Bailing Out of a Bad Contract

Most of what you read here is about drafting good contracts, not about bailing out of bad deals. But bad deals happen – such as to a Florida contractor I advised last week. “How do I get out of this contract?”

I’ll count the ways.

First, understand the measure of damages, what you stand to lose by simply walking off the job. That's material breach of contract. You’ll be liable for the difference between your contract price and what it cost the owner to have another contractor finish the job. But that’s just the beginning. The owner can claim attorney fees (for bringing suit) and file a grievance with the state license board. If you lose the suit for damages and don’t pay, the owner can make a claim against your license bond. If the bonding company pays off, they’ll come after you to recover their loss.

That’s the worst case. But it doesn’t have to happen.

Obviously, the key words here are material breach of contract. The first to commit a material breach will be liable for damages. See my blog post on breach of construction contract. 

Any act by the owner that smacks of material breach can release your contract obligations.

If the Owner Didn’t Breach?

All is not lost. A surprise in the job can open the contract to re-negotiation. Surprises (changed conditions) come in hundreds of flavors. See my blog post.

Contractors are not insurance companies. No contract requires that you overcome every conceivable challenge (changed condition) on site.

Another example: Suppose you discover the owner is slow-pay or short on cash. What then? No contractor has to keep working when an owner has stopped paying.

What if you under-bid the job and can’t possibly perform at the price quoted? Again, all is not lost. I have a friend who did exactly that – on a contract with a government agency. At bid opening, his price was many thousands lower than the next lowest bidder. Turns out, his estimate had omitted finishing the entire second floor. My friend’s company completed the job anyhow – and ended up in bankruptcy. I don’t recommend that.

If you under-bid a job and want out, your legal counsel will advise on the doctrine of mistake. Courts will “reform” (re-write) a contract for some types of mistakes:

• An error in calculation, especially if the mistake is obvious.
• An error so serious that enforcement would be irrational.
• Where the contractor relied on some fact the owner knew wasn’t true.
• When both contractor and owner assumed something fundamental about the job that wasn’t true.

The most common mistake is omitting something from the estimate. On private jobs, it’s easy to shift that risk to the owner. Make your estimate define the job. Anything not included in your estimate is not part of the job. Construction Contract Writer offers good options.

Another way out: write into the contract a termination clause – either for cause or for no cause at all. My recommendations are here.  Construction Contract Writer makes that easy. The trial version is free.