Should I Walk? Should I Terminate?

Law Talk

Quite often we are asked whether a prime contractor should terminate a subcontractor, or whether a subcontractor should walk from a construction contract as a result of a disagreement over payment, work, changes or otherwise. The answer to this is not simple. The results of "walking" or "terminating" can be very severe since either one can be interpreted as a breach of contract. The answer will always be factually driven and may not be something that one can predict beforehand.

A breach of contract is when someone does something that he or she should not have done or doesn't do something that he or she should have done. There are two types of breaches. One is a major breach and the other is a minor breach. A major breach is one that would keep the person who breached the contract from attempting to recover anything. A minor breach is one where the person who breached the contract may still be able to collect but the amount he or she collects might be reduced by the damages resulting from that person's minor breach.

Let us assume that the subcontractor walks, because the sub believes that the prime contractor required a "change" and then would not pay the sub for the "change". The prime feels the "change" was not truly a change in scope and therefore nothing extra was due to the subcontractor. If it turns out that the prime was right or the breach by the prime was minor, the subcontractor may then be in major breach by walking. This means that the sub will not even be able to collect the money due him and may subject himself to damages.

Our office has run into something that can help in making this determination. However, it is not foolproof. It is called a "Request for Further Assurances," and is found in the Uniform Commercial Code that was adopted by California. If you are lead to believe in good faith that the other side is not going to perform its obligations, then you can request further assurances of the other side's performance.

Section 251 of the Restatement of the Law, Contracts, Second Edition, states the rule as follows:

(1)"Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for the damages for total breach...the obligee may demand adequate assurance of due performance and may, if reasonable suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

(2)The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case."

This concept has been acknowledged in California's adoption of the Uniform Commercial Code, Article 2, Sales. (See Cal. Uniform Commercial Code 2609. Although the Uniform Commercial Code generally applies only to the sale of goods, there is some authority that you might be able to use this procedure in construction matters. The concept is similar to the established rule regarding anticipatory breach. This is where someone refuses to perform even before their obligation has arisen.

When you ask for further assurances and if you don't get those further assurances, you may be able to treat the fact that you didn't get the further assurances as a breach. Although this may still require you to determine if the breach was major or minor, at least it gives you a way to determine the fact that there was a breach.

It appears that the maxim that contractors are gamblers is true in this case as well. There is nothing sure in the construction business.