The basic idea behind the law of contract damages is to give the nonbreaching party the money to...
Published: September 2006
Contract language may not give you much leeway
There are two equally important concepts in contract law that every contractor needs to know: What does the law mean and how is it applied?
Take the Spearin doctrine (Electrical Contractor, July 2006), also known as the owner’s warranty of plans and specifications. On its face, the doctrine appears to be so evident that analysis is unnecessary. If you build what the owner has designed, you are entitled to get paid.
But then look at Spearin in operation. A design calls for a cable to make a 90 degree bend, which you install. However, the manufacturer refuses to warrant the cable because of the 90 degree bend. The contractor built what the owner ordered, but is he entitled to be paid?
Many seminars on construction contracting, including my own, concentrate on the first of the two concepts. The effort is made to have you understand the document you are signing so that you are not taken by surprise. You need to know what an indemnity clause is or what kind of writing is required to meet the contract’s “notice” requirements. Seminars on these topics are obviously beneficial and have helped contractors avoid or control what could be serious problems.
In these articles, I also discuss how the law (or contract language) is applied so that you can actually use it to your advantage. For example, it is one thing to have a general understanding of what it means to have a waiver of consequential damages in your agreement, but it is another to understand that you are still entitled to home office overhead on change orders.
In this article, three circumstances will be discussed, with suggestions of ways you can use the contract when, at first reading, you may think the contract offers you no breathing room. I will start with the “no damages for delay” clause, which was the subject of last month’s article.
Putting parameters on the ‘no damages’ clause
What do you do when the owner has issued numerous changes, some of which alter the prior change and other contractors are allowed to move forward, out of sequence with your work? The hoist that the owner was to provide for all contractors to use breaks down regularly.
You cannot seem to develop a rhythm to your job and the completion date keeps telescoping away. You are powerless to stop the problems and you cannot get compensated for the lost time. Your payroll, on the other hand, remains constant or may be increasing. Are things hopeless?
There are steps you can take. Go to the time extension clause first. Typically, that clause will require you to give some form of written notice that you are being held up and that you are entitled to an extension of time for certain types of negative events. In other words, even if you cannot get delay damages, get the time, in writing, in a change order.
Time extensions, if granted, will give you breathing space for reorganizing your job plan. They also may induce the owner to take affirmative action on the cause of your delays. When time extensions compound themselves, the owner is sure to recognize them and the harm they are causing him. This situation may induce the owner to pay you to bring the project back on schedule.
Time extensions are a contractual right. An owner’s refusal to grant time when it is justified is a breach of contract. The compensation for a delay is time. If you are denied the time, then the owner may not stand behind the “no damages for delay” clause.
Do not be put off by the owner’s complaint that you are sending too many notice letters or requests for time. This is the procedure the owner has created in the contract and unless the owner excuses you from doing so, you must follow that procedure.
Thinking in negative time
Contracts contain a variety of clauses, which require that some form of written “notice” be sent within the specified period of time. That time period may be 10, 20 or 30 days. In effect, these clauses allow you a certain period of time after an event has occurred (change, delay, differing condition) to preserve your right to make a claim for the impacts of that event. For a 20-day notice, for example, your written notice on the last day preserves your claims for all costs and time impacts for the prior 20 days. This is the concept of “relation back.”
Logically, if you give your notice 30 days after the event in the example above, you may have lost your right to claim for the first 10 days of the period after the event. But your 20-day relation back from the notice date survives.
In the circumstance where the event has immediate consequences only, a late notice may constitute a waiver of claim regarding the event. Typically, an impact event has continuing repercussions. You can preserve your claims for some of those repercussions even if your notice is too late to cover the first few days.
For example, an owner allows the utility company to trench an area out of sequence with the original schedule, interfering with your access to you work area. The time extension clause requires a 10-day notice, which you did not send. But the trench continues to interfere with your work. Send the notice on day 11, 12, 13 or whenever you remember and make use of the relation back.
Unilateral changes not allowed
Most contracts allow an owner to direct the contractor to change the work. The changes clause refers to additions, deletions and modifications to the work. In this context, the work is the drawings and specifications, not the basic agreement.
A changes clause permits the owner to change the completion date, but not the amount of liquidated damages for late completion. It permits the owner to add equipment for which warranties must be provided, but the owner cannot change the warranty clause.
It permits the owner to add work for which insurance must be maintained, but the owner cannot change the terms of the insurance coverage agreed to in the contract. It does not permit the owner to add or delete an arbitration clause.
In other words, the owner may change what is to be constructed, the timing of the construction and similar changes of the work, but the owner may not change the commercial terms of the contract. The changes clause allows the owner to make unilateral changes to the contract.
That is, he can make these changes without the consent or concurrence of the contractor. For commercial terms not affected by the changes clause, the owner cannot act alone to alter the agreement of the parties. Changes that affect the commercial terms of the contract require the mutual agreement of the contracting parties.
One area where this distinction between commercial terms and the work has grown in contention concerns the warranty clause in which the owner wants to impose design/build responsibilities on the contractor. The warranty provision should spell out limits on the contractor’s promises of liability.
If your warranty clause does not say you are warranting design or performance, it is questionable whether a design/build scope can be imposed on you by the unilateral decision of the owner.
Where a dispute arises and the other party recites a contract clause to show that he is right and you are wrong, you should certainly read the clause. But don’t stop there. Think about how the clause is meant to operate, its purpose and its function; how it relates to other clauses; and how you may be able to use its language to your benefit. EC