Management of Contract Terminations from Multiple Perspectives

AuthorBy John P. Ahlers, Cameron Sheldon, and Hanna Lee Blake
THE CONSTRUCTION LAWYER 23Volume 42 Issue 1 2022
Published in
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
be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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.
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.”
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,”
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
(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

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