contractor had “breached the contract” by failing to complete the project to the church’s satisfaction. The church thereafter denied the contractor access to the construction site.
The church claimed that the following facts demonstrated a breach of contract:
- three fire extinguishers were not installed
- a key lock box for the fire marshal was not installed
- four commercial door closers for exit doors were not installed
- adequate lighting for the nursery and storage areas was not provided
- the kitchen floor was improperly installed
- a damaged water heater was installed
- outside masonry needed painting
Did these shortcomings amount to a breach of contract? Was the church legally justified in withholding the balance due under the construction contract? “No,” said the court.
The court’s ruling. The court noted that the legal doctrine of “substantial performance” allows a contractor to collect the full price under a construction contract “even though it has not literally complied with the contract’s provisions.” The doctrine of substantial performance applies when “only minimal work is left to be completed, or the defects or omissions are of such a nature that can be remedied.”
The court noted that in the months preceding the termination of the contract the church had paid invoices totaling $128,000 plus one change order of $8,700, and that the contractor had sent the church three additional invoices totaling $33,000 which were not paid. The court reviewed the deficiencies (listed above) that the church cited in support of its position that the contractor had breached the contract, and concluded that “the facts reveal only minimal work remained incomplete, and the defects or omissions were of such a nature that they could be easily remedied.” As a result, the contractor had substantially completed the contract and the church could not justify its nonpayment of the balance on the basis of breach of contract.
Relevance to church treasurers. Consider the following points.
(1) Minor defects do not justify nonpayment. Let’s face it. Construction contracts are seldom performed perfectly. This is inevitable in any project performed by imperfect people. In some cases the owner will be upset with the defects and threaten to withhold any remaining payment on the basis of the contractor’s breach of contract. But as this case illustrates, the law is often on the side of the contractor in such cases. If the contractor has substantially performed the contract the owner cannot claim breach of contract and withhold payment.
(2) The owner’s remedies. An owner is not without recourse if a contractor fails to fully perform the contract specifications. An owner has a number of potential remedies in such a case, including the following:
- Construction contracts often provide that the owner may withhold a percentage of the contract price in order to ensure full compliance. This is referred to as a “retention” or “retainage.” Church leaders should insist on such a provision being included in any construction contract.
- If the terms of a contract make strict performance a requirement, then substantial performance will not be enough for the contractor to avoid a breach of contract claim.
- Construction contracts generally call for the mediation or arbitration of disputes.
(3) Material or intentional breach. Contractors can breach a construction contract by committing a “material” breach of the contract, or by intentionally failing to fully perform. A breach will avoid the substantial performance rule, and will entitle the owner to withhold any further payments called for by the contract (in some cases, the contractor may be entitled to payment for work actually performed). It is often difficult to determine if a breach is material, and a church should never make this decision without the assistance of an attorney.
This article first appeared in Church Treasurer Alert, June 2005.
