Interpreting Construction Contracts

Transcription

1

2 Interpreting Construction Contracts

3 Other Titles of Interest Alternative Project Delivery, Procurement, and Contracting Methods for Highways, edited by Keith R. Molenaar and Gerald Yakowenko (ASCE Committee Report, 2007). Comprehensive and objective presentation of alternative methods for highway construction issues. (ISBN ) Construction Contract Claims, Changes & Dispute Resolutions, Second Edition, by Paul Levin (ASCE Press, 1998). Merges the principles of construction law with practical advice to aid those involved in the construction claims process. (ISBN ) Geotechnical Baseline Reports for Construction: Suggested Guidelines, edited by Randall J. Essex (ASCE Committee Report, 2007). Explains the use of geotechnical baseline reports to manage risks associated with subsurface construction and emphasizes compatibility among the report and other contract documents. (ISBN ) Managing Innovation in Construction, edited by Martyn Jones and Mohammed Saad (Thomas Telford, Ltd., 2004). Applies innovative best-practices to the adversarial relationships and fragmented processes that characterize much of the construction industry. (ISBN ) Preparing for Design-Build Projects: A Primer for Owners, Engineers, and Contractors, by Douglas D. Gransberg, James E. Koch, and Keith R. Molenaar (ASCE Press, 2006). A professional reference that covers the basics of developing a designbuild project. (ISBN ) Principles of Applied Civil Engineering Design, by Ying-Kit Choi (ASCE Press, 2004). Details the guidelines, principles, and philosophy needed to produce design documents for heavy civil engineering projects. (ISBN ) Quality in the Construction Project, Second Edition, by the Committee on Professional Practice (ASCE Manuals and Reports on Engineering Practice, 2000). Comprehensive guide to principles and procedures that effectively enhance the quality of constructed projects. (ISBN ) Surety Bonds for Construction Contracts, by Jeffrey S. Russell (ASCE Press, 2000). Describes and analyzes the surety bond process in basic terms. (ISBN ) Ten Commandments of Better Contracting, by Francis T. Hartman (ASCE Press, 2003). Outlines ten basic rules for improving contract performance. (ISBN ) The Engineers Joint Contract Documents Committee (EJCDC) Contract Documents. Fair and objective standard documents that represent the latest and best thinking in contractual relations between all parties involved in engineering design and construction projects. For more information, please visit Visit us on the Web at

4 Interpreting Construction Contracts Fundamental Principles for Contractors, Project Managers, and Contract Administrators H. Randolph Thomas, Ph.D, P.E. Ralph D. Ellis Jr., Ph.D., P.E.

5 Library of Congress Cataloging-in-Publication Data Thomas, H. Randolph, Interpreting construction contracts : fundamental principles for contractors, project managers, and contract administrators / H. Randolph Thomas, Ralph D. Ellis Jr. p. cm. Includes bibliographical references and index. ISBN-13: ISBN-10: Construction contracts United States. 2. Construction contracts United States Interpretation and construction. 3. Contractors United States Handbooks, manuals, etc. 4. Project managers United States Handbooks, manuals, etc. I. Ellis, Ralph D., Ph.D. II. Title. KF902.T ' dc Published by American Society of Civil Engineers 1801 Alexander Bell Drive Reston, Virginia Any statements expressed in these materials are those of the individual authors and do not necessarily represent the views of ASCE, which takes no responsibility for any statement made herein. No reference made in this publication to any specific method, product, process, or service constitutes or implies an endorsement, recommendation, or warranty thereof by ASCE. The materials are for general information only and do not represent a standard of ASCE, nor are they intended as a reference in purchase specifications, contracts, regulations, statutes, or any other legal document. ASCE makes no representation or warranty of any kind, whether express or implied, concerning the accuracy, completeness, suitability, or utility of any information, apparatus, product, or process discussed in this publication, and assumes no liability therefor. This information should not be used without first securing competent advice with respect to its suitability for any general or specific application. Anyone utilizing this information assumes all liability arising from such use, including but not limited to infringement of any patent or patents. ASCE and American Society of Civil Engineers Registered in U.S. Patent and Trademark Office. Photocopies and reprints. You can obtain instant permission to photocopy ASCE publications by using ASCE s online permission service ( Requests for 100 copies or more should be submitted to the Reprints Department, Publications Division, ASCE (address above); permissions@asce.org. A reprint order form can be found at Copyright 2007 by the American Society of Civil Engineers. All Rights Reserved. ISBN 13: ISBN 10: Manufactured in the United States of America

