Breach of contract in construction contracts

In this article we are going to take a look at Breach of contract in construction contracts.

Stravelles run a course in Adjudication which aims to  allow the student to run their own adjudication as the referring or responding party without paying for legal representation.

We support legal representation in more complex cases but we want to encourage especially smaller companies to feel more confident fighting for their contractual rights.

Introduction to breach of contract in construction contracts

In a construction contract if one party fails to perform their agreed actions as per the contract then this may be seen as a breach of contract.

There are several forms of breach of contract including:

Non-Material breach

Some breaches might be seen as minor which are known as a non-material breach.

If one party perpetrates a non material (minor, non serious, default) breach of contract the other party can use the contract to make things square again. For example if the builder damages the Clients property while carrying out the works then the Client might issue a claim of damages against the builder within the contract. This may be a simple deduction from the monies due to the builder.

At no point can the aggrieved party just terminate the contract or consider themselves discharged from fulfilling their own obligations under the contract.

Material breach

Other breaches may be major breaches in the contract which are called material breaches.

Whether or not a breach is material or non material is not straightforward. All breaches need to be assessed on their own merits. For example, if a builder contracts to build a new factory in two parts it may be a minor breach if part one is delayed a week and it does not affect the Client. Or, it may be a massive issue for the Client leading to a huge loss of revenue. In order to determine how important a breach is, both parties must go back to the original contract to understand any special emphasis is put on a possible breach.

If one party perpetrates a material (serious) breach of contract the other party can again use the contract to make things square again. However, the aggrieved party may want to move towards ending or terminating the contract.

It is important that the aggrieved party establishes formally that there has been a material breach of contract.

Repudiatory breach

We can also mention a repudiatory breach which is a fundamental breach and can fall under the umbrella of a material breach. It is the most serious of material breaches. An example would be if  the builder commences work onsite and then does no work substantial work for several weeks.

In this case the Client can issue a notice of termination of the contract and seek damages for loss and/or expense. It is important for the Client to establish that the builder has formally issued notice of an anticipatory breach. For example, if a builder loses their temper in a meeting and shouts they will not be continuing it is important to follow up and ensure they are serious.

Anticipatory breach

Finally, an anticipatory breach (also know as anticipatory repudiation) is where one party issues notice to the other party that they no longer intend to fulfil their contractual obligations. An example would if a builder tells a Client that they have finished the foundations but will not proceed with anymore works.

As per Repudiatory breach it is important for the Client to establish that this breach has taken place and to formally issue notice of such before seeking to terminate the contract.

Irremediable breach

An Irremediable breach is a breach of contract whose rectification is essentially not possible within the contract at a reasonable cost. For example, the builder completes the building and then it is discovered that all of the internal pipes are insulated 10% less than as required per the contract. Now, in order for the builder to lag the pipes correctly, the builder must strip out all of finishes and install again. In this case the cost of fixing the breach would be far more expensive and punitive than the breach. The Client may decide to reduce the value of the final payment issued to reflect the loss in value to the property. This value would all have to be argued and negotiated over.

Any breach in the contract does not necessarily mean a contract can or will be terminated. All breaches in contract (except for irremediable breach) can be compensated for by the guilty partly within the contract through additional monies, time and so on. There are standard terms and clauses that deal with specifically with common issues.

However, in the case of serious fundamental breaches the aggrieved or innocent party can establish the breach formally and then terminate the contract and seek damages.

Examples of breach of contract in construction contracts

There are many examples of material or non material breach of contract in construction contracts. These include:

• Builder refuses to carry out the works
• Client does not make correct payments
• Builder abandons the site
• Client does not give sufficient access to the property
• Builder removes equipment, plant, materials from site
• The Builder fails to proceed with the works in a diligent and regular fashion
• Builder employs other people to do the works contrary to the contract
• The Builder does not rectify or remove poor quality, defective works

Does one breach of contract in construction contracts automatically lead to the discharge of obligations by the other party ?

No absolutely not. Just because one party breaches the contract it does not give the other party the automatic right to terminate the contract and not to discharge their duties.

Every breach must be considered on its own

A material breach might be where the builder abandons the site. It is then pretty clear that the builder has breached their contract to carry out the works in a diligent fashion and to protect the site and so on and are not coming back. An objective outsider would probably agree that the Client would be justified in ending the contract and perhaps seeking damages.

