Where a contract is ambiguous, the court will accord considerable weight to the construction the parties themselves give to it, evidenced by subsequent statements, acts, and conduct. This record reflects that throughout the performance of the contract, Coney did all the undercutting that was required. Not only were there no claims for extra work, there is virtually nothing in the record to indicate that undercutting was of any serious concern to Coney prior to this litigation.^[2]

This case illustrates that the contractor’s failure to protest and demand a change order not only barred recovery for the extra work performed but resulted in the court believing that the extra work was intended to be in the contract in the first place.

Written Notice of Protest

Since the rights and remedies available to the nonbreaching party are proportional to the materiality of the breach, it is extremely important that the nonbreaching party immediately sends a written notice of protest and reservation of rights when any breach occurs unless the matter is extremely minor. What appears to be a relatively minor matter may turn out to have serious consequences. A businesslike written protest and reservation of rights protects the nonbreaching party’s interests.

Contractors naturally wish to avoid being considered “claim happy,” and some fear retribution as a result of putting the owner on notice of alleged breaches. However, the contractor ultimately is judged by overall performance and the degree of professionalism exhibited. In the long run, a reasonable owner respects the contractor for making contractual positions clear from the beginning, as long as the contractor behaves reasonably. If the owner is not reasonable when advised of a breach, the contractor is better off discovering this fact earlier rather than later in the course of performing the work of the contract.

Effect of Disclaimers or Exculpatory Clauses

Consideration of contract breaches often involves the matter of disclaimers or exculpatory clauses (see Chapters 4 and 5). These clauses may govern whether a contract breach has occurred.

First, recall that a disclaimer or exculpatory clause is a clause in the contract stating that a party to the contract, usually the owner, is not liable for the consequences of some act or failure to act that otherwise would have been a breach of contract. The mere presence of a disclaimer in a contract does not necessarily mean that it will be enforced by the courts. Some courts are disinclined to give certain types of disclaimers full force and effect. However, if the disclaimer is prominent and clear and does not conflict with any other provision of the contract, it probably will be enforced. A disclaimer that conflicts with other contract provisions generally is not enforced, particularly in federal government contracts. Courts reason, using an old adage, that the left hand cannot properly take away what the right hand has bestowed.

Anticipatory Breaches of Contract

A threat by a party to a construction contract to take a course of action or to refuse to perform some duty required by the contract that would constitute a breach if actually carried out can, in and of itself, constitute a contract breach. The breach resulting from this type of situation is called an anticipatory breach of contract. As an example, consider a contract in which the owner controls and is contractually required to provide the means of access to the project. If the owner advised the contractor at some point during contract performance that the contractor’s access would be shut off in two weeks, such advice would constitute an anticipatory breach.

Because the nonbreaching party can be damaged by the threat alone, it is not necessary to wait until the threatened action actually occurs to accrue rights of relief. For instance, in the previous example, the contractor faced with the access closure might immediately expend monies to procure or construct an alternate means of access in anticipation of losing the contractually provided access. Once the money has been spent, the damages have been incurred, even if the owner should later relent on the threatened closure. The contractor has accrued the right to be compensated for the money spent. The breach is created by the threat itself.

In such situations, the nonbreaching party should file a written protest and reservation of rights in anticipation of the threatened event after ascertaining that the breaching party really means to carry the threat out. There must be evidence of the clear intent to commit the threatened act or the clear intent not to act, as the case may be. Such intent is usually established by the words and acts of the breaching party at the time. “Words and acts of a party” means their written or oral communications and general behavior.

An anticipatory breach can also arise from an announced intention not to act when the contract requires some action to be taken.

Express Obligations and Implied Warranties

As discussed in Chapter 1, there are two types of contract provisions: express contract provisions and implied provisions (or implied warranties). Both types result in contract obligations or duties.

Express Obligations

Express obligations result directly from the clear meaning of the written words in the contract. The possibilities for breaches of express contract obligations are virtually endless since there is no limit to the different provisions that parties may expressly insert into the contract.

Implied Obligations (Implied Warranties)

Implied obligations are not expressly stated in the contract. Rather, they are the result of widely shared and well-understood implications of the contract. Frequently referred to as implied warranties, implied obligations are much more limited in number than express obligations and are frequently repeated from one contract to another.

Frequent Breach of Contract Situations

In practice, most common contract breaches are breaches of implied warranties. Far fewer common breaches involve express contract obligations. Of the following breach situations, all but the first are breaches of an implied warranty.

