In Black Riv. Plumbing, Heating & A.C., Inc. v Bd. of Educ. Thousand Is. Cent. Sch. Dist., ___AD3d___, 2019 NY Slip Op 06321 [4th Dept 2019]), a contractor alleged that it was wrongfully terminated and sought to recover the value of its unpaid work. In opposition, the owner claimed that the work was defective and therefore asserted that it should be entitled to offset the alleged amount due based on the defective work.
The contractor rejected the owner’s request for an offset and argued that the Fourth Department in Paragon previously held that a wrongful termination renders the termination as one for convenience and therefore deprives the owner of the right to assert an offset (see Paragon Restoration Group, Inc. v Cambridge Sq. Condominiums, 42 AD3d 905 [4th Dept 2007]). The contractor further sought to rely on other cases rejecting a party’s right to assert an offset, specifically where a party expressly elected to terminate the contract for convenience (see Tishman Constr. Corp. v City of NY, 228 AD2d 292 [1st Dept 1996]) or where the terms of the particular contract at issue specified that a wrongful termination for default was deemed to be a termination for the convenience (see Fruin-Colnon Corp. v Niagara Frontier Transp. Auth., 180 AD2d 222 [4th Dept 1992]).
In opposition, we argued that New York case law permits an owner to offset damages that occurred prior to the alleged breach. This rule has been adopted by the Court of Appeals (see General Supply & and Constr. Co. v Goelet, 241 NY 28  [holding that “the owner is entitled to damages for previous default by the contractor which could not be affected in any way by the owner’s breach nor reduced below the amount then fixed by the passage of time”]; see also TRN, LLC v Fabric Branding, LLC, 2017 NY Slip Op 30138[U] [Sup Ct, NY County 2017] [holding that “a party that terminates a contract without giving proper notice and an opportunity to cure may still seek recovery of damages for prior breaches of contract”]; Paragon Restoration Group, Inc. v Cambridge Sq. Condominiums, 14 Misc 3d 1236[A], 2006 NY Slip Op 52579[U] [Sup Ct, Erie County 2006] [holding that where “the termination is not deemed one for convenience, Defendant may still seek an offset for reimbursement for payments made to third parties to correct [the contractor’s] defaults”]). Thus, even assuming for the sake of argument that any wrongful termination occurred, we argued that the owner should still be able to claim an offset.
We further explained that the contractor was misplacing reliance on the Paragon case. There, the trial court concluded that the defendant had terminated for cause rather than convenience, thereby permitting it to claim an offset (see Paragon Restoration Group, Inc. v Cambridge Sq. Condominiums, 14 Misc 3d 1236[A], 2006 NY Slip Op 52579[U] [Sup Ct, Erie County 2006]). Although the Fourth Department in Paragon modified this portion of the order, it disagreed with the trial court’s interpretation of the record and concluded that the defendant had in fact terminated the contract pursuant to a termination for convenience clause, thereby precluding it from seeking an offset (see Paragon Restoration Group, Inc. v Cambridge Sq. Condominiums, 42 AD3d 905 [4th Dept 2007]).
We further pointed out that the termination in our case was clearly for cause rather than convenience and was not made pursuant to the termination for convenience provision. Among other things, the termination letters reference the cause provision in the contract (rather than the convenience provision) and employ the words “cause” and “default”.
Ultimately, the Fourth Department agreed with us and rejected the contractor’s argument, concluding as follows:
“The subject contract did not contain a provision stating that an improper termination for cause shall be deemed a termination for convenience. Additionally, contrary to [the contractor’s] contention, [Paragon] does not support an automatic conversion of an improper termination for cause into one for convenience; indeed, the contract in that matter was terminated ‘without cause, pursuant to a termination for convenience clause’. Where, as here, the termination is for cause, and not for convenience, a defendant may seek an offset for payments made to third parties to correct the contractor’s defaults. Inasmuch as [the owner] may be entitled to an offset, we decline to dismiss their second and third counterclaims” (Black Riv. Plumbing, Heating & A.C., Inc. v Bd. of Educ. Thousand Is. Cent. Sch. Dist., ___AD3d___, 2019 NY Slip Op 06321 [4th Dept 2019] [internal citations omitted]),