I HAVE JUST STARTED serving as an arbitrator in a multimillion-dollar case between an owner and a contractor, where it appears that both sides had very different ideas about what they were agreeing to, right from the start.
Although both should have seen the gaps and done something about them, this never happened. It was only when things went bad (the project cost more and took longer) that they faced their miscommunications. Lawsuits have been on file for three years, two arbitrations conducted and many, many dollars spent unraveling what happened. No one is coming out a winner here.
The story started out like so many others — people who know and respect each other decide that they can undertake a project for their mutual benefit and profit. Because they are “sophisticated businessmen,” they don’t need lawyers to complicate their deal with lots of paperwork. They embark on a handshake. Letters, memos and e-mails are exchanged, all focusing on the positive aspects of the deal. The bank, the perennial fly-in-the-ointment of so many projects, insists on a written contract, so one is thrown together.
The contractor prepares a “standard form” contract that doesn’t exactly fit the situation of the parties, but somehow this isn’t noticed. The contractor leaves the date and price blank, because he knows that the design isn’t definite enough to determine these things yet. The owner adds both a substantial completion date and a guaranteed maximum price when it signs and returns the contract — not noticing that many other clauses of the agreement talk as if there is no completion date or GMP. The contractor promptly (but very politely) objects to these changes but still tells the owner that he fully expects everything to work out just fine. Everyone is “on the same team.”
When the problems begin — starting with extensive and expensive permit delays and conditions — they are solved by throwing money at the project. Work under lights at night, double the number of crews, bring crews in from out of town and put them up in hotels, contract out work that the contractor would otherwise have done with its own forces. Although both sides are aware of the extra cost for these items, neither objects, partly because each believes that the other one will be absorbing the cost, but also because neither realizes that it is just going to keep getting worse until the loan proceeds run out.
At that point, the owner feels it has no choice but to advance funds to get the project done. It has lined up tenants and buyers and its highly prominent executives fear that they will lose face in the community if they don’t open on time. So, it pays the contractor the completion costs, without complaint. Only a year later, after the project is complete and the owner finally goes to a lawyer, does it decide that this is the contractor’s fault and sues him.
What is the lesson here? Help yourself and your customer by talking through potential issues in advance. If you see a term that you don’t agree with, get it resolved up front. If you know or sense that the owner has overlooked something or is going forward on some pretty shaky assumptions, speak up.
Yes, you risk ruffling feathers and piercing the euphoric balloon that you are all floating about in, but think about the consequences of not speaking up — they could be catastrophic.
Certainly, there are terms that are not so important that you want to jeopardize your deal over them, but every term has to be examined to know which ones they are.
Is the owner making marketing, sales and rental plans based on assumptions about completion dates? If so, it probably would be a good idea to explain, in writing, if the permitting process could be particularly long and expensive, or the schedule is particularly aggressive and based on factors not within your control.
Are there potentially expensive items not included in the GMP? If so, from where will the financing come? A failure to secure enough financing to cover all anticipated costs is a good sign that the owner may not fully appreciate what risks it is carrying.
Who will be the owner’s representative, and what will you have to go through to get changes agreed upon? Owners that are governed by groups, such as churches, social clubs and school boards sometimes insist on having group approval of extras, which can be time-consuming when every delay means that costs are running up. Owners that allow one member of a group to be their representative may not fully appreciate what that person is agreeing to — particularly if that person doesn’t have a strong background in construction.
These are just a few examples of the kinds of issues that owners may not even know lurk out there, but an experienced contractor knows can have devastating consequences. Allowing a customer to go forward oblivious to potential problems is not doing anyone a favor.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., e-mail [email protected], telephone 816/421-4800.