What Is Breach of Contract by a Contractor?
A breach of contract by a contractor happens when a party to a contract fails to fulfill the legal obligations agreed upon in the document. A contractor may breach a construction contract, or a services agreement. The contractor’s failure to act as required by the contract is a breach even if the construction defect does not cause any consequential damage to the construction. Examples of breach of contract by a contractor include:
· Failing to pay subcontractors or suppliers, failing to fulfill statutory obligations, such as the Arizona Prompt Payment statute;
· Failing to provide timely notices or otherwise breaching notice provisions;
· Failing to provide proper insurance and IDS;
· Failing to pay in a timely manner for work performed in accordance with the contract;
· Failing to acquire or maintaining required permits;
· Failing to conform to specifications;
· Deviating from Plans and Specifications in an unapproved manner. This concerns the contractual agreement to comply with the plans and specifications for a project. A deviation is a failure to comply with the plans and specifications. A deviation is not a material breach because, usually, it only involves a temporary departure from the plans and specifications and does not affect the general purpose of the contract. A material breach takes place when there is a serious violation of the contract that destroys the object of the contract and prevents performance of the remaining obligations;
· Failing to perform work in accordance with the contract schedule;
· Performing work not in accordance with the specifications;
· Adding time without a change in scope or cost through defective , late or non-conforming work;
· Failure to properly supervise or inspect work;
· Failure to provide construction means and methods in a safe manner;
· Unapproved substitutions;
· Failing to have management or personnel who are qualified, experienced and licensed if necessary;
· Engaging in out of scope work or change work without authorization;
· Delays and time of performance . "Time is of the essence" clauses in a construction contract are common in Arizona. The clause requires the contractor to perform the work within the time specified in the contract. Time of essence clauses are formal agreements that are generally enforceable in Arizona;
· Breach of warranty;
· Interference with performance by owner, subcontractors, etc;
· Failure to warn of dangerous conditions;
· Performance of work beyond the scope of the contract;
· Failure to have necessary business licenses or workers compensation certificates;
· Employing unqualified subcontractors;
· Engaging in misrepresentations, fraudulent inducement or breaches of fiduciary duty;
· Failure to live up to the covenant of good faith and fair dealing. Most contracts, regardless of whether they include a specific agreement or not have an implied term that each party must deal fairly and in good faith in performing their respective obligations.
Legal Ramifications of Breach of Contract by a Contractor
Contractors who breach their contracts take the risk of liability for damages flows from that breach. State construction laws govern when an owner may make a claim made against the contractor’s performance bond. A surety usually pays for these claims, but then expects the contractor to reimburse it for those expenses as well. Breach of contract claims are commonly litigated, and litigation can take years and cost hundreds of thousands of dollars. Damages awards can be substantial.
Lawyers often refer to monetary damages as "compensatory damages." Money is paid to the owner to compensate it for the difference between the cost of performance by the committing party and what that party performed. Damages awardable for breach of contract includes consequential damages. Consequential damages are an attempt to compensate a party for expenses or losses that result consequentially from the other party’s breach. Generally, consequential damages are expenses that would not exist but for the breach. A party can be liable for consequential damages if that party knew or should have known that the damages were a probable result of breach when it entered into the contract. Clause in a contract limiting or disclaiming liability for consequential damages may not be enforced.
Another remedy for breach of contract is an order for specific performance. Courts order specific performance when monetary damages are inadequate to remedy the breach. Specific performance requires that the party perform a specific act other than the payment of money. Specific performance frequently is a required remedy for breach of a contract to sell land because the land may have special value.
Finally, the courts may provide restitution for a breach of contract. Restitution generally is a remedy for an unwritten contract or a contract implied-in-fact. For restitution to exist, a party must transfer a benefit to the other party that was not intended as a gift and that the party transferring the benefit reasonably expected to be compensated for the benefit. Whether or not restitution exists is a fact question.
In sum, the consequences of breach of contract by a contractor may include but are not limited to compensatory damages, specific performance of the contract, and restitution remedies.
What Should You Do When a Contractor Breaches Contract?
