In the construction industry, when one party fails to fulfill their end of the agreement, they are in breach of a contract.
The punishment and damages now depend on whether the breach was intentional, premeditated, major, or minor.
If the parties cannot agree on a settlement, the court will likely step in as both the mediator and ultimate arbiter.
But what leads to a breach of contract in construction?
How can you mitigate the unintended consequences of not fulfilling your end of the deal?
Let’s get right to it.
Key takeaways
Breach of contract in construction involves one party of the agreement not completing their end of the deal intentionally or unintentionally.
To prove a breach of contract, there must be a valid agreement as well as provable damages.
As a remedy to the breach, you can seek reformation, rescission, or specific performance provisions.
What is a breach of contract in construction?
A breach of construction contract is a situation where the contractor, project owner, or other parties to an agreement fail to fulfill their contractual obligation.
Say a construction company decides not to complete the construction work for whatever reason.
They are in breach of contract.
In such a scenario, the owner can trigger the breach of contract clause in the agreement to demand compensation.
Other options to explore include arbitration and dispute resolution.
If nothing works, the project owner can involve the court according to the governing contract law in the agreement.
What are the types of breach of contract in construction?
Contract breaches vary in magnitude and intentionality.
A major (material) breach involves a blatant disregard of a vital element of the contract. For example, the owner of the building refuses to pay after the construction is completed.
A minor (non-material or immaterial) breach involves failing to deliver some aspects of the contract either by omission or intentionally.
An anticipatory breach occurs when one party confirms their inability to fulfill their end of the deal. For example, the construction company cannot finish the project before the completion date.
An actual breach of contract occurs when one party cuts corners to deliver substandard results, such as when the builder uses asbestos instead of cellulose fiber.
What leads to a breach of a construction contract?
To prove that the other party breached parts of the contract, you need to prove how their action or inaction resulted in dereliction of duty.
Olga is a Senior Web Analytics Manager at PandaDoc who has been working in the Digital Marketing field for the past 15 years. Olga had roles driving marketing campaigns in document automation, contracts, invoices, and agreements. In her daily life, she is a big fan of traveling and connecting with new people.
The contractor flaunts waste disposal regulations.
The contractor refuses to redo or rectify substandard work.
The construction company hires unapproved subcontractors.
The owner refuses to adjust payment even with change orders.
The contractor refuses access to the building or construction site.
The builders refuse to work without due cause or prior notification.
The owner terminates the contractor’s agreement without warning.
The builders use unapproved materials and building specifications.
The owner wants to implement wholesale changes to project plans mid-project.
The construction company removes building materials and equipment from the site without prior notice.
Once you can prove any of these performance issues or non-performance claims with a valid, legally binding contract, you’ll be entitled to compensatory damages.
What can you do if someone breaches a construction contract?
Here is what happens when a construction contract is breached.
First, go through the contract clauses to ensure that the roles and responsibilities are clearly outlined.
If the breach falls outside the scope of work, cut your losses.
If the breach falls within the other party’s responsibilities, you need to notify them through written or verbal means.
This could be a phone call or a written legal notice expressing your grievances.
For tangible physical and financial damages, gather proof of non-performance and how it relates to the breach.
If the party takes responsibility, you can reach an informal resolution in the form of extra work, refund or balance of payment, or mutual termination of contract.
But if the other party refuses to take responsibility, consult a construction attorney for guidance on the next steps — arbitration, litigation, or other measures.
Once you can prove the damages, the judge will either mandate the defaulting party to pay compensation, complete the work, or pay fines.
What are the common remedies for breach of construction contract?
Here are the standard legal remedies that apply for any major or minor breach of a construction contract.
Damages
The most common remedy for any breach of contract is damages — which are financial compensation for the perceived or actual effects of the other party's failure to fulfill their role.
Here are the different types of damages:
Liquidated damages: the financial compensation stated in the contract.
Punitive damages: reimbursement for intentional or malicious breaches.
Compensatory damages: compensation for actual damages or financial losses.
Nominal damages: awarded by the court just to punish the guilty party, even if no losses occurred.
Specific performance
The specific performance remedy comes into play when the judge mandates both parties to see out the contract despite their differences.
This remedy is rare, especially in cases where the relationship between the contractor and owner has gone sour.
But if the breach of contract case is minor — say the builder painted the house gray instead of green — the court can order the contractor to repaint the house.
No further punishment required.
Reformation
As the name suggests, a reformation remedy involves going back to the original contract but with a slight adjustment in roles and responsibilities.
For instance, if the breach in question occurs because the contractor refused to dispose of project waste, the judge can order both parties to alter the contract instead of taking up any more of the court’s time.
The revised agreement will now include waste disposal as the contractor’s responsibility, while the owner will pay them extra for their services.
Repudiation
The repudiation remedy becomes valid in cases of anticipatory contract breach when the breaching party notifies the other about their inability to deliver.
In this case, the aggrieved or injured party can choose to terminate or discharge the contract.
The property owner can hire a new contractor to replace the original one early on in the construction project due to subpar performance.
However, the court would have to compel them to pay the contractor for the work done to this point.
For instance, if the contractor is taking more time than expected, the building’s owner can fire them, pay them the balance for workmanship completed, and hire a new contractor.
Rescission
Rescission involves rolling back the contract as close to the pre-agreement stage as possible.
This remedy is viable if the (anticipatory) breach occurs in the early stages.
Say the roofing expert just started work but realizes the real estate owner wants to use illegal building material.
The remedy would be a rescission by terminating the contract.
How to mitigate the fallout from contract breaches
Any involvement in a breach of contract lawsuit is always bad, but you can mitigate the financial and reputational consequences.
Here are your options as the breaching party:
Establish why you are no longer able or willing to fulfill your contractual obligations.
Review the contracts to see if you have any recourse to break the agreement.
Follow the contractual or alternative dispute resolution mechanisms.
Respect the court’s decision and pay for consequential damages.
Notify the other party to iron out an amicable settlement.
Seek legal advice from a construction law expert.
As the non-breaching party, here is what you can do:
Check the options you have for breach of contract claims according to the contract's terms. Some clauses to consider include “stop-work”, “stop-payment”, “arbitration”, and “jurisdiction” provisions.
If the claims are not documented in the contract, hire an experienced attorney to seek advice about next steps.
Notify the breaching party and explore other agreed-upon dispute resolution mechanisms.
Gather enough evidence to prove that the breaching party is at fault, as well as the potential monetary damages resulting from their action or inaction.
Don’t rush to pursue legal action. The judge might end up siding with the breaching party.
In general, bear in mind that the professional relationship will always go downhill once a material breach of contract occurs.
Contract disputes are all but guaranteed to break any mutual trust established between both parties.
Use PandaDoc to keep your contracts updated and valid
When a contract breach occurs, your saving grace could be those minor boilerplate clauses in straightforward, clear-as-day construction agreements.
We offer a full suite of tools, including construction templates to make sure you have the right clauses in your contract, and a complete contract management solution for drafting, managing, and storing construction documents.
To find out how the PandaDoc platform can help you keep your contracts up to date, start a free trial or book a demo today!
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