What to Do When Your Customer Doesn’t Honor Contract Terms

• What is a breach of contract and what are the causes
• What you can do when your contract isn’t honored
• Steps to take on the front end to avoid breach of contract

Transcript

Matt Viator (00:12):
my name is Matt [inaudible]. I’m a senior legal associate here at Levelset. Uh, it means I’m one of the in-house lawyers here that helps, uh, uh, helps handle all our legal needs. Um, and, uh, one of those things is to talk to contractors about common legal issues, such as breach of contract. Um, so yeah, let’s go and go to the next slot. Uh, I’m sure you’re probably familiar with Levelset, but, uh, you know, payment help us here. That’s that’s our business. Uh, we help thousands of contractors and suppliers, uh, every day, uh, speed up and protect their payments. Um, we do that through our traditional lien rights management, uh, services, uh, and notice services, but so much more than that, uh, these days, um, one of those tools that we use to help people, uh, get paid, what they’ve earned is legal guard. And we’ll talk about that more towards the end and go ahead and go to the next one.

Matt Viator (04:09):
All right. So what does a construction contract? Uh, obviously we all know what contracts are, so, I mean, I keep this one pretty brief, but, uh, so just to go over the basics, anytime that there is going to be offer acceptance consideration and mutual assent, and you both know you’re contracting to do a contract can be formed. Um, whenever people hear, is there a contract they typically think, okay, is there this multi page document full of legalees that we’re signing? Um, but that’s, that’s really an over-simplification, uh, anytime that there is an agreement, um, there’s probably a contract, uh, and this could be, you know, signing a purchase order could be a written contract. You could create a written contract by, uh, sending emails back and forth and some situations or text messages in some situations, but it doesn’t have to be in writing at all for there to be a contract.

Matt Viator (05:03):
One of the things we hear from users a lot is that other isn’t a contract, we just did it verbally. Well, there may be a verbal contract and that contract may be enforceable. So a contract goes far beyond what we normally think of for a standard written contract. And there’s even these things called implied contracts, where even if you didn’t say anything, even if you didn’t sign anything, if you and your customer have acted in a way where you both, it looks like you both believe there’s a contract. Uh, it’s possible that a contract can be formed that way. Um, but obviously, um, any lawyer will tell you written contracts are gonna be the way to go for everything. Um, that’s this, this includes change orders as well. Um, whenever there’s a written contract and there’s a verbal change order, you know, the written contract would typically be, uh, typically be what the court will be willing to rely on to say, okay, this is actually, what’s supposed to be happening here because I have this agreement. And then you all say that you may have agreed verbally on something else. So, um, having everything in writing is obviously the best way to go. Um, it gives you something to refer back to later on if there is an issue, uh, on the project. Um, and yeah, so then let’s go ahead and move to the next slide.

Matt Viator (06:19):
Typo, what are the types of breach? So whenever there’s a contract in place, if something goes, if someone’s, uh, behavior and activity goes against the what’s in that contract, or was understood to be that contract, that may be, that may be a breach of that contract. Um, and so there are a couple of different types of breach. Um, it’s extremely common to see breach of contract thrown around all the time. There’s two major categories for breach. That’ll be a material breach as we think of as a major breach of contract. That’s what leads to, uh, the bigger disputes there’s also non-material breaches, and those will be your more minor breaches. So, um, for instance, you know, say your contract says you have to be at the job site every day at 9:00 AM you get there at nine 15? You know, that’s, that’s a breach, but it’s not necessarily all that major to breach.

Matt Viator (07:12):
That might be an example of a material breach. Whereas if you’re, you know, if you’re not upholding, if you’re not sticking to your scope of work, if something is defective, that might be a more material breach. Um, and whenever you hear about these big breach of contract disputes with these big, uh, big awards, that’s almost always going to be a large material breach. Uh, there’s some other types of breach of contract that I won’t really go into too much detail here just for brevity, but you have anticipatory breach. That’s when, um, it’s apparent that a breach of contract is going to happen, whether, you know, whether you like it or not. So like, if you know that if it’s clear that the other party is not going to be able to uphold their contract, you might be, uh, might be able to get an anticipatory breach for that.

Matt Viator (07:57):
Uh, and then there’s also fundamental breach. That’s almost like a super material breach in some situations that’s where, you know, the, the contract is just not going to be done fundamentally by one of the parties or both of the parties. Um, but yeah, so those are your general types of breach of contract and understanding the different categories. Most, mostly the, you know, the major category of breach being material, the minor category of breach being non material, um, understanding those two buckets and how, and where you should categorize, um, issues with your customer will help decide how to attack that breach of contract situation. Um, can we go to the next slide?

