Commentary: Contract or Gamble? The Dangers of Hidden Provisions
Long gone are the days when a handshake was all that was needed to get a contractor to build a building and for him to be assured he would be paid. Today�s construction contracts, like most other contracts, are lengthy documents intending to address all possible issues that may arise during contract performance. But they frequently fail, or they provide unexpected consequences.
For example, the often-used AIA contract for construction AIA Document A-102 - 2007 cost-plus with a guaranteed maximum price contract is 13 pages long. It is usually combined with the associated AIA General Conditions, which is another 11 pages long. Among the provisions of those documents are a number of surprises that the parties (or their attorneys) probably did not expect when they signed the contract.
A recent arbitration with a large contractor exhibited two of those surprises, to the possible disappointment of the owner. One was a contract provision inserted by the general contractor setting forth a schedule of hourly rates for the project manager, project superintendent, project engineer and others. The owner, believing that the contractor’s compensation was based upon the actual cost of the work plus a fee, was surprised to learn: first, that the hourly rates fixed for those employees amounted to about double their salaries on an annual basis; and second, that, being salaried employees, they simply logged their time for the project based upon a normal 40-hour work week, not actual time spent on the job. Imagine the additional secret profit generated for the contractor over a two-year contract period.
Another hidden surprise involving that same project was the AIA General Conditions provision, which said that: “If the property insurance requires deductibles, the owner shall pay costs not covered because of such deductibles.” On the project, a plumbing subcontractor’s negligence caused some water damage. An insurance claim was made; the insurance company paid the remedial costs less the $50,000 deductible, and the contractor sought to recover that $50,000 from the innocent owner. Under the circumstances, the contract language appeared to require the owner to pay a portion of the damages caused by faulty subcontractor work.
Those contractors lucky enough to get city and county of Denver construction work may be surprised to find that if they have a dispute with the city on a project, either the manager of public works or the manager of aviation (depending on which agency is involved) gets to decide the dispute or can select a hearing officer to decide it. The contractor’s right to appeal the decision is limited under the city’s contract language.
Those kinds of contract surprises appear in other contracts as well. For instance, the Colorado Real Estate Commission has an approved brokerage-listing contract providing that a broker is entitled to a commission on the “sale” of a property. Obviously, when a seller of real estate contracts with a broker to sell a property, the seller expects to pay the broker when the sale is completed and the seller gets paid. However, the approved contract defines “sale” as a contract to sell the property even though the sale might not go through for some reason. Under that language, the seller would owe a broker’s commission even if the buyer backs out.
There is some hope, however, for the unsuspecting. Recognizing some parties’ attempts to enforce strict or unreasonable contract terms, the courts, including those in Colorado, have adopted a theory to address these problems. That theory is the judicial creation of an implied duty of good faith and fair dealing essentially “written” into every contract by the courts.
That duty of good faith and fair dealing will be the subject of a later “Construction Law Briefs” column.