Construction Contracts

Construction Contracts 103 - Breach

by Ken Robinson

This is the final installment of a three-part series on construction contracts. Be sure to check out the two previous parts, Construction Contracts 101 - The Basics, and Construction Contracts 102 - Interpreting Contracts

A contract is in essence a promise given in consideration for a reciprocal promise.  A construction contract is a very complex series of promises that establish the rights and obligations of the parties.  A breach of the contract in its simplest form, then, is a failure to perform a promise.  Technically, a breach of contract can provide the non-breaching party with a remedy; for example, if the non-breaching party incurs a loss as a result of the breach.  In that case, the non-breaching party can assert a claim for damages.

 If the level of a breach rises to a “material breach,” additional remedies are available.  A material breach can excuse the non-breaching party from further performance under the contract until the material breach is cured.  This might occur in a construction setting where the owner refuses payment until the contractor cures the breach.  In some cases, a material breach gives rise to a right of the non-breaching party to terminate the contract.  Colorado Structures, Inc. v. Insurance Co. of the West, 161 Wash.2d 577, 167 P.3d 1125, 1132 (2007) (material breach permits, but does not require, non-breaching party to cancel or terminate contract), cited with approval in Blood v. Qwest Services Corp., 224 P.3d 301 (Colo. App. 2009).

Curiously, there is no legal standard as to what constitutes a material breach of contract.  Rather, the question of whether a breach is a material breach is a question of fact for the fact finder, either the jury, the judge in a trial to the court, or the arbitrator.  Carder, Inc. v. Cash, 97 P.3d 174 (Colo. App. 2003) (Whether a breach of a contract is material, and therefore excuses further performance by the other party, is a question of fact; in deciding that question, the trier of fact should consider the extent to which an injured party will obtain substantial benefit from the contract, as well as the adequacy of compensation in damages).  Colorado appellate courts have provided some guidance on this issue.  See, e.g., Kaiser v. Market Square Discount Liquors, Inc., 992 P.2d 636 (Colo. App. 1999).  (In deciding whether a breach of contract is material, the extent to which an injured party would still obtain substantial benefit from the contract, and the adequacy of compensation in damages for the breach, should be considered.  The importance or materiality of contract terms must be assessed in context and in light of the expectations of the parties at the time the original contract was formed.  Whether a breach of contract is material is a question of fact); Blood v. Qwest Services Corp., 224 P.3d 301 (Colo. App. 2009) (A material breach of a contract does not obligate the non-breaching party to terminate the contract; rather, that party can continue performing its own obligations and insist the other party do likewise).   See also Restatement Second, Contracts § 241 (Circumstances significant in determining whether a failure to render performance is material); Restatement Second, Contracts § 242 (Circumstances significant in determining when remaining duties are discharged).

The lesson for contract administrators is that a failure to perform by any party to a construction contract, be it a late payment by the owner, or a missed milestone by a contractor, needs to be evaluated in the larger context of the project and the consequences of the breach, and then take action appropriate to the conditions.  As stated above, in the extreme, this could be termination of a contract, but this should be the remedy of absolute last resort as the consequences to the project could be unacceptable.

For more information on construction contracts, please contact Ken Robinson or another member of our Construction Contracts, Real Estate Law, or Construction Law & Litigation teams.

Construction Contracts 102 – Interpreting Contracts

by Ken Robinson

This is the second of a three part series on construction contracts. Please check back next week for Construction Contracts 103 - Breach, and be sure to check out last week’s Construction Contracts 101 - The Basics

The guiding principle of contract law is that a contract will be interpreted to give effect to the intention of the parties.  To discern that intention, a court will look first to the written document, the so-called "four corners rule" of contract interpretation.  If that document is ambiguous -- that is, susceptible to more than one interpretation -- the court can look outside the four corners to "extrinsic evidence."  Extrinsic evidence can include other documents, testimony of the parties as to their intent in entering into the contract, called "parole evidence," or the way the parties actually conduct themselves under the contract, particularly before a dispute arises.

Another principle of contract interpretation, not always applied with consistency, is that an ambiguous contract will be construed against the interests of the party who drafted the contract.  This means that if a party is given a contract on a take it or leave it basis with no opportunity to fairly negotiate the contract language, and the contract is susceptible to more than one interpretation in some respect, an ambiguous provision will be construed in favor of the non-drafting party.  Also, a court will always try to harmonize all parts of the contract so that if a clause is ambiguous and one interpretation of the clause creates a conflict with another non-ambiguous clause, the non-conflicting interpretation will prevail.

