| Termination occurs when the employer instructs a | | | | breaching party under the contract whereas a |
| contractor to permanently stop the performance | | | | non material breach will entitle the non breaching |
| of work and leave the site. Construction contracts | | | | party to recover damages but will not releases |
| specify each party’s rights, obligations, and | | | | him or her from further obligations. However, |
| remedies for termination. Termination on | | | | there is no litmus test that can readily distinguish |
| construction projects often results in claims and | | | | the material breach from the non material breach. |
| disputes; therefore, the decision to proceed with | | | | An immaterial breach of contract is therefore a |
| this option should not be taken lightly. | | | | trivial breach of contract and does not vitiate the |
| | | | | contract. For example, a contractor for a HVAC |
| There are two general types of termination | | | | system under which the maintenance is |
| typically addressed in construction contracts: | | | | periodically taken place does not make inspections |
| termination for convenience and termination for | | | | on a regular basis. This act is a technical breach of |
| cause (sometimes referred to as termination for | | | | the contract but is immaterial as long as the |
| default). In a termination for convenience, the | | | | ultimate objective of continuity of uninterrupted |
| owner may terminate the contract for whatever | | | | operation has been ensured. |
| reason it wishes, such as economic/business | | | | |
| reasons, or as the most expeditious way of | | | | Breach of contract is an actionable wrong. |
| eliminating a non-performing contractor with | | | | Non-compliance with the terms and conditions |
| minimum risk of a legal dispute. Contractor’s | | | | agreed upon entitles the party violating the same |
| remedies for termination for convenience vary | | | | to resort to remedies available. Remedies for |
| from contract to contract, but may include a | | | | breach of contract may be embodied within the |
| reasonable cost of work performed prior to | | | | letters of the contract itself or in the absence of |
| termination, including profit, anticipated profits on | | | | specific provisions in cases of breach; the |
| uncompleted work, justifiable and reasonable | | | | applicable laws will supply the remedies. Common |
| termination costs including project wind-down | | | | remedies for breach of contract more often |
| costs and other costs as may be mutually agreed. | | | | includes demand for specific performance or |
| | | | | rescission of the contract or claim for damages. It |
| Termination for cause may occur when the | | | | bears stressing that good faith must be exercised |
| owner believes the contractor has not performed | | | | at all times. Full compliance with the terms and |
| according to its contractual obligations and thus | | | | conditions laid down and specified in the contract |
| has materially breached the agreement. Breach of | | | | must be observed. Breach of contract will |
| a contract may terminate the obligations of the | | | | definitely expose the erring party to liabilities, |
| contract. Either one party or both parties have | | | | penalties and of course to such tremendous |
| failed to perform an obligation as envisaged under | | | | amount of inconvenience. |
| the contract. A breach may usually occur when a | | | | |
| party refuses to perform the contract, does | | | | Some of the more commonly cited reasons for |
| something that the contract prohibits, or prevents | | | | terminating a contract for cause include failure to |
| the other party from performing its obligations. | | | | pay labor, subcontractors, vendors, or material |
| However, not all breaches end up in contract | | | | suppliers, failure to meet the project schedule or |
| close-out. | | | | diligently perform the work, defective or deficient |
| | | | | performance, failure to follow applicable laws or |
| A material breach is controversial that goes to | | | | regulations and failure to consistently follow safety |
| the heart of the contract. The injured party can | | | | requirements. |
| seek damages; that is, a monetary compensation | | | | |
| enough to cover economic losses resulting from | | | | Since some construction contracts provide for |
| the breach of contract. For example, a contractor | | | | excusable delays, such as force majeure, the |
| uses materials that are not in compliance with the | | | | decisions to terminate for cause must also |
| specification. A material breach is any failure to | | | | consider events which are excusable under the |
| perform that permits the other party to the | | | | contract and prevent the contractor from |
| contract to either compel performance, or collect | | | | performing as required. Termination-for-cause |
| damages because of the breach. If the contractor | | | | contract clauses vary from contract to contract, |
| in the above example had been instructed to use | | | | but some may require the owner to provide |
| copper pipes, and instead used iron pipes which | | | | proper notice to the contractor of its alleged |
| would not last as long as the copper pipes would | | | | breach or failure to perform and provide a |
| have, the employer can recover the cost of | | | | reasonable period for the contractor to cure, or |
| actually correcting the breach - taking out the iron | | | | start to cure, the alleged breach. |
| pipes and replacing them with copper pipes. A | | | | |
| contractor’s refusal to start work is clearly a | | | | Typical claims from owners under termination for |
| material breach whereas a contractor’s | | | | cause include, but are not limited to, the following, |
| installation of wrong ironmongery would be a non | | | | to the extent that they are not waived by |
| material breach. | | | | contract the extended project duration and |
| | | | | overhead costs (e.g., replacing one contractor with |
| Various circumstances can worsen to a degree | | | | another almost invariably results in overall project |
| that a disgruntled contractor has no option but to | | | | delays), loss of profits or deferred production, |
| abandon the contract and walk off the site. | | | | liquidated damages or actual damages for delay |
| Whether due to non payment, inadequate design | | | | and cost to complete the project if the final |
| drawings, too many instructions that cause the | | | | project costs exceed the value of the terminated |
| works technically different than envisaged in the | | | | contract less amounts paid to the terminated |
| original contract, excessive employer intervention, | | | | contractor. |
| lack of cooperation from the engineer, or | | | | |
| otherwise, the circumstances can be simply | | | | Typical claims from contractors under termination |
| beyond the control of the contractor so that the | | | | for cause may include costs to bid the project, |
| decision to abandon the contract becomes | | | | mobilization and demobilization costs, anticipated |
| inevitable. An analysis of when a contractor may | | | | profit on the project, costs for work performed |
| justifiably abandon the contract begins with the | | | | but not paid, home office overhead costs, |
| fact of materiality. A breach is considered material | | | | winding-down costs, damages for loss of good will |
| if it substantially deviates the purpose of the | | | | loss of future business due to potential negative |
| contract and is serious enough to justify the | | | | publicity following termination and betterment |
| other party in abandoning the contract. | | | | issues such as changes or upgrades included in the |
| | | | | owner’s cost-to-complete damage model that |
| A material breach releases the non breaching | | | | are above and beyond the contractor’s |
| party from all obligations further owed to the | | | | original scope of work. |