Every construction contract you sign includes implied obligations—but precisely because they are “implied,” they are often so vague that their application can be difficult to predict. In other words, these implied contract duties can land you in court, jeopardize relationships, and add costs to your projects.
You can curb your losses and your litigation risk by better understanding implied contract obligations before you sign, says industry pro John A. Snow. In his AudioSolutionz webinar, “Implied Warranties and Provisions in Construction Contracts,” he discusses three implied covenants—good faith, workmanship, and buildability—and how to avoid assuming risks you didn’t ask for.
Let’s take a closer look at these three common, but pitfall-laden, contract clauses—and examples of the disputes they cause.
Example 1: Good Faith & Fair Dealing Means Paying on Time
You bet, “good faith” is about a vague as a term as you can write into a contract, but that does not mean you can ignore it. Construction contracts commonly include some version of the implied covenant of good faith and fair dealing to keep parties from treading on one another’s rights under the contract. But courts differ on how they interpret and apply such provisions.
In California, for example, the state Supreme Court recently considered whether a “good faith” clause entitled a contractor to withhold payment from a subcontractor for any dispute—not necessarily one related to payment obligations. California does offer a “good faith” dispute exception to its prompt payment laws (for up to 150 percent of any amount disputed). But the answer here was “no.”
“For higher-tiered parties who occasionally pull out the ‘good faith’ withholding ticket when justifying non-payment to lower-tiered parties, it appears to be the end of that ride, at least when it comes to a dispute that is not directly related to the specific payment that is otherwise due,” according to a California Construction Law Blog post.
Example 2: Contractor Warrantied Work Against Its Own Defects Only
The implied warranty of workmanship can be used to describe quality and timeliness, and it’s generally built into every contract, explains Bill Kellum of Kellum Law Firm. While details vary by state, in Mississippi, for example, “contractors have a duty to construct all projects in a workmanlike manner, free from defects. Also, the contractor may not contract away his duties under the warranty.”
Like good faith, workmanship can be interpreted a variety of ways.
In Equitrans Services, LLCv. Precision Pipeline, LLC, 2015 U.S. Dist. Lexis 173454 (W.D. Pa. 2015), for instance, the parties’ contract stated that the contractor “warrants its Work against all deficiencies and defects in materials and/or workmanship and as required for [sic] in the Contract Documents.” The contractor contended that, under this provision, it warrantied against defects in its materials and workmanship only—not defects caused by others.
The Equitrans court agreed, but it still couldn’t decide what “workmanship” was exactly: The court concluded that it could not resolve ambiguities in the contract at the summary judgment phase. (Note: You can read more about this case in “Contractor Warrantied Only Its ‘Workmanship’—But What’s That?” Construction Claims Monthly, Vol. 38, No.3.)
Example 3: Look to Spearin for Buildability Lessons
Buildability, according to construction law expert Julian Bailey, refers to “the capacity of a design to be implemented physically in a manner that is safe, sound and otherwise in accordance with the terms of the relevant construction project.” Here’s what’s important, adds Bailey in his book Construction Law: “which party accepts the risk that the relevant design will be impossible to implement in a manner that is safe, sound, and otherwise in accordance with the terms of the contract?”
In a federal government contract, the Spearin Doctrine (U.S. v. Spearin, 248 U.S. 132, 136-38 (1918)) comes into play, holding that a governmental entity-owner impliedly warrants that the plans and specifications it provides to a contractor on a construction project are adequate for contract performance.
States too have Spearin-like statues.
For instance, in Louisiana, a contractor is not liable for mistakes in plans and specifications upon which it relies to perform its work—as long as it didn’t espy any obvious hazards on the horizon. Louisiana Revised Statute 9:2771 reads, in part: “No contractor … shall be liable for destruction or deterioration of or defects in any work constructed, or under construction, by him if he constructed, or is constructing, the work according to plans or specifications furnished to him which he did not make or cause to be made and if the destruction, deterioration, or defect was due to any fault or insufficiency of the plans or specifications.”
In LaShip, LLC v. Hayward Baker, Inc., 2017 U.S. App. Lexis 3694 (5th Cir. 2017), the court ruled that because a contractor did not “make or cause to be made” the project’s performance specifications, it could use the above statute to shield itself for any defects arising from its reliance on the specs provided by owner.
Tip: Watch for Specific Contract Wording
There are plenty of contract provisions that can trap you into promising more than you’d like. Pay particular attention to: the timing of payment obligations, the creation of fiduciary obligations for construction funds, and pay-if-paid clauses, advises Construction Executive.
Also: Know that many contractual obligations are state-specific, so obtaining legal counsel can be critical if operating out of your comfort zone. In Texas, for example, certain rights favor subcontractors, especially when it comes to payment.
Bottom line: Don’t sign another contract without fully ascertaining and understanding your obligations and rights, says Snow. In his webinar, “Implied Warranties and Provisions in Construction Contracts,” he explains how to draft smart contracts and avoid litigation where possible.
Editor’s Note: Thanks to Kimberly Gilbert for contributions to this post.
