Views from the Expert: Stick With the Agreement

SWTA:

Keeping a contract enforceable may require nothing more than doing exactly what you agreed to do: “Stick with the Agreement”

By William F. Dexter

construction defect cost administration

Countless professional associations, attorneys and consultants advise us constantly about creating clear and concise contracts that control and define our risks.  The hope is that, with the “perfect contract,” we will avoid the web of litigation that is spun by every player in the construction drama. 

Professional associations have spent decades refining the agreements that are made available to the industry.  The AIA’s A-201, the EJCDC’s “Standard Forms of Agreement  and numerous form contracts developed by the AGC have given construction practitioners an arsenal of legal language to define limitations on liability.  These agreements have incorporated a new vocabulary of risk-conscious words and phrases and woven them with great care into a fabric of proactive risk control.  Over the years, the courts have tested virtually every paragraph and phrase to establish legal interpretations of the language.  This all seems like great news to those of us who consistently use standard forms of agreement as a component of our efforts to limit our risks.  Now the key challenge is to “Stick With The Agreement” (SWTA). 

THE BAD NEWS:  

The carefully drafted language of your contract goes out the window depending on how you adhere to the provisions you agreed to.  The guiding principle of this topic is Stick With The Agreement!  Imagine the following scenario during a typical construction project:  The owner and the contractor have a detailed agreement that provides for a strict change order procedure that includes among other things, submittal to the architect for review and signed approval by the owner.  During framing, the owner approaches the contractor and asks him to change the framing in the buildings entry to allow for an atrium window assembly.  The contractor agrees and states that he will initiate a change order.  The owner waves him off and directs him to just make the change and he will pay when it is done.  As he promised, the owner promptly writes the check – paying in full the cost of the change.  Later during the finishes selection, the owner asks that the entry floor covering be upgraded from tile to marble.  Again, the contractor indicates that he will initiate the contractual change order procedure.  The owner repeats that he is sure of this decision and will pay for the upgrade as soon as he is billed.  Once again, the contractor performs the work and is immediately paid for the marble.  This occurs a few more times during the job, always with the same pattern.  Finally as the exterior flatwork is about to be poured, the owner requests that the standard broom finish be replaced with an exposed aggregate using seeded polished pebbles.  The contractor, now familiar with the drill, installs the concrete walks and driveways and sends a bill to the owner for $12,500 over the original line item cost.  Surprised and shocked at the invoice, the owner refuses to pay the change order claiming that the contractor failed to follow the prescribed contractual procedure thus nullifying his invoice.  “We have a written agreement!” the owner shouted as he walked away. 

Is the owner correct on this?  Does the language in the contract that had been signed bind the contractor to provide this change order request in writing?  (Think about it.) 

The predominant response from our polls of engineers, architects and contractors to this question is this:  “Since the contractor deviated from the precise language of the contract he is not entitled to be paid for the change executed without a signed change order.”  Some consider that the owner ambushed the contractor.  However, the courts see this differently.  In numerous similar disputes, the courts have held that the two parties modified the contract by their behavior when initiating and executing change orders. The legal term is “implied waiver”.  The judge’s ruling favored the contractor and ordered his bill paid to the last penny.  The decision is based upon the premise that the contractor was entitled to rely upon the waiver of the change order procedure by the repeated actions of the owner.  This has some serious ramifications when applied to our own agreements.  Consider that your firm deviated from the scope of work defined in the contract and by doing so repeatedly, incurred additional liability.  Construction phase services are a “mine-field” of liability for the contractor who is not strictly adhering to the language in the agreement. 

The risks are also abundant for architects. Consider the consequences of deviating from established procedures within the firm’s policy manual.  The firm may have taken great care in drafting policies for dealing with numerous in-house administrative tasks because of the possible risks associated with confronting every detail of the work.  One such area of concern is the manner in which contractors’ RFI’s will be addressed.  Consider this situation:  The owner has decided to remove a load bearing wall between two rooms and would like you, the architect to prepare drawings and calculations to replace the wall with an appropriate beam.  Your company policy states: “All change orders and RFI’s will be detailed with the same care that is used in the development of the original construction documents. This includes, detailed drawings, references, calculations, specifications and principle review.” 

The change drawings are completed in full compliance with the policy manual; every detail checked and double-checked. It is an impressive package of specifications and calculations.  As the architect delivers them to the contractor, he is asked if there are any special shoring requirements prior to removing the wall.  The architect stresses the importance of shoring to the contractor and advises him to make sure that the roof members are adequately supported before removing the wall.  

Later that day, the architect receives a call from the owner that a portion of the ceiling joists collapsed during the removal of the wall and she wants to know why your plans failed.  What earlier appeared to be a casual conversation at the job site was actually an RFI in disguise from the contractor.  Adhering to the firm’s policy, a detailed response to this element of the work would have been created.  By casually dismissing the contractor’s question, the architect inadvertently invited an unqualified individual to join his design team in making engineering decisions.  In the ensuing trial for liability, the architect was held responsible for failing to design the shoring system that would have supported the roof during the modification.  The judge relied upon the undisputed fact that the contractor had specifically asked about shoring and that duties of design and engineering are clearly and solely within the realm of the design professional.

THE GOOD NEWS:

The underlying message from both examples is clear: Be careful what services you agree to provide and how the details of your relationship with the parties are handled; and then adhere to what you agreed to. Contract language and company policies are created with a substantial investment of time and money to minimize the risk your firm or company faces. 

Look carefully at the detailed procedures and provisions of the contract forms you use and ask yourself how diligent you are at following your own contract.  The standard forms of agreement are intended to be broad so as to anticipate most possible events and arrangements.  Chances are that the scope of your services is rather specialized and not broad.  If there is language within your agreements that is consistently not adhered to by either of the parties, you may find it totally unenforceable in a dispute.  Consult with your attorney regarding customizing your contracts to suit the way you do business.  The time spent in reviewing your standard practices and incorporating them into the fabric of your agreements under the scrutiny of legal counsel is the first half of responsible risk management.  When the language in the agreement doesn’t apply, replace it or eliminate it.  The second half of the recipe is to educate the owner and your staff regarding the importance of keeping the contract language in force.  The subtleties and nuance of the law regarding contracts is a topic worthy of further study.  Be prepared to share this information with your clients.  No one benefits from unenforceable contract provisions.  Above all, “Stick With The Agreement!”

About the Author

Bill Dexter is a 40 year veteran of the construction industry and the former Director of the California Center for Construction Education for the College of Architecture and Environmental Design at California Polytechnic State University, San Luis Obispo. As an internationally recognized risk management-consultant, his industry training company serves construction organizations nationwide and overseas in the areas of liability mitigation.  Bill has participated as an industry spokesman before The American Institute of Architects, The Construction Specifications Institute, Pacific Coast Builders Conference, the California and Nevada Contractors State License Boards and the Association of General Contractors.

Disclaimer: JDi Data’s series of ‘Views from the Expert’ blogs provides information and expanded points of interest for our clients and partners.
These are personal blog posts.  The opinions expressed here are the authors’ and not those of JDi Data or any other person.