Matt Viator (08:41):
All right. So just real quickly, we’ll go over, you know, what’s some common causes, uh, for breach of contract are, um, so defective performance, uh, if, if your work is, um, or if, if you or your customers work is unsatisfactory, uh, for some reason, you know, that the fact of work could be a breach of contract. Now, again, there are levels to that, if it is so defective to be unsafe, that would almost definitely be a material breach. That would be a, that would be something that’s a major issue. Um, and if it’s, you know, if, if something’s a little sloppy or if, uh, if it is not exactly, uh, done pursuant to scope, but it is acceptable work that might be a, uh, a non-material breach, uh, scheduled delays. Uh, again, that that could be a material breach. It could be a, it might be a non-material breach if you’re not really going to hold up the project.

Matt Viator (09:37):
And if you are able to, um, really fix that issue before it snowballs out of control, um, cost overruns going over your budget, that’s, that’s going to be a really common one. Um, construction projects will often go off budget and, or off schedule and over budget. Um, even though that is an extremely common situation, that it’s still a breach of the contract, and there are still maybe, you know, some, some remedy available to you, um, and author on authorized changes to scope of work. This goes back to change orders. We were talking about earlier. Um, if you have a contract with a specific scope of work that says, okay, this is exactly what, um, what you’re supposed to be doing. And then maybe something happens onsite and, uh, verbally you’re instructed, oh, go ahead and do this too, or do this differently. That could, um, that could result in a breach of contract if it’s not authorized.

Matt Viator (10:38):
Um, you know, so, you know, contracts will often have guidelines for how change orders will be made. Um, you know, they must be in writing. It must be signed by the project manager, whatever that may be, if a change is made and it’s not made in the way that’s dictated in the contract, that it’s not made according to the rules that you’ve agreed to beforehand, that may actually end up breaching the contract. Even if you think you’re doing everything that your customer is asking of you. So those are some really typical, uh, causes for breach of contract. And again, um, every situation is going to be different. And so, you know, unfortunately I’ll be able to, I’m not able to, you know, prescribe, oh, this is definitely this, this is definitely that. But, um, but yeah, based on the degree of these breaches, you can, you can think about it and understand, okay, this, this, this breach of contract is so serious that it’s going to affect, um, these other trades. Is it the, the, the project schedule there’s, you know, something’s going to have to happen here or, okay. Maybe we can fix this by staying onsite for an extra hour, uh, coming in on a weekend. Um, let’s go ahead and go to the next slide.

Matt Viator (11:49):
All right. What remedies are available if the is breached? Uh, so this is a, this is a big one. Um, and I’ll say that, uh, the, the next section we’ll kind of come back and make this point a little bit more strongly, but keep in mind that not every breach of contract is going to result in a lawsuit, it’s going to result in some big blow up. Um, you know, the breach may just result in you and your customer having a conversation saying, okay, how are we going to fix this? Um, all right, come up, creating a plan of action. And then, um, you know, it might be resolved, you know, in a matter of minutes. Um, but for these, these remedies are kind of a, a better example of a major breach of contract situation and where, you know, you’re having to go to court or small claims court and a judge is going to have to get involved.

Matt Viator (12:42):
Um, so yeah, so let’s just go through some of those types of, uh, remedies. Uh, the first is going to be damages. That’s the one that everybody thinks too, uh, damages are going to be the one that everyone tends to think about. Um, you know, that’s, that’s going to be, uh, you know, money changing hands as a result of the breach, either flowing one way or the other. Um, typically we think of convincing Tory damages, compensatory compensate, someone being compensated for a result of the breach. Um, but there’s also, uh, some other types of damages punitive damages. That’s going to be punishment. Um, that’s typically pretty uncommon. Um, courts are generally reluctant to penalize the parties to the contract, unless there’s something egregious going on, something maybe intentional or, um, you know, you’re trying to fleece the other party. They might, um, award punitive damages and then another really common one is going to be liquidated damages.

