Chapter III Contract Clauses

• Library: SC Construction Law Desk Book (SCBar) (2022 Ed.)

Chapter III Contract Clauses¹

K. Michael Barfield

A. Introduction

Practitioners rarely draft construction contracts from scratch, opting instead to modify standard documents commercially available to suit the needs of their client. Many versions of copyrighted standard contract documents are available, such as ConsensusDOCS, and those from different organizations including The Associated General Contractors of America ("AGC"), The American Institute of Architects ("AIA"), and Associated Owners & Developers ("AOD"). These documents are used in South Carolina by state and local governments and by private entities as well. While the availability of documents varies by organization, standard documents are available for all parties concerned with a construction project, including Architects, Construction Managers, Consultants, Contractors, Design-Builders, FF&E Vendors, Interior Designers, Joint Venturers and Owners. Standard documents are available for more unique contractual arrangements including public-private partnership agreements and integrated project delivery agreements. Some of the most frequently used documents include standard agreements with various fee structures, including stipulated sums or fixed fee and cost plus fee with or without a guaranteed maximum price, general conditions, bond forms, pay applications, subcontracts, and change order forms. Other documents available include agreements for green construction and subcontracts on federal projects. While they are widely used in jurisdictions throughout the nation, South Carolina statutes and case law may affect the terms and interpretation of these documents. Moreover, modifications to these documents may further affect the parties' contractual positions. Critical contract clauses from the most commonly used standard documents and South Carolina law related to those clauses are addressed herein.

Regardless of the source of the contract language, consistency is critical. Contractors frequently use all or part of an AIA form contract in their contracts with owners, but they fail to use the corresponding AIA form contract with their subcontractors. Instead, they will opt for a simple document that either they or their subcontractors create. In fact, it is common that contractors and subcontractors simply execute a copy of the subcontractors' bid-proposals to function as subcontracts. If a general contracts with owners contemplate that subcontracts will operate under similar terms, contractors' failure to follow through with such requirements in their subcontracts can, of itself, constitute a breach of contract with the owner.

Similarly, not all standard form contracts apply to every project. For example, one of the most commonly used AIA form contract, A-103, contemplates the involvement of an architect throughout the life of a project. In fact, A-103 states that the architect shall function as the informal initial arbiter of disputes between the owner and the contractor during the project. Further, the architect is tasked with pay application of approval through the life of the project. This is time-tested arrangement that can work very well-provided that the owner if willing to pay the architect to take on such responsibilities. If an owner and a contractor enter into a contract that calls for ongoing participation by the architect can find themselves and uncharted territory if problems do arise but no architect has been retained to address them.

B. Claim Notice Requirements

Standard documents all require notice of claims by the contractor; however, not all require notice of claims by the owner. Current AIA documents require either party to provide written notice of a claim to the other party while ConsensusDOCS only requires written notice of a claim by the contractor.² AIA documents require notice to be made within 21 days after occurrence of the event giving rise to the claim or when the condition is first recognized and require that notice be sent to the "Initial Decision Maker"³ and the project architect as well as the owner.⁴ConsensusDOCS requires prompt written notice of delays and requires written notice within 14 days after the contractor recognizes the delay if it intends to make a claim for additional time or money.⁵ Within 21 days of giving such notice, the contractor must submit written documentation of its claim including its request for additional time and/or money while the owner must respond approving or denying the claim within 14 days of its receipt.⁶ If the owner fails to respond, the new ConsensusDOCS deems that failure to respond as a denial of the claim.⁷

The South Carolina Supreme Court addressed the importance of notice clauses in Austin-Griffith, Inc. v. Goldbert.⁸ In Austin-Griffith, a contractor and project owner were involved in a dispute where the owner ultimately terminated the contract and completed the project itself.⁹ The contractor filed two mechanic's liens claiming that the owner had breached the contract, owed him additional money, and could not assess liquidated damages as the owner had caused delays to the project.¹⁰ While addressing multiple issues, the court found that the contractor had not given proper notice of delay pursuant to the contract that required the time for completion to be extended "for such additional time as should be [caused] by such delay, provided, however, that the contractor herein shall at the time of such delay, if any, demand of the owner in writing such additional time within which to complete the performance of this contract."¹¹ The court held that this form of notice provision is a condition precedent to any right of the contractor to be excused for owner caused delays, and, where no demand has been made, the contractor cannot assert an owner delay.¹² It further indicates that the parties, by including such a provision, "attached value and importance to its precise terms," that when a contract requires a written request for an extension of time, an oral request is insufficient, and that the purpose of such a provision is clearly to prevent the contractor from making a delay claim after completion of the project.¹³

C. Construction Schedule and Time for Completion

At the start of construction, and before approval of the first pay application, contractors are required to submit a proposed construction schedule to the owner, usually for the owner's approval. Based on the complexity of the project, the owner may require a schedule as simple as a bar chart or as complex as a cost and resource loaded schedule using the critical path method of scheduling. Owner approval is recommended as it prevents the contractor from modifying the schedule at will and requires him to justify any changes to the schedule or extensions to the contract time. Monthly updates are usually required in conjunction with submission of each progress payment application.

AIA documents expressly provide that the schedule must not exceed time limits included in the contract.¹⁴ In some instances, contractors have submitted claims for acceleration alleging that they were unable to complete the project early as planned because of a delay by the owner which resulted in additional costs to the contractor.¹⁵ Therefore, it is wise to require that the schedule reflect project completion at the end of the contract time and not at an earlier date.

All construction contracts should include a contract time for completion. If absent, case law provides that a contractor may be liable for delays even if there is no contractual completion date.¹⁶ In The Drews Co. Inc. v. Ledwith-Wolfe Assoc. Inc., the contract at issue did not include a contractual completion date and did not indicate that time was of the essence.¹⁷ The court held that when there is no completion date included, time is not of the essence, but the contract must nonetheless be performed in a reasonable time.¹⁸ The court further concluded that the determination of whether the contractor's performance is timely is a factual question properly decided by a jury.¹⁹

In lieu of proving actual damages for delayed completion, contracts often include a liquidated damages clause that provides a daily rate of damage for unexcused delay.²⁰ Liquidated damages should be based on a reasonable estimate of actual damages and are not enforceable when deemed to be a penalty.²¹

As written, standard documents indicate that the contractor is responsible for the sequencing of the work. However, ConsensusDOCS allows the owner to make reasonable changes to the work's sequence.²² That provision does, however, indicate that to the extent the contract price and time are affected by owner changes, they should be adjusted.²³

The South Carolina Supreme Court has addressed the importance of maintaining the construction schedule as submitted to the owner.²⁴ In Hunter Bros. Sys. Inc. v. Brantley Constr. Co., Inc., the contract between the owner and general contractor included standard language from the AIA documents that required the contractor to prepare "an itemized progress schedule giving the sequence and dates for all major stages of the Work" and to "regulate his operations, plans, working shifts, number of men employed as to maintain a program in accordance with the schedule or such revisions thereof as are approved by the Owner."²⁵ In this case, the general contractor was concerned it would be assessed liquidated damages by the owner for late completion, and it attempted to set off monies due its electrical subcontractor because of delays allegedly caused by the subcontractor failing to start its work as originally scheduled.²⁶ However, the subcontractor's refusal to start its work was predicated on the contractor's failure to complete installation of the roof prior to installation of its conduit.²⁷ Testimony indicated that the sole reason that conduit installation did not commence was the general contractor's failure to complete the roof as scheduled.²⁸ The court agreed that it was...