Construction E-Bulletin: Follow the Terms of Your Contract
May 11, 2007
“Follow the terms of your contract” is the message from the Supreme Court of Ohio recently in the case Dugan & Meyers Constr. Co. v. Ohio Dept. of Admin. Servs., 113 Ohio St. 3d 226, 864 N.E.2d 68, 2007-Ohio-1687 (2007). The dispute in that case arose out of a $ 20.9 million contract which the State awarded to Dugan & Meyers to construct a project at Ohio State University. The project fell behind schedule and the State eventually terminated Dugan & Meyers, replaced it with another contractor to complete the work and imposed liquidated damages. Dugan & Meyers countersued for delay damages caused by deficient plans and specifications, among other things.
At trial, the Court of Claims determined that the principal cause of the delay was indeed “an excessive number of errors, omissions and conflicts in the design documents” prepared by the State’s architect. The Court of Claims, for that reason, determined that the State was not entitled to terminate Dugan & Meyers or to backcharge Dugan & Meyers for the costs of the replacement contractor or for liquidated damages, and awarded Dugan & Meyers substantial damages including over $700,000 in delay damages.
Although the Supreme Court of Ohio, on appeal, agreed that there were serious problems with the plans, it affirmed the Appeals Court’s overturning of the judgment in favor of Dugan & Meyers for two primary reasons. First, although the contract specifically required “a written request for an extension of time within ten days of the occurrence of a delay,” Dugan & Meyers stopped making such requests very early in the project. It was this failure to request extensions of time in accordance with the contract that left Dugan & Meyers liable for liquidated damages. Second, the contract expressly provided that there would be no additional compensation for delay. Although such “no damages for delay” provisions are now sometimes unenforceable in Ohio by statute, the Dugan & Meyers contract predated the statutory change and the court disregarded the statute in its analysis, finding that the terms of the contract precluded any claim by Dugan & Meyers for damages due to delay. Under the current statute, the result might have been otherwise. In addition, in a private contract, the result might also have differed, since the courts tend to apply harsher rules in the protection of public funds than in private disputes.
At its heart, the Supreme Court’s decision is consistent with the its earlier decisions in enforcing onerous terms in public contracts. For example, in its 1982 decision in S & M Constructors, Inc. v. Columbus, 70 Ohio St. 2d 69, 434 N.E.2d 1349 (1982), the Court ruled that a contractor had no claim against the city for additional costs incurred when the contractor encountered subsurface conditions different from those described in the reports the city had provided to bidders. The Court rejected that claim specifically because the contract expressly stated that the contractor could make no claim against the city if different subsurface conditions were encountered. In Foster Wheeler Enviresponse, Inc. v. Franklin County Convention Facilities Auth., 78 Ohio St. 3d 353, 678 N.E.2d 519 (1997), the contractor contracted to remove an estimated 140 cubic yards of contaminated earth from a jobsite for $165,000. After work began, the contamination was found to be far more widespread, and the contractor eventually removed an additional 3,546 cubic yards at a cost, per the contract unit price, of $939,000. The Ohio Supreme Court rejected the contractor’s attempt to recover this extra cost specifically because the contractor had not obtained written change orders for the extra removal as required by the contract.
The central lesson of the Dugan & Meyers decision, and its predecessors, is that the contract language may well be enforced in Ohio even when the result is a large and unexpected loss for one of the parties. For that reason, the first advice for contractors is to look for contract clauses that may bar recovery of extra costs in an unfair way and do not assume that a lawyer will ultimately be able to find a way around such clauses. The practical risk of such terms depends on the nature of the project and the history of other players involved in the project. Also be wary of notice requirements and other technical provisions that may be difficult, as a practical matter, to comply with—we have seen bidding documents that require detailed written notices within 48 hours of an occurrence, which would be virtually impossible for project staff to administer correctly. Such terms can be negotiated where feasible; otherwise, a business judgment just be made as to participation and price.
The second advice is to know what the contract “boilerplate” requires the contractor to do, and when, before problems arise. Have a responsible person who is familiar with the contract tasked to review job progress frequently and to take any steps required by the contract. Be alert for seemingly small impacts that could generate large costs by the time the job is finished. Follow up promptly on issuance of change orders. Do not trust oral assurances from an owner or CM that “we’ll sort out the paperwork later.” Err on the side of literal compliance with all of the terms in the contract.