Matt Viator (13:40):
Um, it’s extremely common for a contract to contain liquidated damages clauses. That’s going to be, um, you know, thick liquid cash. Your whenever damages are, um, whenever liquidated damages are included in the contract, that means the contract is going to state specifically what the damages are as a result of a, of a breach. So it might be, um, a okay, if, if, if the completion of the project is delayed one month, uh, you may have liquidated damages of X number, and that’s the that’s in there to compensate for, you know, the, the delay on the project. Um, but you can’t just put anything you’d like in the contract. Well, you can put it there, but it doesn’t necessarily mean that a court will give credence to, um, that liquidated damages clause. So one thing that’s important to remember with liquidated damages when you’re writing your contracts and reviewing your contracts is that liquidated damages clauses are supposed to be tied to the actual damage.

Matt Viator (14:40):
So, um, if you, if you, if it’s something in there that’s obviously intended to be punishment, uh, it might not be upheld as a liquidated damages clause. So, okay. If you’re one day over do over, uh, over the schedule, you have to pay me a million dollars, unless there’s some economic basis for that damage, um, chances are, it could be considered punitive. It could be, uh, considered a punishment and it might not be upheld as a legitimate, um, liquidated damages clause, um, there, and there’s, there are subcategories to all of these there’s specifics. You know, there may be different terms that people use, uh, different areas, but, um, broadly those are the, those are going to be your major categories of damages. Um, another way that a court will, might deal with a breach of contract is rescission. Um, again, I like the workplace, so rescission, I think scissors, the contract is, um, you know, you’re effectively cutting the contract off, you’re ending the contract, and you’re putting everyone back in the position that they were before the contract.

Matt Viator (15:44):
Um, it’s, it’s a common, it’s a common remedy. Um, but, uh, it’s not one of the ones that you tend to think of first a reformation. Um, this is reforming the contract. That means you’re going to be recreating the contract with the new and updated terms based on the situation that you find yourself in. Um, and then specific performance is one that logically makes a lot of sense when you first think about it. And it’s one that a lot of people, you know, would like and would like to rely on. So specific performance means that, um, the court will be forcing you to, or forcing you and your customer to perform exactly as laid out in that contract. But the whole reason you’re before that court is because there’s been a breach, there’s a big dispute. You’re probably not getting along very well. Courts are reluctant to, um, to making people play nice to make the two parties come together and, uh, kumbaya.

Matt Viator (16:40):
And so despite the fact that specific performance makes a lot of logical sense it’s in the contract, you should be doing that. Um, so despite the fact that it makes a lot of sense, courts are typically pretty reluctant to do excuse me, um, to go forward with specific performance now, and a, uh, an exception to that would be, um, whenever the parties are so specialized and so good at what they do or the, you know, the issue is so specific, um, that those parties are the only ones that can really even do. You know, what that contract is, is, um, is supposed to do then specific performance might become a little bit more common, uh, for your specialty material fabricators, especially manufacturers. That might be a situation where specific performance is a little more common because there’s not going to be a lot of people with that specific knowledge, um, to be able to perform that contract. Um, so yeah, whenever you’re thinking about breach of contract or thinking about going through a lawsuit, typically, you’re going to be thinking about damages. Um, if it’s a really sophisticated project and, you know, it’s a thorough contract, maybe you’re dealing with liquidated, but most commonly you’re dealing with compensatory damages and I’m putting a dollar figure to the breach at hand. Um, can we go ahead and go to the next slide?

Matt Viator (17:59):
All right. What should you do if your contract has been breached? Um, so the first, the first step is going to be to review the contract again. Um, you really want to be sure that you understand everyone’s obligations and their rights under the contract, and you want to make sure that this is in fact, a breach, um, you know, was there, was there actually a breach, uh, does the contract say how that breach should be resolved? Maybe there’s an arbitration agreement in the contract while that means you probably need to go to arbitration before you start throwing out legal claims. Um, maybe disputes are supposed to be resolved by the architect. That’s a little bit old school, but it’s, it’s, it’s still out there in some contracts. Um, and maybe there are required notices, uh, relating to a breach. So maybe, you know, once you realize that, um, there’s been a breach, maybe you’re required to notify the other party that way they can try and resolve it within a timely manner, um, in order to avoid the issue snowballing out of control.

Matt Viator (18:55):
So all three of those would be examples of, uh, contracts, really trying to avoid those massive blowups, those court cases, those, um, getting the lawyers involved and causing massive delays. Um, so yeah, you should review the contract, make sure there’s a breach and then, um, make sure that there’s not a make or be aware of at least of how that breach is supposed to be resolved if the contract has anything about that at all. Um, the next step, and again, this is all my opinion. Obviously it’s not legal advice, I’m a lawyer, I’m not your lawyer, but I think these are some really reasonable steps. This is what I would be advising my clients to do would be that you want to ask yourself an important questions, you know, what do you want to happen to resolve this breach of contract? You know, maybe, maybe what you want.

