A. Contracts considered in the context of construction projects. 3. Particular forms of agreement unit price, T&M, Design/Build.

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1 Issues in Interpretation and Drafting of Construction Contracts Overview of Course Materials and Subject Matters By Greg Harris Partner, Construction and Litigation Group January Overview of Course Materials and Subject Matters. A. Contracts considered in the context of construction projects. 1. Example -- same absolute weight different perception going up and down. 2. Special considerations and elements -- implied terms, custom and usage. 3. Particular forms of agreement unit price, T&M, Design/Build. B. Distinguish contract and tort principles and the consequences of each. 1. Stuart v. Coldwell Banker 1 no negligent construction claim for economic loss (except for property damage or personal injury) Series of contract claims. a) Significance is separate and different contractual limitations may apply. 2. Bershauer Phillips v. Seattle School District 2 no tort claim for negligent design for economic loss (except for property damage or personal injury). a) Contract limitations or restrictions may apply. b) Economic loss rule will prevent negligence recovery for most claims. 1 CITE 2 CITE By Greg Harris Page 1 of 10

2 3. Anti-Indemnity statute 3. Tort reform says that a party will only be responsible for the effects of that party s negligence -- creates a limitation on the parties ability to limit liability by contract. C. Damages are expectation loss based what effect? Greg Harris Ater Wynne LLP Seattle, WA 2. Review of Basic Contract Principles Review of Basic Contract Principles A. The Requirements for a Valid Contract 1. Offer, Acceptance, Consideration. a) Elements of an offer. i) Who, what, when, where, how much? ii) PQ squared (price, quantity, quality). b) Acceptance or equivalents. i) Explicit assent or agreement. ii) iii) Acquiescence by silence. Acceptance of performance. c) Consideration or substitutes. i) New promise. ii) New value or change of obligation peppercorn - not look at the relative values. iii) Waiver of claim or right to assert. 2. No writing required. a) Services not sale of goods no UCC application -- predominant purpose test. 3 CITE By Greg Harris Page 2 of 10

3 b) Part performance. B. What if the Contract Provisions Don t Cover Everything? 1. What the contract doesn t specifically state. a) If the fact of agreement is sufficiently definite, the Court will imply other terms, even essential terms to preserve a basis for determining rights, duties and basis for compensation. i) A reasonable price. ii) A reasonable time to perform. b) The conduct of the parties matters. i) Course of dealing examples. ii) Course of performance examples. c) Level of quality -- Industry standard disagreement and difficulty of proof. d) Good faith and fair dealing. i) Inheres in every contract in Washington. ii) Once in contract relationship, can t negotiate at arms length. iii) iv) Stay out of the way. Be responsive in providing information. v) Fairly price work. vi) Actively cooperate to insure each party realizes the full benefits of full performance of the contract. 2. What the contract leaves for future resolution. a) Allowances, selections by the owner. b) Completion of design by architect. c) Design build activities by specialty subs. C. How Can the Base Contract Be Modified? By Greg Harris Page 3 of 10

4 1. No writing required unless Contract specifically provides such for on same basis and for same reasons that oral contract is sufficient in the first instance. 2. Even if contract specifically requires a writing, that provision may be: a) Modified by oral agreement of the parties. b) Waived by oral agreement of the parties. c) Waived by unambiguous conduct of the parties course of performance. [ effect of contract clauses about the consequences Absher draft example clause??] D. How Are Ambiguities in Written Contract Resolved? Greg Harris Ater Wynne LLP Seattle, WA 1. Hierarchy and rules for resolving ambiguities 2. Only if all else fails do you interpret against the drafter Overview of Specific Contract Considerations in Construction Contracts 3. Overview of Specific Contract Considerations in Construction Contracts. A. Implied Terms. 1. Contractor already bound to do many of the things -- why set forth in form contracts? a) Examples of clauses obey all laws good and workmanlike manner. b) Provides a basis for owner to perform that function and claim for specific breach of the clause rather than having to prove the exact scope of the contractor s obligation. c) Provides a contractual basis for liability, otherwise the enforcer may be only a third party like the City or prosecutor in the case of a criminal statute. 2. Owner already bound to do things why include it in the body of the contract? a) Examples of clauses pay on 10 th of the month -- answer RFIs within specific time. By Greg Harris Page 4 of 10

5 b) Provides a basis for contractor to objectively judge owner s performance and to demand performance. 3. What are the typical implied terms in construction contracts? secrets of the construction lawyers a) Obey all laws. b) Complete work in a good and workmanlike manner. c) Conform to industry standards. d) Complete work in a reasonable time. e) Pay a reasonable price. f) Enter into agreements or arrangements with the other party to help them if no detriment to you. B. Promises of Performance. 1. Freedom of contract at work a) Contractor free to agree to do, and will be held to perform, anything that is capable of performance Cite free to make any dumb agreement he wants to and the courts will not save him from that. b) In the absence of a differing site condition clause, the contractor takes the property as he finds it. Cite 2. Examples of clauses with specific undertakings a) Procure and pay for all of the work. b) All of the work in Div 17 of the specs. c) Design and build. d) Substantially complete on or before. e) Pay all fees. f) Procure all permits. g) Waive all claims for consequential damages. h) Limit additional costs or mark-up percentages charged on change order work. By Greg Harris Page 5 of 10