6 Contents Preface xv Acknowledgments xvii Chapter 1. Introduction Objective 1 Scope 1 How to Use This Book 3 Outline 4 Chapter 2. Basic Concepts The Appellate Process 5 Fact-Sensitive 7 Hierarchy of Documents and Rules 8 Consistency 8 Equity 8 Reference 9 Chapter 3. What Is a Contract? Formation Principles 11 Form 14 Exercise 3-1: Rosen & Morelli and Kreisler Borg 15 References 16 Additional Cases 16 Chapter 4. Fundamental Principles Common-Law Rules 17 Procedural Interpretation Rules 17 v

7 vi Contents Operational Interpretation Rules 26 References 35 Chapter 5. Types of Changes and Disputes Identifying the Type of Dispute 37 Bilateral Change vs. Unilateral Change 38 Cardinal Changes 39 Minor Changes 39 Change Orders 39 Constructive Changes 41 Examples 42 Exercise 5-1: Diamond and the U.S. Assay Office 42 Exercise 5-2: Grand Forks and Moorhead Construction 45 Reference 48 Chapter 6. Notice Requirements Contract Language 49 Background 50 Rules of Application 53 Other Issues 63 Illustrative Example 67 Exercise 6-1: Granger Contracting and Chiappisi Brothers 70 Exercise 6-2: Linneman Construction and Montana-Dakota Utilities Co. 72 Exercise 6-3: Acchione & Canuso and PennDOT 74 Exercise 6-4: McKeny Construction and Rowlesburg, W.V. 75 Exercise 6-5: Northern Improvement Co. and South Dakota State Highway Commission 76 Exercise 6-6: Federico Co. and Commonwealth of Massachusetts 78 References 79 Additional Cases 80

8 Contents vii Chapter 7. Extra Work and Oral Change Orders Contract Language 81 Background 82 Rules of Application 84 Other Issues 96 Illustrative Example 97 Exercise 7-1: Long and Lazer Construction Co. 101 Exercise 7-2: Henry s Electric Co. and Marilyn Apartments 102 Exercise 7-3: Laramee and Care Systems 103 Exercise 7-4: Owens Plumbing & Heating and Bartlett, Kans. 103 Exercise 7-5: Utah DOT and Thorn Construction Co. 104 Exercise 7-6: Security Painting Co. and PennDOT 105 References 106 Additional Cases 107 Chapter 8. Rules for Contract Interpretation Contract Language 108 Rules of Application 109 Rule against the Drafter 126 The Order-of-Precedence Clause 127 Illustrative Example 128 Exercise 8-1: Barash and New York 132 Exercise 8-2: Long and Lazer Construction Co. 133 Exercise 8-3: W. H. Armstrong & Co. and U.S. Government 134 Exercise 8-4: R. B. Wright Construction Co. and U.S. 135 Exercise 8-5: Lyon Metal Products and Kaiser Construction Co. 137 Exercise 8-6: Lancaster Area Sewer Authority and Environmental Utilities Corp. 139 Exercise 8-7: Metro Insulation Corp. and Boston Housing Authority 142 Exercise 8-8: Foothill Junior College District and Jasper Construction Co. 144

