June 1, 2011

Think before you stop work for breach of contract

Mclaughlin & Associates

While performing contractual ob­liga­tions, be they to provide work, service, material or equipment, situations can arise where a contractor, subcontractor or supplier might wish to stop work for various reasons.  These reasons can include non-payment, delay, unsafe conditions, permit issues, or other instances of non-performance by the other side. They can also include factors beyond the control of both you and your client, such as strikes, lockouts, acts of God, or even material unavailability.

Whether or not a party can stop work or supply under a contract without being exposed to consequences will depend on circumstances, and on what that contract says. As will be discussed below, the decision to stop work must be made carefully and cautiously.

Not all breaches of contract will allow you to stop work, of course. If, for example, you have not been provided with certain materials, information or approvals as required, you are not necessarily entitled to simply stop all work and leave the site, to sue for damages. Whether or not the breach gives rise to a right to stop work will usually depend on the extent to which you are able to continue.

Check contract terms
Accordingly, if you want to ensure that you will not be required to continue to work in certain circumstances, it is preferable to have your right to stop work in that instance expressly included in the contract. This includes the right to stop work in the event of non-payment. While it is true that many a Court would recognize the right to stop work for non-payment, it is not always clear.

Contracts are, of course, allocations of risk between parties. If the parties have decided, in the contract, who will bear the risk of a certain event, the contract will generally prevail in that regard (unless the clause in question is unconscionable, for some reason). It is accordingly important, before deciding if stopping work is something you want to consider in the event a problem or dispute arises on site, to check the terms of your contract.

The contract, for example, might state that you are responsible to get permit approvals or do subsurface investigations, such that it would be difficult for you to argue you were entitled to stop work pending the approvals or based on subsurface conditions, for example. (That is not to say that where an owner puts the onus on the contractor to do investigations, the contractor will never be able to pursue a claim in relation to unforeseen conditions. It is just to say that, where such a clause exists, it should be considered in deciding how to proceed in the event of a dispute).

The contract might also include clauses which require you to comply with certain notice provisions before stopping work, giving the other side the opportunity to rectify the default before the project is affected. Stopping work before such provisions are complied with can result in a claim for damages from the other side. These damages can be substantial if your work stoppage has had an impact down the line on the project.

The contract might also set out what is to happen in the event that a dispute arises. Where the contractor, subcontractor or supplier, for example, believes he or she is entitled to be paid for certain work as an 'extra,' the contract might provide that the claimant provide the work in question at its cost, leaving the dispute for resolution to another date, without any guarantee that the 'extra' will be paid. If the claimant were to refuse to perform the work in those circumstances, the claimant might then be exposed to a claim in damages for breaching the contractual provision in question.

Know your rights
We should point out that if you are considering a decision to stop work under a contract, you should be very, very careful to ensure you have correctly assessed your contractual right to do so. This is because the consequences can be relatively severe if you are wrong. If it is determined your stopping work was improper, for example, you can be liable for more than the value of your outstanding work: you might also be liable for the increased premium costs charged by another contractor to complete your work, as well as whatever architectural or costing survey work is required to develop a completion scope of work. In addition, it will generally take some time to get another company in to complete your work. This can lead to delay claims from the owner, and perhaps other contractors, subcontractors and suppliers, who suffer damages as a result of the delays. In short, the damages associated with a wrongful termination of a contract, or with wrongful stoppage of work, can be severe.

Lastly, we should point out that how you characterize your work 'stoppage' can have impacts, in law. In many jurisdictions, for example, whether or not you 'abandon' your contract or not might determine when your lien rights will expire. Also, if you 'terminate' the contract (as opposed to simply stopping work, pending a correction of the breach by the other side) you will in many circumstances restrict the type of damages you might be able to recover in the event of a claim. Similarly, if you have been terminated by the other side, whether or not you 'accept' the termination will have an impact on the type of damages you might pursue.

Given these issues, in the event that you are considering whether or not to stop work on a project, or have been terminated by the party who hired you, you would be well advised to seek advice from someone knowledgeable in construction law issues, before deciding how to proceed. The issues can be complicated, and the consequences of a poor decision significant.
Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law and contract issues and can be reached for comment at 416-368-2555, 519-426-3777 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.