6 i) Limit delay claims to a time extension Not valid in WA but only because of a statute. -- Cite 3. Because the parties are completely free to contract or not as to each of these issues and because the party contracting knows what the contract says, the extent of that parties knowledge of any factors needed to evaluate the risk of such an agreement and his or her ability to comply with the agreement made, these clauses will generally be quite strictly enforced by the courts. C. Contract Procedures. 1. Generally two types. a) Ministerial or operational procedures. i) Generally not significant in disputes. ii) Failure to follow is a minor breach and little economic consequence. b) Procedures with substantive impact on the rights and liabilities of the parties. i) Now very prominent in disputes Mike M. Johnson discussed in detail by others in the program. ii) Failure to follow is a minor breach but may have significant economic consequences. 2. Examples of operational procedures. a) Number and date of safety meetings. b) Form to be used for pay applications. 3. Examples of procedures with substantive impact. a) Notice of claims or protest of directives. b) Documentation required for a proper pay estimate. 4. Because the parties are completely free to contract or not for these procedures, unless they are nearly impossible to comply with, then a noncomplying party will not be saved or excused from the consequences of noncompliance by a court and these clauses will generally be quite strictly enforced. D. Risk Shifting. E. Warrantees By Greg Harris Page 6 of 10

7 1. Generally a contract promise and hence usually strictly enforced. Because a warrantee is a specific promise, the warranty may be limited or modified by contract language. 2. Contract language limiting a warrantee may be disregarded if it causes the warranty to fail of its essential purpose or because of the disparate bargaining position of the parties leading to overreaching. CITES 3. Usually a two part promise by the contractor. a) During a set period usually one year the contractor agrees to repair and the owner must use that remedy and await the contractor s actions. i) Typically that the work was done in a good and workmanlike manner. ii) The work was done in accordance with the agreed plans and specifications. b) The warrantees actually extend for the period of the statute of limitation six years on a written contract in Washington because at least the warranty of good and workmanlike construction is involved in any breach of warranty claim, no matter when arising. c) Specific vendor warrantees for elements of the work or equipment may extend for set periods which may even be longer than the statute of limitations. d) The contractor may promise to deliver specific warrantees on these items and if it does not, may itself be liable for the benefits the owner would have realized had the warrantees been delivered. Whether that failure would extend the statute of limitations is not clear since the contractors breach would have occurred when the warrantees were not delivered to the owner as promised. F. Forms of contract that are particular to construction. 1. Fixed price or guaranteed maximum cost. a) A defined scope of work to be completed for a specific price or for costs, but in any event not exceed a specific amount. This will be the principal type of agreement form which the materials deal with below. b) Basic example. 2. Time and Materials. a) Simple Example. By Greg Harris Page 7 of 10

8 Greg Harris Ater Wynne LLP Seattle, WA b) Complicated Example. c) Modified Time & Materials where hourly rate is agreed in advance. 3. Unit Prices. a) Road contracts and excavation or underground utilities. b) Same issues as fixed price because of assumptions. c) Problems caused by variation in quantities. Legal Relationship -- Contractor and Owner 4. Legal relationship -- contractor and owner. A. Form of contract. 1. Plans and specifications by owner Bid Build. 2. Design/Build. 3. Cost of the work plus fee with a Guaranteed Maximum Price ( GMP ). 4. GC/CM (General Contractor/Construction Manager). B. Essential contract terms to minimize future problems. 1. Identity of the parties and responsibilities Who? 2. Scope of Work, incorporated Contract Documents What? 3. Payment terms How much? 4. Scheduling responsibilities and delays When? 5. Unanticipated conditions Surprises? 6. Changes to the Work What now? a) Because the owner changed its mind? b) To accommodate incomplete design? 7. Termination and dispute resolution What if we can t agree? By Greg Harris Page 8 of 10

9 Legal Relationship Contractor and Subcontractor Greg Harris Ater Wynne, LLP Seattle, WA 5. Legal Relationship contractor and subcontractor CITE CITE A. Contract formation 1. Express contract. 2. Promissory estoppel. 3. Subcontractor listing law. B. Incorporation by reference Flow down. 1. Example Appendix p. C. Contingent payment terms. 1. The subcontractor gets paid when the general contractor gets paid. a) Example -- Appendix p. 2. The subcontractor gets paid if and when the general contractor gets paid. D. Changes. a) Example -- Appendix p. 1. Examples -- Appendix p. -- p. E. Indemnity. 1. Examples -- Appendix p. -- p. F. Termination. 1. Examples Appendix p. -- p. G. Dispute Resolution. 1. Examples -- Appendix p. -- p. By Greg Harris Page 9 of 10

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