9 viii Contents Exercise 8-9: Western Contracting Corp. and Georgia State Highway Department 145 Exercise 8-10: Jacksonville State University, Dawson Construction Co., and Bob Roberts Co. 146 Exercise 8-11: Security Painting Co. and PennDOT 148 Exercise 8-12: D Annunzio Brothers and NJT 150 Exercise 8-13: Blake Construction Co. and U.S. Navy 151 Exercise 8-14: Farrell-Cheek Steel Co. and Forest Construction Co. 153 Exercise 8-15: Granger Contracting Co. and Chiappisi Brothers 153 Exercise 8-16: J. A. Jones Construction Co. and U.S. Army Corps of Engineers 155 References 159 Additional Cases 159 Chapter 9. Differing Site Conditions Contract Language 160 Background 161 Rules of Application 163 Type II Condition 174 Other Issues 176 Illustrative Example 177 Exercise 9-1: Blauner Construction Co. and U.S. Treasury 179 Exercise 9-2: U.S. Army Corps of Engineers and Stuyvesant Dredging Co. 181 Exercise 9-3: Morrison & Lamping and State of Oregon 184 Exercise 9-4: Umpqua River Navigation Co. and Western Pacific Dredging Corp. 187 Exercise 9-5: Grand Forks, N.D., and Moorhead Construction Co. 190 Exercise 9-6: Western Contracting Corp. and California Department of Water Resources 193 Exercise 9-7: P. J. Maffei Building & Wrecking Corp. and U.S. Government 194

10 Contents ix Exercise 9-8: Carlos Teodori and Penn Hills School District Authority 195 References 197 Additional Cases 199 Chapter 10. Misrepresentations Contract Language 200 Background 201 Rules of Application 202 Relevant Information Withheld 218 Illustrative Example 222 Other Issues 225 Exercise 10-1: J. A. Thompson & Son and State of Hawaii 227 Exercise 10-2: Williams-McWilliams Co., Michigan Wisconsin Pipeline Co., and U.S. Government 228 Exercise 10-3: P. T. & L. Construction Co. and State of New Jersey 232 Exercise 10-4: Charlotte, N.C., and Ruby-Collins 235 Exercise 10-5: Pennsylvania Turnpike Commission and York Engineering & Construction Co. 238 Exercise 10-6: Utah DOT and Thorn Construction Co. 240 Exercise 10-7: Indianapolis and Twin Lakes Enterprises 241 Exercise 10-8: Post & Front Properties and Roanoke Construction Co. 242 Exercise 10-9: Ideker Corp. and Missouri State Highway Commission 242 Exercise 10-10: Waldinger Corp. and Daniel Hamm Drayage Co. 244 Exercise 10-11: Pinkerton & Laws Co. and Roadway Express 246 Exercise 10-12: Flippin Materials Co. and U.S. Government 250 Exercise 10-13: Public Constructors and State of New York Department of Public Works 252

11 x Contents Exercise 10-14: E. H. Morrill Co. and California Department of Public Works 253 References 255 Additional Case 256 Chapter 11. Defective Specifications Contract Language 257 Background 258 Rules of Application 259 Performance Specifications 271 Illustrative Example 276 Exercise 11-1: Blount Brothers and U.S. Government 278 Exercise 11-2: Marine Colloids and M. D. Hardy 279 Exercise 11-3: Western Foundation Corp. and Veterans Administration 281 Exercise 11-4: J. D. Hedin Construction Co. and Veterans Administration Exercise 11-5: J. D. Hedin Construction Co. and Veterans Administration Exercise 11-6: Weston Racquet Club and Republic Floors of New England 289 Exercise 11-7: Rhone-Poulenc Rorer Pharmaceuticals and Newman Glass Works 291 Exercise 11-8: ALTL and The Architectural Group 292 References 293 Additional Cases 295 Chapter 12. The No-Damages-for-Delay Clause Contract Language 296 Judicial Attitude 298 Rules of Application 298 Illustrative Examples 308 References 311 Additional Cases 312

