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 completion has a related contractual meaning in most US construction contracts: the stage when the work is sufficiently complete that the owner can occupy or use it for its intended purpose. It typically triggers the release of most retainage (the portion of each payment withheld as security), the start of warranty periods, the end of liquidated damages, and in many states the start of the statute of repose. Engineers acting as the owner's representative often certify substantial completion, and the date has legal consequences for everyone.

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.

American courts apply the implied covenant of good faith and fair dealing during performance, and many construction contracts give the owner a right to terminate for convenience. Federal government contracts include a termination for convenience clause by regulation, and courts have held that the government must act in good faith in using it. Where a contractor is wrongly terminated for default, many contracts convert the termination into one for convenience, which limits the contractor's recovery to costs incurred and some profit on work performed.

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.

American courts vary in how strictly they enforce notice requirements. Many enforce them as written, especially where the contract makes timely notice a condition precedent to recovery. Others excuse late notice where the owner had actual knowledge of the problem and was not prejudiced by the delay. Federal contract law tends toward the more forgiving view, while some state courts are strict. Engineers advising clients should never rely on forgiveness: 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.

Impossibility and commercial impracticability excuse performance when, without the fault of the party seeking the excuse, an event whose non-occurrence was a basic assumption of the contract makes performance impossible or impracticable. Frustration of purpose excuses performance when such an event destroys the principal purpose of the contract for one party. UCC section 2-615 codifies impracticability for the sale of goods. Courts apply these doctrines narrowly: a large increase in cost, by itself, is rarely enough.

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 Westbrook bridge, the construction contract sets completion for June 30, 2028, liquidated damages of $1,100 per day and a cap of 10 percent of the $2.8 million price. The contractor finishes on September 15. Northbridge, as the owner's representative, 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 = 2_800_000
LD_PER_DAY = 1_100          # 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: $51,700 (cap $280,000)

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. Every state has a mechanics lien statute that gives contractors, subcontractors and suppliers, and in many states design professionals, a right to record a lien against private property they improved, subject to strict notice and filing deadlines. Liens cannot usually attach to public property, so on public projects payment is protected by bonds instead: the federal Miller Act requires payment bonds on federal construction contracts over $100,000, and state Little Miller Acts do the same for state and local work. The federal Prompt Payment Act requires federal agencies to pay proper invoices on time or pay interest, and most states have prompt payment statutes for public and often private construction that set payment deadlines and interest on late payments.