## Facts

- Zara Contracting Co., Inc. held a federal prime contract to extend the Tri-Cities Airport at Endicott, New York, and furnished a Miller Act payment bond through American Bonding Company of Baltimore.
- Zara subcontracted essentially all performance to Susi Contracting Co., Inc. and D’Agostino & Cuccio, Inc., requiring large-scale excavation and placement for runways.
- The subcontract included a clause disclaiming representations about subsurface conditions and purporting to bar claims for damages from unknown conditions.
- During performance, subcontractors encountered unexpectedly difficult soil conditions (including heavy clay) that increased costs and impaired progress and equipment.
- Subcontractors sought additional compensation from Zara for the added work and costs; Zara refused.
- About two months after work began, Zara took over completion of the work, excluded the subcontractors, and later received payment from the United States for completion.
- Subcontractors sued on the payment bond seeking compensation for (1) labor and materials furnished, (2) added excavation costs from unforeseen conditions, and (3) rental value of equipment Zara retained and used after takeover.
- The district court found Zara wrongfully terminated the subcontract and awarded damages for the reasonable value of services and for increased excavation costs; it also awarded equipment rental, which both sides challenged on appeal.

## Issues

1. Whether Zara’s takeover and exclusion of the subcontractors was a wrongful termination or was justified by subcontractor breach.
2. Whether subcontractors could recover increased excavation costs caused by unforeseen subsurface conditions despite the subcontract’s disclaimer and no-claim clause.
3. Whether, after a prime contractor’s material breach, subcontractors may recover against the prime and Miller Act surety on a quantum meruit theory for the reasonable value of labor and materials furnished.
4. Whether, and how, subcontractors are entitled to compensation for the reasonable rental value of equipment retained and used by the prime after termination.

## Decision

- The court affirmed the finding that Zara wrongfully terminated the subcontract; alleged subcontractor defaults were waived or not substantial enough to justify takeover.
- The court upheld the award for increased excavation costs caused by unforeseen soil conditions notwithstanding the disclaimer clause.
- The court held subcontractors could recover, against both Zara and the surety, the reasonable value of labor and materials furnished where Zara’s material breach forced cessation of performance.
- The court increased the allowance for equipment rental, holding the district court undervalued the reasonable rental value for Zara’s post-termination use.
- The judgment was modified to increase equipment-rental damages and, as modified, affirmed.

## Legal Principles

- A prime contractor must show a substantial, unwaived breach to justify terminating a subcontract; otherwise, takeover constitutes a material breach.
- Where the prime materially breaches by wrongful termination, the subcontractor may treat the contract as terminated and seek restitution for the reasonable value of labor and materials actually furnished.
- A Miller Act payment-bond surety may be liable for quantum meruit recovery measured by the reasonable value of labor and materials supplied to the federal project when the prime’s breach prevents completion.
- A subcontract clause disclaiming subsurface-condition representations does not necessarily bar recovery for materially increased costs from unforeseeable conditions, particularly where equity disfavors allowing the prime to obtain adjustments upstream while shifting all resulting costs downstream.
- When a prime retains and uses a subcontractor’s equipment after wrongful termination, the subcontractor is entitled to compensation measured by the reasonable rental value for the period of use.

## Conclusion

The Second Circuit held that Zara’s wrongful termination entitled the subcontractors to recover on the Miller Act payment bond for the reasonable value of labor and materials furnished, permitted recovery for increased costs from unforeseen soil conditions despite a disclaimer clause, and required additional compensation for the reasonable rental value of equipment Zara retained and used after takeover.


United States ex rel. Susi Contracting Co. v. Zara Contracting Co., 146 F.2d 606 (2d Cir. 1944)