Failure to Make Payment for Completed Work

The obligation to make payment for completed work is always expressly stated in the contract (see Chapter 5). The obligation would be implied even if it were not expressly stated. Failure to make payment is a “material breach” and excuses the nonbreaching party from further performance—that is, courts will support the right of a contractor or a subcontractor who is not being paid to stop work and abandon the project or the right of a material supplier to abandon a purchase order contract and cease supplying material. This particular breach by an owner—or contractor in subcontract and purchase order situations—invariably excuses further performance of the contract. A party who is not being paid cannot be expected to continue to perform.

In a leading case on this issue, the U.S. Supreme Court stated in 1919 that

In a building or construction contract like the one in question, calling for the performing of labor and furnishing of materials covering a long period of time and involving large expenditures, a stipulation for payments on account to be paid from time to time during the progress of the work must be deemed so material that a substantial failure to pay would justify the contractor in declining to proceed…^[3]

The failure to pay must be “substantial” to justify a contractor abandoning the work. In a Kansas case, a subcontract for concrete work to be performed for a general contractor provided that the subcontractor was to submit invoices by the 25th of each month and the prime contractor would forward the invoices to the owner for approval and payment. The subcontract also provided that the prime contractor was under no obligation to pay the subcontractor for work performed until the prime contractor had been paid for the work by the owner. During performance, the turnaround time between the subcontractor’s invoice submittal and receipt of payment ran 36 to 38 days. The subcontractor walked off the job and sued the prime contractor for breach of contract, stating that lack of prompt payment prevented them from meeting their payroll. In reversing a trial court decision in favor of the subcontractor, the Supreme Court of Kansas determined that the subcontract did not require the prime contractor to make payment within 30 days as the subcontractor alleged and that, even if it did, a delay of six to eight days was not enough to justify the subcontractor’s abandonment of the work.^[4]

Although courts will support contractors walking off the job when failure to pay reaches substantial proportions, stopping work and abandoning the contract under other breach situations is an extremely risky course for any contractor or subcontractor to take and can result in the contractor or subcontractor being held to have materially breached the contract.

As discussed in Chapter 7, contractors often include clauses making payment to the material supplier or subcontractor conditional upon being paid by the owner. Also, courts have usually held such clauses enforceable only with regard to the timing of the prime contractor’s payment to the material supplier or subcontractor. Such clauses permit delay in making payment when the owner has not paid the contractor for the work in question, but if the contractor continues to withhold payment from the subcontractor after it has become clear that the owner will never pay, the contractor will be in breach of contract. Extremely strong, clear, and prominent contract language is required to establish the contractor’s right to withhold payment altogether from a material supplier or subcontractor who has properly performed the contract when the owner does not pay. Even then, courts may refuse to enforce the right because they strongly support the proposition that a material supplier or subcontractor that has performed according to the contract is entitled to be paid.

Interference with Contractual Performance

Every contract includes an implied warranty that no party shall act or fail to act in a manner that impedes or interferes with the other party’s ability to perform the contract work. There is an implied duty of cooperation.

Frequently encountered examples of breaches caused by interference with contractual performance include the owner’s failure to coordinate properly the work of multiple prime contractors, taking unreasonable time to check and approve shop drawings, or failing to make the site or access to it available to the contractor. Another frequent claim of contract breach arises from a prime contractor’s failure to coordinate properly the work of subcontractors, so that one subcontractor’s work interferes with another’s.

The following cases illustrate incidents in which courts found breaches of contract due to interference. In Illinois, an electrical contractor on a multiple prime project recovered lost labor productivity because of the owner’s failure to coordinate properly the various prime contractors on the site. The electrical contractor’s progress was hampered by the general building contractor’s failure to complete rough-in work. The electrical contractor was also forced to perform work in a start-and-stop, out-of-sequence manner because the general building contractor was frequently moving its crews about the site. In ruling for the electrical contractor, the Appellate Court of Illinois said:

Although we agree the District’s duty to keep the project in the state of forwardness is not tantamount to a warranty guaranteeing that no delays will occur, if the District either actively created or passively permitted to continue a condition over which it had control which made performance of the contract more difficult or expensive, it may be held to have breached an implied contractual duty for which it must respond in damages.^[5]

In a Florida case involving construction of a shopping center, the District Court of Appeals of Florida ruled that the owner’s lateness in providing necessary drawings and specifications and in executing required change orders amounted to active interference in the work.^[6]

