Material breaches can lead to project abandonment.

A recent Texas case offers some insight to legal principles which may be applied in our New York and New Jersey courts. When is a contractor legally excused from performing its contract with an owner? In Sage Associates vs. Northdale Construction Company, 809 S.W.2d 775 (1991), an owner and contractor had entered into a contract for the construction of a high-rise apartment building.

The contractor had also furnished the owner with a surety's performance bond.

The owner was obligated under the contract to make progress payments as well as payments for change orders and utilities to the contractor.

After completing a portion of the construction, the contractor left the project and sued the owner claiming that the owner breached the contract by failing to make progress payments, as well as payments for change orders and utilities. The owner sued the contractor alleging that the contractor breached the contract by abandoning the project and by performing substandard work. The owner also sued the surety on the performance bond, also claiming that the pay on the bond, also claiming that the owner breached the contract.

The court reduced the case to two issues, namely, "(1) which party breached the contract? and (2) what are the damages resulting from the breach?"

With respect to the first issue, the court stated:

"The contractor is excused from performance where the owner refuses to permit him to proceed, fails to provide the required means to complete the contract, or fails to make payments provided by the contract, including installment payments."

After finding that the owner had failed to make the installment payments and payments for the utilities and change orders, the court held that the contractor was within its rights in stopping work and that the owner was wrong when it terminated the contractor.

With respect to the damage issue, the court held:

"Where the owner wrongfully interferes with the contractor and prevents completion of the contract, the contractor is entitled to recover an amount which would place him in a position equivalent to that which he would have occupied if there had been no breach and the contract had been performed fully... The contractor may also recover any damages that he may have sustained by reason of the owner's breach of the contract, including the profits that he would have made had he been permitted to perform."

The court also addressed the surety's liability on its performance bond. Under the terms of the bond, the surety was not liable to the owner, unless the owner made payments to the contractor strictly in accordance with the terms of the contract. After finding that the owner disregarded the payment provisions, the court relieved the surety from performance on the bond. Courts in New York follow the same rationale when it comes to an owner's breach of contract. In Farrell Heat., Plumbing, Air Cond. Contr's Inc., Etc., 68 A.D. 2d 958, 414, N.Y.S. 2d 767 (3 Dept. 1979), a general contractor was retained by a governmental agency (Agency) to perform various work at a mental hospital.

The contractor requested the government agency to remove the mental patients from the facility so that the contractor could safely perform its task. The agency refused to remove the patients and contractor abandoned the project.

Each party sued the other for breach of contract and the Agency brought an action against the contractor's bonding company. The Court held that the Agency had breached the contract and the contractor was justified in abandoning the contract. The Court further held that the trial court had properly dismissed the agency's action against the bonding company once the court determined the contractor's abandonment was excused due to the Agency's breach. The Court further determined that the contractor was properly awarded damages on an actual cost basis or the portion of the job it completed before it stopped work.