Government contractors are familiar with the obligation to retain minority or women-owned businesses as subcontractors to obtain government work. Increasingly, apex private sector businesses require participation by minority or women-owned businesses as a condition of obtaining work, as well.

A recent decision by the federal court for the Southern District of New York is a cautionary tale, and highlights the care required when terminating a minority business enterprise (MBE) sub-contractor. Annuity Funds Operating Engineers Local 15 v. Tightseal, No. 17-CV-3670 (S.D.N.Y. August 14, 2018).

Annuity Funds Operating Engineers Local 15 v. Tightseal

The case arose after Jadlau, the general contractor on the Queens Midtown Tunnel Rehabilitation Project, terminated one of its MBE subcontractors, Tightseal Construction. The subcontract between Jadlau and Tightseal provided that Jadlau would withhold contributions due to various union sponsored fringe benefit funds and pay them. Allegedly, at some point, Jadlau ceased payments to these funds. After Jadlau terminated Tightseal, the union funds sued Tightseal to collect the delinquent contributions. Tightseal and its CEO then sued Jadlau under 42 U.S.C. Section 1981 (part of the Civil Rights Act of 1866) claiming Jadlau had terminated the subcontract in “bad faith.” Specifically, Tightseal and its CEO claimed that Jadlau’s termination of the subcontract was due to racial animus. It should be noted that the punitive damages which can be awarded under Section 1981 are uncapped, making claims under this statue more potent than Title VII claims.

Jadlau moved to dismiss the (third-party) complaint filed by Tightseal and its CEO. The court granted Jadlau’s motion as to Tightseal’s CEO but denied motion as to Tightseal. The district court found Tightseal’s CEO’s section 1981 claim failed because he was not a party to the subcontract between Tightseal and Jadlau. As the court explained, the Supreme Court had already concluded a “shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation’s contracts,” quoting Domino’s Pizza v. McDonald, 546, U.S. 470, 477 (2006). The district court noted that the CEO had not alleged he was the third-party beneficiary of the subcontract, or that Jadlau had the actual ability to interfere with the formation of any contracts between the CEO and any other party, both of which are alternative theories of liability under Section 1981. Accordingly, the court dismissed his claim.

The district court, however, determined Tightseal could bring a claim under Section 1981 because it was a party to the subcontract with Jadlau. Tightseal alleged it was a “disadvantaged African-American Company” and that Jadlau had “subjected it to race discrimination.” The court found this allegation was sufficient to state a claim under Section 1981 because Tightseal alleged that Jadlau’s superintendents had subjected its CEO to racial harassment by calling him racist names and using racial slurs when addressing him. The case will now proceed to discovery and a likely trial absent a settlement.

The decision highlights several important lessons for contractors to keep in mind.

  • First, the obligation to avoid racial harassment extends beyond the employees in one’s own workforce.
  • Second, general contractors should establish a complaint process or ombudsman system for subcontractors that mirrors the internal harassment complaint procedure for their own employees. A complaint procedure for subcontractors and other vendors may not preclude dissatisfied subcontractors but it may avoid unnecessary litigation.
  • Third, it is important to carefully draft the terms of the subcontract so as to avoid third party beneficiary claims.

For more, please reach out to your Baker McKenzie lawyer.