The Danger in Terminting a Service Contract

THE DANGER OF TERMINATING A SERVICE CONTRACT

    Your landscaper broke another sprinkler head. The company clearly had to go, so you went to the Association’s file and reviewed the written contract. Much to your dismay, you found that the contract did not expire for another 14 months, at $1000.00 per month. However, you did find the following clause:
Section 1.3. Termination/Default By Contractor. This Contract may be terminated in whole or in part by the Association if the Contractor defaults or persistently fails or neglects to carry out the Work in accordance with this Contract or fails to perform a material provision of this Contract.
    Because you were certain that the landscaper had defaulted, you wrote to the company’s president terminating the contract. By return mail you received a letter from the landscaper’s attorney claiming that you, not his client, has breached the contract. To make matters worse, the attorney made a claim for $14,000.
   
    When no compromise was reached, the landscaper filed suit against the Association. Where do we go from there?
 
POWER TO TERMINATE:

    While many variations exist, service contracts typically contain one of the following two types of termination clauses:

    1. The contract may be terminated for any or no reason upon giving the contractor a designated notice, or

    2. The contract may only be terminated if the contractor defaults.

    Of course, if the first of these termination clauses exists, the possibility of becoming engaged in a contract dispute such as outlined above is very much limited.

    However, in our fact pattern, Section 1.3 only permitted the Association to terminate the landscaping contract if the Contractor defaulted or persistently failed or neglected to carry out the Work in accordance with the contract or failed to perform a material provision of the contract.

WHAT IS A BREACH AND WHO MUST PROVE THAT IT OCCURRED:

    While it is beyond the scope of this article to go into a detailed explanation of when a breach occurs, the language contained in above cited Section 1.3 is a good general statement of what it means to breach a contract.

    Most important is the fact that, if the parties disagree, the Association must prove to a judge or jury that a breach actually occurred. This can be a long and expensive process and the outcome is typically uncertain.

WHAT HAPPENS IF THE ASSOCIATION WAS WRONG:

    Unfortunately, in our case the judge found that the Association wrongfully terminated the landscaping contract. This means that the Judge must now decide how much the Association must pay to the landscaper. As to this issue, the recent case of RKR Motors vs. Association Uniform Rental & Linen Supply, Inc. 31 FLW D2646, confirms that the damage for wrongful termination of service contracts is typically the 'lost profits' of the service provider.

    In its simplest terms, 'lost profits' are computed by subtracting the service provider’s costs of performance from the unpaid portion of the contract price. If we apply this concept, the landscaper would be entitled to all of the remaining sums that should have been paid (14 months at $1000.00 per month), less the costs that it would have had to pay to perform the remaining portion of the contract.

    Typically it is a simple matter to determine the amount of money that a service provider would have received if the contract had not been wrongfully terminated. However, it is much more difficult to identify the costs which would have been incurred had the contract not been terminated. By way of example, while both RKR Motor and Association Uniform Rental & Linen Supply generally agreed as to the unpaid contract amount, they had wildly different opinions as to the costs which should be deducted from that amount to calculate the 'lost profits'.

    As expected, RKR Motors took the position that, based on the size of the contract in relation to the size of the company, only sales tax, the cost of the garments, the cost to launder the garments, the cost to wash the garments, and the cost to repair and maintain the machines should be considered to be costs. Based upon this calculation, and after reducing those costs from the unpaid portion of the contract price, Association Uniform Rental & Linen Supply claimed that it was entitled to $82,444.00 in 'lost profit' damages.

    On the other hand, RKR Motors argued that the court should also take into account a percentage of the fixed expenses such as salaries and rent of the service provider thereby substantially reducing the damage claim to $10,437.00. Unfortunately for RKR, the court agreed with the service provider and awarded a judgment in the amount of $82,444.00.

    In our case, clearly a portion of the cost of labor and materials (gas, oil, etc.) would be deducted from the amount that must be paid to the landscaper. However, as with RKR, the amount of such reduction will depend on the particular circumstances of the community and the landscaper.

    For most Associations, any amount of lost profits paid to the service provider is money that the Association does not want to spend. Therefore, prior to terminating a contract, we recommend that you consult with your attorney to determine if the contract can be terminated and, if so, the proper procedure for doing so.

The firm of Taylor & Carls, P.A., with offices located in Maitland, Melbourne, Tampa and Palm Coast, Florida, was founded in 1981 and has practiced in the area of community association law since that date. This edition was prepared by Elizabeth Lanham-Patrie, Esq. and Robert L. Taylor, Esq. of Taylor & Carls, P.A. The information contained in The Association e-Lawyer should not be acted upon without professional legal advice. The opinions expressed herein are as of the date hereof, and this law firm undertakes no obligation to advise the Association of subsequent changes in the law.

©2006 Taylor & Carls, P.A. All Rights Reserved.
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