One of the most important things a project owner or client can do upon suspecting a breach is to quickly and carefully review the contract governing the scope of work. The contract will set forth clear directives regarding both the process by which deficiencies should be corrected and any related time deadlines. It will also likely contain provisions directing the project owner or client to send the contractor written notice of the deficiencies. While it is not always a mandatory contractual requirement, it is always a good idea to ensure that such written correspondence is sent prior to taking further action. Failure to do so could later be viewed by the contractor as an implied waiver of its failure to meet the contract requirements, and a missed opportunity to require a strict adherence to the contract terms in the event a dispute later arises.
If possible and practical to do so, the project owner or client should also document any alleged breach with photographs, video, and/or written notes. If any damages have already been sustained as a result of the breach, it is preferable to make those documents "date-stamped" as soon as possible. As an example, if a contract directs the contractor to perform cutting and patching work in the interior of an occupied space, but the contractor leaves a portion of the wall in disrepair, and the project owner or client notes water intrusion into the space as a result of the cutting and patching deficiencies, it is critical that date-stamped photographs of the water intrusion be documented as soon as this is discovered.
Once a contractual notice has been properly given by the project owner or client, it is always a good idea to seek legal advice from an experienced construction attorney prior to taking any further action. In particular, upon receiving notice of a breach of contract allegation made by a project owner or client, the contractor (or subcontractor) should immediately contact its own experienced construction attorney to begin preparing a strategy for responding to and repairing the deficiencies. Even before taking action to perform corrective work and/or respond to claims for damages, a contractor must be careful to avoid spoliation of evidence or otherwise verifying the project owner or client’s allegations in a manner that may end up working against the contractor should the dispute proceed to an arbitration or litigation forum.
What Remedies are Available to the Non-Breaching Party for Breach of Contract by a Contractor
In the event of contractor breach of contract, an aggrieved owner has a number of remedies available, including compensation for damages, specific performance, and rescission of the contract. The purpose of these remedies is to return the non-breaching party as nearly as possible to its original position prior to the breach.
The most common remedy in a breach of contract case are damages. Damages are monetary loss suffered as a result of the defendant’s breach of contract and were intended to place the injured party where it would have been if the contract had not been breached. Money damages can be imposed if the party seeking to recover the damages suffered a unique or quantifiable detriment vis-a-vis the owner or owner’s property.
A court in New Jersey may also order specific performance by a breaching party.
Specific performance is a remedy in which a party is required to perform a specific act, usually that which is stated in a contract. Specific performance is an equitable remedy that falls under the jurisdiction of the Chancery Division of the Superior Court of New Jersey. Specific performance is usually limited to breach of contract cases involving real property. In other words, it is available for unique goods or services, but courts have been hesitant to compel parties to perform personal services under a contract. Generally, specific performance will not be ordered if damages will be sufficient to compensate for the breach.
In the event that a party to a contract has so substantially breached it that he has deprived the other party of essentially the whole benefit for which he made the bargain, then the party who was aggrieved may elect to rescind the contract rather than suing for damages. Rescission is an equitable remedy which will cancel a contract and relieve the parties of their obligations under the agreement, in whole or in part.
In order to rescind a contract, the party seeking to do so must show that: (1) The contract is current and valid; (2) The party seeking to rescind the contract is able and willing to restore the other party to its status as it existed before the contract was executed, or that the party cannot restore the other party to such standing, as is often the case with personal service contracts; and (3) He is without fault in regard to the subject matter in controversy, unless that fault is an issue raised by the other party.
Attempt to Reach a Settlement with the Breaching Contractor
Mediation or negotiation is an excellent alternative to litigation. The primary difference between mediation and negotiation is that usually mediation occurs under the guidance of a trained third-party neutral- the mediator. When mediation is agreed upon by the parties, a certified professional mediator will meet with the parties and will strive to provide a resolution for the conflict without it getting bitter or going to trial. The mediator does not decide who is right or wrong. He/she does not give legal advice. Rather, he/she acts as an objective, impartial third party to assist the parties to reach their own resolutions. The mediator provides a non-adversarial forum for the parties to meet. Each party identifies their own concerns and interests that may be confidential in nature.