In another case, during performance of a government contract requiring the installation of meters in apartments housing naval personnel, the contractor encountered recurring problems with noncooperative occupants. The U.S. Court of Appeals determined that the Navy had breached the contract by failing to provide reasonable access for the performance of the work. In reversing an earlier decision by the Armed Services Board of Contract Appeals, the court held:

After the contractor notified the project manager that the contractor’s reasonable efforts had not resulted in gaining entry to certain apartments, the Navy was under an implied obligation to provide such access so that the contractor could complete the contract within the time required by its terms. Consequently, if any part of the contractor’s work was thereafter delayed for an unreasonable period of time because of the Navy’s failure to provide access to the apartments, the contractor is, under the “Suspension of Work” clause entitled to an increase in the cost of performing the contract.^[7]

The preceding cases are illustrative only. Abundant case law decisions support many other forms of breaches of contract caused by interference.

The Spearin Doctrine

Perhaps the most important and well-known implied construction contract warranty is the Spearin Doctrine, which refers to the owner’s implied warranty of the accuracy and sufficiency of the drawings and specifications. The Spearin Doctrine resulted from a landmark case decided in 1918 by the U.S. Court of Claims (now the United States Court of Federal Claims). Spearin had a contract with the government to construct a dry dock project that contained a large sewer. Spearin performed the contract work strictly in accordance with the government’s drawings and specifications. During contract performance, a storm occurred, and the completed sewer burst, destroying itself and causing considerable damage to the balance of the other work in progress. The government took the position that the possibility of damage to the work during the life of the project was a risk that Spearin as the contractor had assumed. Spearin disagreed. The Court of Claims decision in this case has proven to be the Magna Carta of rights for construction contractors. In ruling for the contractor, the court said:

If the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.^[8]

Simply stated, the Spearin Doctrine says that the owner warrants the accuracy and sufficiency of the drawings and specifications that are for the contractor’s use in performing the contract work. The basic principle involved applies to owners, prime contractors, or anyone who contracts with and furnishes drawings and specifications for the use of the party actually doing the work. This means that if the drawings and specifications are precisely followed and the result is not satisfactory, the responsibility rests with the entity that furnished the drawings and specifications. Additionally, the responsibility for the consequences of errors and omissions lies with the furnisher of the drawings and specifications. This responsibility extends to the cost of attempting to comply with defective drawings and specifications, including the costs of all delays involved, such as time needed for the drawings and specifications to be corrected.

An exception to the applicability of the Spearin Doctrine is the situation when the specifications are of the performance type. Performance specifications are those that simply define the requirements that the finished product must meet, leaving it to the contractor to devise the design, means, methods, and materials required to meet the specified requirements. Here, if the finished product does not meet project requirements, the contractor bears the liability.

A number of other implied warranties are similar in principle to the Spearin Doctrine:

• Architect/engineers impliedly warrant that their design work is competently performed and conforms to the normal standards of the profession.
• When the contract calls for owner-furnished materials or equipment, owners impliedly warrant that the materials or equipment that they furnish are proper and suitable for their intended purpose.
• When a contract requires the contractor to follow a specified erection procedure or construction sequence, the owner impliedly warrants that the contractually specified construction method or procedure will work and produce the desired result. If it does not, the responsibility for both the poor result and the costs associated with attempting to comply with the specified method or procedure lie with the owner.
• When architect/engineers, construction managers, or contractors provide cost estimates to owners, they impliedly warrant that these cost estimates are reasonably accurate.
• Contractors who perform construction work for laypersons who are relying on the contractor’s skill and expertise impliedly warrant that such construction work will be done properly and will result in a product generally satisfactory for the intended purpose.

In all of these situations, the entity that impliedly furnishes the particular warranty involved is responsible for the damages suffered by the other party to the contract if the warranted promise is not fulfilled.

Misrepresentation

In a sense, misrepresentation can be considered a breach of an implied warranty that representations in the contract documents are accurate. If such representations tum out to be materially different from indicated in the contract documents, a misrepresentation breach of the contract has occurred, entitling the nonbreaching party to damages consisting of the costs and delays resulting from reliance on the representation.

