Chapter 8 Contract Claims

• Library: Arkansas Construction Law Manual (2016 Ed.)

Contract Claims

John M. Scott^* © 2016

8.1 Scope of Chapter......................................... 8-2

8.2 Claims of Performance and Breach............... 8-4

A. Substantial Performance.............................. 8-4

B. Breach of Contract....................................... 8-7

1. In General....................................... 8-7

2. Breach of Express Warranties.......... 8-8

3. Breach of Implied Warranties........... 8-9

C. Restitution, Unjust Enrichment, and

Quantum Meruit........................................ 8-11

D. Rescission................................................. 8-14

E. Damages................................................... 8-15

F. Negligence and Other Tort Claims Arising

Under a Construction Contract................... 8-16

G. Strict Liability Applied to New Construction 8-17

8.3 Differing Site Conditions............................ 8-19

A. Type I Differing Conditions......................... 8-21

B. Type II Differing Conditions....................... 8-22

C. Site Inspection and Disclaimer Clauses....... 8-22

D. Superior Knowledge................................... 8-24

8.4 Inadequate, Ambiguous or Defective Plans

or Specifications........................................ 8-25

A. The Spearin Doctrine................................. 8-26

8.5 Scope and Cardinal Changes....................... 8-27

8.6 Acceleration.............................................. 8-29

8.7 Owner Interference.................................... 8-31

8.8 Untimely or Improperly Reduced Payment.. 8-33

8.9 Improper Inspection or Rejection............... 8-34

8.10 Wrongful Termination............................... 8-35

8.11 Pass-Through Claims and Liquidation

Agreements............................................... 8-37

8.12 Indemnification......................................... 8-38

8.13 Importance of Notice of Claims.................. 8-40

8.14 Waiver and Release of Claims..................... 8-42

8.15 Other Defenses.......................................... 8-43

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8.1 Scope of Chapter

This chapter covers claims arising under contracts for the construction or improvement of real property, including those based on written, oral, and implied contracts. The parties may choose to define countless obligations through custom-drafted contracts. Others use contracts propounded by the American Institute of Architects (“AIA”) (the AIA form contracts), Associated General Contractors of America (ConsensusDocs), or Associated Owners and Developers (AOD 2002). Despite their industry origination, these forms’ stated goals generally are to present a fair and balanced starting point.

Custom contracts can have all the depth of the industry form contracts, or they can be slightly more detailed than the so-called “back of the envelope” or “hand shake” deals. Where the parties have chosen to omit detailed obligations (or have not realized they should include them), they may be forced to look to traditional common law principles if things go wrong. Where specific contractual requirements speak to a subject, the specific language may trump general common law or implied duties on the subject.

Construction contracts may allocate price and responsibilities in a number of ways. There are traditional design-bid-build contracts where the owner has already commissioned the design of the project prior to the contractor’s providing a price and executing the contract. The design-build contract has gained momentum in recent years, allocating the responsibility to design the project to the design-build contractor, whereby the project is substantially more “undefined” at the time the initial contract is entered.

When it comes to pricing, contracts generally follow one of three pricing schemes: (1) fixed amount (or lump sum price); (2) cost-plus a fee (generally cost plus a percentage of the cost of the work); or (3) cost-plus with a guaranteed maximum price (“GMP”). These pricing concepts address risk allocation and considerations related to the definition of compensable costs, whether additional work is subject to compensation, who obtains the benefit of cost savings, rights to audit the other parties’ records, and situations that call for increases to the compensable costs of the work.

While general contract principles may be applied to construction contracts, they are applied under different operative conditions.¹ More sophisticated contracts may contemplate as many potential variables as possible. Nonetheless, the law can intervene to bridge or alter omitted, unjust, or unintended contract language. This chapter addresses the types of claims and defenses available to the parties to a construction contract and the mechanisms and protocols for pursuing those claims. Issues relating to delay and to specific damage theories are not considered at length here because they are the subjects of Chapters 7 and 9 respectively.

8.2 Claims of Performance and Breach

A. Substantial Performance

“The doctrine of substantial performance is intended to protect the right to compensation of those who have performed in all material and substantive particulars, so that their right to compensation may not be forfeited by reason of mere technical, inadvertent, or unimportant omissions or defects.”² Substantial performance cannot be determined by a mathematical rule relating to the percentage of the cost of completion.³

Arkansas appellate courts have adopted general guidelines in determining whether performance is substantial. “Substantial performance, as defined by the cases, permits any such omissions or deviations from the contract as are inadvertent or unintentional, are not due to bad faith, do not impair the structure as a whole, are remediable without doing material damage to other parts of the building in tearing down and reconstructing, and may without injustice be compensated for by deductions from the contract price.”⁴

Factors to consider in determining substantial performance include the following:

(1) the extent to which the injured party will be deprived of the benefit that it reasonably expected;

(2) the extent to which the injured party can be adequately compensated for the part of that benefit of which it will be deprived;

(3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;

(4) the likelihood that the party failing to perform or offer to perform will cure the failure, taking account of all the circumstances, including any reasonable assurances;

(5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing; and

(6) The quality of the work performed. ⁵

The doctrine of substantial performance may allow a contractor who is liable for a non-material breach to recover compensation under the contract subject to credit to the owner for its damages.⁶

A material breach is a failure to perform an essential term or condition that substantially defeats the purpose of the contract for the other party.⁷ Basic contract law teaches “that where there is a material breach of a contract, substantial nonperformance, and entire or substantial failure of consideration, the injured party is entitled to rescission of the contract and restitution and recovery back of money paid.”⁸ Attention to traditional damages theory will guide the attorney.

Roberts Contracting Company, Inc. v. Valentine-Wooten Road Public Facility Board contains an insightful analysis of the various equities at issue with a problem project.[9] There, the contractor, Roberts, sued for retainage and sums still owed for work completed on the contract, despite not having completed the entire project and even walking off the job that was over a year past the deadline for completion. The owner, Valentine-Wooten Road (“VWR”), counterclaimed for damages and liquidated damages. The trial court found substantially for VWR, yet the Court of Appeals fashioned relief that would compensate Roberts for the work it actually performed, while also upholding VWR’s claim for liquidated damages as a set-off.

The trial court found Roberts’ failures to complete the sewer system as a failure to substantially perform its obligations.¹⁰ In deciding it could not reverse this finding, the Court of Appeals applied the general guidelines listed above for determining when performance is substantial.¹¹ The appellate court found that, although much work had been done on the sewer system, it could not be used for its intended purpose, and therefore there was no substantial performance.¹² Roberts’ “throwing its hands up” and leaving the project weighed against a finding of substantial performance.¹³ Nonetheless, the Court did find that Roberts should be awarded compensation for the work it had completed, subject to appropriate offsets for liquidated damages.

The Roberts Contracting case is worth reviewing for its citation to precedent for determining substantial performance and the rights and remedies of owners and contractors on a troubled project. In short, the questions of substantial performance and material breach are fact intensive. Practitioners advising clients must gather the facts, understand the quality and quantity of work at issue, and weigh the factors as they assess the case.

B. Breach of Contract

1. In General

A breach-of-contract analysis begins with a determination of the contract’s terms.¹⁴ When performance of a duty under a contract is contemplated, nonperformance of that duty is a breach. The parties’ intentions are not gathered from isolated analysis of words and phrases, but rather from the whole context of the agreement. Courts give great weight to the construction of the contract by the parties, and they may look to the conduct of the parties to determine their intent. When a contract is free of ambiguity, its construction and legal effect are questions of law for the court to determine.

A complete analysis of precedent involving ambiguous...