Contract documents

May 24, 2023

In a perfect world, every construction project would run smoothly and according to plan. There would be no hiccups or surprises, no overruns, or hidden costs. The weather would hold up, and every facet of the project would be a breeze from beginning to end. But unfortunately, we don’t live in a perfect world, and nowhere is this fact truer than in the wonderful world of construction.

Things happen on a construction project; sometimes, those things can result in one party or parties choosing to not honor their end of an agreement. When this position is taken, you have what is known as a Breach of Contract. Breaches can occur in written and oral agreements and their severity varies. But regardless of the nature of the instance or the number of parties involved, it’s a situation that no one wants to face. No one wants to face them, but breaches are part of the construction mix.

What Determines a Breach?

 When one or more parties fails to deliver the services outlined in an agreement, be it verbal or written without a defensible position, a breach of contract has occurred. In construction this could mean:

• Say for example, you’re a contractor for a major job. The job has specifications, but when you complete it, your work doesn’t match them. When this occurs, the contract is breached.
• Timeline integrity is where many contract breaches are found. If you’re a contractor working on a project with a firm delivery date and fail to meet it, you’ll also find yourself in breach of contract.
• Payment is an important part of the construction mix. Payment is also one of the areas where breaches most commonly occur. If you’re working on a project with agreed upon payment dates and those dates are missed, the agreement is breached.
• Let’s say you’re working on a large project. Then one day you and your crew show as usual, but when you arrive you see another group doing the job you were hired to perform. Unless your employer previously gave you written or verbal notice or has a defensible cause, they’re in breach of the contract.

What are the costs?

Damages for contract breaches vary from project to project unless your agreement has what’s known as a liquidated damages clause. A liquidated damages clause is a provision that requires the breaching party to pay an agreed upon amount to the other party as compensation for their failure to comply.

For example, if you’ve signed an agreement containing a liquidated damages clause stipulating that every missed deadline would cost you $100. Each time you miss a deadline, each time you fall into this type of breach, you’ll owe your employer $100. Without a liquidated damages clause, damages are calculated as the difference between the value expected and the value received by the non-breaching party.

Other costs include the following:

• Compensatory: Compensatory damages awards occur when the filing party receives financial compensation for losses directly tied to the breach. Compensatory damages fall into two categories: Consequential and Expectation Damages. In those cases where you incur unexpected losses due to a breach, you may incur Consequential Damages. An example would be if a remodeling job for your auto repair shop was due to be completed on October 24th but wasn’t completed until December 14th. No doubt you’ve lost revenues and profits, which are calculated and awarded as part of your Consequential Damages.
• Expectation: For Expectation Damages, let’s say you’re a contractor and agree on the price of a project to remodel an auto repair shop. You finish the job on time, but your employer breaches the contract and refuses to pay, so you decide to sue. If you win, you’ll receive the amount you initially agreed to do the work for, otherwise known as the Expectation Damages.

Remedies for Breaches

 The contract is in breach, so where do you go from here? Well, there are several different remedies for a breach including the following:

• Settle it Amongst Yourselves: Breaches don’t have to end up in a courtroom with lawyers, finger-pointing, testimonials, and such. A breach can often be settled when parties put their heads together and find a solution that works for everyone. Going to court should be the final solution, and before you begin moving down that road, assess the situation and see if you can deal with it amicably without involving anyone outside of the project orbit.
• Hire an expert to mediate: Settling a breach in-house should be the first option, but sometimes it just doesn’t work. When it can’t be resolved in-house happens, your next move is to hire a mediator. A mediator is a neutral and their sole purpose is to render a fair and accurate decision.
• Court: As mentioned in the cost section, the courts are always an option. Putting your situation in the hands of the courts might be the only way to resolve it. If you’re filing a breach, be prepared to show documentation and evidence that supports your claims. If you’re the party accused of breaching an agreement, you should also be prepared with a defensible argument.

 Contract breaches happen, but it doesn’t always have to be a battle. If you find yourself on either end of a breach, do your best to settle it amicably without outside intervention. Working it out among parties saves you unwanted legal fees and associated costs. More importantly, handling a breach inside can also salvage a relationship. Relationships drive every sector of the economy, including construction, and building sustainable linkages is an integral part of your success.

Remember, the construction world is not a perfect one, and from time to time, disagreements — breaches — are bound to arise. React to and plan for them accordingly, but always from a position of logic and considering ramifications, both now and, more importantly, well into the future.

To learn more about how AIA Contract Documents can help you with your business, visit https://aiacontracts.com/.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.