Construction Contract Breaches Explained
A construction project constitutes a mutual agreement between two or more parties wherein the builder is hired by the owner to perform specified services in relation to the construction of a particular structure in exchange for a certain sum of money.
The parties enter into an agreement that covers the objectives of the project, the obligations of the parties, and the consideration expected from both sides. This is the basic notion of a contract. Thus, when either party fails to deliver on the terms specified in the agreement, there is a breach of contract.
The party who failed to satisfy the terms of the agreement stands liable for the damages caused to the other party. For the purpose of this discussion, the term "breach" will be used to connote any departure from the terms of the contract, including minor deficiencies in work performance, objective failure to perform and abandonment of the project.
The contract breach creates a legal duty for the party at fault to correct the defects within the scope of his/her performance. Thus, the aggrieved party who has suffered the breach has a legal right to pursue the corrective and/or remedial alternatives specified in the contract. A breach of a construction contract may be defined as a non-performance or improper performance of the construction work by the builder.
There are several types of breaches in the context of a construction contract. However, the following distinctions are the most common types of construction contract breaches:
Another critical distinction is between a material breach and a simple breach of contract. A material breach goes to the essence of the agreement and deprives the aggrieved party of a benefit under the contract. The remedy for such breach is termination of the contract and recovery of damages. A simple breach on the other hand only entitles the aggrieved party to recovery of damages, but does not provide grounds for the termination of the contract.
The remedies available for breach in the above-discussed cases include but may not be limited to:
The party materially damaged must present evidence that the defective performance resulted in significant damages. Most construction contracts contain limitations on recovery of damages. Thus, mitigation becomes a key issue to the extent of recovery .
The aggrieved party who suffered the breach should also mitigate his/her damages. Failure to do so will limit his/her ability to recover any damages. In the context of construction contracts, mitigation often involves the execution of the contract with the contractor in order to obtain the benefit of the bargain anticipated. The aggrieved party objects to completion of the contract by the original builder and seeks to finish the project through an alternative contractor.
In this situation, any additional expenses and other damages caused the aggrieved party by the breach become the primary categories of damages for which recovery is permitted.
Every breach of contract does not entitle a party to recover not only the costs of performance of the contract in accordance with the contract but also the profits which would have been realized had the contract been fully performed. If the cost of performance of the contract is less than the amount of loss of future profits, a party will be entitled to the lesser of the two.
The general principle upon which the Courts act in awarding damages for breach of contract is that the aggrieved party is entitled to receive such an amount as will put him in the position he would have occupied had the contract been duly performed. No more, nor no less.
The aggrieved party is entitled to claim damages from the builder in respect of the time and money he has reasonably expended as a result of having to hire another contractor to complete the project. This is known as the cost of cover.
For example, if the due performance of the building contractor has been stopped by his default in performing the contract or the aggrieved party has been obliged to employ another person to execute the contract himself, the builder of the house would only be liable to pay for the difference between the cost of finishing the building, and the price for completion of the contract with its original contractor. In addition, the aggrieved party must prove on the balance of probabilities that the damage was reasonably foreseeable by the parties at the time they entered into the contract. Thus it must be shown that the party in breach should have been aware that the breach of the contract would cause the aggrieved party to incur this type of loss or damage.
Examples of Breach of Contract in Construction
A minor breach is when one party does not fully perform as promised in the construction contract. When the breach is minor, the innocent party may only seek expectation damages, which essentially give them the economic position they would have been in if the breach had not occurred. The promisee (party seeking to enforce) must also be able to perform their obligations if expectations damages are to be collected – they cannot recover anything if they are in breach themselves. To use the "perfect tender rule," a purchaser must demand a perfect performance that fits perfectly with the specifications listed in the contract. This is a strict rule of law that reduces the discretion to courts to even determine if a breach occurred, let alone whether or not the breach was a material one that would allow for damages to be awarded to the promisee. A material breach occurs when there has been a substantial failure of performance. Courts have generally agreed that a breach is material when it has caused "significant damages," "a significant loss of expectancy" and was not "a de minimus deviation from thee promised performance." There is still no bright-line test to determine whether a breach was material, and courts will look at the specifics of the case in determining whether the damages are significant and whether enforcing the contract would be just given the circumstances. Some factors that courts may consider include: Anticipatory breaches arise when a party either expressly or implicitly indicates that they will not perform their portion of the contract if it goes into effect. A mere statement of nonperformance, even if made before an explicit refusal of performance, may amount to a breach of contract when such statement gives an objective indication that performance will not take place.
Common Reasons for Breaching a Construction Contract
In commercial construction, the most common breaches arise because of delay in the completion of work, defective or negligent work, and failure to make payments to subcontractors and suppliers. Over the years, I have represented owners and contractors in the context of defective workmanship, performance delays, and missed payment obstacles. These factors, combined with continued inflation, prompt disputes.
Delays are common in construction, but are rarely "permitted." Most construction contracts allow for a delay due to certain uncontrollable factors, called "force majeure" events. Such events include fire, earthquakes, acts of terrorism, tsunamis, and hurricanes. However, even these events have litigated over the years.
