Breach of Construction Contracts

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According to the Bureau of Labor Statistics, the construction sector is primarily engaged in the construction of buildings or engineering of highways, utility systems etc. Construction work covers a broad range of developments including new work, additions to residential homes or commercial buildings, alterations, redesigns and reconstructions, demolition sites, or maintenance or repairs. Most construction companies have a general place of business; however, the construction company often performs multiple projects at different sites. The production responsibilities of the construction sector are typically covered in contracts with the owners of construction projects (prime contracts) or contracts with other construction establishments (subcontracts).

In the construction industry, contractors rely heavily on construction contracts to protect themselves legally from any potential losses. The construction contract serves as an agreement between the two parties involved in a construction project, and both parties to the contract are obligated to perform their end of the contract. If one of the parties fails to perform their end of the contract, or otherwise "breaches" the contract, then the other party can sue them for damages. The damages are the sum of money that compensates the financial losses suffered as a result of the contract breach.

Understanding Contracts

Contracts are legally enforceable agreements that are made between two parties. Under a contract, each of the parties makes a promise to fulfill a specific obligation or to pay a certain amount of money. If one of the parties fails to do as they promised, and the other party has fulfilled their end of the agreement, then the injured party has a right to pursue financial damages.

In general, both oral and written contracts are legally enforceable; however, it is always recommended to put a contract into writing in case a dispute arises between the two parties down the line. If a contract is oral, then the terms of the contract can be open to misinterpretation, or one of the parties can forget a term of the original arrangement altogether.

A contract breach occurs when one of the parties fails to perform their duties under the terms of the contract. A contract can be breached when one of the following occurs: 1) one of the parties doesn't perform their duties as promised, 2) one party does something that prohibits the other party from performing their duties under the contract (e.g. one party fails to complete laying a foundation or installing the electrical), and 3) one of the parties refuses to perform their contract duties.

Computing Damages in a Construction Contract

Construction contracts are computed based on either cost-to-complete or diminution-in-value. While both measures are perfectly valid, it will be up to the court to determine which method is used. With cost-to-complete, the losing party is required to pay damages to either replace or complete the project based upon the original agreement. This method is typically used when the breaching party has either provided poor quality workmanship or when they have failed to complete the project.

Under the diminution-in-value method, the losing party is required to pay the difference between the completed project and the project that was originally outlined in the contract. Therefore, with a new home, the court would calculate the market value of the finished home and the home that was first specified in the initial contract, and the losing party would have to pay the difference between the two. This method is typically used when the losing party has already performed a significant amount of work on the contract under current agreement.

Types of Damages in a Breach of Contract

There are different types of damages that may apply under a breach of a construction contract. When one of the parties has breached the contract, then the party that has held up to their end of the contract may be entitled to various legal remedies. These may include consequential damages, liquidated damages, nominal damages and damages for specific performance.

Consequential damages require the losing party to pay the other party enough damages so they can be in the same position they would have been in if the contract had been performed correctly. Punitive damages are meant as punishment, whereas liquidated damages mean that the breaching party would pay a specified sum in an amount that was included in the contract. Finally, nominal damages refers to a minimal amount provided to the winning party of the case, yet losing little.

Under California law, there is what is called a "statute of limitations" that applies to filing lawsuits. What is a statute of limitations? It is the deadline that a person has to file a lawsuit and if they miss the filing deadline, they lose their legal right to file a lawsuit permanently. The amount of time that someone has to file a claim varies depending upon the type of lawsuit being filed; for breach of written contract claims in California, one has four years from the date the contract was broken to file a lawsuit.

If you entered into a construction contract and the other party has failed to uphold their end of the agreement, then the sooner you take legal action the better. At The Mirkhan Firm, our business lawyers are well aware the construction industry is under a great deal of pressure and competition at this point time due to the weakened economy; therefore, it's absolutely imperative that your business remain afloat and your overhead be kept as low as possible if you want to remain solvent. For this reason, we take quick and decisive actions to help find the most affordable solution to your breach of contract claim.

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There are cases where the court may not consider that a financial damage award is appropriate, in which case the court may award an equitable remedy instead of a monetary award. This remedy may require that the breaching party performs their duties under the contract, or the court may nullify the contract or otherwise void it; therefore, neither party would be required to perform their obligations.

Contract law is complex and each state has enacted its own set of laws in breach of contract claims. If you have encountered a dispute with another other party, or if the other party has failed to perform their duties under the contract, then you are encouraged to contact a Los Angeles business litigation attorney from The Mirkhan Law Firm right away. We will give you honest and forthright advice about your rights and inform you of any legal remedies under California State laws.