The representation in the contract documents need not necessarily be explicit. It may be implied or suggested by the information that is provided. A Missouri contractor on a highway grading project recovered damages from the Missouri Highway Commission after discovering that the cuts and fills on the project were not balanced, even though the contract documents did not explicitly state that they would be balanced. The Missouri Court of Appeals held that other information in the contract had the effect of representing to the contractor that the cuts and fills were balanced.^[9]

Misrepresentation can be either intentional or nonintentional. Nonintentional misrepresentation is more common. When misrepresentation can be shown to have been intentional, it is also a tort. Tortious misrepresentation subjects the wrongdoer to punitive damages in addition to the actual damages resulting from the misrepresentation.

Three essential elements must be proven to establish misrepresentation. First, there must have been a positive representation, either expressed or implied by other expressed representations in the contract documents. Second, the representation must subsequently be found to be either untrue or incorrect. Finally, the nonbreaching party must have both relied on the representation and suffered damage as a result of that reliance.

Nondisclosure of Superior Knowledge

Another important breach of a contract implied warranty is the nondisclosure of superior knowledge. This concerns a situation in which some material condition or circumstance emerges during the course of contract performance that makes performance more difficult and costly, about which the contract documents are totally silent. If it can be proven that the owner or, in the case of a subcontract, the prime contractor, was aware of the condition or circumstance and either deliberately concealed or failed to disclose it, such nondisclosure constitutes a breach of the contract. The nonbreaching party is then entitled to damages amounting to the extra cost in dealing with the nondisclosed condition or circumstance as well as the cost of any resulting delays.

In a sense, nondisclosure of superior knowledge is a form of negative misrepresentation. Both parties to the contract are commonly understood to warrant that they have made available to the other party all information or data that they possess that might affect the other party’s performance of the contract work.

The doctrine of nondisclosure of superior knowledge has evolved from a long line of court cases. In the leading case, an industrial manufacturer had a contract to manufacture a product for the federal government. The government failed to disclose the fact that it was necessary to grind a new disinfectant prior to blending it in with the other ingredients. The government had sponsored research on the development of the product and was aware that the grinding process would be required to meet the product’s specifications. The U.S. Court of Claims (now the United States Court of Federal Claims) determined that the government breached the contract by not disclosing its superior knowledge. The court said:

Where the “balance of knowledge” favors the government, it must disclose its knowledge, less by silence it “betray a contractor into a ruinous course of action.”^[10]

In a later classic construction case, the U.S. Navy contracted with a joint-venture contractor to construct very tall radio towers on the northwest coast of Australia. The contractor’s performance was adversely affected by a destructive pattern of high winds and dangerous offshore currents. The court found that the Navy knew about the winds and the currents but did not disclose this superior knowledge to prospective bidders by including the known data in the bid documents or otherwise making this superior knowledge known. The court, in finding for the contractor and awarding the resulting extra costs, stated that under these circumstances “the government cannot remain silent with impunity.”^[11]

This principle can apply to any contractual relationship in which one party possesses superior knowledge affecting the other party’s burden of performance and does not disclose it prior to entering into the contract. Also, the duty to disclose superior knowledge continues after award of the contract throughout contract performance.

Improper Termination of Contract

Another breach situation that occasionally arises is improper termination of the contract. This breach is really a form of interference with contractual performance, discussed earlier in this chapter. If an owner or, in the case of a subcontract, a contractor, improperly terminates the contract, the contractor or subcontractor has been prevented from performing.

Most construction contracts contain express provisions for termination for default (see Chapter 5 on “red flag” clauses). However, when these provisions are improperly or unjustly invoked, the party invoking them has committed a material breach of contract. In other words, the party terminating the contract must be certain that the other party actually was in default.

If the terminating party is not correct and a court later finds the termination improper, the act of terminating the contract may itself be declared a material breach of the contract, entitling the terminated party to all damages flowing from the improper termination. These can include damage to a contractor’s reputation, loss of bonding capacity, and in some cases the bankruptcy of the company. The monetary damages are usually very substantial.

For example, the writer was involved as an expert witness in a case where a private contract had been signed for the renovation of an existing structure to convert it to a large central office facility. The owner terminated the design-build contractor at approximately the 95% completion point, alleging that the contractor was behind schedule and was producing shoddy work. The owner then entered into a contract with another contractor for the completion of the original work plus a number of changes and additions. Substantial monies were due the original contractor at the time of termination for a number of months of contract work that had been performed, consisting primarily of work performed by a large number of subcontractors, all of whom remained unpaid. A board of arbitrators first ruled that all of the subcontractors were entitled to be paid in full and directed the design-build contractor to immediately pay them. The board then ruled that the design-build contractor be paid by the owner for all payments made to subcontractors plus their own costs and a reasonable profit thereon. Additionally, the arbitrators were so offended by the circumstances of the termination, which they determined to be totally unjustified, that they took the unusual step of ordering that the owner pay all costs of the arbitration proceedings.