Among common reasons for delay are:
Defective work arises for many reasons. The most critical reason is because a contractor or subcontractor has failed to comply with specifications for the project. Often these include plans and specifications which are controlled through the design/ construction or design-bid-build process. Likewise, the contractor may be responsible if its work violates Tittle 24 (Energy Conservation). General conditions and stipulations in Division 1 of the California General Conditions of the State of California, Construction Trades Council1720, and "General Conditions of The Contract For Public Works Of Improvement" made by and between the County of Los Angeles and the Momentary Preservation CommunityDevelopment Committee, dated November 21, 2011, also apply.
Failure to make payments to employees, subcontractors, or suppliers may render the prime liable to the owner. Under such circumstances, the prime has violated the "no-lien" clause of its contract and, in some circumstances, can be liable for wrongful withholding of payment.
Additionally, improper licensing, insolvency, bankruptcy, and limited availability of funds are among common causes of breaches of construction contracts.
Legal Remedies for Construction Contract Breach
Upon breach, the injured party has several different legal "remedies." The most common remedy is an award of damages. Damages is a legal term for money you may be awarded by the court in order to compensate you for the loss you suffered from the breach. Damages may be awarded for the inconvenience caused by the breach of contract; for any financial losses directly resulting from the breach; for any personal injuries suffered as a result of the breach; for mental distress caused by the breach; and for lost opportunity.
Another remedy may include specific performance. Specific performance is a court ordered remedy where the court requires the breaching party to perform their contractual duties. Specific performance is typically only ordered when damages are not an adequate remedy.
Finally, in a construction contract, the non-breaching party may be able to recover by obtaining a cancellation of the contract or judgment upon a bond that secures the non-breaching party against a breach.
How to Prevent Breaching a Construction Contract
As in any other type of contract, the easiest way to avoid breaching a construction contract is to make sure that the contract is drafted clearly and unambiguously. No one wants to breach a contract, and in looking at whether a party has breached its construction contract, or if one party’s breach has damaged the other party, courts will often start with the language of the contract itself. Therefore, it is helpful when the other party will know exactly what you meant when you drafted your contract. This means being careful with how you defined terms and used them throughout the contract – if you defined "Completion" or "Substantial Completion" one way in one part of the contract then used the word "Completed" with a different definition in another part, the other party can argue that the contract is ambiguous and try to apply a different meaning to the word.
However, contract drafting is only one part of preventing a breach by either party. Proper project management is another important part . If your contract calls for Progress Payments and you are late in getting those payments made to the Owner, they may have right to terminate you for Cause. You also want to ensure that your specifications are clear so that there is no confusion as to what was required. If there is an issue, go back to the contract and posts a notice so you can prove up your delays, your costs, or the other party’s breach of contract. Make sure that you’re doing everything you can to keep on time and on budget.
If you find that you need to breach your contract for any reason, be careful about how you go about it. If your contract requires that you give notice and you don’t, you may not be able to claim your full damages. Be sure to notify the other party that you will be terminating them for an Event of Default, and list out the reasons specifically. Also be cautious about what you do with other parties about the project in the meantime; if you notify the Owner that you won’t be continuing with the project, but continue to work anyway, you could be waiving your right to terminate.
Mediation and Arbitration in Construction Contracts
Alternative "ADR" Methods – Mediation and Arbitration
Although quality contracts will prevent many disputes, the unfortunate fact is that disagreements do occur between parties to a construction contract. When these disagreements occur, there may be no better tool to have at your disposal than a contract itself. Many construction contracts contain clauses requiring both a mediation conference and then, if necessary, binding arbitration – both forms of alternative dispute resolution.
While arbitration is a relatively uncommon clause, mediation is estimated to be the most commonly utilized form of alternative dispute resolution. When parties to a construction contract have a disagreement, the contract often provides that the parties will first attend an informal mediation to discuss the issues and try to resolve them to everyone’s satisfaction. A key advantage of the mediation process is that parties often have opportunities to present their side of the story that are not there in other forms of dispute resolution.
If mediation does not serve to resolve the dispute, the construction contract may require that the parties move on to binding arbitration. While parties are generally entitled to appeal an adverse arbitration decision, such appeals are limited and occasionally require a substantial showing from the appealing party. For this reason, it is critical to have a solid legal analysis of any final arbitration decision that the other party may issue.
Consulting and Legal Advice
Retaining an attorney experienced in the area of construction law is essential for those who suspect or discover a breach. An attorney can review the contractual terms, interview witnesses, compare performance with contract terms and invoice, and advise whether or not you should pursue the matter, and if so, how to proceed. Retaining an attorney at the earliest possible time will keep costs down and prevent the need for litigation at a later date. If a lawsuit has already been filed , an attorney will advise whether or not to file a counterclaim, and what damages you should seek.
It is essential that you obtain the assistance of a qualified expert such as engineers, architects, trade experts and estimators to determine what damages may have occurred as a result of the breach of contract. They will be needed at every step of the process so their retainer can be included in any claim for damages that is submitted in court.