Matt Viator (19:42):
Isn’t, doesn’t align with reality, but, you know, take out a piece of paper, write down what you want to happen. Think about what you think is fair, uh, regardless of what you want, you know, is that fair? Is that reasonable? Um, what do you think the other side is willing to do to resolve that breach? You know, maybe, maybe you think they’re not willing to do enough, but it’s, it’s a good idea to at least think about, okay, how are they going to respond to this was their likely reaction going to be to anticipate their next move and, you know, try and resolve it as amicably as possible possible. Um, and then how much effort is it going to take to get them to go along and resolve the issue? Um, we all, we all know what it’s like to have a, uh, a bad customer.

Matt Viator (20:29):
Maybe somebody you work with all the time, but, you know, they don’t, they don’t always respond, um, to issues the way that they should. Um, so again, if you can anticipate the reaction, anticipate how much work you’re going to have to do to get them to do what they’re supposed to do, that’ll get you in the right head space to really approach the situation. Um, and once you’ve done all that thinking and reviewing of the contract, it’s probably time to go talk to the other party and try to come up with some creative solutions and, um, and get it resolved before you’re having to call on the lawyers. Um, I wrote down on my notes, it’s a little corny, but you know, you catch more flies with honey than vinegar, right? But, um, negotiating settling and moving forward without feeling without hard feelings is it’s one, it’s the most common way to resolve breaches of contract.

Matt Viator (21:18):
Certainly the most common for non-material breaches, but even from material breaches, everyone wants to get it done, get the project done, get paid without having to get, um, there’s two formal. Um, and it’s going to be the fastest, easiest, and cheapest way to do it. Um, even if you’re having a layout, some capital or, you know, go back and do some substantial, uh, reworking, or they’re going to have to do that, it’s going to be cheaper than getting the lawyer involved and forcing them to do that. It’s going to be cheaper than taking it to court and having them do that. Um, and it can, it can help to avoid the snowball effect of, uh, causing delays and ruining a customer relationship. You know, if, if, if you’re working with a customer and you’re telling, you know, you’re willing to hash out a reasonable way of fixing that breach, um, maybe maybe on the next job whenever they’re, you know, whenever they’re looking at bids, they’re saying, oh yeah, wait, we worked with them before.

Matt Viator (22:16):
Um, yeah, I liked the way they did business. So, um, it typically, if it’s at all avoidable, and if it’s not some high dollar issue, you’re going to want to try and resolve these issues without having to bring in a lawyer. Um, but lawyers are, you know, we have, we have our place in the, uh, construction dispute landscape. And so if, if necessary, it’s a good idea to consult with a lawyer to make sure that you understand your rights and the implications of the breach. Um, they can help negotiate, uh, the resolution with the other party. Uh, they can help review the relevant documents and communications, um, that went back and forth to kind of let you know where you’re at and the, um, where, you know, where they think you’re at and the dispute. Um, and they can, they can tell you, Hey, look, it’s probably a better idea to go a different route.

Matt Viator (23:08):
And here’s why, um, and often just the mere presence of a lawyer can help grease the wheels. You know, even if that lawyer is not taking this to court, oh, they’re, uh, their, their, their lawyers CC’d that that’ll get some attention. And certainly this step can be moved up way further in the process. Um, depending on how you like to run your business and how these, how these disputes typically go for you, um, having that lawyer in your ear can, can only be a good thing. Obviously, you know, there’s a cost to that, but, uh, having legal expertise in your corner is, is certainly great every step along the way. And the more proactive that help is the earlier that inflection point is, uh, the more you can leverage that help to get a good resolution, because once the cat’s out of the bag, you know, the speed is the dispute.

Matt Viator (24:03):
Um, and it can, it can be hard to reel things back in, excuse me. Um, and then let’s go and go to the next slot and bonus. What do you do to make sure or rather make sure that you’re not in breach of your contract because, uh, that can one, it can limit the, it can limit your ability to recover from someone else’s breach. You know, if you, if you’re both in breach of the contract, then, uh, you know, you might not be able to get what you’re looking for. Um, and also even, even without a specific, uh, issue or dispute, it’s a really good idea to review your contract regularly, make sure that everything that you’re promising you’re going to do, and you’re able to do make sure that that’s actually happening. Um, you don’t want to build in, you know, future breaches for yourself in your contracts.

