Contract law II: performance, breach and remedies

Once a contract is formed, each party must do what it promised. Most contracts are performed without drama: the engineer delivers the design, the client pays, and everyone moves on. But on any project of real size, something goes wrong. A site turns out to be different from what the borings showed, a supplier fails, a client changes its mind, a flood stops work, or a party simply does not pay. This lesson covers what the law says when performance goes off track: what counts as performance, what counts as breach, when a contract can be ended, and what the injured party can recover.

Lesson 3 dealt with formation and terms. Here we follow the Northbridge bridge into construction, where Northbridge acts as the owner's contract administrator for the construction contract as well as the designer under its own services agreement. That dual role is common for consulting engineers and brings its own legal responsibilities, which we will flag along the way.

Performance and substantial performance

A party performs a contract by doing exactly what it promised, on time. In practice, construction and engineering contracts are almost never performed perfectly, and the law recognizes this. Under the doctrine of substantial performance, a contractor that has completed the work in all essential respects, with only minor defects or omissions, is entitled to the contract price, less the cost of correcting the defects. It cannot be refused payment altogether because of trivial shortcomings.

Substantial performance also has a statutory meaning in Canadian construction lien legislation. Saskatchewan's Builders' Lien Act, Ontario's Construction Act and similar statutes define it by a formula based on the value of the remaining work, and use it to start the clock for lien claims and the release of holdback, the portion of each payment retained to protect subcontractors. Contract administrators are often required to certify substantial performance, and getting the date right matters to everyone down the payment chain.

Some obligations are conditions, essential terms whose breach goes to the root of the contract, and others are lesser terms (sometimes called warranties in this context) whose breach gives a right to damages but not to end the contract. Contracts often state which terms are essential, for example by saying that time is of the essence. Without such a statement, courts look at the importance of the term and the seriousness of the consequences of breach.

Breach

A breach is a failure to perform a promise without lawful excuse. It may be a complete failure, a defective performance or a late performance. An anticipatory breach, also called repudiation, happens when a party, before performance is due, shows clearly that it will not perform: for example, a client tells the engineer to stop work and says it will not pay for anything further. The innocent party may then choose to accept the repudiation, ending the contract and claiming damages, or to affirm the contract and keep insisting on performance. The choice must be made clearly and promptly.

For a breach to justify termination, it usually must be fundamental: it must deprive the innocent party of substantially the whole benefit of the contract. Less serious breaches give only a right to damages. A party that terminates for a breach that turns out not to be serious enough is itself in repudiatory breach, which is one of the most expensive mistakes in construction law. That is why well-drafted contracts set out a termination procedure: written notice identifying the default, a cure period, and only then the right to terminate.

Canadian courts have also held that a party's duty of honest performance (from Bhasin v. Hrynew) and its duty to exercise contractual discretion reasonably (from Wastech) continue while a contract is being performed and terminated. A party may terminate for convenience if the contract allows it, but it must not mislead the other party about its intentions while doing so, as the Supreme Court found in C.M. Callow Inc. v. Zollinger.

Giving notice

Construction and engineering contracts are full of notice requirements. A contractor that encounters differing site conditions must give notice before disturbing them. A party claiming extra time or money must give written notice within a set number of days of the event. A party wanting to terminate must give a notice of default and a cure period. These provisions exist so that the other side can investigate, mitigate and plan while the facts are fresh.

Canadian courts have generally enforced notice requirements strictly, especially where the contract makes notice a condition precedent to a claim. In Corpex (1977) Inc. v. Canada (1982), the Supreme Court of Canada denied a contractor's claim for extra costs because it had not given the notice the contract required. Some courts have softened this where the owner had actual knowledge and suffered no prejudice, but engineers advising clients should never rely on that. Give the notice the contract requires, in the form and within the time it requires, and keep proof of delivery.

For the engineer as contract administrator, notice provisions cut both ways. The engineer must recognize when a contractor's letter is a notice of claim and process it under the contract's procedure, and must make sure the owner gives the notices the owner is required to give. Missing a contractual deadline can waive the owner's rights or expose the engineer to a claim from its own client.

Excuses for non-performance

Sometimes a party's failure to perform is excused. The law excuses performance only in narrow circumstances; contracts commonly widen them.

Frustration occurs when, without the fault of either party, an unforeseen event makes performance radically different from what the parties contemplated, for example if the site is expropriated or the bridge is destroyed by fire before completion. A frustrated contract ends automatically, and both parties are discharged from future obligations. Most common law provinces have frustrated contracts statutes that adjust the parties' positions, allowing recovery of money paid and compensation for benefits conferred. Mere increases in cost or difficulty do not frustrate a contract.

Force majeure clauses define events beyond a party's control, such as natural disasters, wars, epidemics, government orders and strikes, and say what happens if one occurs. Usually the affected party gets extra time but not extra money, and either party may terminate if the event lasts long enough. The clause applies only to the events it lists, interpreted according to its wording; the COVID-19 pandemic produced many disputes about whether epidemic, government action or catch-all wording covered pandemic delays. The affected party normally has to give prompt notice and show that the event actually caused the delay and could not be avoided with reasonable effort.

