Slaying a Contract Beast: Like nothing we’ve seen before

Cartoon of a brown, fuzzy monster baring its teeth and looming over a frightened man. Shutterstock / Malchev / SCC.Comics

Past articles have discussed difficult problems in contract language. Methods for making sense of ambiguities or simple imprecision in contract drafting have been developed by the courts. These rules work successfully, more or less.

In my law practice, clients have presented a rich variety of these issues. At the heart of the court’s resolution of disputes arising from unclear and conflicting contract terms is this maxim: If the parties intended to enter into a contract, the courts will plow through the clauses and try to get to where there is a meeting of the minds of the parties.

Recently, however, I was faced with a problem contract that was unique in how poorly it was glued together from irreconcilably different pieces. None of the standard rules for untangling the conflicts within and between the parts of the “agreement” helped make sense of the document.

The nature of the beast

The owner of a manufacturing plant knew that it needed substantial upgrades and replacements for its old, outmoded systems and equipment. He hired a design firm, which developed 3D CAD drawings and a thick set of specifications. When this design was sent out for bid, the proposals received were for amounts far in excess of what the owner expected or wanted to pay.

At that point, the owner’s in-house engineering group met with my client, a contractor that had been doing maintenance and upgrades at the facility for years. The engineers and the contractor agreed that there would be significant cost savings if they worked together, essentially by ignoring the design firm’s plan. Unfortunately, the engineering group did not fully explain this new approach to the owner’s executives.

When the contract documents were assembled by the owner’s purchasing group, they consisted of the following:

  • All of the detailed CAD drawings and specs
  • Terms and conditions for a lump-sum design/build contract (a document the owner pulled from a past job by another contractor)
  • A purchase order that contained an estimated contract value and stated that this was a “time and materials” agreement with no fixed price (a document the owner had used in the past for maintenance work).

The obvious conflicts between 1, 2 and 3 went well beyond “apples and oranges,” yet the contractor signed the agreement. Then the situation got worse.

The beast mutates

During construction, the contractor performed the work as directed by the owner’s engineering group, but this work had little relationship to the design firms’ documents. At the end of each month, the chief engineer met with the contractor and they listed what had been done that past month, and agreed on an amount of compensation based on their estimates. No time and materials (T&M) cost records were kept. By evidence later obtained, the owner’s executives knew none of this.

The monthly invoices, all approved by the owner’s chief engineer, contained a summary description of the work. Anyone with knowledge of the design documents would have known from looking at these invoices that the original design was not being followed. However, the invoices were sent to the purchasing department, which stopped its inquiry at seeing the chief engineer’s approvals for payment.

The beast discovered

The owner’s executives finally got involved in this chaos when the actual costs exceeded the estimated contract price of this purchase order. Payment for further invoices stopped abruptly. Because the chief engineer told the contractor that this payment problem would be taken care of, the contractor finished the job. When no further payments were made, the contractor called me.

What do we call the beast?

My first question was, what kind of a contract was I dealing with? It was not a specified job—the design by the owner was ignored. It was not design/build—the contractor did not design the work, but instead followed the engineer’s instructions. It was not T&M—the contractor had no time or material estimates and no documentation of costs, only cost estimates. It was not fixed-price—two of the three parts of the contract documents said it was fixed-price, but the purchase order said it was open-ended.

Were the contract documents so inconsistent that there was a failure to have a meeting of the minds? If so, then there was no written contract that was enforceable. Did the owner legally accept the new contract terms created by its own chief engineer by paying the invoices along the way? Did the chief engineer have the authority to do what he did and thus bind the owner?

The beast’s fate

After a couple years of litigation, the parties settled. The owner’s chief concern was that it could not prove that there was any meaningful contract agreed to by both parties, and so a court would award the contractor its actual costs plus overhead and profit (a “quantum meruit” recovery, meaning recovery of “what one has earned”). The contractor’s chief concern is that it did not have sufficient records to prove its actual costs.

Even though this situation may seem unusual, there are other beasts in contracts. You need to eliminate any of these beasts before signing a contract.

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