Matt Viator (24:54):
So, you know, if there’s something in there that looks nice, but you can’t really deliver on, maybe, maybe you don’t include that in the contract. Maybe you alter it. Um, maybe you find some language that’s a little bit more flexible to make sure that you’re not setting yourself up for failure. Um, yeah. And again, if, if you’re in breach of your contract, for some reason, even if it’s an unrelated reason that could, that could eat into your ability to recover from someone else. Um, yeah, let’s see. I think that’s probably it for the both of us. Uh, do you wanna go to the next slide?

Matt Viator (25:28):
Awesome. Um, well I think I’m going to go out before we get to any questions. I’ll go ahead and talk about, uh, Levelset legal guard for a little bit. Um, oh, that’s not out of order. Um, but, uh, but yeah, so legal guard allows so love us. It offers Lubar as a service, is it as a subscription service to allow users to have access to lawyers without, you know, having that in-house lawyer, the vast majority of construction businesses, you know, don’t have the budget or the bandwidth to have an in-house lawyer advise you on everything. And if you’ve ever worked with a lawyer, you know, that our time, uh, is valuable quite literally, um, you know, lawyers bill by the hour. So, uh, it can really add up. So [inaudible] takes a little bit different of an approach. Um, it allows you to bring in that legal help a little bit earlier, a little bit more proactive that way you set yourself up for success.

Matt Viator (26:27):
Um, now these lawyers they’re able to evaluate your contracts. They can help you bolster them as necessary. Uh, it can help, you know, maybe they can help create a playbook for your common, uh, issues you run into commonly, um, and having a lawyer that’s familiar with your business and your common issues that can help, you know, for the, for those, uh, those disputes that do get out of hand that can help minimize your future legal bills in this night. Now your lawyer doesn’t have to spend all this time getting up to speed and learning your business and learning, uh, you know, what’s going on. If they already understand all of that, they can get right into the meat of the issue. Um, and minor interventions, you know, an ounce of prevention is worth a pound of the cure, minor interventions, along the way. It can help the, uh, the major disputes.

Matt Viator (27:19):
And so with legal guard levels that makes construction lawyers more accessible, and that, that provides savings by avoiding those major disputes down the road. And that can give you the comfort, knowing that you’re doing things, the, what you’re, you’re operating your business, the way that you want to, and that everything on the backend is legally sound. Um, so it’s a, it’s a complete legal solution it’s designed specifically for construction, uh, for the construction industry. Um, you know, the, uh, the healthcare lawyer, the, uh, the ambulance chaser, you know, they’re, they’re not going to know a lot about the construction industry. They’re not going to know about, um, you know, exactly what to do whenever there’s a illegitimate back charge. Uh, and you’re in your, customer’s really just trying to boost their margins. Uh, and so these attorneys or construction lawyers they’re vetted, um, and they’re going to help you provide, they’re going to help provide you legal coverage, uh, for every situation.

Matt Viator (28:14):
And so through legal guard, you get connected to a lawyer in your area for a flat yearly rate. Uh, and that covers services like the attorney reviewing your contract, or maybe attorney written letters for disputing those back charges, or even, um, you know, reviewing liens licenses and other documents. Um, so I just want to encourage you to take that opportunity, um, when it comes to being proactive and avoiding contract issues, um, you know, we can help you find other construction attorneys near you through legal guard and those attorneys, they they’re good at what they do, and they know, okay, poor change order etiquette is, you know, that’s where most of my clients get into issues. So let’s go ahead and solidify that here. Uh, they, they know what the combinations are, uh, for construction businesses, and they’ll be able to help you prevent those major disputes that can be business altering and even life changing. And now that I’ve done all that long-winded explanation, let’s go ahead and take any questions that we might have. All right. Looks like we don’t have any questions.

Speaker 3 (29:34):
Well, thank you again, everyone. And thank you, Matt, for running this webinar. Um, I, myself, this incredibly valuable, and I know we were speaking earlier that, um, I’m, I’m so impressed with everything that is that, that, you know, and that you’re able to convey. Um, and I’m so grateful to have had you here to help us out with this webinar today. Thank you for everything that you shared. Thank you to everyone that joined here. Um, if you do have any questions, um, here is mass contact info. We will also be sending this, uh, webinar slide deck as well as the recording. So you’ll have all this information to refer back to. And if you do have any questions, you can also visit Levelset dot com. Um, we offer a legal network and entire community where you can ask questions and get answers in real time from, um, legal associates, just like Matt. So thank you again so much for joining, and we will see you next time.