It is important to understand that a contract is not necessarily a static document, even where the parties don't sign any addenda or modifications.  This is because the parties can inadvertently choose one interpretation of an ambiguous provision merely by acting consistently with that interpretation, particularly before a dispute arises.  For example, if a notice requirement in a change clause is not clear, but the parties proceed on the project processing changes with no formal notice, the notice requirement will be dispensed with by a court based upon the way the parties acted.  That is, their conduct is regarded as dispositive of the parties' intentions as to the ambiguous notice provision.

It is also important to recognize that the parties can amend their contract by their very conduct even though they had no discussions about the modification and signed no addenda, and even though the contract has a requirement that any modification of the contract be in writing and signed by both parties.  In Hahl v. Langfur Const. Corp., 529 P.2d 1369, (Colo. App. 1974), the operative contract had a written change order requirement.  A dispute arose as to the validity of the subcontractor's claim for additional work,  and the general contractor defended on the grounds that the work had been performed without prior written authorization.  The Colorado Court of Appeals held that the parties had amended their contract and waived the requirement for written authorization by their words and their conduct.  Accord, Hi-Valley Constructors, Inc. v. Heyser, 428 P.2d 354 (Colo. 1967) (by their conduct, parties waived contract requirement for written authorization).

For more information on construction contracts, please contact Ken Robinson or another member of our Construction Contracts, Real Estate Law, or Construction Law & Litigation teams.

Construction Contracts 101 – The Basics

by Ken Robinson

This is the first of a three part series on construction contracts. Please check back next week for Construction Contracts 102 - Interpreting Contracts and again in two weeks for Construction Contracts 103 - Breach

Virtually all construction projects are accomplished by way of a contract of some sort, and it is important to keep basic contract law in mind when drafting, negotiating, reviewing and entering into construction contracts.  To be enforceable, a contract must be supported by consideration.  In its simplest form, consideration is a promise – a contract thus is a promise given in exchange, that is in consideration, for a promise received.  A contract does not necessarily need to be in writing; the conduct of the parties can rise to an enforceable oral contract.

In a construction setting, a contractor agrees, promises, to build a structure in exchange for the owner’s promise to pay for the construction.  Of course, the complexities of a construction project require that there be many promises given and received.  These promises create rights and obligations on both sides that are expressed in the written contract language.  However, the effect of a contract doesn’t end there, as there are often obligations that are attendant to a written contract implied by law.  For example, every contract in Colorado contains an implied duty of good faith and fair dealing.  Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359, 1362 (Colo. App. 1994).  The doctrine exists to effectuate the parties' intentions and to honor their reasonable expectations.  City of Golden v. Parker, 138 P.3d 285, 292 (Colo.2006); Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995) (Good faith performance of a contract involves “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.”).

While it is unlikely that anyone can draft a truly "impenetrable contract," it is possible to craft a relatively clear and consistent document that is not susceptible, at least on its face, to multiple interpretations giving rise to the possibility of a dispute over contract meaning.  To do so, it is helpful to understand some of the basic rules of contract construction that a judge, or an arbitrator, will use in trying to decide a claim.

For more information on construction contracts, please contact Ken Robinson or another member of our Construction Contracts, Real Estate Law, or Construction Law & Litigation teams.

Anatomy of a Construction Contract

The function of a contract is to reflect the intentions of the parties.  In construction, the shared intention is to construct a specific project, within a defined time frame, at an agreed price, and in a prescribed manner.  If the contract is well-drafted, the parties have a good start toward a successful project.  The contract will tell the parties what their respective rights and obligations are, as well as the consequences on not fulfilling their obligations.  It is important to recognize that, unlike in old England, there is no debtor's prison in the American system of jurisprudence, and the remedy for non-performance may often be too little too late.  Good contracts can help minimize unintended consequences.  Good construction contracts have their own anatomy in the form of eight fundamental categories of clauses.  Understanding the categorical nature of any particular clause can help determine the relation of that clause to the contract as a whole and thus foster better negotiation, drafting and administration of construction contracts.  

Housekeeping.  Every contract must properly and completely identify the parties, the project and the contract documents.  This includes full corporate names and addresses, and a formal property description for the project.  If there are other material participants, such as the designer and the owner, it is useful to include them as well.  It is also imperative that all of the contract documents be identified with specificity.  Contract documents include the construction agreement itself, but they may also include separate general and special conditions, construction drawings, specifications, addenda, project manuals, soils reports, etc.  If such documents are identified as part of the "contract documents," they become part of the construction agreement that governs the parties' respective rights, obligations and liabilities, and they must be reviewed for consistency and applicability.  Contracts should also include a signature section evidencing assent to the agreement.  Make sure the contracts get signed, preferably before commencement of the work.  There is no need to inject spurious issues into future disputes such as whether a party is bound by a contract for lack of signatures.

