Breach of Contract: Part 2

1. Waiver of breach

Some construction contracts contain a provision that the owner waives all claims against the contractor if it makes final payment with the knowledge of a construction defect.  Such a clause was upheld in a case in which a contract for sought damages, the contractor interposed a defense a paragraph of the construction contract which provided that the making of the final payment constituted a waiver of all claims except those arising from defective work appearing after completion of the contract.  The court held that the owner must have been aware of the defect before making final payment because the owner had employed another contractor as an inspector to monitor the work.

The defect, although it may have been latent to a lay person was patent to a qualified inspector, therefore the damage claim was waived.

2. Anticipatory breach

What rights does a party to a contract have it the other party says it is going to breach the contract?  Such a breach is known as an anticipatory breach.  For example, if a contract called for drywall, but the owner told the contractor it would withhold the next progress payment unless the contractor installed lath and plaster where drywall was specified, the owner would be guilty of anticipatory breach of contract.

An anticipatory breach of contract would give the contractor all of the rights it would have if the owner actually and without justification refused to make a progress payment.  The contractor would have the option to either: (1) affirm the contract and recover all damages sustained because of the breach, including the profit the contractor could have made if permitted to continue with the contract and complete the contract, or (2) rescind the contract and recover the reasonable value of the work and materials already furnished.

Anticipatory repudiation of a contract permits a party to immediately sue for damages for breach of contract, and also relieves that party of any obligation to perform or offer to perform any conditions precedent.

3. Owner’s damages where contractor abandons work

When a contractor breaches its contract with the owner by failing to properly perform, the owner may eject the contractor from the job, hire another contractor to finish the work, and hold the direct contractor liable for damages.  The difference between the contract price and the actual total cost becomes the measure of damages.

Suppose K agrees to build a residence for O for $250,000–halfway through the job O discovers that K’s work is defective.  K refuses to make corrections.  O has paid K $200,000.  O now ejects K from the job and employs another contractor to complete the work according to the plans and specs.  O must pay the new contractor $140,000.  Therefore, the total cost of the job is $340,000.  But if K had performed the contract as agreed, O would have had its house for $250,000.  The damages, therefore are $90,000 which O can collect from K in a lawsuit.

The same measure of damages would apply to a breach between a subcontractor and prime contractor.  The underlying principle is that the promisee should get the job it bargained for at the price it bargained for.

4. Liquidated damages

What happens when a contractor completes a job in accordance with plans and specs but does not finish within the time limit imposed by a contract?  The owner’s measure of damages is the reasonable rental value of the premises during the period of delay.  If a contractor were one month late in completing a 50-unit apartment building with a monthly rental of $20,000 the damages suffered by the owner would be $20,000.

Most construction contracts contain clauses that excuse the contractor for delay caused by inclement weather delays and delays in inspection by government, agencies, war, flood, fire and other occurrences.  Such provisions are important.  Without them, the risk of delay is placed on the contractor.

How do you determine a loss if there is delay with regard to constructing a highway, bridge or school building that is not ordinarily or ever rented?

To address this problem, most public construction contracts (and some private ones) contain liquidated damage clauses which are presumed valid under civil code section 1671.  Exceptions for liquidated damages include consumer contracts, rentals and residential leases.  They are presumed valid and usually state as follows:

The parties agree that the public work would suffer substantial damage as a result of failure of the contractor to finish the work on time, but it would be impracticable or extremely difficult to fix the actual damages, and therefore, the parties, agree that a reasonable approximation of the actual damages to be suffered by the public is the sum of $1,000 per each day during which full performance of the contract is delayed.

The $1000 is known as liquidated damages.  The parties have agreed in advance on a measure of damages which would otherwise be difficult to ascertain.

There is no requirement in California that a liquidated damage clause be balanced by a bonus provision if the contract is completed early.

Penalties v liquidated damages

California courts do not like penalties and forfeitures.  A penalty is a provision in a contract that the contractor will pay a penalty of $4500 for each day during which the contract remains uncompleted after June 1.  An example of a forfeiture is a provision under which the contractor would forfeit all right to be paid money previously earned on other jobs in the event of a default by the contractor in performing a later contract with the same owner.

The policy of the law is that a party to a contract should be able to collect only such damages as will compensate it for the loss actually caused by the breach of the other party. In other words, even an innocent party should gain no more from the breach of contract than it would gain from its performance.

Apportionment for liquidated damages

The law provides that liquidated damages are presumed valid–it does not resolve the issue of whether liquidated damages may be apportioned.

In one case, a contractor was required by contract to perform excavation and other contract work for a dam.  The contract provided that the work would be finished in 120 days, but the job actually took 369 days.  The flood control district attempted to enforce a $50 per day liquidated damages provision, but the court found that the first 40 days of delay was caused by failure of another contractor employed by the flood control district to vacate the job site. An additional 40 days of delay was caused by the fact that the contractor had to excavate 112,000 cubic yards of material, whereas the flood control district had represented that the contractor would only have to excavate about 52,000 cubic yards.  A severe storm also delayed the job for an additional 37 days.

The flood control district contended that even if the court granted extensions of time for those three causes of delay the contractor still did not finish the job within the required time.  The court refused to attempt apportion the amount of delay attributable to each of the causes and fix the damages. The court laid down the rule that where delays are occasioned by mutual fault of the parties (partly by the owner and partly by the contractor) a court will not attempt to apportion the damages and will refuse to enforce the liquidated damages provision entirely.  Since the owner by its acts made it impossible for the contractor to perform within the prescribed time, the owner lost its right to enforce the liquidated damages provision.

5. No damage for delay clauses

What if construction contract provisions allow time extensions for delay, but deny the contractor additional compensation for the delay?  Variations of this type of clause are found in public and private contracts.  Nevertheless, in certain situations, the contractor still is entitled to compensation for delay as well as an extension of time.

The civil code provides that delay in the performance of an obligation is excused when performance is prevented or delayed by the act of the creditor, “even though there may have been a stipulation that this shall not be an excuse…”  The code provides, however, that the parties may expressly require in a contract that the party relying on the provisions of the code section give written notice to the other party, within a reasonable time, of an intention to claim an extension of time, provided the requirement of such notice is reasonable and just.

Generally, the courts strictly construe such clauses against the party asserting that no damages are recoverable for delay.  Nationwide authority recognizes three exceptions to the enforcement of no damage for delay provisions in construction contracts.  First, if the owner abandons the contract, then the no damage for delay clause will not be enforced.  Second, if the owner operates in bad faith, the no damage for delay provision is void.  Third, the no damage for delay provision will not be enforced to prevent recovery of damages not of the type within the contemplation of the parties at the time the parties entered into the contract.