When an owner hires a contractor to perform work, there is an expectation that the contractor will adhere to the express and implied contract terms, the ultimate goal being to build what the contract calls for in a proper, safe and timely manner, free of claims from injured third parties or unpaid suppliers and subcontractors. These are essential considerations in every construction contract. But sometimes the parties’ contract will include other requirements that would be considered comparatively minor in nature, such as using only designated lay down areas, placing a sign on the premises, keeping a log book, cleaning up at the end of each work day, or dozens of other things having far less importance to accomplishing the ultimate goal.
While the failure to adhere to such requirements is in breach of contract, whether a contractor may be fired if these less crucial requirements are not met isn’t always addressed in the contract language itself – and when it isn’t, the owner may face a difficult choice. Firing a contractor who is performing properly obviously would be a breach of contract by the owner. Riblet Tramway Co. v. Stickney, 129 N.H. 140, 146-47 (1987) (“If Riblet were to meet all contractual requirements, its performance would be acceptable, and the State could not terminate the contract without breaching it.”). The risk to the owner of terminating without adequate cause is substantial; wrongful termination gives the contractor a right to recover its lost profit, typically measured by the unpaid contract price less any savings from not having to perform the balance of the contract. Kearsarge Computer, Inc. v. Acme Staple Co., 116 N.H. 705, 708 (1976) (“If the defendant’s breach saves expense to the plaintiff, the plaintiff will recover the contract price minus the savings”).
In determining whether a contractor’s performance is “bad enough” to justify terminating its contract, the courts use the concept of “material” breach. “Only a breach that is sufficiently material and important to justify ending the whole transaction is a total breach that discharges the injured party’s duties.” Fitz v. Coutinho, 136 N.H. 721, 725 (1993). That’s not much guidance! “‘Whether conduct is a material breach is a question for the trier of fact to determine from the facts and circumstances of the case.’” South Willow Properties, LLC v. Burlington Coat Factory of New Hampshire, LLC, 159 N.H. 494, 503 (2009) (citation omitted). That won’t give owners a warm and fuzzy feeling either.
The best guidance given by our Supreme Court to date is found in Gaucher v. Waterhouse, 175 N.H. 291, 296 (2022): “A breach is material if: (1) a party fails to perform a substantial part of the contract or one or more of its essential terms or conditions; (2) the breach substantially defeats the contract’s purpose; or (3) the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.” But even this leaves much to interpretation.
Owners who are sued for wrongful termination over a minor breach always argue how important that minor breach was to them. But satisfactory performance, and therefore “material” breach, is gauged by an objective standard. In McNeal v. Lebel, 157 N.H. 458, 465 (2008), the Court held that “the plaintiffs’ subjective satisfaction, or lack thereof, with Lebel’s work is legally irrelevant so long as any flaws in Lebel’s performance did not amount to a material breach; absent material breach by Lebel, the plaintiffs were contractually obligated to allow him to finish the job.”
My advice to owners who ask whether they can safely terminate their contractor for breach of contract is simple: err on the side of caution. If slow performance is the culprit, offer the contractor an opportunity to pick up the pace and get back on schedule. If poor workmanship appears, offer the contractor an opportunity to cure. If a sub or supplier sends a notice of intent to lien, consider issuance of two-party checks. But if the breach does not impact safety, quality, timeliness or liens, the better course will usually be simply to ride out the storm.
While the failure to adhere to such requirements is in breach of contract, whether a contractor may be fired if these less crucial requirements are not met isn’t always addressed in the contract language itself – and when it isn’t, the owner may face a difficult choice. Firing a contractor who is performing properly obviously would be a breach of contract by the owner. Riblet Tramway Co. v. Stickney, 129 N.H. 140, 146-47 (1987) (“If Riblet were to meet all contractual requirements, its performance would be acceptable, and the State could not terminate the contract without breaching it.”). The risk to the owner of terminating without adequate cause is substantial; wrongful termination gives the contractor a right to recover its lost profit, typically measured by the unpaid contract price less any savings from not having to perform the balance of the contract. Kearsarge Computer, Inc. v. Acme Staple Co., 116 N.H. 705, 708 (1976) (“If the defendant’s breach saves expense to the plaintiff, the plaintiff will recover the contract price minus the savings”).
In determining whether a contractor’s performance is “bad enough” to justify terminating its contract, the courts use the concept of “material” breach. “Only a breach that is sufficiently material and important to justify ending the whole transaction is a total breach that discharges the injured party’s duties.” Fitz v. Coutinho, 136 N.H. 721, 725 (1993). That’s not much guidance! “‘Whether conduct is a material breach is a question for the trier of fact to determine from the facts and circumstances of the case.’” South Willow Properties, LLC v. Burlington Coat Factory of New Hampshire, LLC, 159 N.H. 494, 503 (2009) (citation omitted). That won’t give owners a warm and fuzzy feeling either.
The best guidance given by our Supreme Court to date is found in Gaucher v. Waterhouse, 175 N.H. 291, 296 (2022): “A breach is material if: (1) a party fails to perform a substantial part of the contract or one or more of its essential terms or conditions; (2) the breach substantially defeats the contract’s purpose; or (3) the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.” But even this leaves much to interpretation.
Owners who are sued for wrongful termination over a minor breach always argue how important that minor breach was to them. But satisfactory performance, and therefore “material” breach, is gauged by an objective standard. In McNeal v. Lebel, 157 N.H. 458, 465 (2008), the Court held that “the plaintiffs’ subjective satisfaction, or lack thereof, with Lebel’s work is legally irrelevant so long as any flaws in Lebel’s performance did not amount to a material breach; absent material breach by Lebel, the plaintiffs were contractually obligated to allow him to finish the job.”
My advice to owners who ask whether they can safely terminate their contractor for breach of contract is simple: err on the side of caution. If slow performance is the culprit, offer the contractor an opportunity to pick up the pace and get back on schedule. If poor workmanship appears, offer the contractor an opportunity to cure. If a sub or supplier sends a notice of intent to lien, consider issuance of two-party checks. But if the breach does not impact safety, quality, timeliness or liens, the better course will usually be simply to ride out the storm.
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