If there is a theme I have pounded upon here at Construction Law Musings in the over 13 years of posting, it is that the specific terms of your construction contracts will make a huge difference. While there have been reminders galore, a case from the Eastern District of Virginia presented another wrinkle on this theme. The wrinkle? A factoring company.
In CJM Financial, Inc. v. Leebcor Services, LLC et. al., the Court examined this scenario (though it went into more detail than I will here): Leebcorp hired a subcontractor, Maston Creek Services to provide certain construction services under two separate contracts. Maston then hired CJM, a factoring company, and assigned CJM its receivables and the right to collect those receivables. We wouldn’t be discussing this case if all had worked out as planned, so you likely anticipate at least some of what came next. The short story is that Matson failed to pay some of its suppliers and Leebcorp exercised its termination rights under those contracts when Matson refused to cure. In the interim, CJM had paid part of certain payment applications to Matson in compliance with the factoring agreement. When Leebcorp failed to pay CJM for Matson’s work, CJM exercised its assigned rights to collect the receivables and sued Leebcorp for breach of contract. In response, Leebcorp counterclaimed for, among other counts including civil conspiracy, breach of contract based on Matson’s failure to perform. CJM moved to dismiss the counterclaims.
While I recommend the discussion of the declaratory judgment and conspiracy claims found in the opinion (linked above), I will focus here on the breach of contract claims. After analyzing the choice of law on the diversity claim and holding Virginia law applicable and then setting forth the elements of breach of contract, the Court granted CJM’s motion to dismiss reasoning as follows after finding an enforceable contract between CJM and Leebcorp based upon the assignment and proper notice of that assignment by CJM to Leebcorp:
Leebcor has not pled sufficient facts to satisfy the second element showing that CJM breached the contract. Specifically, Leebcor alleges that CJM ”had an affirmative duty to ensure that Maston Creek met the terms of the Hurlburt Field Subcontract.” Yet, Leebcor does not allege any facts which show that CJM knew that it had this duty, agreed to it, or that it was part of its consideration in forming a contract. Rather, Leebcor merely alleges that CJM had the duty to ensure that Maston “performed in accordance with the terms of the Hurlburt Field Subcontract,” which included confirming that Maston obtained the proper “partial waivers and release of liens for all labor, materials, and equipment before it submitted a pay application.”
The Court went on to state that even if CJM knew about Matson’s breach that knowledge did not provide an affirmative duty to assure performance by Matson. Because CJM had no affirmative contractual duty to assure performance by Matson, it could not breach such a duty, and therefore no breach of contract occurred. In sum, the Court did not find there to be a term in the contract between the parties that required the factoring company to assure compliance of a third party to the contractual duties that would have allowed it to collect in the first place.
The lesson on breach of contract? Be sure that you have all of the duties that you want to enforce spelled out or you could end up like Leebcorp without a counterclaim to assist in defraying the costs of a non-compliant subcontractor. I highly recommend that you read the entire opinion to obtain the nuance that is not available in a short post such as this one and that you consult with an experienced Virginia construction lawyer early in the contracting process and beyond when entering into such complex agreements as that involved here.
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