Make sure it gets in

May 9, 2016

Builders must ensure pre-contract discussions are included

Most construction contracts contain merger clauses, which provide that the contract language is the final expression of the parties and no pre-contract discussions or oral representations are part of the contract unless expressly stated therein.

As a recent decision in New York illustrates, if a party intends to rely upon pre-contract discussions regarding the contractual undertaking, it should ensure that the content of such discussions makes it into the contract.

In Laws Constr. Corp. v. Town of Patterson, 135 A.D. 3d 830 (N.Y. Sup. Ct., App. Div., 2d Dept. 2016), the contractor submitted a bid in July 2005 on a construction project and was determined to be the lowest bidder. When the contract award was delayed, the contractor was given the option to withdraw its bid. At a meeting held on March 29, 2006, the town supervisor was asked whether the town would reimburse the contractor for increased labor and materials costs incurred due to the delay. In a letter dated March 31, the town supervisor advised that “there appears to be no prohibition regarding application of contingency monies built into the contracts toward potential increases in costs of material and labor due to the extended time factor.” 

Relying on the letter, the contractor did not withdraw its bid, and on Aug. 24, 2006, entered into a written contract with the town. The contract contained a merger clause stating that it superseded other representations, both oral and written, and provided that a “modification” could be made by “(1) a written amendment to the contract signed by both parties, (2) a Change Order, (3) a Construction Change Directive, or (4) a written order for minor change in the Work issued by the Architect.”

According to the contractor, the town’s construction contract administrator advised that the contractor could submit its claim for increased costs at the conclusion of the project. On Oct. 24, 2008, the contractor submitted its final requisition and sought reimbursement for increased costs of labor and materials caused by the delay in contract award in the sum of $121,119.93, which the town refused to pay.

The contractor filed suit against the town to recover damages in the sum of $121,119.93 for increased costs of material and labor associated with the delay in construction. The town asserted a counterclaim alleging that, during excavation, the contractor damaged electrical lines and failed to decommission several sewer tanks in breach of the parties’ contract.

The town moved for summary judgment and dismissal of the complaint, claiming the contractor’s requisition for increased material and labor costs constituted an improper after-the-fact attempt to modify a competitively bid contract. The contractor countered that the town was estopped from denying its payment for increased costs by its post-bid, pre-contract statements assuring it that it could recover such costs. The contractor also cited the contract administrator’s statement regarding when to invoice for the additional costs as confirmation that the contract had been effectively modified. 

The trial court granted the town’s motion and dismissed the case. The contractor appealed. The court of appeals observed that estoppel generally is not available against a municipal defendant with regard to the exercise of its governmental functions. 

However, it recognized that an exception to the general rule applies in “exceptional circumstances” involving the “wrongful or negligent conduct” of a governmental subdivision, or its “misleading nonfeasance,” which “induces a party relying thereon to change his position to his detriment” resulting in “manifest injustice.” 

The question, therefore, was whether the town supervisor’s letter, indicating that “there appears to be no prohibition regarding application of contingency monies built into the contracts toward potential increases in costs of material and labor due to the extended time factor,” and the contractor’s claim that it was later told to request payment for such an increase in costs at the completion of the work, constituted such exceptional circumstances.

In the end, the appeals court held that the contents of the letter did not arise to the level of a promise by the town to cover the additional costs and that the oral statement of the contract administrator did not meet the requirements of a written change order. The bottom line is that if something is important enough to discuss with an owner pre-contract, it is important enough to include as an express statement in the written contract. 

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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