Tag Archives: construction contract

Why “Time Is Of The Essence Clauses” Matter

Time is of the essence clauses are common in construction contracts and for good reason. This clause activates certain rights and remedies to various parties in a construction contract. Every contractor should be familiar with the importance of this clause. Watch to learn more.

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2017 AIA CONTRACT UPDATES

If you work in construction you’re familiar with the American Institute of Architects more commonly known as the AIA. They create form contracts used by many construction companies in various types of construction projects. Many smaller contractors pull these contracts offline and present them for execution without much modification at all. Given the frequent use of these agreements, it’s no wonder that their 2017 updates are considered a big deal.

OWNER-CONTRACTOR AIA UPDATES

Project Timeline

The parties now have choices with regard to when the project will commence and when the project will be substantially completed. The parties can elect to have the project commence on the date the agreement is executed or a different date. The parties can elect a specific date for substantial completion or a certain number of calendar days.

Termination Fee

If a contractor is terminated for convenience under the AIA agreement, the AIA assumes the contractor will be paid a termination fee.

Payments

Here’s the big one. The AIA treats the A101 and the A102 differently, and for good reason. The A101 is a standard form agreement for a fixed fee. This is commonly known as a fixed fee agreement. The A102 is a cost-plus agreement with a maximum guaranteed price. This means that the owner will pay for the cost of labor and materials plus some additional percentage of the total cost of labor and materials as the contractor’s fee.

In the A101 because the contract is based on a fixed sum, less significance is given to the percentage of work completed. However, owners are still required to pay for only the contract amount able to be allocated to the work. Unlike A101, because A102 is a cost-plus agreement, emphasis on percentages remains high. The A102 also adds documentation requirements for the contractor on contingency cost items and cost-plus subcontracts.

As always, if you plan to use an AIA form take the extra step to have your counsel customize the form for your specific project. Counsel may also want to attempt to negotiate a better position for your company. If neither is feasible for you, please take the time to read and understand the form before presenting it for execution.

Nothing in this article is to be considered legal advice. If you have questions or need representation due to nonpayment on a construction project, please call 832-930-0529 or email us at info@stephenspllc.com

Zachry Constr. Corp. v. Port of Houston Auth.: Limits On Contractual Freedom In Construction

Zachry Constr. Corp. v. Port of Houston Auth.

Limits On Contractual Freedom In Construction

Generally speaking, as long as your contract isn’t illegal or unconscionable, courts have a tendency to allow parties to enter into agreements at their own risk. Courts reason that any mitigation of risk can and should be negotiated by the parties to the contract. However, in Zachry Constr. Corp. v. Port of Houston Auth., the Texas Supreme Court’s ruling demonstrates that sometimes public policy can dictate the validity of a contract’s provisions.

Background Facts

Zachry Construction Corporation (“Zachry”) and Port of Houston Authority (“Port”) entered into a contractual agreement whereby Zachary was to build a wharf on a ship channel. There was a very tight timetable which Zachary was aware of when they entered into the contract. To complete the project on time, Zachry developed a plan that required it to use a freeze wall.

At some point during the construction, Port decided it needed the wharf to be 332ft larger than it originally planned. Zachary elected to use another freeze wall but the Port had reservations regarding the use of the freeze wall. However, the Port waited until two weeks after a change order was issued based on Zachary’s plan and then demanded that Zachary submit a plan without the freeze wall.

Zachary completed the original section of the wharf and begin constructing the second section without the freeze wall. This delayed completion by two years and it caused $2.36 million in liquidated damages. Zachary eventually filed suit for $30 million in damages.  However, the Port pointed to a No-delay-damages provision which stated in part:

Zachry or any of its subcontractors or suppliers shall receive no financial compensation for delay or hindrance to the Work, regardless of the source of the delay;

Zachry was not entitled to financial compensation even if the source of the delay resulted from events of force majeure or the negligence, breach of contract, or other fault of the Port; and

Zachry’s sole remedy shall be an extension of time.

 

Generally speaking, there are five exceptions to the rule that a contractor may agree to assume the risk of construction delays and not seek damages under Texas law. The two exceptions relevant to this case are: where the delay

(ii) resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision;  

(v) was based upon active interference with the contractor or other wrongful conduct, including arbitrary and capricious acts, willful and unreasoning actions, without due consideration and in disregard of the rights of other parties.

Although Zachry was able to convince a jury that the intentional acts of Port voided the no delay damages provisions, the court of appeals stated that the “other fault” language in the no-delay-damages provision was intended to cover the kind of misconduct by the Port found by the jury. However, the Texas Supreme Court disagreed.

The Law

The Texas Supreme Court doubted whether “other fault” was intended to include the kind of deliberate, wrongful conduct in which the Port engaged. The court stated that experienced contractors can assess potential delaying events when estimating and bidding public works, but they cannot assess potential delays that may arise due to an owner’s direct interference, willful acts, negligence, bad faith fraudulent acts, or omissions. See Zachry, No. 12-0772, 2014 Tex. LEXIS 768, at *40-41.

Secondly and more surprisingly, the court stated that, a contractual provision exempting a party from contract liability for harm caused intentionally or recklessly is typically unenforceable on public policy grounds. The court reasoned that this case was comparable to cases where pre-injury waivers of future liability for gross negligence were void as against public policy. The court stated that its conclusion was supported by lower courts in Texas and 28 other U.S. jurisdictions. See Zachry, No. 12-0772, 2014 Tex. LEXIS 768, at *41-44.

What This Means

This case is important for a number of reasons. However, the biggest reason is that outside of this case, generally speaking, courts only interfered with waivers and other immunizations in tort or injury cases. The public policy exception’s extension to contract law is something that all contractors should be aware of.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.StephensBell.com

Architect Screws Up the Plans? Guess Who’s left holding the bag? CONTRACTORS!

The LAW
Essentially, the economic loss rule states that with regard to unintentional torts such as negligence, and negligent misrepresentation, there can be no recovery for the plaintiff unless the plaintiff suffers some form of physical injury. See LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014). Purely financial loss is insufficient. See Id.

WHAT HAPPENED
When analyzing the latest Texas Supreme Court case on the issue, it becomes apparent that contractors should beware! In LAN/STV, an architect completed plans for a project on behalf of the owner. The owner then incorporated those plans to solicit competitive bids. Naturally the contractors based their bids on the architect’s plans and one contractor was awarded the project. However, early into the project the contractor realized that the plans were completely flawed. The flawed plans delayed the job and cost the contractor 14 million in revenue.

The contractor sued the owner for breach of contract but eventually settled out of court for 4.7 million. The contractor then tried to sue the architect but as is typical in the construction industry, the contractor did not have a contractual relationship with the architect because the contractor only entered into an agreement with the owner. Consequently, there was no contract remedy such as breach of contract through which the contractor could obtain damages from the architect.

The contractor decided to sue under a tort theory of negligent misrepresentation. The Texas Supreme Court Stated that “the law has long limited the recovery of purely economic damages in an action for negligence”, and concluded that “the economic loss rule does not allow recovery.” LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014).

WHAT IT MEANS FOR YOU
What this means for you is that you must protect yourself during the bargaining process. If you are the general contractor, it is probably wise that while bargaining with the owner, you insist on protection from the architect. This protection can come in the form of insurance, which you can include in the cost of your bid or a indemnification clause that you put in the contract. The same applies to sub-contractors.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.kestephenslaw.com.