by Ken Robinson
This is the final installment of a three-part series on construction contracts. Be sure to check out the two previous parts, Construction Contracts 101 - The Basics, and Construction Contracts 102 - Interpreting Contracts
A contract is in essence a promise given in consideration for a reciprocal promise. A construction contract is a very complex series of promises that establish the rights and obligations of the parties. A breach of the contract in its simplest form, then, is a failure to perform a promise. Technically, a breach of contract can provide the non-breaching party with a remedy; for example, if the non-breaching party incurs a loss as a result of the breach. In that case, the non-breaching party can assert a claim for damages.
If the level of a breach rises to a “material breach,” additional remedies are available. A material breach can excuse the non-breaching party from further performance under the contract until the material breach is cured. This might occur in a construction setting where the owner refuses payment until the contractor cures the breach. In some cases, a material breach gives rise to a right of the non-breaching party to terminate the contract. Colorado Structures, Inc. v. Insurance Co. of the West, 161 Wash.2d 577, 167 P.3d 1125, 1132 (2007) (material breach permits, but does not require, non-breaching party to cancel or terminate contract), cited with approval in Blood v. Qwest Services Corp., 224 P.3d 301 (Colo. App. 2009).
Curiously, there is no legal standard as to what constitutes a material breach of contract. Rather, the question of whether a breach is a material breach is a question of fact for the fact finder, either the jury, the judge in a trial to the court, or the arbitrator. Carder, Inc. v. Cash, 97 P.3d 174 (Colo. App. 2003) (Whether a breach of a contract is material, and therefore excuses further performance by the other party, is a question of fact; in deciding that question, the trier of fact should consider the extent to which an injured party will obtain substantial benefit from the contract, as well as the adequacy of compensation in damages). Colorado appellate courts have provided some guidance on this issue. See, e.g., Kaiser v. Market Square Discount Liquors, Inc., 992 P.2d 636 (Colo. App. 1999). (In deciding whether a breach of contract is material, the extent to which an injured party would still obtain substantial benefit from the contract, and the adequacy of compensation in damages for the breach, should be considered. The importance or materiality of contract terms must be assessed in context and in light of the expectations of the parties at the time the original contract was formed. Whether a breach of contract is material is a question of fact); Blood v. Qwest Services Corp., 224 P.3d 301 (Colo. App. 2009) (A material breach of a contract does not obligate the non-breaching party to terminate the contract; rather, that party can continue performing its own obligations and insist the other party do likewise). See also Restatement Second, Contracts § 241 (Circumstances significant in determining whether a failure to render performance is material); Restatement Second, Contracts § 242 (Circumstances significant in determining when remaining duties are discharged).
The lesson for contract administrators is that a failure to perform by any party to a construction contract, be it a late payment by the owner, or a missed milestone by a contractor, needs to be evaluated in the larger context of the project and the consequences of the breach, and then take action appropriate to the conditions. As stated above, in the extreme, this could be termination of a contract, but this should be the remedy of absolute last resort as the consequences to the project could be unacceptable.