Phantom Menace: Beware of Unknown Unknowns in Contracts
Written contracts generally provide a very stable method of making promises enforceable. Reducing all promises to a single self-contained writing reduces surprises and provides a single yardstick to measure compliance. Unfortunately, many contracts today – especially construction contracts – tend to be composites; assemblages of different documents into a single contract. We’ll call this a “Compound Contract” for ease of reference. Compound Contracts have the benefit of avoiding excessive cut-and-paste work, but also have a nasty potential side effect: parties may not know what is in their contract. Thus, contractors and owners are sometimes surprised when they seek to enforce certain promises, only to learn that those promises were altered by attachments to the main contract form.
Perhaps the simplest form of Compound Contract is a one-page invoice or bid with a statement at the bottom that says, “subject to terms and conditions on reverse side.” Flip the document over, and you’ll find a clump of fine print, which may add contour, nuance, or red tape to what was otherwise a clear exchange of money for goods or services.
The more complicated Compound Contract may have “terms and conditions” from numerous other documents intended to be attached to the contract itself, and all of which alter the parties’ promises in ways large and small. Today’s Compound Contracts can be several inches thick, making substantive review difficult.
Thus, Compound Contracts can make risk management difficult. Worse yet, what if your file copy of the contract does not have all the original pieces? Your one-page contract was photocopied without the fine print on the back, or your multi-part behemoth is missing parts. Unfortunately, you don’t notice the omission until after a problem arises. Are you still bound to all of the various additional terms? The short answer is: you’re definitely bound if the original you signed had all the pieces, and you might still be bound even if the original you signed didn’t have all the pieces.
A recent example of this comes out of Texas in a case called LDF Construction, Inc. v. Texas Friends of Chabad Lubavitch, Inc. There, a contractor performed repair and remodel work to a commercial facility pursuant to a stock construction contract form prepared by the American Institute of Architects (“AIA”). The stock AIA A101 contract incorporated an outside set of stock general conditions, the A201 form, by way of a one-line reference several pages into the document. The A201 General Conditions are lengthy and detailed – far longer than the A101 contract itself – and contain many important clauses dealing with insurance, indemnity, dispute resolution, and roles of the different parties. In that case, the parties signed the A101 contract without ever obtaining a copy of the A201 General Conditions.
The contractor finished the work, and several years later the owner filed a lawsuit claiming the work had been performed improperly. The A201 General Conditions contained a specific arbitration clause covering all disputes between the owner and contractor, so the contractor petitioned the court to force the owner into arbitration rather than continue the lawsuit. The Court of Appeals of Texas agreed with the contractor, holding that the arbitration clause should be enforced.
The Court’s language was fairly unforgiving: “The law presumes that a party knows and accepts the terms of the contract he signs, and the law does not excuse a party’s failure to read the contract when he had an opportunity to do so…. That presumption includes documents specifically incorporated by reference into the contract.”
Beyond that specific case and beyond incorporation of terms and conditions generally, the problem can be much more complicated when the “incorporated” documents are not legal documents at all. Having represented contractors, subcontractors, and owners in hundreds of construction disputes, I have seen contracts incorporate all manner of documents including subcontractor/supplier lists, lien waiver forms, prior estimates, plans, specifications, bid instructions, shop drawings, and more.
One of the more common incorporations I see is the set of plans together with the project manual. While acceptable as scope documents, plans and specifications are more complicated as incorporated contract documents, because they frequently include language regarding performance bonds, unseen conditions, change orders, and pay applications that may directly conflict with language elsewhere in the Compound Contract. For example, the contract may state the owner must obtain permits, but the “incorporated” project manual may require the contractor to obtain permits. Or the contract itself may refer to a simple schedule of values, but the “incorporated” project manual may require that the schedule of values match a specific format such as AIA G-703.
Such problems are not easily resolved by typical priority clauses, which address potential conflicts between plans details, submittal details, and manufacturer details, but say nothing about conflicts found in more substantive contract language.
The bottom line for contractors, subcontractors, and owners alike is to know your contract. If an outside document is referenced in a contract, get a copy and read it. If terms conflict, try to reconcile them. If a term would make your job difficult, negotiate a change. Don’t wait until you have a problem to go rounding up the pieces of your contract. By then you may be too late.
Note: I authored this post for www.constructionlawwatch.com while I was employed at Ball Janik.