Many an initial construction dispute attorney-client conference sounds like this: Client: “I have a contract dispute with my [owner/design professional/contractor/subcontractor].” Attorney: “Ok, what does your contract say?” Client: “I don’t know, we stuck it in a drawer after we signed it and haven’t referred back at all for anything until now.” Or an initial construction transaction conference sounds like this: Client: “I need you to prepare a contract for me with my [owner/design professional/contractor/subcontractor].” Attorney: “Ok, what business terms and risk allocation have you negotiated?” Client: “We haven’t, frankly we just need something to put in the file, we have done business before and don’t anticipate any issues.”
The best contracts reflect the parties’ mutual expression of intent and risk allocation. Quite often however, parties execute contracts without negotiation, sometimes without even reading them, and some execute them even though they disagree on the terms, but the parties decide (perhaps poorly) that the economic realities of obtaining the work on the front end outweigh the anticipated risks of performance challenges, claims, and disputes resulting from unbalanced risk allocation and unrealistic expectations of economic benefit. Even as to contracts in which the parties negotiate commercially fair and reasonable terms and balance risk and intend to follow the terms and procedures set forth in the contract relative to project administration, they failed to do so. It is common that in all the hustle and bustle of an ongoing construction project, the parties will resort to administrative short cuts that in the short term keep the project going, but in the long term create a morass of confusion and disagreement as to the parties’ agreements.
In many states, parties can waive or modify written contract terms through their course of dealing even where the written contract includes a nonwaiver provision. See 13 WILLISTON ON CONTRACTS § 39.36 (2019). This general rule, that a party to a written contract may waive a provision despite the existence of an anti-waiver or failure to enforce clause, is based on the view that the nonwaiver provision itself, like any other term in the contract, is subject to waiver by agreement or conduct during performance.
The most frequent examples, of course, of dealing departures from express written contract terms are with respect to change management, schedule updates and revisions, progress billings, and claims. With respect to changes, contracts often require written change documentation signed by representatives of the parties with express authority to bind their respective parties. However, changes often arise from oral instructions given by and to field personnel and are not properly documented or tracked. Regarding schedule, there can be lengthy and complex schedule specifications for the creation, updating, and revision of construction schedules on multimillion dollar projects that even sophisticated parties ignore or are unaware of until the attorneys get involved. Parties frequently engage in a draft or “pencil” progress pay application review such that negotiation and approval of the draft may create a reasonable expectation of approval of the formal billing. Claim notice and escalation procedures are frequently ignored in lieu of fine print buried deep within project meeting minutes. Many governmental authorities establish contracting officers and other personnel who possess the sole authority to change contract terms. Nevertheless, parties often ignore the contract terms to their detriment. So, if you are seeking to present a claim at the end of the project and haven’t followed any contract procedures for timely notice, proper substantiation and effective reservation of rights, you may be out of luck. However, if on that same project there is a history of the other party granting relief without such compliance but now seeks to deny your claim because of your failure to strictly comply with those requirements, the judge, jury, or arbitrator may excuse such failure to avoid the forfeiture of the claim based on the parties’ course of dealing waiver of their contract terms.
Does this mean parties who haven’t used their contract during construction can escape their responsibilities down the road? Of course not. For example, failure of the parties to follow contract procedures regarding changes, delays, and payments likely will not invalidate a contractual indemnity for latent defects. The contract still matters. However, in any instance in which one party seeks to enforce a contract obligation or defense (for example, timely notice of claims) contrary to the parties’ course of dealing during the project, the party against which that contract term is now being enforced may argue successfully that such term was modified or waived based on the course of conduct throughout the project and is no longer enforceable. The best practice to avoid such a dispute is to take time to negotiate a contract that matches the parties’ expected course of conduct, and then follow the contract terms and procedures during the project.
