When a contract is terminated before completion, it follows that one or both parties will lose money, even when the termination is performed according to the terms of the contract.However, when one party wrongfully terminates the contract, the other party can recover some of the financial loss through damages.
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DEFINING TERMINATION OF CONTRACT
Termination of contract is ending a contract before all terms have been met. Any duty each party had to perform any obligations no longer exists. There is no requirement to complete the terms once termination is declared.
The contract may contain language entitling the parties to pursue claims for damages under terms of the contract, or the parties may pursue claims for damages under common contract law.
TYPES OF TERMINATION
There are two types of termination:
- Termination for cause
- Termination for convenience
Termination for cause is also known as termination for default. For cause arises from the general principles of contract law or the terms of the contract itself.
Termination for convenience is only available through the terms of the contract. There is no general contract principle covering termination for convenience.
Termination for cause is usually due to a breach of construction contract; one or more terms of the contract are not fulfilled by a party to the contract. The question then becomes whether or not the breach is a material breach.
DETERMINING A MATERIAL BREACH
Damages can only be sought and awarded for a material breach of contract, a breach that is so critical that it is unreasonable to expect the other party to continue with the contract. A material breach may be determined by:
- Reviewing contract case law
- Presence of language in the contract defining a material breach
- Failure to perform any contract term
- Seriousness of the breach and the probability that the injured party has received substantially what it was supposed to receive under the contract
The materiality of a breach is determined case-by-case and in light of the purposes that caused the parties to enter into a contract. The amount of monetary damage is not a determining factor.
DEFINING WRONGFUL TERMINATION
Termination, as we stated above, is the ending of a contract before all the terms of the contract have been met. If the termination is for cause, it means there has been a breach of contract; one or more terms was not fulfilled.
Wrongful termination occurs if:
- There is insufficient justification for termination under the general principles of contract law or under the terms of the contract
- There is no authorization for termination authorized by the contract
- One or more of the procedural requirements necessary for proper termination under the contract terms is not followed exactly
Wrongful termination is a repudiation of the contract which is, itself, a material breach of contract, providing the opportunity to pursue damages by the non-breaching party.
WHAT DAMAGES ARE AVAILABLE FOR WRONGFUL TERMINATION?
The damages for wrongful termination vary and include:
- Direct damages – incorrectly installed plumbing lines required rework
- Consequential damages – water leaking from the incorrectly installed plumbing damaged the drywall, which then had to be replaced.
- All other damages necessary to place the non-breaching party in the position it would have been if the contract had been properly completed
Under contractual termination, the contract may contain categories of loss that can be recovered and the limits on recovery. Common law termination, which must prove the breach is material or substantial, could increase the damage recovery amount because of a particular stipulation that may not come into play with a contractual termination.
Common law termination, once a material breach has been determined, states that the innocent party should be allowed to recover enough to get them to where they would have been if the contract had been properly completed. It includes loss of profits as well as other damages.
Recovering damages from a common law termination depends on the non-breaching party’s ability to prove the existence of those lost profits.
EXAMPLES
If a contractor wrongfully terminates the contract with the owner, the owner (as the non-breaching party) would be entitled to recover damages from the contractor, including:
- Costs of hiring a replacement to complete the work
- Costs associated with the delay in completion of the work, including lost profits
- Additional costs for completion due to termination
- Additional costs related to project administration
- Additional costs of project management
If an owner wrongfully terminates the contract with a contractor, the contractor would be entitled to recover damages from the owner, including:
- Cost of the work to the point of termination plus all overhead
- Lost profits
- If the project is substantially completed, the contractor may recover the contract amount less the actual costs that would have been incurred if it had completed the project
Needless to say, wrongful termination is expensive for either party.
IN SUMMARY
Termination of a construction contract that does not meet all terms of termination written into the contract or the terms of common contract law is known as wrongful termination, which is a material breach of contract.
The wrongfully terminated party is entitled to pursue damages from the terminating party. The damages include direct damages, consequential damages, and damages to set the non-breaching party to the contractual endpoint of the project.
Before terminating a construction contract, consult an attorney to help you determine your rights and obligations to avoid committing an expensive wrongful termination.
