June 05, 2017

Three Things to Consider Before Terminating Your Construction Contract

The design and construction process is extraordinarily complex, and it rarely proceeds as planned and almost never conforms strictly to the contract documents. These documents often include hundreds of pages of general and special conditions, hundreds of drawing sheets, and thousands of pages of specifications containing words and symbols of great significance to those in construction, but of little meaning to laypersons.1 This can make it difficult for courts to determine whether a deviation from the contract documents is “material” enough to trigger contractual or legal remedies. Here are three things to consider when making an initial determination whether the breach of a construction contract is “material” — i.e., whether it matters enough to trigger legal rights to recover damages or even terminate the contract altogether.

Understand the General Test for Materiality

Determining whether a breach is material will depend on a variety of factors, including the facts of the dispute, the terms of the contract and the case law in your jurisdiction. A generally accepted standard is that a breach is material when it “reasonably endangers future performance of executory contract obligations so as to go ‘to the heart of the contract’ and ‘defeat the very object of the contract.’”2 Some questions to ask in making this determination include:3

  • Does the breach demonstrate a clear unwillingness or inability of the breaching party to perform going forward?
  • Has the contract already been substantially performed by the breaching party?
  • Can the breach be remedied solely by monetary damages?
  • Has the breaching party been given notice of the breach and an opportunity to cure?
  • Has the non-breaching party taken any action after the breach that would negate the materiality of the breach?

Read and Understand the Contracts

Construction contracts will often provide a detailed procedure for providing notice of an alleged breach, any requisite opportunity to cure and what remedies are available (or not available). The contract may define, by type or category, what constitutes a “material” breach. Finally, the contract may contain provisions for converting material breaches into claims that are compensable as damages under the contract. These provisions are generally enforceable, and they act to limit the non-breaching party to a pre-defined amount of monetary damages or other relief.4 Thus, it is critically important to understand any contractual provisions that may define, or limit, what is considered a material breach of the contract.

When in Doubt, Treat the Breach as Immaterial

Mistakenly determining that a breach is material — and triggering a right to terminate — can carry severe consequences. If a court later determines that the breach was not material, and therefore termination was unjustified, it can expose the party asserting a material breach to significant liability and damages.5 (Discussing cases where owners were held responsible for a) completion costs, b) lost profits and c) extra-contractual “bad faith” damages.) When in doubt, treat the breach as immaterial and seek a remedy lesser than termination, such as specific performance or monetary damages.

1 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 18:2 (Dec. 2016 Update).
2 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 18:1 (Dec. 2016 Update).
3 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 18:4 (Dec. 2016 Update).
4 Ibid
5 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law, § 18:3 (Dec. 2016 Update).

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