Delay

Delay is the most common source of construction disputes. Engineers, whether as designers or contract administrators, need to understand the vocabulary. An excusable delay is one for which the contractor is entitled to more time, such as owner changes, differing site conditions or force majeure events. A compensable delay is an excusable delay for which the contractor is also entitled to extra money, usually because the owner caused it. A non-excusable delay is one for which the contractor is responsible, which may expose it to liquidated damages. Concurrent delays, where owner and contractor delays overlap, are the hardest to resolve; contracts and courts deal with them in different ways, often by granting time but not money.

Liquidated damages are a sum the parties agree in advance will be paid for each day of non-excusable delay. They save the owner from having to prove its actual loss, which is often hard on public projects like a pedestrian bridge where the loss is the public's inconvenience rather than lost revenue, and they give the contractor a known limit on its exposure. They are enforceable if they are a genuine pre-estimate of the likely loss at the time of contracting, and unenforceable as a penalty if they are extravagant compared with any loss that could be expected. Many contracts cap total liquidated damages at a percentage of the contract price.

On the Clearwater bridge, the construction contract sets completion for June 30, 2028, liquidated damages of $1,500 per day and a cap of 10 per cent of the $3.8 million price. The contractor finishes on September 15. Northbridge, as contract administrator, has granted 21 days for an owner design change and nine days for a flood. The program calculates the chargeable damages.

from datetime import date

CONTRACT_PRICE = 3_800_000
LD_PER_DAY = 1_500          # pre-estimate of the owner's daily loss
LD_CAP = 0.10               # liquidated damages capped at 10% of the price

completion_due = date(2028, 6, 30)
actual_completion = date(2028, 9, 15)
excusable_days = {"Owner design change": 21, "Flood (force majeure)": 9}

late = (actual_completion - completion_due).days
excused = sum(excusable_days.values())
chargeable = max(0, late - excused)
ld = min(chargeable * LD_PER_DAY, LD_CAP * CONTRACT_PRICE)

print(f"Days late: {late}")
for cause, days in excusable_days.items():
    print(f"  less {days:2} days excused: {cause}")
print(f"Chargeable days: {chargeable}")
print(f"Liquidated damages: ${ld:,.0f} (cap ${LD_CAP * CONTRACT_PRICE:,.0f})")

Days late: 77
  less 21 days excused: Owner design change
  less  9 days excused: Flood (force majeure)
Chargeable days: 47
Liquidated damages: $70,500 (cap $380,000)

The calculation is simple; the hard part is the inputs. Whether the flood was a force majeure event, whether the design change really caused 21 days of delay on the critical path, and whether the contractor gave timely notice of both are the questions on which a delay claim turns. That is why contract administrators need accurate schedules, daily records and prompt written decisions.

Remedies

The main remedy for breach of contract is damages: money to put the injured party in the position it would have been in if the contract had been performed. These are expectation damages. Where expectation is hard to prove, a party can sometimes claim reliance damages instead, the expenses it incurred in reliance on the contract. Three limiting principles apply.

• Causation: the loss must be caused by the breach.
• Remoteness: under the rule from Hadley v. Baxendale (1854), still applied throughout the common law world, recoverable losses are those that arise naturally from the breach, or that both parties would reasonably have contemplated as a probable result when they made the contract. Unusual losses are recoverable only if the defendant knew of the special circumstances.
• Mitigation: the injured party must take reasonable steps to limit its loss, and cannot recover losses it could reasonably have avoided.

Engineering contracts often exclude consequential or indirect damages, such as lost profits, loss of use and business interruption, which would otherwise be recoverable if they were within the parties' contemplation. Because the line between direct and consequential losses is notoriously unclear, the better contracts list the excluded categories rather than relying on those labels.

In some cases a court will order a party to do what it promised, a remedy called specific performance, or to stop doing something, an injunction. These equitable remedies are discretionary and rare in construction and services contracts, because courts are reluctant to supervise ongoing work and because damages are usually adequate. They are more common for contracts involving land or unique goods, and for enforcing confidentiality and non-competition obligations.

Getting paid

For engineers and contractors, the commonest breach is non-payment. Construction lien legislation in every common law province gives contractors, subcontractors and, in most provinces, consultants who supply services to an improvement a right to register a lien against the owner's land (or, for public land, against the holdback funds) to secure payment, subject to tight deadlines. Prompt payment legislation now adds a timetable for payment and fast interim adjudication of disputes in several jurisdictions: Ontario's regime took effect in 2019, Saskatchewan's in March 2022, and the federal Federal Prompt Payment for Construction Work Act applies to federal construction projects. These regimes typically require the owner to pay a proper invoice within 28 days unless it gives a notice of non-payment, with subcontractors paid within days after that, and they let any party refer a payment dispute to an adjudicator whose decision is binding in the interim. Consultants should check whether their services count as construction under the relevant statute.