Our Contract Says What??? Effect of Contract

Our Contract Says What???
Effect of Contract Provisions on
Construction Claims
Nebraska AGC Annual Convention
February 19, 2015
Jeremy Fitzpatrick
Kutak Rock LLP
402-231-8756
[email protected]
Medical Clinic Project
Proposed Contract (revised AIA A101/201)
Contract Negotiations
Contract Provisions
Contract Provisions – Changes
o No compensation for
changed work unless
approved in writing
before work performed
Contract Provisions – Changes
o Architect “shall”
determine increase in
contract sum if no
agreement (Change
Directives)
Contract Provisions – Changes
o Contractor must
perform disputed work
if a change directive is
issued pending
resolution of dispute
Contract Provisions – Claims
o Performance bond
required
Contract Provisions – Warranty
o One-year contractual
warranty to repair
defects
Contract Provisions – Claims
o Claims must be made in
writing within 21 days
Contract Provisions – Disputes
o “The initial decision [of
the architect] shall be
final and binding on the
parties but subject to
mediation and, if the
parties fail to resolve their
dispute through
mediation, to binding
dispute resolution.”
Contract Provisions – Disputes
o Litigation = binding
dispute resolution
o Mediation a perquisite
to bringing litigation
o No jury trial waiver
Contract Provisions – Disputes
o Prevailing party in
dispute wins attorney’s
fees
Contract Provisions – Termination
o No provision for
termination by
contractor (revision
to form)
Disputes
Disputes – Change Directives
Disputes – Change Directives
“7.3.7 If the Contractor
. . . disagrees . . . The
Architect shall determine
the . . . adjustment . . . in
the contract sum.”
Disputes – Change Directives
Disputes – Change Directives
“7.3.5 Contractor shall
promptly proceed with
the change of Work
involved.”
Disputes – Change Directives
“15.1.4 If the Contractor
wishes to make a Claim
for an increase in the
Contract sum, written
notice shall be given . . . ”
o Contractor makes separate
claim for increase in
contract sum
Disputes – Difficult Owner
• Owner consistently
behind in making
payments
• Owner’s rep
antagonistic at every
stage of the project
Disputes – Contested Changes
o Disputes over whether
work is changed work
o Owner verbally directs
changed work
o Owner refuses to issue
change orders
Disputes – Contested Changes
o Contractor submits
change order requests
o Change order requests
denied
o No separate claim made
Disputes – Walk?
Disputes – Walk?
o Material breach
standard
o Fact-specific
Substantial Completion
(significant unresolved claims)
Mediation
Mediation Fails
Mediation Fails
Mediation Fails
Mediation Fails
Mediation
o Consider mediation during project
o Hire mediator to review and resolve
disputes monthly
o Settle disputes early/set up mediator for
global resolution at end of project
Litigation
Jury Trials
Jury Trials (Lawyer’s Perspective)
Jury Trials (Lawyer’s Perspective)
Jury Trials (Client’s Perspective)
Jury Trials (Client’s Perspective)
Bench Trials
Arbitration
Rulings on Disputed Issues
Compensation: Change Directives
o Architect “shall”
determine increase in
contract sum if no
agreement (Change
Directives)
Compensation: Change Directives
o “The initial decision [of
the architect] shall be
final and binding on the
parties but subject to
mediation and, if the
parties fail to resolve their
dispute through
mediation, to binding
dispute resolution.”
Compensation: Change Directives
Radec v. School District No. 17 (Neb. 1995)
• Construction of new school
• Deduct change order (removal of
fill dirt)
• Dispute over amount of deduction
Compensation: Change Directives
Radec v. School District No. 17 (1995)
• Agreement (AIA): If absence of
agreement on cost of change
directive, the cost shall then be
determined by the Architect.
• Court did not separately analyze
the claims/dispute clause under
the contract
Compensation: Change Directives
Radec v. School District No. 17 (1995)
• Where parties agree the quantity
and quality of work done shall be
left to the judgment of a third
person and his decision shall be
final, such decision will be
enforced.
Compensation: Change Directives
Radec v. School District No. 17 (1995)
Three exceptions:
• Fraud
• Gross mistake implying bad faith
• no reasonable basis
• patently erroneous
• Failure to exercise an honest
judgment
Compensation: Change Directives
Radec v. School District No. 17 (1995)
• “Gross mistake”: Not attempting
to verify whether deduct figures
bore a reasonable relationship to
the actual deduct costs & ignoring
accurate accounting from
contractor
Compensation: Change Directives
• Architect “shall” determine increase in
contract sum if no agreement (Change
Directives)
• Claims: “The initial decision shall be
final and binding . . . but subject to .