Often, by the time a problem has become serious enough that a contractor feels the urge to call its lawyer, it is too late to go back and touch any bases that were missed. The Dugan & Meyers case teaches us, once again, that the most important law that governs a construction contract is what is written in the contract itself. While failure to comply with construction contract terms in every particular is not always fatal to a contractor’s claim, it is a major hurdle to overcome in litigation, especially when a public owner is involved.
At trial, the Court of Claims determined that the principal cause of the delay was indeed “an excessive number of errors, omissions and conflicts in the design documents” prepared by the State’s architect. The Court of Claims, for that reason, determined that the State was not entitled to terminate Dugan & Meyers or to backcharge Dugan & Meyers for the costs of the replacement contractor or for liquidated damages, and awarded Dugan & Meyers substantial damages including over $700,000 in delay damages.
Although the Supreme Court of Ohio, on appeal, agreed that there were serious problems with the plans, it affirmed the Appeals Court’s overturning of the judgment in favor of Dugan & Meyers for two primary reasons. First, although the contract specifically required “a written request for an extension of time within ten days of the occurrence of a delay,” Dugan & Meyers stopped making such requests very early in the project. It was this failure to request extensions of time in accordance with the contract that left Dugan & Meyers liable for liquidated damages. Second, the contract expressly provided that there would be no additional compensation for delay. Although such “no damages for delay” provisions are now sometimes unenforceable in Ohio by statute, the Dugan & Meyers contract predated the statutory change and the court disregarded the statute in its analysis, finding that the terms of the contract precluded any claim by Dugan & Meyers for damages due to delay. Under the current statute, the result might have been otherwise. In addition, in a private contract, the result might also have differed, since the courts tend to apply harsher rules in the protection of public funds than in private disputes.
At its heart, the Supreme Court’s decision is consistent with the its earlier decisions in enforcing onerous terms in public contracts. For example, in its 1982 decision in S & M Constructors, Inc. v. Columbus, 70 Ohio St. 2d 69, 434 N.E.2d 1349 (1982), the Court ruled that a contractor had no claim against the city for additional costs incurred when the contractor encountered subsurface conditions different from those described in the reports the city had provided to bidders. The Court rejected that claim specifically because the contract expressly stated that the contractor could make no claim against the city if different subsurface conditions were encountered. In Foster Wheeler Enviresponse, Inc. v. Franklin County Convention Facilities Auth., 78 Ohio St. 3d 353, 678 N.E.2d 519 (1997), the contractor contracted to remove an estimated 140 cubic yards of contaminated earth from a jobsite for $165,000. After work began, the contamination was found to be far more widespread, and the contractor eventually removed an additional 3,546 cubic yards at a cost, per the contract unit price, of $939,000. The Ohio Supreme Court rejected the contractor’s attempt to recover this extra cost specifically because the contractor had not obtained written change orders for the extra removal as required by the contract.
The central lesson of the Dugan & Meyers decision, and its predecessors, is that the contract language may well be enforced in Ohio even when the result is a large and unexpected loss for one of the parties. For that reason, the first advice for contractors is to look for contract clauses that may bar recovery of extra costs in an unfair way and do not assume that a lawyer will ultimately be able to find a way around such clauses. The practical risk of such terms depends on the nature of the project and the history of other players involved in the project. Also be wary of notice requirements and other technical provisions that may be difficult, as a practical matter, to comply with—we have seen bidding documents that require detailed written notices within 48 hours of an occurrence, which would be virtually impossible for project staff to administer correctly. Such terms can be negotiated where feasible; otherwise, a business judgment just be made as to participation and price.
The second advice is to know what the contract “boilerplate” requires the contractor to do, and when, before problems arise. Have a responsible person who is familiar with the contract tasked to review job progress frequently and to take any steps required by the contract. Be alert for seemingly small impacts that could generate large costs by the time the job is finished. Follow up promptly on issuance of change orders. Do not trust oral assurances from an owner or CM that “we’ll sort out the paperwork later.” Err on the side of literal compliance with all of the terms in the contract.
Often, by the time a problem has become serious enough that a contractor feels the urge to call its lawyer, it is too late to go back and touch any bases that were missed. The Dugan & Meyers case teaches us, once again, that the most important law that governs a construction contract is what is written in the contract itself. While failure to comply with construction contract terms in every particular is not always fatal to a contractor’s claim, it is a major hurdle to overcome in litigation, especially when a public owner is involved.
