Builders and Contractors Exchange
Weekly Bulletin: 7 Mar 2008
Risks of abandoning a project
By: John R. Lockard
All contractors have encountered circumstances for which they have considered terminating their work on a project. Owners may be slow in payment or may fail to recognize (and pay for) extra work. General contractors may cause repeated delays to the project without compensation. A contractor takes a large risk, however, if it leaves a project without good, legal justification.
Under Virginia law, the first party to make a "material breach" of a contract may not enforce its contract against the other party. Unfortunately, there is no clear definition of "material breach" under Virginia law. Generally, a "material breach" is a breach that is "so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract." The parties can also define in their contract what constitutes a material breach. Abandoning a construction project, however, would almost certainly be a material breach unless the contractor had a legal right to terminate its work.
As is often the case, the parties must look to their contract to determine whether one party has made a "material breach." For example, courts have ruled that failure to make payment is a "material breach," but the contract will usually provide the specifics about when payment is due. Often, construction contracts contain a "pay when paid" clause that provides that payment is not due to subcontractors until the owner has paid the general contractor. In such a case, a subcontractor may be making the first "material breach" if it abandons the project if payment was delayed by the owner's failure to pay the general contractor.
Contractors should think twice before abandoning a construction project. A contractor that abandons a project may not be able to collect its contract balance, and could face a claim from the other party for the costs to complete its work. A contractor can protect its rights by insisting that its contract contain clear and definite provisions for payment and other key terms.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.