Owners and contractors administering subcontracts are often under the mistaken impression that they can properly terminate a construction contract (or subcontract) for default because the contractor or subcontractor fails to complete promptly minor defects, called “punch list” items, after the contract work is substantially complete. Uncompleted punch list items do not constitute a breach. The contract cannot be properly terminated on this account.

For instance, the Corps of Engineers Board of Contract Appeals determined that a road construction contractor who had achieved substantial completion, but who had not performed punch list items, was improperly terminated for default by the government. They concluded that once it had the use of the project for its intended purpose, the government must pay for contract performance. The board said:

Failure to correct minor deficiencies in a substantially completed contract is not a default; it is a constructive, deductive change… to declare a contract in default under such circumstances would work a forfeiture—a result the law abhors.^[12]

In this situation, the contractor or subcontractor is entitled to be paid the balance of the contract price, less the actual cost to remedy any punch list items that the owner actually remedies, or engages others to remedy, less any diminished value to the completed project for punch list items that either are not remedied by choice or that are impossible to remedy.

Conclusion

Any discussion of possible breach of contract situations can be virtually endless, particularly if one attempted to elaborate on breaches of express contract obligations. This chapter is merely a brief look at this important subject. The next chapter examines some important provisions and ramifications of contract changes clauses.

Questions and Problems

1. What is a contract breach? What two elements (in addition to privity of contract) are necessary to prove a contract breach? Do breaches involve acts of commission, acts of omission, or both?
2. Are all breaches equally material? Why is the degree of materiality important? What should the nonbreaching party do when the contract has been breached? Why are some contractors reluctant to put the owner on notice that the contract has been breached? Why should a contractor’s actions in a breach situation not be governed by this concern?
3. What two means might a court employ to determine the materiality of a breach?
4. What is the significance of a disclaimer with respect to contract breaches? What two conditions must exist for a disclaimer to be given full force and effect?
5. What is an anticipatory breach? How may a party be damaged by a threat of something that is not carried out? How can the nonbreaching party judge whether the threat posed in an anticipatory breach is likely to be carried out?
6. Must the obligation element of a contract breach be expressed, implied, or can it be either? What type of contract breach tends to recur in similar ways more frequently?
7. What is the single breach of an express contract obligation discussed in this chapter? Can this breach be a material breach excusing continued performance by the nonbreaching party?
8. Explain the breach of interference. What implied warranty is involved? What single example of a contractor-committed interference breach and what three examples of owner-committed interference breaches were discussed in this chapter?
9. What is misrepresentation? What implied warranty is involved? What three elements are necessary to prove misrepresentation?
10. How did the Spearin Doctrine originate? What is the implied warranty involved? Describe five implied warranties that are similar to the Spearin Doctrine.
11. What is the doctrine of nondisclosure of superior knowledge? Give the names and the details of the cases mentioned in this chapter that illustrate the principle of this doctrine. What is the central implied warranty?
12. Why is improper contract termination a form of interference? Is this breach a material breach? If the terminating party is wrong, what is a court of law likely to decide?
13. Do uncompleted punch list items constitute a material breach that justifies termination of the contract? How is final payment to the contractor reckoned when all of the contract work is complete except for punch list items that the contractor either cannot or will not remedy?
14. Indicate whether each of the following occurrences during the performance of a federal construction contract is (a) a breach of an express condition of the contract, (b) a breach of an implied warranty of the contract, or (c) not a breach but an occurrence contemplated by the contract and dealt with by one or more of the standard clauses of the contract. Refer to Chapter 5 on standard (“red flag”) clauses.
    1. Contractor encounters a differing site condition.
    2. Government refuses to grant a timely, fully justified, and documented request for an extension of time.
    3. Government suspends work on a portion of the project.
    4. Government does not disclose to bidders or to the successful contractor important information affecting the contractor’s cost of performance.
    5. Government fails to pay properly submitted monthly progress payment requests in a timely manner.
    6. Government orders acceleration.
    7. Government terminates contract without stating any reason.
    8. A government-specified construction method proves completely unsatisfactory when the contractor follows it.
    9. Government changes the specified manner in which the work is to be performed.
    10. The plans contain a number of serious errors.