Management of Contract Terminations from Multiple Perspectives

• Author: By John P. Ahlers, Cameron Sheldon, and Hanna Lee Blake
• Pages: 23-29

THE CONSTRUCTION LAWYER 23Volume 42 Issue 1 2022

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The Construction Lawyer

, Volume 41, Number 4. © 2022 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not

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CONTRACT TERMINATION

Management of Contract Terminations

from Multiple Perspectives

By John P. Ahlers, Cameron Sheldon, and Hanna Lee Blake

Termination of a construc-

tion contract is fraught with

risk. Despite careful planning

and efforts by the project team

before construction even com-

mences, one or more events

may occur during construction

that result in termination of the

contract. The way the termina-

tion is handled, and the steps

taken by the parties to protect

their interests, can have signif-

icant impacts if the propriety

of the termination is later dis-

puted. This article outlines the

status of the law on termination

“for cause,” presents practical

tips for both terminating and

terminated parties, and then

examines the role of the surety

and how an obligee may best

reap the benets of a perfor-

mance bond.

I. Navigating Termination

“the right way”

A. No Bright-Line Test for

Material Breach

What constitutes a “material breach” is generally the

seminal issue in a contract termination dispute. A valid

nding of breach is the essential prerequisite to the

granting of any resulting remedy.

1

But only a “mate-

rial breach” based on legitimate and well-documented

concerns as to a party’s ability to perform justies ter-

mination “for cause.”

2

Surprisingly, however, there is no

common law legal standard by which “material breach”

may be evaluated.

Courts have variously dened material breach as follows:

•

“[W]here the covenant not performed is of such

importance that the contract would not have been

made without it.”3

•

“[O]ne which touches the fundamental purpose of

the contract and defeats the object of the parties

in entering into the contract.”4

• A breach “so gross that the very object of the con-

tract is defeated.”5

Ultimately, only an unexcused breach of signicance

justies the invocation of the ultimate remedy of termi-

nation “for cause.”6

Many courts have held that whether a breach is

“material” is a question of fact that depends on the circum-

stances of the particular case, leaving the practitioner with

little guidance as to what constitutes a material breach.7

Other courts have opined that whether a breach is mate-

rial is a question of law “where the evidence concerning

the materiality is clear and substantially uncontradicted,”

8

further obscuring the test for materiality.

Further blurring any bright line determination of

material breach, the American Institute of Architects

(AIA) standard contract forms use the term “substan-

tial breach” but do not dene “substantial,” leaving it

up to a court to x the boundaries of what is deemed

to be a substantial breach under the circumstances of

the dispute.9

To create a framework for establishing a material

breach, the Restatement Second of Contracts attempted

to implement a set of signicant factors to consider in

determining whether a breach is material under §241.

In determining whether a failure to render or to offer

performance is material, the following circumstances are

signicant:

(a) the extent to which the injured party will be

deprived of the benet which he reasonably expected;

(b) the extent to which the injured party can be ade-

quately compensated for the part of that benet of which

he will be deprived;

(c) the extent to which the party failing to perform or

to offer to perform will suffer forfeiture;

(d) 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;

(e) the extent to which the behavior of the party failing

to perform or to offer to perform comports with stan-

dards of good faith and fair dealing.

This framework, however, only establishes circum-

stances to consider and does not provide a denitive test

or denition. All denitions leave much to the discretion

of a court without rm guidance for parties to deter-

mine the merit of a termination predicated on an alleged

material breach. Given this unsettled law, if a termina-

tion is challenged in court, the result is often a lengthy

and expensive dispute resolution procedure, which rarely

benets either party.

John P. Ahlers

Cameron Sheldon

Hanna Lee Blake