Breach of Contract

Breach of Building Contracts

The purpose of damages is to place the innocent party in the position in which he would have been in, if the contract was performed in accordance with its terms.  The general principles of damages apply.  See the sections on damages. The person claiming damages must mitigate his loss.  This requires that he take reasonable steps to minimise the loss.

In the context of a building contract, the failure to complete the contract or defective work will constitute a breach of contract.  The question arises as to whether the appropriate measure is the cost of repair or the diminution in value of the building.  The courts have generally favoured the cost of repair but will substitute the diminution in value when it is wholly uneconomic or unreasonable to insist to require repair.

The cost of repairs is assessed at the date when the obligation ought to have been undertaken.  What is reasonable will depend on the circumstances.  In domestic cases, the courts may award additional compensation for the inconvenience and distress of living in uncompleted residential accommodation.  The same principles do not appear to apply to commercial premises.

Where the failure consists of not completing the work at all, damages are usually based on the additional cost in completing the work.  A credit will be given for the part of the price unpaid.  If it is the employer who has breached the contract, the contractor is entitled to damages.  This may include damages for loss of profit as well as other actual losses suffered.

The employer’s breach may or may not be sufficiently serious to justify termination.  The contractor is entitled to damages for what he would have received under the contract or the part outstanding, less the cost of completion.  If the contract was unprofitable then only nominal damages will be available.

Liquidated Damages

Generally, a construction contract provides for the liquidated or fixed damages for delay in completion and other specified breaches.  Liquidated damages are allowed at law provided that they are a reasonable pre-estimate of loss.  They must not be a penalty, in which event they would be unenforceable.

If the liquidated damages are less than the actual loss, then the contractor will have to accept them and there is no right to further compensation.  If they are more than the actual loss, then they are still payable, notwithstanding that they exceed the actual loss provided that they are a reasonable pre-estimate and are not extravagant and unconscionable compared with the greatest amount of loss that could be incurred.

The entitlement to liquidated damages may be lost if the contractor has himself breached his obligations and time is at large.  They may not apply if the contract has been granted an extension of time. If liquidated damage becomes inoperative for reasons as above, the contractor may still have a claim for breach of contract and for an unliquidated sum in damages in respect of breaches.  The contractor may not be able to recover more than the amount he would have been entitled to, if the liquidated damages provisions had applied.

The contracts specify the conditions applicable before a liquidated damages claim arises.  The contract administrator may be obliged to issue a non-completion certificate and the employer may be obliged to give notice of his intention to deduct the liquidated damages.  Other types of contracts may not require certification of non-completion.

Additional Work

A contractor may seek payment for the reasonable value of work done in situations where there is no breach of contract or no contractual entitlement or relationship.  This may arise where there is an undertaking by the employer to pay a reasonable sum or where services are requested but no price is agreed upon.  It is implied that a reasonable sum is payable.

Where a price clause is inoperable, it may apply where there is extra work that is outside the scope of a contract.

A quantum meruit payment is to be a fair and reasonable payment.  In the context of building contracts, there are likely to be provisions that apply by analogy which will be available in some cases with reference, to a valuation of the work.  The provisions that would apply to a variation or additional works under the scope of the contract may be available as an appropriate method of measurement.

Proving Loss

An employer’s claim for breach of contract will generally be an unliquidated claim.  The contractor may seek payment and issues may arise in purporting to set off the unliquidated claim for damages, against liquidated claims of sums ostensibly due under the contract.  Questions arise as to whether the employer’s right to a liquidated claim may be set off.

In strict terms, the employer may be obliged to pay the sums claimed and seek arbitration or apply to the court on the basis of the unliquidated claim.  A counterclaim may be considered in an application for interim payment as the court or arbitrator is obliged to consider what will happen if the matter proceeded to trial.

If the contractor seeks summary judgment, a claim for payment only may be defeated if it satisfies the criteria for equitable set-off which may be narrower than a cross claim which could be permitted to be brought in proceedings.  See generally the sections on set-off and counterclaims.  Cross claims which arise out of the same contract as the principal claim may be potentially available by way of equitable set-off.  It may also apply to a separate contract provided they are closely linked.

A certified payment under a contract has a status equivalent to a bill of exchange.  Generally, it must be honoured in itself and may not be set-off by a liquidated claim.  Some case law allows the set off bona fide contract counterclaims.  The modern position is that in order to exclude the right to assert a cross-claim admissible as equitable set offs, it is necessary to find clear provisions in the contracts which so provide.

Some contracts specify the procedures by which cross-claims and set-offs may be made.  They may require the giving of notice to the other party specifying the money to be withheld and the reasons.

Suspension of Performance

At common law, a party may not suspend the performance of an obligation on a temporary basis on the ground that the other party is in breach of contract.  If that other party’s breach is sufficiently serious such as to be a fundamental breach, he may terminate the contract, treat it as discharged and claim for breach of contract.  Where the breach is insufficiently serious to justify termination; the contractor must continue with the work and claim a remedy.

There may be a right to suspend work.  This is typically expressly granted where there has been non-payment.  The UK Housing Grants, Construction and Regeneration Act provides that sums due under construction contracts that have not been paid by the final due date for a given payment, the payee has a right to suspend works until payment.  Seven days notice must be given to the other party.

A period of suspension is to be ignored for the purpose of calculating time under the contract so that there is a de facto extension.    Many contracts provide specifically that the contractor is entitled to recover loss and expense in such circumstances.