Scope of Work.  A construction contract is not complete if it doesn't fully specify the scope of work to be performed by the contractor.  For most projects, the scope of work is described in construction drawings and specifications and these must be identified in detail in the construction contract.

Contract Price.  The Contract Price is another key component of the construction contract and must be stated without ambiguity.  If it is not, ultimately a judge or an arbitrator will be required to decide the reasonable value of the work performed, and at a much later time than completion of the project.  The contract price will, of course, depend on the project delivery method.  The most common forms are fixed price and cost-plus, with or without a guaranteed maximum price.  These forms of pricing can, in turn, be affected by whether the contract is for just construction, for design build, or for some form of construction management.

Schedule for Performance and Completion.  A large number of construction disputes arise out of scheduling.  The more clearly the parties can identify the construction schedule in a contract, the lower the risk of protracted disputes later on.  A schedule can be in the simple form of a start date and a completion date or, on more complicated projects, bar charts or full-blown critical path method project schedules.

Allocation of Risk.  There is always uncertainty in construction projects and, with that uncertainty, risk.  The risk can, and often does, translate to liability for unforeseen costs.  Good construction contracts provide for those risks by inclusion of clauses addressing matters such as differing site conditions, non-payment, injury to person or property, warranty and claims by others.  The purpose of such clauses is to reflect the parties' agreement at the beginning of the project as to who bears the risk of liability in the event that unforeseen events transpire that create liability and impose additional costs on the project or the parties.  If these provisions are not included, it becomes necessary for a court or arbitrator, much later on, to decide how the applicable law distributes that risk.  Insurance is an important aspect of risk allocation and a necessary component of every construction project.  Experience has shown that the best allocation of a particular risk is to the party best situated to manage that risk.

Contract Administration and Logistics.  This category of clauses addresses contract and project administration matters, and includes more ministerial aspects of the project such as payment procedures and reporting.  While perhaps stating the obvious, in addition to good contracts, good project documentation is essential to optimal project administration, and it is critical to resolving disputes favorably.  

Dispute Resolution.  If a dispute arises over performance obligations under a construction contract, and the contract does not provide for any dispute resolution procedures, the claimant’s recourse is in the courts.  Litigation is expensive and time-consuming, however.  Thus, contracting parties will often call for alternate dispute resolution (“ADR”) procedures which are intended to provide in theory at least, for quicker, more cost-effective resolution of disputes.   A common ADR procedure is mediation in which a trained neutral conducts a structured settlement conference between or among the parties with the intention of reaching a voluntary and acceptable settlement by the parties.  The mediator has no authority to make decisions that are binding on the parties.  Nevertheless, if the contract calls for “mandatory mediation,” the parties are required to participate in mediation in good faith, even if they don’t agree to settle in mediation. 

The major ADR procedure utilized in the construction industry is arbitration.  An arbitration procedure is binding on the parties, effectively substituting for most of the court’s responsibilities.  Arbitration statutorily divests the courts of jurisdiction over most aspects of a contractual dispute under the contract with an arbitration clause.  Radil v. National Union Fire Ins. Co. of Pittsburg, PA, 233 P.3d 688 (Colo. 2010).  The Colorado Uniform Arbitration Act, C.R.S. §§ 13-22-201, et seq., can be preempted by an enforceable arbitration clause that invokes the Federal Arbitration Act, 9 U.S.C. §§ 1, et seq.  An arbitration proceeding is typically similar to a judicial proceeding, but often without all of the procedural elements in conventional litigation such as depositions and written discovery.  In either form of ADR, the parties pay equally for the fees of the mediator and/or the arbitrator.

Warranties.  Warranties impose an obligation to repair defective work, and they can be express, as in stated in the contract, or implied where the law will impose a duty irrespective of the contract.  An express warranty is legally separate obligation from the duty to perform under the construction contract even though a warranty may be recited in that contract.  Hersh Companies Inc. v. Highline Village Associates, 30 P.3d 221, 225 (Colo. 2001).  “[Warranty] claims seek recovery for the breach of a subsequent contractual duty to repair or replace rather than recovery for a deficiency in the original work, they do not fall within the class of actions governed by [the limitations of actions statute for construction professionals].”). 

For more information on construction contracts, contact Ken Robinson or another member of our Construction Law & Litigation team.