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Breach Of Construction Contract: What Happens Next?

Austin Landes, CIC
8 minute read

A contract is often a written document that details an agreement between two parties. While some contracts don’t have to be written, and can be oral agreements, typically, a contract will be written and include signatures from both sides with details regarding what both parties’ obligations are. With a construction contract, the contract will typically include what work has to be done by one party and how much the other party must pay in order to compensate for that work. The contract may also specify certain requirements for the work, such as: when the work must be finished, what materials must be used, what time of day the work can be conducted, and safety requirements for the job. If the person performing the work doesn’t meet these requirements, they are in breach of contract. Once this happens, there are a few different ways the dispute can be resolved.

Types of Resolutions

Step 1: Seek An Informal Resolution

The first step is usually to try to resolve the issue informally. During an informal dispute resolution, both parties would communicate with each other and discuss the issues with the breach of conflict and how to best resolve them. For example, if you have a construction contract that requires you build a bench out of cherry wood, but cherry wood is no longer available, you would be forced to breach your contract. However, you may choose to call the person you have the contract with and discuss using pecan wood as an alternative and amend your contract to reflect this change.

In other instances, you may breach the contract without knowing and the informal resolution may look a little different. For example, if you are required to complete construction by the 15th of April, but accidentally completed it on the 17th of April. The other party may come to you frustrated construction wasn’t completed on the pre-determined date. You can then offer the solution to discount the total cost of construction in order to balance out the frustration of a 2 day delay.

Step 2: Legal Consultation

If you find yourself in a breach of construction contract situation, and informal resolution isn’t working (or you haven’t attempted it because you don’t believe it will be fruitful) legal consultation is your next step. An attorney can tell you whether you are liable for a breach of contract, as well as the possible legal consequences for the breach of contract. This can help you determine your next steps.

Step 3: Formal Legal Action

If an informal resolution is not possible, and an attorney consultation has made it clear that you cannot resolve this outside of court, the next step typically involves legal action. This might mean filing a lawsuit where a court will determine fault and potential damages. This step will change depending on which side you are on. For example, if you are the party who was ordered to complete a construction project, and you failed to do so, you would not file a lawsuit until the other party has breached. This typically occurs after the project was set to be completed and the other party didn’t pay. For example, if you are required to build a house under a contract, and you build the house to all of the contract specifications apart from the requirement to paint the house blue- you painted the house grey, you would not have a way to sue the other party until the other party fails to pay you. Once the party obligated to pay the cost of the house has failed to pay, you may now sue them for breach of contract. They will then allege that you breached the contract first by failing to paint the house the agreed upon color, and the court will determine the proper resolution.

However, if you are the other party, and your house was painted the wrong color, you may sue immediately upon the determination that the house will not be painted the correct color by the end of the contract deadline. However, it is important to note that if the contract includes an arbitration clause, disputes may need to be resolved through an arbitrator or arbitration panel. Arbitration is more formal than resolving the case yourself, but less formal than a regular court proceeding.

Potential Outcomes

Depending on the nature of the breach and the terms of the contract, several outcomes are possible:

  • Specific performance: The contractor may be required to complete the work as outlined in the contract. This is fairly rare in breach of contract cases that make it to court. Judges are hesitant to order specific performance and force an individual to work. This is for a few reasons: (1) it has been compared to slave labor; (2) the party performing the work in unlikely to do a good job if they are being forced to do it.
  • Partial financial damages: The contractor could be ordered to pay damages to the owner for losses incurred due to the breach. For example, if you were required to paint the house blue and you painted the house grey, you may have to pay to repaint the house the proper color.
  • Excused Breach of Contract: The owner might have the right to terminate the contract and hire a new contractor to finish the work. If you have started working on a project and are only partially complete, the court can give the other party the right to pay you for the work you have completed, terminate your contract, and find someone else to complete the work. In some circumstances the court can also order you to pay the difference in cost if the next person is more expensive than your original quote.

Please note, the specific remedies available will depend on the contract terms and the laws of the state where the project is located.

How to Protect from a Breach of Contract Lawsuit

To avoid breaches of construction contracts in the first place, consider the following tips:

  1. Get Everything in Writing: This includes the initial contract, as well as any changes or amendments. Written agreements provide clear evidence of what was agreed upon. While some changes can be made orally, and courts may still require you adhere to them, there is a split in the way this is handled. When in doubt, it is always best to have a clear and concise writing that lays out both parties obligations.
  2. Be Clear and Specific About the Scope of Work: The contract should precisely state what work the contractor is expected to do, which materials they should use, and other relevant details. Additionally, it should lay out payment obligations including the amount to be paid, who is responsible for tendering this payment, and when it each payment should be made.
  3. Set Realistic Deadlines: Ensure the deadlines are feasible. In construction, it can be heard to anticipate how long work will take. There can be weather delays, issues getting materials, worker shortages, etc. Set realistic deadlines and have set expectations for what will happen if a deadline isn’t met.
  4. Establish a Dispute Resolution Process: This process should be outlined in the contract to provide a clear roadmap for resolving any disagreements during the project. Many contracts have arbitration/ mediation clauses. Others have a requirement to notify the other party in writing of the issue at least 30 days before filing any legal action to give the other party an opportunity to rectify it.
  5. Obtain a robust insurance plan: No one ever plans to get sued. You can take every possible precaution, and still find yourself on the other end of a nasty lawsuit. One of the best ways to protect yourself and your business is to obtain an insurance plan that will take care of you in the event of a lawsuit.
Austin Landes, CIC

About The Author: Austin Landes, CIC

Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.

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