Breach of Contract: Part 1

If a party fails to perform under a contract, there is a breach.  A breach by one party excuses the other party from performing under the contract.  One party cannot ignore its duties under a contract and demand that the other party perform its duties.  One who breaks a promise can’t insist that the other party perform.

1. Substantial performance questions arise under construction contracts which is complicated.  How do you comply with every requirement of the plans and specifications?  What if there is some minor deviation.

What if the required pipe that is installed is better than what was required?  What if the pipes is not quite as good?  You can’t economically remove all the pipe from a building and replace it.  There is no doubt a breach.  To replace all the pipe would be wasteful and unjust, therefore there is the doctrine of substantial performance.

The doctrine of substantial performance cannot be applied if the contractor has not exercised good faith or if he has willfully and deliberately departed from the specifications.  Nor can it be applied where the deviations are so great as to substantially affect the usefulness of the building for the purpose for which it was intended.

The doctrine of substantial performance may be applied even if the contract provides that there shall be no deviations from the plans and specifications.

The limits of the doctrine are illustrated by the case of shell v schmidt(1958) the contractor deviated from the plans in three respects: (1) the specs called for wood sheeting on the exterior walls, but the contractor used construction paper covered with chicken wire; (2) the specs called for two furnaces of 30,000 btus each but the contractor installed one 25,000 btu furnace; and (3) the specs called for gypsum lath and plaster, but the contractor used sheet rock with tape joints for interior walls.  The court held that the doctrine of substantial performance was inapplicable,   the contractor was responsible for the cost of correcting all of the defects.

While one defective item standing alone may be minor, an accumulation of apparently minor defects can constitute a lack of substantial performance –famous builders inc v bolin(1968)

2 Severability

In lowy v united pacific insurance(1967) the court cited this doctrine and added it to substantia performance.–the court found that a grading contractor was entitled to be paid for its work. Under the contract the grading contractor was required to do excavation and grading for an 89 lot subdivision and also required to install curbs, gutters, pavement and ancillary items.  After finishing 98 percent of the work, the contractor quit and sought payment for the balance of the contract.  The subdivide defended the nonpayment on the ground that the contractor had breached the contract by failing to perform the cub, gutter and paving work.  The court found that the contractor had in fact breached the contract to install the street improvements.  But awarded damages for the performance of the excavation and grading portion of the work, on the ground that part of the job had been substantially performed.  The curb and gutter work was to be performed on a unit price basis per lot–and therefore the work could be apportioned.

3. Impossibility of performance in 1667. An English court, in the case of pardine v jane stated the rule of law, that where a party by its own contract undertakes a duty–it is bound to make good notwithstanding any accident or circumstances, because it might have provided for such in the contract.

This rule of strict liability has been moderated by judicial decisions and the inclusion of force majeure clauses in contracts that excuse the promisor if performance is made impossible for reasons which it cannot control.

4. Destruction of the project

Few construction projects include specific provisions that the owner is obliged to make the job site available to the contractor.  It seems superfluous–the owner has to make the site available.  However, the parties, by contract should designate who is to bear the loss if a project is destroyed, whether destruction be caused by fire, flood, earthquake, collapse or anything else.   The owner should have to maintain insurance against those hazards if they are insurable, and should provide that if the project is destroyed before it is finished that the contractor should be paid the reasonable value for its work finished up to the time of destruction.  The contract should also state what happens if the project is destroyed from uninsurable losses–such as war, rebellion and earthquake.

–The cases are all over the place–a contract should provide for the owner to have “all-risk” insurance with course of construction, vandalism and malicious mischief clauses-naming the prime contractor and subs as additional insured.

–The contract should provide that if the building id destroyed or substantially damaged from any cause before the job is finished–the contractor will be paid the reasonable value of the work performed until the time of destruction and that both parties will thereafter be relieved of performing any further obligations under the contract.

–The contract should excuse the contractor for delays caused by acts of god, acts of the owner or its agents, inclement weather, strikes, inability to obtain skilled workers, delays by public bodies or public utilities and inspections or any other contingencies not the fault of the contractor.

–If the work to be done encounters a special risk, such as the risk of encountering underground rock or water or the risk that a particular source of supply will be shut off–the parties need to agree in advance as to who will bear the risk.

