Contractors' Recovery Where Breach Prevents Full Performance
Where a general contract or subcontract is terminated because of the other party's breach of that contract, the general or subcontractor victimized by the breach usually has a choice of two remedies.
The first option is for the contractor to seek contract damages. Contract damages usually include lost profits representing the difference between the full contract price and the contractor's direct cost to complete the contract work. Direct costs are those needed to perform the work in the field. They include costs the contractor actually incurred to the date of termination, plus an estimate of additional direct costs the contractor would have incurred to complete the remaining contract work. Direct costs do not include home office overhead costs which are fixed indirect expenses that are necessary to operate the business, but are not directly related to any particular job. By deducting only direct costs from the contract price, the contractor receives as damages s its entire gross profit (profit plus overhead), even though it may have performed only a small part of the contract work. The idea is to place the contractor in exactly the same financial position he would have been in had there been no breach of contract preventing full performance.
A contractor would normally pursue contract damages as its remedy where either (a) the breach preventing performance occurred early in the contract before much work was performed, or (b) the contract price included a substantial markup over costs, making it a high profit contract.
The second option open to a contractor prevented from completing is to seek recovery of the fair value of work actually performed without regard to the contract price. This is an attractive option where the cost of partial performance exceeded anticipated costs. Fair value is usually computed by totaling the contractor's direct cost of partial performance and adding a reasonable mark-up for profit and overhead.
The theory of a fair value award is that a contractor should receive the full value of his work, as if there were no contract, where his contract performance was prevented by the other party. The party who breaches the contract should not be permitted to limit the contractor's recovery by invoking a contract price favorable to it. In other words, the party who breaches the contract is not allowed the benefit of its bargain. A contractor would normally pursue fair value recovery, instead of contract damages, where he performed considerable work prior to termination and the cost of that work exceeded the contract price.
As with most rules there is an exception. Fair value recovery in excess of the contract price may not be an available remedy where wrongful termination occurs after substantial completion of the contract work, particularly where the contractor attempts full completion. In that circumstance the contractor may be limited to recovering its contract price less the cost to complete the remaining work.
This
newsletter is intended to provide general information of interest to the
construction industry. It is not intended to provide specific legal advice or
to address fact specific issues. For that you should consult your legal
counsel. Corwin & Corwin LLP assumes no liability in connection with the
use of this newsletter. The Supreme Judicial Court may consider this material
advertising.
©1992-2000 Corwin & Corwin LLP. All rights reserved