When a contractor delays a construction project, the owner is often faced with a Hobson’s choice—to terminate the contractor for breach or try to coax it to the finish line with a minimum of further damage. Savvy owners recognize that terminating a contractor for a cause—even where the contractor is bonded—can often lead to additional costs and even more extensive delays.
 
But does allowing the contractor to finish late result in the owner waiving its rights against the defaulting contractor? Yes and no.
 
In a recent case involving a building in upstate New York, McPherson Builders (“Builder”) contracted with Performance Premises (“Owner”) to construct a steel building. The contract contained a “time of the essence” clause and substantial completion was required to be achieved in 85 days. When the job ran late, the Owner failed to terminate the Builder. Instead, it let the work proceed to completion. But once the project was complete, the Owner claimed that the Builder had breached the contract (by not completing within 85 days) and refused to pay the Builder. It also asserted a counterclaim for delay damages resulting from the Builder’s late finish.
 
For its part, the Builder, which had filed a mechanic’s lien, sought to collect its contract balance. It argued that the Owner, by not terminating it, waived any rights it might otherwise have possessed against the Builder.

The Appellate Ruling

The appellate court sorted it out. It held that while the Owner had indeed waived its right to terminate the Builder, it had not waived its right to damages for the late finish. Once the Builder failed to finish by the anticipated substantial completion date “nothing [it] could possibly do would wipe out the damage” suffered by the Owner. Therefore, the Builder’s claim for contract balance could be offset by the Owner’s own delay damages — damages that were not waived.
 
There are a few lessons to take away from this case. First, there are a number of breaches of contract which can be waived if not acted on promptly. Payment is one example (e.g., if payment is long-delayed, but then eventually made, a contractor who did not timely act on the delayed payment cannot then hold the owner in breach and suspend its work or walk off the job). On the other hand, even where some breaches have been waived, it does not mean that all rights have been abandoned (e.g., depending on the contract, the contractor may be entitled to interest on the late payment).
 

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