Always hire the services of an experienced Park City Utah real estate lawyer to draft your construction contracts. The clauses of the contract will determine how you can legally terminate the contract.
The termination of a contract for default is the exercise of the property owner’s express right to completely or partially terminate a contract because of the contractor’s actual or anticipatory failure to perform its contractual obligations. If the contractor can establish, or if it is otherwise determined, that the contractor was not in default, or if the failure to perform was excusable (i.e., the failure arose out of causes beyond the control and without the negligence of the contractor).
In general, the Default articles may be looked on as a limitation of remedies clause, which results in a forfeiture of rights by the contractor. The articles establish the rights of the property owner and the procedures it must follow in the event the contractor fails to perform his contractual obligation.
When the Default articles are invoked, the property owner is not liable for the contractor’s costs on undelivered work and is entitled to repayment of any advance or progress payments made to the contractor. The clause does not permit the property owner to use it as authority to acquire any completed supplies or manufacturing materials, unless it is ascertained that the property owner has acquired title under some other provision of the contract. If the property owner has acquired title, it is required to pay the contractor the contract price for such supplies or the amount agreed to by the parties for any manufacturing materials acquired by the property owner.
Furthermore, the contractor is liable to the property owner for any excess costs incurred in acquiring supplies or services similar to those terminated for default and for any other damages, whether or not repurchase is effected.
Procedures for invoking default
When a default termination is being considered, the property owner has to determine which type of termination action (i.e., default, convenience, or no-cost cancellation) is most appropriate under the circumstances. A default termination action may be initiated only after review by contractual and technical personnel and by counsel to ensure the propriety of the proposed action. In determining whether to terminate a contract for default, the property owner is required to consider such factors as
• The terms of the contract and the applicable laws and regulations;
• The specific failure of the contractor and the excuses for that failure;
• The availability of the supplies or services from other sources;
• The urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor;
• The degree of essentiality of the contractor in the property owner acquisition program and the effect of a termination for default on the contractor’s capability as a supplier under other contracts;
• The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and
• Any other pertinent facts and circumstances.
Failure to make timely delivery
It has long been held that time is of the essence in any construction contract specifying fixed dates for delivery or performance. Accordingly, if the contractor fails to perform within the time specified, or an extension thereof, the Default article authorizes the property owner to terminate the contract, in whole or in part, by written notice to the contractor. As a practical matter, the property owner should be lenient in granting reasonable extensions of time for contract performance because it is more interested in production than litigation. Nevertheless, it may terminate the contract immediately after the close of business on the exact date specified in the schedule.
In those instances where the contract requires delivery in increments, the entire contract can be terminated for default when the contractor fails to meet any incremental delivery schedule. Where the property owner is held to be estopped from terminating one or more increments for a delivery failure, it nonetheless retains the right to terminate subsequent increments for delivery failure since each delivery failure of later increments creates a new right in the property owner to terminate that increment or the entire remaining contract.
A material breach does not automatically and ipso facto end a contract. It merely gives the injured party the right to end the agreement. The injured party can choose between canceling the contract and continuing it. If he decides to close the contract and so conducts himself, both parties are relieved of their further obligations, and the injured party is entitled to damages to the end of the contract term. If he elects instead to continue the contract, the obligations of both parties remain in force, and the injured party may retain only a claim for damages for partial breach. A contract–and the property owner’s right to terminate–remains in effect, regardless of any prior breach by the property owner, where a contractor fails to put an end to the contract due to property owner’s breach before the property owner exercises its right to terminate.
Failure to meet specification requirements
In the absence of unusual facts or circumstances, the property owner has the right to demand strict compliance with all contract provisions. Where performance fails to conform to the contract’s specifications, this can be the basis for default termination, even if delivery is timely, since such failure constitutes nondelivery under the Default articles.
Under the doctrine of substantial compliance, the contractor may be entitled to relief even though the articles delivered did not conform precisely to the requirements of the specification. In order to obtain relief under the doctrine, the contractor must demonstrate in good faith that (1) the items shipped substantially compiled with the contract’s specifications, (2) the items were timely delivered, and (3) the contractor had reasonable cause to believe that the items were acceptable and the defects minor and correctable within a reasonable time. Once these conditions have been met, the contractor must be given a reasonable time within which to cure the defects, thereby precluding the issuance of a default termination even if the time extends beyond the original delivery date.