12 Contents xi Chapter 13. Substantial Completion Contract Language 313 Background 314 Significance of Substantial Completion 314 Evolution of Substantial Completion 317 Primary Rules of Inquiry 318 Certificate of Substantial Completion 324 Illustrative Examples 325 References 327 Additional Case 328 Chapter 14. Liquidated Damages Contract Language 329 Background 330 Basic Principles of the Liquidated-Damages Clause 331 Primary Rules of Application 334 Strategy 337 Illustrative Examples 338 Exercise 14-1: S. J. Otinger Construction Co. and Montgomery, Ala., Water Works & Sanitary Sewer Board 341 References 342 Appendix A: Additional Exercises Exercise Exercise Exercise Exercise Exercise Exercise Exercise Appendix B: Exercise Solutions Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise

13 xii Contents Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise

14 Contents xiii Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Solution: Exercise Case Table 433 Index 441 About the Authors 451

15 This page intentionally left blank

16 Preface Little work is done on construction projects without a contract. Even if there is no written document, verbal commitments are usually recognized judicially as valid contracts. Therefore, all parties involved in a construction project must read, understand, and correctly interpret the language of key provisions of the contract. We wrote this book because we have observed a widespread lack of understanding about construction contracts. We are engineers, and we wrote this text for engineers, contractors, and administrators. Although the text is based on case law research, we focus on understanding and application. By reading the text and working some of the problems at the end of each chapter, readers build confidence that they can render judicially correct interpretations of construction contracts. Thus, we designed this book to build confidence. Four key elements make our text unique. First, the chapters are easy to read and comprehend. Second, they contain numerous examples. Third, we limit the use of legal terms and concepts. And fourth, readers do not need to master legal terminology; where we use legal concepts, we give many examples so the concepts can be readily understood. We present the resolution of conflicts in flowcharts or decision trees. The flowcharts are based on the review of hundreds of appellate court cases. From our review, it is evident that judges in all jurisdictions, public or private, repeatedly ask the same questions, and these questions have been incorporated into the flowcharts. Depending how each question is answered, the outcome is reasonably predictable and the law stays fairly consistent. In each chapter, we include case studies and exercises based on actual court cases. The case studies may involve several issues, but they are strategically placed to reinforce a key point in the text. The exercises may be used for workshop discussion or as classroom problems. Solutions to the exercises are presented in Appendix B. We derive the xv

17 xvi Preface solutions using the flowcharts and then present the resolution of the dispute. In all but a few instances, the flowchart solution is consistent with the judicial outcome. Some disputes can be quite complicated and are beyond the scope of this book. This book is not a substitute for sound legal advice, which should be sought in the drafting of contracts and for complicated disputes.

18 Acknowledgments I would like to acknowledge my graduate students, without whose legal research this book would not be possible. They are: Dennis Wright Robert Mellott Martin Ponderlick Steve Wirsching Michael Clark Michael Cummings Randolph Thomas First, I thank my friend and partner in this project, Randolph Thomas, for his dedication and untiring work. I also must thank my wife and daughter for their unselfish support of this and every other professional activity I have undertaken. Ralph Ellis Jr. xvii

19 This page intentionally left blank

20 Chapter 1 Introduction Technical competence, common sense, and experience are not enough to ensure that one is a good construction manager or contract administrator. Today, one may be called on to use communication or negotiation skills, interpret the OSHA regulations, or help develop an environmental impact statement. Managers are frequently called on to interpret construction contracts, a task for which they usually have had little or no formal training, and so they often resort to intuition, common sense, or hearsay. Each may yield a different interpretation. Objective This book defines rules for construction contract interpretation for the most troublesome contract clauses. The rules were developed for contractors and contract administrators to improve the quality of contract administration. The view is that by following these simple rules, the parties to a dispute can reach a contractually correct decision without resorting to the courts or other resolution forums. In this book, a contractually correct decision is assumed to be the same as a judicial decision. Scope In general, a correct judicial contract interpretation is determined by (1) the application of well-defined rules of law applied to the facts or (2) results 1