. . binding dispute resolution.”
• “Final” decision?
Compensation: Change Directives
• Architect “shall” determine increase in
contract sum if no agreement (Change
Directives), subject to claims process
in article 15.
Compensation: Change Directives
o “The initial decision [of
the architect] shall be
final and binding on the
parties but subject to
mediation and, if the
parties fail to resolve their
dispute through
mediation, to binding
dispute resolution.”
Compensation: Change Directives
Neighbors Const. Co., Inc. v. Woodland
Park (Kan. Ct. App. 2012)
• No deference for “initial decisions”
of architect because disputes
subject to further dispute
resolution
Compensation: Change Directives
Initial decisions on claims: Final and
binding unless subject to binding
dispute resolution.
Verbal Change Orders Work
o No compensation for
changed work unless
approved in writing
before work performed
Verbal Change Order Work
“[W]here the parties ignore provisions in a
written contract requiring change orders to be
in writing, it will not furnish a defense to a
claim for compensation for the additional
work performed.”
Shreves v. D.R. Anderson Constructors, Inc., 206 Neb. 433, 293 N.W.2d 106 (Neb. 1980).
Verbal Change Order Work
Party “knew about the additional work . . .
and its conduct indicated approval and
authorization for the work to proceed.”
Griffin v. General Industries, Inc., 193 Neb. 694, 696, 228 N.W.2d 880, 882 (Neb. 1975).
Unapproved Change Orders – Claim Notice
Cameo Homes – 8th Cir. (1995)
o Contractor hired to repair municipal buildings
o Written approval of change orders required
o Claims required to be submitted to architect in
writing within 21 days
Unapproved Change Orders – Claim Notice
Cameo Homes:
o Contractor submitted change order requests to
CM
o Contractor did not separately submit claims to
architect
o Work performed without approval of change
orders
Unapproved Change Orders – Claim Notice
Cameo Homes:
o SJ for owner: Contractor had not complied with
contract’s notice provisions for claims (21-days
notice to architect)
o Rejected argument that submitting rejected
change requests to CM satisfied claim
requirements
Unapproved Change Orders – Claim Notice
Cameo Homes:
“Cameo failed to give written notice to the
architect of its breach of contract claims . . . as
required by the contract. . . . It is therefore
contractually barred from bringing them
[now].”
Unapproved Change Orders – Claim Notice
Golden State – C.D. Cal. (2004)
“[T]he 21 day written notice requirement . . .
does not create a condition precedent to
seeking judicial resolution of claims.”
Golden State Foods Corp. v. Columbia/Okura LLC, (D. C.D.Cal. 2014).
Unapproved Change Orders – Claim Notice
Golden State:
“Although . . . ‘Claims must be initiated by
written notice’ . . . ‘within 21 days after
occurrence of the event giving rise to such
Claim,’ [the agreement] does not specify the
consequences of failing to timely present
such written notice.”
Golden State Foods Corp. v. Columbia/Okura LLC, (D. C.D.Cal. 2014).
Request for Attorney’s Fees
Claims for Extra/ Changed
Work
o Under Nebraska law,
parties cannot agree in a
contract that the prevailing
party in litigation will win
its attorney’s fees.
Quinn v. Godfather’s Investments, 217
Neb. 441 (Neb. 1984)
Post-Completion Defect Issues
o One-year contractual
warranty to repair
defects
Post-Completion Defect Issues
o Defect discovered
within one year of
substantial completion
o Negotiations
o Lawsuit 4.5 years after
SC
Post-Completion Defect Issues
o Construction Defect
SOL: 4 years, 2 years
from discovery
Neb. Rev. Stat. § 25-223
Post-Completion Defect Issues
o When does clock start
running?
o Traditional rule:
substantial completion
Post-Project Defect Issues
James Adams v.
Manchester Park, LLC
(Neb. Ct. App. Nov. 2014)
Post-Completion Defect Issues
o Manchester:
o Suit 4+ years after SC
o Claims: express and
implied warranties
o Trial court dismissed
claims (sol)
Post-Completion Defect Issues
Manchester – Nebraska Court of
Appeals:
o Breach of warranty claims (no
distinction of implied/express)
started running at end of express
warranty, not substantial
completion
Post-Completion Defect Issues
Manchester:
o Petition for further review filed with
Nebraska Supreme Court (December
2014)
Take-Aways
Our Contract Says What???
Effect of Contract Provisions on
Construction Claims
Jeremy Fitzpatrick
Kutak Rock LLP
402-231-8756
[email protected]