5.  Remedies

The general rule in California is that a contractor injured by an owner’s breach of contract may choose three different remedies: (1) it may keep the contract alive for the benefit of both parties holding itself ready and able to perform its duties under the contract at all times; (2) it may treat the breach as putting an end to the contract for all purposes of performance–leave the job and sue for the profits it would have realized had the contract been performed or (3) it may treat the contract as terminated (rescinded) and recover the reasonable value of the work it has performed.

A. Walking off the job

Contract law holds that a party to a contract cannot insist on timely performance by another party while at the same time refusing to perform its own obligations–if there is an inexcusable breach the other party has the option of walking off the job or terminating performance, there are normally detailed default provisions in contracts—there are required written notice provision or a series of such notices before termination–California courts require the observance of such notice provisions

Civil code section 8830 sets forth procedures for terminating private contracts and stopping work after January 1 1999

B. Terminations Under civil code section 3260.2, a contractor  that is not paid within 35 days from the date when payment is required may serve a 10-day stop work order provided there is no dispute as to the contractor’s satisfactory performance.  If payment is not made within the 10 days, work may be stopped and the contractor may seek an expedited judicial determination of liability for the unpaid amount.  The amount recoverable is limited to what could have been recovered on a mechanic’s lien.  –that is the market value of the work installed.  –the sub is deprived of a cause of action against the prime contractor for profits lost or for other termination expenses.

A contractor who has the right to terminate performance because of a non-payment should consider whether to undertake a common law termination or a civil code section 3260.2 termination–the advantages of the 322 60.2 termination are that the contractor is insulated from subcontractor claims for lost profit and termination expense–the contractor gets expedited judicial determination of the amount due from the owner and the contractor is protected from delay and remobilization claims by the owner.

C. Rescission The amount that the contractor can recover will depend on whether it decides to rescind and sue for the reasonable value of the work performed–sometimes reasonable value exceeds the contract price.  Sometimes it is less.  If you rescind you need to give notice to the other party =–promptly—–the claim for damages for breach of contract is not considered inconsistent with a claim for relief based on rescission–election of the remedy can be made at a later time.

In rescission–the measure of damages becomes the reasonable value –not limited by the contract price.–a case ensured where the reasonable value was greater than the contract price–because the contract price was discounted.

The measure of damages for breach of contract per the civil code in California is the amount that will compensate the party aggrieved for all the detriment proximately caused thereby or that in the ordinary course of things would be likely to result therefrom.

D. Benefit of the bargain

An owner cannot breach its obligations under a contract and at the same time expect the contractor to continue performance.  The contractor is entitled to the benefit of the bargain–in one case a framing contractor filed suit against a general for breach of contract–the sub was to be paid so much per unit in profit–the court awarded the sub the profit it would have made.

E. Recoverable damages An important rule limiting damages is that in breach of contract –damages are recoverable that would have been contemplated by the parties at the time the contract was made.  A contractor was not permitted to recover profits allegedly lost on future jobs because of a loss of bonding capacity caused by breach of contract by a public agency.  The agency had ejected the contractor from the job and made a demand on the contractor’s bonding company to perform the work.  The bonding company then refused to write further bonds for the contractor–the court held that the public agency at the time the contract was entered into could not have anticipated that the if the contractor was removed from the job that it would lose profits on future jobs because of lack of bonding capacity.

F. Total cost damages

Courts require a contractor to introduce evidence to show the exact amount of damages caused by a specified breach by a project owner—-to invoke total cost damages the contractor must produce its estimate, deduct from its claim the amounts of any busts in the estimate, and deduct the costs of any inefficiencies that are the fault of the contractor or subs

G. Breach by contractor.  This depends on whether the contract has been substantially performed–if it has been the damage is the difference between the market value of the building as build and as specified.  The general value for a tortious injury to property is the difference between the value of the property before and after injury which is to say the diminution in value.

  1. Damages for construction defects

An owner’s measure of damages for construction defects is the cost to repair or replace the defective installation.  The damages than an owner can recover for construction defects is limited by economic loss.

I.  Following plans and specs

If the plans and specs are followed–even though the result may be unsatisfactory–and good workmanship was implied there is no damage.

  1. Termination or ejection What about slow performance–is the breach minor or major–the owner must assess the option to terminate and include a time is of the essence clause in the contract.  –it gives the owner the option to terminate.
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© 2013 Robert L. Bachman