Construction Business Owner, June 2007

Is a contract "default" the same thing as a "breach" in relation to construction contracts? What is the difference between a "material" breach and a "non-material" breach of a construction contract?

Legal dictionaries and common law decisions define a “breach of contract” as a violation of one portion of a contract that does not excuse the non-breaching party’s performance but gives the non-breaching party the right to recover damages. Conversely, a “material breach of contract” is a substantial breach of a significant term or terms of a contract that excuses the non-breaching party from further performance under the contract and gives the non-breaching party the right to recover damages.

Here are some real project examples of these definitions in action are—A utility contractor installs brand Y instead of brand X ductile iron pipe. (Brand X was required in the contract specifications.) Despite the fact that both brand X and Y ductile iron pipe function equally well, the contractor has nevertheless breached its contract by failing to comply with the material specifications of the contract. In this example, the utility contractor’s breach is a “non-material breach” of the contract, and the owner’s remedy would be to recover damages (if any) it suffered because it did not receive the full “benefit of its bargain” (i.e., the difference in value between brand X and Y pipe).

If the above facts are changed so that the contract provides for the installation of 24-inch brand X ductile iron pipe and the utility contractor instead installs 8-inch brand X ductile iron pipe, the contractor has committed a “material breach” of its contract obligations because the 8-inch water line will not carry/service the same amount of water as the 24-inch pipe specified in the contract. In this case, the owner may be justified in terminating the contract and certainly would be entitled to recover damages because it clearly did not receive the benefit of its bargain.

Fortunately, most construction contracts and subcontracts outline/define what events of default constitute a material breach that would permit the non-breaching party to cancel the contract and recover breach of contract damages. However, despite contracting parties’ best intentions and efforts at drafting comprehensive contract provisions, it is inevitable that all possible situations will not be covered in the contract documents. The contractor who has not been paid a progress payment may argue that the owner’s failure to pay is a material breach, and that as a result, he is entitled to terminate his contract on non-payment grounds; likewise, the owner that has failed to pay, may contend that the contractor’s failure to perform its contract obligations in a good and workmanlike manner justified its non-payment and as a result may, terminate the contractor due to the contractor’s failure to perform in accordance with the plans and specifications. In these circumstances, courts will perform a fact-specific analysis to determine which party’s breach constitutes a material breach of the contract, thereby justifying the actions taken by the non-breaching party. In some circumstances, it will be determined that both parties breached their contract obligations to each other, and appropriate remedies and damages will be ordered/assessed against each of them.

In the construction industry, more often than not, parties benefit if a contractor is kept on the job, and remedial efforts are taken both at the negotiation table and in the field to alleviate contractual disputes and correct deficiencies in work product. It's not always easy to ascertain whether or not a breach is material permitting the non-breaching party to cancel a contract. Conclusions on these types of issues can only be reached after viewing the factual circumstances through the legal prism of substantial performance, right to cure, remediation rights, mitigation, excuse and the right to recover damages.

Hugh J. Gorman, III is a partner in Hinckley, Allen & Snyder LLP's Construction Law Group resident in the Boston, MA, office. The group represents a diverse clientele of owners, general contractors, sureties, subcontractors and suppliers throughout the United States with respect to all aspects of construction law. He can be reached by phone at 617.345.9000 or visit www.haslaw.com.

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