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In the recent case of Donald M. Durkin Contr. Inc. v. City of
Newark, et. al., 2007 U.S. Dist. LEXIS 68417, the U.S. District
Court for the District of Delaware refused to apply the doctrine
of “constructive termination for convenience” in favor of Defendant
City of Newark (“City”). City entered into a contract
with a general contractor (the “Contractor”) for construction of
a water reservoir. City breached the contract, admitting that it
terminated the contract without providing the Contractor seven
days notice as required by the contract. City argued that the
court should apply the doctrine of constructive termination for
convenience as the appropriate way to calculate damages for its
breach.
Constructive termination for convenience is an outgrowth of
termination for convenience doctrine, a judicially created concept
originally developed to limit damages when government
entities breach a contract. Under this doctrine, the breaching
government entity is responsible only (a) for costs incurred by
the contractor, (b) for profit based on work already done, and
(c) for costs of preparing the termination settlement proposal.
In other words, the doctrine awards no expectancy damages for
the contractor as would be provided in an ordinary breach of
contract situation.
Applied constructively, the doctrine allows government entities
to retroactively justify a breach. The government entity may
defend itself in a breach of contract action on the ground that
a valid justification for nonperformance existed at the time of
the breach, though the government had no knowledge of the
ground at the time of breach. In practice, the doctrine serves
to limit the amount of damages available to contractors.
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In Durkin, the court considered City’s breach an improper
termination because, while City had the right under the contract
to terminate at any time for any reason, it did not follow
the notice procedures required by the contract. The contract
contained provisions spelling out the specific measure of damages
for proper termination, but was silent on damages for
improper termination. The Court awarded Contractor $11.6
million in damages on its breach of contract claim pursuant to
Contractor’s own calculation of damages.
On a Renewed Motion for Judgment as a Matter of Law and
Motion for a New Trial, City argued that its breach should be
construed as a constructive termination for convenience. The
court held that, because a clause specified limited damages in
situations where City properly terminated the contract and not
in situations where City improperly terminated, City’s failure
to properly terminate the contract precluded its limiting of
damages.
Durkin is important in that it highlights for contractors and
government entities the importance of defining the scope of
damages available in all possible breach situations. The
difference in recovery based on constructive termination for
convenience versus damages based on a contract provision
versus damages based simply on common law contract principles
can be significant. It is therefore vital for contracting
parties to carefully negotiate the measure of damages applicable
to every possible breach contingency.
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