Stan Martin | Commonsense Construction Law LLC | October 4, 2016
Was one party trying to be cute, or was this simply an error not caught in the drafting process? Two inconsistent terms made it into the final contract, and then became the basis for a post-termination dispute. One term allowed the contractor to recover lost profits in the event of a termination for convenience, and the other disallowed any claim for lost profits regardless of the basis for termination.
First an aside: this project was to be designed and built via the integrated project delivery method, where owner, contractor and designer (and sometimes critical subs or consultants) sign the same contract. There are also other contract forms, however, and that is what we are dealing with today. It is unfortunate that a project delivery method touted as a means to minimize or avoid post-project disputes should come to a disputed end.
At one point early on in what the court refers to as “numerous” revisions to the contract, the contract had included the following clause:
7.2.4.3 In case of such termination for the Owner’s convenience, the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.
This clause is included in the AIA Form A195-2008, Standard Form of Agreement between Owner and Contractor for Integrated Project Delivery. Thus, it is on the pre-printed form. The parties also negotiated changes to AIA Form A295-2008, General Conditions of the Contract for Integrated Project Delivery. Among other changes to the standard form, the parties added a section 12.13 entitled “Owner’s Rights to Terminate This Contract.” Section 12.13.1 of that document included the following:
The Owner may terminate this Contract with respect to any or all of the Contractor, Architect and Engineer for convenience at any time for reasons other than for cause, without prejudice to any claims that the Owner may have against any of them so terminated, by giving the terminated party at least 7 days prior written notice thereof. In the event a terminated party is the Contractor, and such termination occurs after the establishment of the GMP, the Owner shall pay the Contractor such portions of the [GMP] as are due and properly invoiced for Work performed prior to the effective date of such termination, together with reasonable termination expenses necessarily incurred by Contractor, and Contractor shall comply with the requirements for final payment with respect to Owner’s payment of such amount … Neither Contractor, Architect nor Engineer shall be paid their anticipated profits or revenues for Work not performed or for economic losses relating to the termination of the Contract by Owner with respect to any of them.
Thus, the last sentence in the negotiated section 12.13.1 of the A295 directly contradicted the pre-printed section 7.2.4.3 in the A195.
According to the court’s decision, section 7.2.4.3 was deleted early in the negotiating process. But that section was reinstated later by the contractor, and at the time that change was not redlined as other changes had been. Thus, the owner failed to note that the clause had been reinstated.
After the owner terminated the contract for convenience, the contractor sued for its lost profits. The owner filed for summary judgment, and the federal District Court allowed that motion.
The contractor tried to argue that there was a way to rationalize the two conflicting contract clauses, but the court did not agree: “Terms of a contract should be harmonized if possible. … However, here it is not possible so to do because sections 12.13.1 and 7.2.4.3 are irreconcilable and destroy each other’s meaning.” (citations omitted) Where 12.13.1 was “specially drafted,” it would take priority over the pre-printed section 7.2.4.3. Other arguments to the contrary (by the contractor), that each clause should be construed against the other party, or that the priority of documents clause made the A195 form take precedence over the A295 form, were unavailing, for reasons noted in greater detail in the court’s decision.
Thus, one of the standards of contract interpretation – construing specifically negotiated clauses to take precedence over pre-printed forms – was applied here, and the contractor’s claim for lost profits was dismissed. The case is DPR Constr. v. Shire Regenerative Med., Inc., 2016 U.S. Dist. LEXIS 133617 (S.D. Cal., Aug. 29, 2016) (LEXIS subscription required).