12.1 Introduction

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

12.1 INTRODUCTION

12.101 Effect and Grounds of Termination. Termination is as ominous as it sounds—it is the extinguishing or ending of all, or part, of performance under a contract. The decision to "pull the plug," as many say when deciding on termination, must not be arrived at hastily. As will be detailed in this chapter, the grounds for termination ordinarily must involve substantial and "material" breaches of a contract. If a contract is terminated without such grounds, there are usually costly consequences.

12.102 Types of Termination and Available Remedies. The types and available remedies for termination vary by contract, and invoke longstanding contract interpretation issues unique to the law of the commonwealth, many of which correlate with the law of federal government contracting and the common law in general. Termination of construction contracts is not a subject that has been repeatedly and widely reviewed or discussed in Virginia courts, but every effort has been made in this chapter to include discussion of all reported Virginia cases relating to termination of construction contracts.

This chapter will focus primarily upon the termination of construction contracts by owners, but it will also deal to a lesser degree with termination by contractors. Owner defaults, some of which may give rise to termination rights, are discussed in greater detail in Chapter 17.

12.103 Common Law Rights to Termination of a Contract.

A. In General. Virginia courts, like most other courts, use the terms "termination" and "rescission" interchangeably. ¹ There are two well-settled tenets of Virginia's common law of contracts to be considered. First is the cardinal principle that before partial failure of performance of one party will excuse the other party from performing under the contract or give

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that party a right of rescission, the act that was not performed must go to the root of the contract. ² Second is the equally significant rule that the parties, by agreement, may abrogate such common law principles and, when that occurs, the courts must enforce the clear terms of the agreement. ³ In conjunction with these tenets are two equally important rules of law. First, Virginia recognizes the doctrine that a party may cure even a material breach. ⁴ Second is the integrally related rule of contracts that the law abhors a forfeiture, and that "contractual provisions for forfeiture are looked upon with disfavor by the courts." ⁵

B. Materiality Requirement. The fundamental requirement to terminate or rescind a contract is that the breach complained of be "material." A material breach is one that goes to the root of the contract and deprives the injured party of the benefit that the party justifiably expected from the exchange. ⁶ Conversely, a breach that does not undermine the fundamental expectations of the parties cannot be the basis for cancellation. Accordingly, "[i]f one party to a bilateral contract commits a partial breach of his duty, one that is not so material as to discharge the other party's duty of performance, the latter's only remedy is damages for the partial breach." ⁷ As stated in RW Power Partners, L.P. v. Virginia Electric & Power Co.:

It is in society's interest to accord each party to a contract reasonable security for the protection of that party's justified expectations. But it is not in society's interest to permit a party to abuse this protection by

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using an insignificant breach as a pretext for avoiding its contractual obligations.8

The Virginia Supreme Court, in Neely v. White,9 has reiterated these principles as follows:

The controlling legal principle is clearly and succinctly stated in 12 Am. Jur., Contracts, § 360, as follows: "It does not follow in every case of mutual and dependent promises that upon a failure of one party to perform his promise the other party will be exonerated or excused from performing his promise. Before partial failure of performance of one party will excuse the other from performing his contract or give him a right of rescission, the act failed to be performed must go to the root of the contract. A failure of consideration of such a degree that the remaining consideration may be deemed to be no substantial consideration is an excuse for nonperformance of a promise. . . . But a failure of an unsubstantial part of the consideration for a contract is not such an excuse. Such failure of the consideration is merely a ground for an abatement of the damages."10

Stated another way, rescission (or termination) at common law "should be permitted only when the complaining party has suffered a breach so material and substantial in nature that it affects the very essence of the contract and serves to defeat the object of the parties."11

The Restatement (Second) of Contracts § 241 points to five factors that are useful in identifying the materiality of a breach:

1. The extent to which the injured party will be deprived of the benefit which he reasonably expected;

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2.	The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
3.	The extent to which the party failing to perform or to offer to perform will suffer forfeiture;
4.	The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; and
5.	The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. 12

The factors articulated by Restatement (Second) of Contracts § 241 are supported by Virginia case law. For example, the doctrine of materiality cited in Neely v. White above is based on the same considerations that appear in factors (1) and (2) of the Restatement. ¹³ Thus, Virginia's substantive law is fully consistent with the materiality analysis prescribed by the Restatement. ¹⁴

C. Failure of Consideration. Although rescission is an available remedy for a truly "material" breach, it requires an additional analytical step. Under Virginia law, the equitable remedy of rescission is not available unless the rescinding party also alleges and proves a failure of consideration. ¹⁵ A failure of consideration of such a degree that the remaining consideration may be deemed to be no substantial consideration is an excuse for nonperformance of a promise. ¹⁶

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D. Condition Precedent. Failure to perform a promise when such performance is a condition precedent is also an excuse for nonper-formance of the promise made by the other party. ¹⁷

E. Adequate Remedy at Law. Rescission will not be granted for breach of a contract where the remedy at law is plain, adequate, and complete. ¹⁸ Termination or rescission of a contract at common law is a draconian remedy with conditions that are difficult to establish and should not be undertaken without careful consideration.

F. Opportunity to Cure. The common law of Virginia also embodies the doctrine that a party may cure even a material breach. ¹⁹ Although a material breach justifies the injured party in suspending performance, it does not of itself justify the injured party in terminating the contract. Fairness dictates that the party in breach be allowed a period of time, even if only a brief one, to cure the breach if possible. ²⁰

G. Right to Modify the Common Law by Contract. Parties may alter the common law right of rescission or termination by agreement. ²¹ The reason for altering the common law right would be to include clear language that something other than a material...