But a non material breach may be where the builder installs the wrong brand of insulation. This may be simply negotiated. If the insulation is essentially the same quality but just a different brand name the Client may accept it. If the insulation is the same quality but well known to be 50% cheaper then the Client may accept the change but require a cost saving.

At no point in this scenario would the Client be justified in terminating the contract or refusing to make the next payment for all of the works to date. The two contractual parties must work together to ensure that the project continues and that both parties are compensated and penalised fairly. So in this example the Client might still make the regular payments for works completed but make an agreed deduction for the saving in the insulation cost.

Remember that construction projects always have issues and the contracts are generally flexible enough to cover any of these issues that arise.

Existing Contractual provisions for a breach in contract

Most construction contracts allow for breaches in contract by providing ways that both parties can effectively make right a breach whether non-material or material.

For example most construction contracts include clauses for:

• Variations
• Extensions of time
• Loss and expense claim
• Liquidated damages
• Retention and defects liability period

Consequences of breach of contract

Suspension of the works

Section 112 of The Housing Grants, Construction and Regeneration Act 1996 allows building contracts to suspend performance for non payments.

Termination

Most building contracts allow for unilateral termination of the contract due to frustration, insolvency, convenience and other events. Any party can simply terminate the contract at any time but they may be liable to claims for damages from the other party.

Again, it is important that the aggrieved party establishes formally that there has been a material breach of contract before termination.

How to terminate the Contract?

If one party considers that the other party has committed a serious material breach of the contract then they must give notice of this event.

They can then follow up with a termination of contract notice and then instruct their legal representatives to sue for damages.

The importance of a contract administrator

A contract administrator as its name suggests is someone who is responsible for administrating the contract on behalf of the Client. The contract administrator will deal with payments, changes, loss and expense claims and any other tasks outlined within the contract.

When the builder in a construction contract commits a breach it is the responsibility of the contract administrator to issue a notice of this breach to all parties and to apply the appropriate response such as the application of damages. For example, if the builder installs the wrong type of masonry brick it is up to the Client to issue a notice that the builder must rectify this mistake. If the builder does not fix the mistake then the contract administrator is entitled to appoint someone else to rectify and deduct these costs from the payments due to the builder.

It is of the upmost importance that the contract administrator issues all such notices formally in writing (including email) in sufficient time for the builder to take action.

The builder of course will have some representative to deal with the Clients contract administrator. This may be simply the owner of the building company or one of their employees, typically a quantity surveyor. The builders CA will issue notices when the Client has committed a breach of contract or has amended the contract in some way. For example, the builder may issue a notice of delay because the Client has not handed over possession of a property on the date as outlined in the contract. This notice may be accompanied or followed by a claim for loss and/or expense.

The importance of paperwork

When a breach occurs in the contract the innocent party must take action and issue notice of this breach as soon as possible. This means there is a formal record of this breach and can give the aggrieved party the opportunity to terminate the contract if justified.

If an aggrieved party notices the breach but does not take action then the other party may argue that this breach was accepted as sufficient in discharging their responsibilities. For example if the Client notices that the wrong form of insulation has been installed but does not issue a notice of breach or take any action it may be reasonable to assume they accept this new insulation.

If the Client takes no action but then several weeks later refuses to pay for the insulation they may be the ones in breach of contract.

So when the Client notices some a breach like some defective work they must take action to inform the builder of what action needs to be taken. The Client is then justified in reducing payment for that defective work until it is rectified. But only that defective work, a Client cannot withhold payment for all of the works just because some small parts of the work is defective.

What do we recommend when a breach of contract occurs?

It is always best for both parties to resolve any dispute within the contract. We recommend both parties keep on top of their paperwork and to issue paperwork in accordance with the contract.

In every construction project there is an agreed timetable for the works to take place, the program. There is also an agreed timetable or schedule of payments. The Client must make payments according to that schedule. They can only make deductions to payments if they have formally notified the other party of their intention to do so with detailed justification of the deduction.

Once the paperwork is issued negotiation can be used to resolve the disputes. Other options is mediation and conciliation. Formal options with binding decisions can be obtained through Arbitration and Adjudication.

Minor non material breaches can be dealt with very easily and using the contract to keep both parties working together to finish the works. It is in the interest of both parties to deal with any issues quickly and move on to finish the contract.

However, when a serious material breach occurs the aggrieved party must consider whether this breach is just the start and therefore it is better terminating the contract now rather waiting for more breaches.