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Can we terminate a contract even through there are late payments attached to it in California?

Anonymous Contractor

Have construction contract with following: "Owner shall remit payment(s) to the Contractor based on Contractor's invoice within seven business days of receipt of the invoice. If payment is not received by Contractor within fourteen (14) days after delivery of payment request/invoice for work completed, Contractor shall have the right to stop work or terminate the contract at Contractor’s option." Owner initially refused to pay entire draw, but eventually paid at day 17. Would like to terminate contract, but not sure (despite explicit language provided above) whether late payment received prevents such action.

1 reply

Matt Viator

Construction Lawyer

Levelset Admin at Levelset

| 1,000 reviews

Nov 8, 2019

First, if the contract terms discuss termination, then the contract should be followed. So, if the contract allows the contractor to terminate due to any late payment, or if there are other provisions regarding the ability to terminate due to breach, then those provisions should likely be analyzed before any action is taken. Further, if the contract doesn't explicitly provide the ability to terminate, or if there isn't some reasonable roundabout way of terminating the contract due to payment coming a few days late, then terminating the agreement may compound the contractor's problems rather than soothe them.

What is considered a material breach?

In order to terminate a contract for breach, that breach must generally be material. And, to be material, a breach must generally be significant and really throw a wrench into the whole arrangement. Payment being made a few days later than what's allowed is certainly a breach - but it's important to analyze whether it's a material breach. If the breach was relatively insignificant, then a contractor would likely not be entitled to terminate their agreement without further issue. While not determinative, here are some questions worth asking: - Did the late payment have an overwhelmingly negative effect on the recipient? - Was the late payment done in bad faith or just a product of circumstance? - What was lost due to the breach? - Can the other party get the job back on track?

Would cashing a check prevent the termination of the contract?

Acceptance of a check could certainly serve as evidence that a contractor accepts the late payment and is willing to proceed. If the check was made in full and was only a few days late, a contractor would be, in large part, in the same position as they would have been if payment had been made on time - which could undermine an argument that the breach was material. But also, even if the check were refused, there'd probably be a strong argument that the contractor refusing payment a few days late was acting unreasonably, themselves, and that termination of the agreement over a few day delay would be improper.

Talking out the issue is usually a better idea than trying to terminate

Construction terminations are often ugly affairs. What's more, when there's question as to whether the termination is warranted at all, a contractor who terminates their agreement will likely open themselves up to more liability than they would by proceeding with the job. Certainly, there are situations where termination is appropriate - including when payments are being made late or when draws are being improperly denied. However, in a vacuum, a single payment being delayed a few days might not be the most sound grounds for termination. Not every dispute can be worked through, and "talking it out" isn't always an option. But, forging a working relationship with a property owner - even one that's uncomfortable at times - will typically be a better idea than terminating an agreement altogether and inviting further dispute.

If payments continue to be slow, options may emerge

With all of the above in mind, if a customer continuously makes slow payments and acts unreasonably, then the potential for termination may become more appropriate. Further, keep in mind that there are tools like lien laws and prompt payment laws that can be leveraged into faster payments. While a contractor may not have much to do about a single payment that was a few days late - they won't have to suffer in silence about habitually slow payments.

Additional resources

Here are some additional resources that might be helpful here: - Construction Contracts | A Deep Dive on Breach of Contract - How a Termination Clause Works in a Construction Contract - Wrongful Termination | When is Termination Considered Wrongful?

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