Construction Law Notes
Edward J. Kinberg
Attorney

Introduction

As many of my previous articles have dealt with the duties and responsibilities of contractors, this month I will be discussing various duties of an owner.

While the contract between the owner and the builder identifies the general responsibilities of the owner, the owner has several duties which are "implied" even if they are not specifically mentioned in the contract. While "implied" duties, and their extent, may vary from state to state, they generally include:

The owner must perform its obligations in good faith.
The owner may not interfere with the progress of the work.
The owner must extend reasonable cooperation.
The owner must make timely payment.
If you believe your costs of performance have been increased because an owner failed to comply with his/her "implied" duties, you need to ensure the facts supporting your conclusion are well documented. Once you have gathered your facts, you need to consult an attorney familiar with construction law/litigation in the community in which the project is located for advise regarding your options.

The Duty of Good Faith

In Appeal of -- Turner-Mak (JV), 96-1 B.C.A. (CCH) P28,208 The Armed Services Board of Contract Appeals noted "there is an implied duty of good faith and fair dealing in contract performance and enforcement that is imposed upon contracting parties." In this case the Contractor sought to "rescind" its contract based on a mistake in the bid. In this case, the Board found that the Contractor was not entitled to relief because its "deliberate inaction" breached its implied duty of good faith and fair dealing.

While the contractor lost this case, it is a good illustration of the duty of good faith. In effect, this duty requires the owner to act in a timely and reasonable manner. For example, if an owner learns of a defect in the drawing and fails to give the contractor timely notice of the defect, the owner has breached its duty of good faith and is liable for any additional costs the contractor incurs as a result.

While many contractors tend to limit their claim analysis to the strict terms of the contract you also need to consider the possibility that the owner has not acted in good faith. If you want to assert such a claim, you will need to present specific examples of the owner's actions (or failure to act) to support your claim. In so doing, you must remember that allegations are not evidence. You must have "hard" evidence to support your conclusion.

Duty Not to Interfere with Progress

This is a particularly important duty for you to keep in mind, as a breach of this duty may help avoid the harsh effect of a "no damages for delay" clause in a contract.

Breach of this duty can occur in a number of different ways, some of which are:

Excessive number of defective specifications.
Failure to coordinate multiple prime contractors.
Improper administration of the contract.
Failure to make the site available in a timely manner.
Failure to furnish owner supplied materials in a timely manner.
Demanding performance substantially in excess of the industry standard.
However, a court may find that the owner has not breached this duty if the delay was caused by the general conditions of the work which could, or should, have been reasonably foreseen by the contractor. Once again, the outcome of this type of claim will be controlled by the facts. You must be prepared to demonstrate that you did your best to accomplish the job and that the owner actively interfered with your work causing an increase in cost.

Duty of Reasonable Cooperation

While this is closely related to the two duties discussed above, it is somewhat different. In this regard, you may not have to demonstrate actual interference with your work. If you can show that the owner failed to take reasonable steps to control the working conditions, you may be able to recover excess costs incurred as a result.

A breach of this duty could arise from an unreasonable interpretation of contract requirements or requiring certain aspects of the work be performed in an unreasonable manner. For example, an owner may allow one subcontractor to accelerate its work resulting in delay or interference with another subcontractor's work.

Duty to Make Timely Payment

While an owner's obligations to make payment are generally controlled by the terms of the contract, there a number of issues that arise in this regard.

The most common issue concerns percentage of completion. In most construction contracts, the owner pays for the work as the project progresses. If there is a dispute as to the amount of progress, the owner may limit payment to the percentage it approves. If the owner's determination of progress is unreasonable, he/she may be in breach of this duty.

The most common issues in this regard are defective specifications, differing site conditions and change orders. Each of these items increases the cost of the work, but do not get added to the contract price until a contract modification is issued.

If the owner fails to issue contract modifications in a timely manner, he/she could be in breach of this duty. In addition, if an owner fails to take reasonable, and/or timely, action to acknowledge changes, there may be breach of the duty to make timely payment.

Should you have a payment problem on a contract, you must also consider the impact the "delayed" payment had on your ability to perform. If you are forced to delay ordering supplies or to layoff workers because of financial problems caused by the owners payment practices, you may be able to recover your damages. If you are considering this type of claim, you must be able to demonstate that the financial problems were the sole cause of the owner and were not caused by poor planning or financing arrangements by your company.

Conclusion

In determining the cause of a loss on a contract, you need to consider the "implied" duties of the owner as well as specific contract provisions. Even though you may not be able to identify a specific contract provision for your loss, you may still be able to recover based on the owner's breach of an "implied duty."

You also need to keep in mind that all of the above duties are closely related. While you may not be able to identify one specific "implied" duty the owner breached, you may be able to prepare a convincing case based on a combination of "minor' violations of several different duties.