All information is confidential unless the parties agree that certain statements or information shall be disclosed. It is up to the parties to determine the terms that best suit their needs. A successful mediation ends in an agreement , which is usually written down and signed by the parties. This may then be incorporated into a revised written contract or other resolution. The key is that it is voluntary and therefore can be a valuable opportunity to put things back on track.
It is rare for an entire construction project to come to a standstill simply because the deadline cannot be met. Likewise, it also is rare for a breach of contract to result in a party bringing a lawsuit, assuming they have good legal representation. In both circumstances, there usually are solutions that a general contractor and a home improvement contractor can work out together, outside of court, that will is more beneficial to both parties and will place the impacted party in the same financial position they would have been had the contract been performed as intended.
What Can You Do to Prevent Further Breach by a Contractor?
After experiencing a contractor breach of contract case, you know the full cost of a disagreement and are likely to make sure you have safeguards in place the next time around. Not every contractor or subcontractor who you hire will breach a contract, of course. This makes using a contract an important part of reducing your risk. For owners, this means clear contract terms and requirements. Contractors need to keep their customers abreast of progress and materials selection. The owner should be aware of the process as it unfolds and ask questions about upcoming scheduled events.
Proper drafting and thorough explanation can prevent breeches on the owner side and put the contractor in a more comfortable position. A contractor who is clear about its rights could avoid a breach by alerting the owner to needed repairs or alterations as the work proceeds. On the subcontractor side, the contractor needs to spell out exactly how the subcontractor should capitalize on materials and where the trigger point is for sending a notice of a needed change. For example, if a PM tells the subcontractor that under no circumstances should that subcontractor send a change order request of more than $200 to the Project Manager (PM), then that should be in the contract. Otherwise, the subcontractor could be shorted on what it has coming.
When you are moving equipment or materials from place to place, explain to the owner or subcontractor that this is being done as part of a value engineering change that will affect the cost. If the owner knows that the cost is going up and they are agreeable, there should be no crisis. Of course, that conversation needs to happen in advance of the work taking place. If the conversation happens when the invoice comes in, that could result in a breach of contract on the subcontractor’s side or a rejection of payment on the owner’s side.
Every job or contract the contractor enters into going forward should have a provision that calls for a pre-determined process for dealing with disagreements between the owner and the contractor or the contractor and the subcontractor. This is the opportunity to spell out what will happen if there is a conflict including who will mediate, who the arbitrator will be, and how more expensive litigation can be avoided.
The small things can also make a big difference. If an invoice is late, maybe they should also be discounted late. If a payment to a subcontractor or supplier is late, that can cost you interest. Some contracts indicate that if the owner is breach, then all delays will be compared against the month the first scheduled delay starts.
When you are preparing for a project, remember that problems start small and snowball from there. "You didn’t tell me when supplies were due" or "I didn’t know I had to prove that the delay was caused by the owner" are small fires that, if not extinguished immediately, will grow hot and become a conflagration.
The small things can be resolved by having a process and a contract. A written document established in the beginning terms of the agreement can determine the outcome in the end.
When Should You File for Legal Action for Breach of Contract by a Contractor?
Timing is often critical in deciding whether to pursue legal action against a breaching contractor. If you have a valid claim, Texas law may require you to file suit within 4 years. Deadlines for suit based on written contracts can be much shorter. The time limits are often called "Limitation Periods" or "Statutes of Limitations."
Once the time limit is up you may lose your right to sue. You may also lose your right to compensation if you wait too long to negotiate a settlement outside of court. The longer you wait the less likely it is that you will reach a positive , fair negotiated result. Consider the following tips:
Even after the Limitation Period has expired, litigation may still very well be worth considering in some cases. Some homeowners may not be convinced that they have a viable case until years later. Although that can be a problem, it doesn’t mean your claim is barred after the expiration of the Limitation Period.
Texas courts have recognized that certain types of fraud can keep a claim from being barred by the passage of time. If the contractor used fraud to avoid a negotiated resolution, then that may also act to keep your claim viable.