Despite careful efforts at estimating, arranging for manpower, negotiating supply contracts, and other sound planning, a job still goes sour on occasion. Somewhere along the way, you decide you have had enough and want to walk away.
What pushed you over the line? Was it scheduling, which no one is paying heed to, or extreme delays, mounting dollars in unresolved extras, late payments, or changing paperwork requirements? What point do these problems have to reach before you have the right to abandon the job? This last question is among the more difficult in construction contract law and should be answered with great care.
The legal standard
The basic rule in determining if a breach of contract justifies abandonment is whether there is a “failure of performance so material as to deprive a party of that for which he bargained.”
This is legal jargon. What it really means is if two parties have agreed on a contract, neither one should be able to simply end the agreement unless there are extraordinary circumstances. Otherwise, contract law would be chaotic. Generally, the courts support the sanctity of contracts unless one of the parties shows that it does not intend to follow the agreement.
The standard is exceptionally high. Negligence or mistakes by one side are not enough. A party displays intent to abandon if it “positively and absolutely refuses to perform the conditions of the contract.”
The owner or general contractor rarely states in words a clear intention not to abide by the subcontract’s terms and conditions. As a result, the courts recognize that actions are meaningful, and some are so egregious that the contract should be considered abandoned. As with many things, it often comes down to money.
Justification for abandonment
In 1955, the court ruled that a contractor was justified in abandoning a project to raise power lines where the contract called for payments every 15 days and the contractor’s most recent progress payment, which the owner was withholding during negotiations for a time extension, was more than two weeks late.
In a 1978 case, another court held that an electrical subcontractor was justified in walking off the job when it was not completed 188 days after the completion date, because the contractor caused delays.
More recent cases in various state courts are examples of other breaches significant enough to constitute abandonment. In Louisiana, a subcontractor engaged in erecting prefabricated metal buildings was allowed to abandon a contract to erect a building before performance. This was not a situation of walking off the job, but in refusing to walk there in the first place.
Partial nonpayments on five other contracts with the same contractor were the reason. The contractor had not paid the 10 percent retainage withheld on four of the completed contracts and had not paid extra labor costs for requirements not contemplated in the contracts for two of the buildings. Because of this pattern of breach by nonpayment by the contractor, the subcontractor was able to preemptively abandon the sixth contract.
In an Illinois case, an electrical subcontractor and general contractor disagreed about who was to pay for temporary light and power on a project. During negotiations, the electrical subcontractor wrote a letter stating that fixtures would not be installed until both parties agreed to a contract regarding the temporary power and lighting.
Shortly after sending the letter, the electrical subcontractor was refused a monthly progress payment of $19,800 on the $350,000 job. This refusal to pay a progress payment was found to be sufficient justification for the electrical subcontractor to abandon the job.
Insufficient justification of abandonment
Other cases, however, have been decided against abandonment. In some, the breaches seem more onerous than the cases noted above.
The mechanical subcontractor on a $68 million construction project was not justified in abandoning the project when the prime and concrete contractors caused significant delays. When the subcontractor and the prime contractor could not reach an agreement on the value and payment method of the acceleration claims, the subcontractor walked off the job. The court ruled that since the subcontractor was still receiving payments according to the contract and the prime contractor did not deny liability for acceleration caused by the delays, the subcontractor was not able to discontinue work.
In another case, a contractor repairing a lighthouse for the Coast Guard was not justified in abandoning the project because of unsafe working conditions. The Coast Guard provided a report showing that conditions were safe nine days after the abandonment as well as another report from an independent architect/engineering firm stating that the conditions were safe three months following the abandonment. The contractor provided expert reports that stated the structure was not safe, but the court questioned the credibility of the reports. It also partly blamed the contractor for creating any hazard. Unsubstantiated claims of unsafe working conditions were not sufficient justification to abandon a project.
Underbidding a job and running out of money is not sufficient reason to abandon a contract. Nor is failure to be compensated for delays and disruptions, even if compensation is ultimately found to be owed and was not paid in a timely way.
In one such case, the court determined that the contractor should not have abandoned the project, even though payments were past due and owing. The contractor offered two reasons for abandoning the project. The first dealt with the city’s refusal to turn off steam lines. The contractor stated that city guidelines prevented performance, but there was evidence that the contractor was on notice of the guidelines at the time of making the contract and there were only three instances of actual delay.
The contractor’s second, and stronger, reason for abandonment was delayed payment. Of 19 payments made during the construction schedule, only seven were made approximately on time. Of the other payments, six were made two months after the contractor’s application for payment, and the other six were made three months after the contractor’s application for payment. The court found that there were payment delays, which were a result of the city’s inefficient bureaucracy. But the contractor’s inadequate paperwork may have contributed to the delays. The court concluded that since payments were made in substantial conformance with the contract documents, the contractor was not justified in abandoning the project.
In a similar case the concrete subcontractor left the job when the first two monthly progress payments were made six and eight days late, respectively. The court mentioned that the subcontractor had been given a deficiency notice and was having trouble keeping enough workers on the project. The court also mentioned that the payment clauses in the contract did not specify monthly progress payments. The court ruled that, even if payments were to be made monthly, delays on two monthly payments of only six and eight days were not sufficient to justify abandonment.
If any conclusions can be drawn from a survey of these cases:
* One contracting party must show a clear intent not to abide by the terms of the contract.
* The party claiming abandonment must have strong justification and must have a clean record of its own performance.
* Un-negotiated extras, by themselves, do not justify abandonment unless the changes amount to a “cardinal change” (i.e., basic change to the scope of the contract).
Certainly, no major decision to walk off a project should be contemplated without the advice of a legal professional.