Waiver of Rights
If the property owner fails to exercise its right to terminate immediately upon a contractor’s failure to make timely delivery, it may have waived that right. It has often been said that the term “waiver” is a troublesome term in the law. It is a flexible word with no definite and rigid meaning, and since it may be used in many senses, it is often of equivocal significance. While the term has various meanings depending on the context, it is nevertheless capable of taking a very definite meaning from the context in which it appears. Waiver is generally defined as an intentional relinquishment of a known right. As minimum requirements to constitute an implied waiver of substantial rights, the conduct relied on must be clear, decisive, and unequivocal, showing a purpose to waive the legal rights involved before such conduct constitutes a waiver.
The determination as to what conduct constitutes an election or waiver is more conjectural than to prescribe the proper method of effecting a valid termination once the election has occurred. The necessary elements of an election by the nondefaulting party to waive default in delivery under a contract are (1) failure to terminate within a reasonable time after the default under circumstances indicating forbearance, and (2) reliance by the contractor on the failure to terminate and continued performance by him under the contract, with the property owner’s knowledge and implied or express consent.
What is a reasonable time for the property owner to terminate a contract after default depends on the circumstances of each case. Notice of failure or of the possibility of termination for default is not required to be sent to the contractor before the actual notice of termination when the contractor has defaulted for failure to make delivery implying that the property owner is required to issue a termination notice “at once.” The period for default termination will naturally be greater where the contractor abandons performance, or where his situation is such as to render performance impossible or unlikely, than where he continues performance in reliance on the lack of termination and proceeds to incur obligations in an effort to perform.
Time is of the essence in any contract containing fixed dates for performance. When a due date has passed and the contract has not been terminated for default within a reasonable time, the inference is created that time is no longer of the essence so long as the constructive election not to terminate continues and the contractor proceeds with performance. The proper way thereafter for time to again become of the essence is for the property owner to issue notice under the Default clause, setting a reasonable, but specific, time for performance on pain of default. The election to waive performance remains in force until the time specified in the notice, and, thereupon, time is reinstated as being of the essence. The notice must set a new time for performance that is both reasonable and specific from the standpoint of the performance capabilities of the contractor at the time the notice is given.
Failure to make progress
The property owner may also terminate a contract for default before the specified delivery date if the contractor fails to make progress so as to endanger performance of the contract. This remedy is based on the policy that the property owner should not be required to stand idly by awaiting nondelivery by a contractor who obviously cannot meet a required delivery or performance date. Rather, the property owner should have the option to terminate inadequate performance in order to obtain needed supplies or services from a more capable source.
Cure Notice Requirement
As a condition to a default termination for failure to make progress, the property is required to give the contractor written notice, specifying the performance failure and providing a time period in which to cure the failure. The cure notice must specify the progress failure in sufficient detail so as to enable the contractor to effectively utilize the opportunity to cure. Default terminations for failure to make progress have been frequently overturned on the basis that the notice to cure did not set forth performance defects with the particularity required of such a notice. On the other hand, the termination will not be defective if the contractor was actually aware of the basis for default. If the contractor was not misled by the lack of particularity in the notice, the courts will generally find that the notice was sufficient.
When deficiencies become the rule, necessitating corrections or deductions from the contract price virtually every day, overall performance of the contract can be deemed unsatisfactory even though individual problems are resolved. The repeated need for correction may itself serve as the default, making termination an appropriate remedy. It is entirely permissible for the property owner to make a tentative decision to terminate the contract before the expiration of the cure period, so long as the decision is subject to reconsideration if there are subsequent timely cure efforts. Similarly, there is no harm if a final decision to terminate is made before the expiration of the cure period if the contractor makes no further efforts to cure. But when an irrevocable decision to terminate is made before the end of the cure period and a contractor’s timely efforts to cure are ignored, the termination is improper.
A separate basis for default termination is repudiation, or anticipatory breach of contract. Repudiation, as defined by section 2-610 of the Uniform Commercial Code, centers on an overt communication of intention or an action that either renders performance impossible or demonstrates a clear determination not to continue with performance. A repudiation occurs when (1) the contractor, by a positive and unequivocal statement made before performance is due, indicates that he will not perform the contract according to its terms and conditions; or (2) the contractor, although willing to continue performance, admits that he is totally unable to perform. The hallmark of anticipatory repudiation is that there must be a definite and unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives.
Always have your construction contracts prepared by an experienced Park City Utah real estate lawyer. The lawyer will ensure that your rights are protected.
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