Owners: Watch Out For Implied Liabilities in Construction Projects

As seen in the Cincinnati Business Courier

As a construction owner, you can incur liability if you fail to recognize and comply with certain implied legal obligations, many of which spring from an implied covenant of good faith. Simply put, this covenant states that neither party will do anything to injure the right of the other to obtain the benefits of the contract. An owner can be found to violate this covenant when acting intentionally, or in bad faith, to frustrate or delay a contractor.

One of the traps for the unwary arises even before the commencement of the contract. The owner has a duty to furnish information that will not mislead prospective bidders. In one common example, an owner could provide a contractor with soil studies showing no significant rock in an area to be excavated. If the owner knows, based on earlier projects, that there is good probability that rock will be encountered, he could be found to have misled the contractor by providing the clean soil study.

The additional soil information is best disclosed in bid documents or at preconstruction meetings. Meeting minutes should be prepared and distributed to all attending. Erring on the side of caution and documenting disclosures best positions an owner to defeat a claim of failure to disclose material facts.

Accurate plans and specs
The owner also has a duty to provide the contractor with accurate plans and specifications. A contractor is not responsible for the consequences of any defects in plans and specs which it follows during construction, and is not liable for completed work that is defective in this circumstance. Furthermore, the contractor can recover for additional work, extras or delays caused by inadequate documents.

While the owner’s design professional is presumably liable for design defects, there are steps that an owner can take to minimize its risk. Risk of loss can be shifted through disclaimers or contractual language making the contractor the guarantor of the adequacy of the plans and specs. Another step would be a “verification” clause requiring the contractor to verify the design for accuracy and completeness. Lastly, in more complex projects, the owner could obtain a peer review of the design documents. Plans would be checked at the earliest possible stage for internal consistency, completeness, and compliance with applicable building codes.

In a typical building project, a contractor must prepare shop drawings illustrating how certain aspects of the work are to be fabricated or installed. The owner has a duty to review these drawings and return them in a reasonable time to avoid delays. If an owner’s delay in approving submittals slows the project, the owner will be liable to the contractor for damages.

It’s about time
Lastly, the owner has a duty to approve justified requests for extensions of time. If he refuses to grant a legitimate request, he could be liable for breach of contract damages under the theory of constructive acceleration. This applies when a contractor incurs additional expenses to finish by the project deadline and the owner unjustifiably refuses a request for extension. To avoid such a claim, the owner should always respond promptly to extension requests, avoid threatening language in discussions with the contractor, act in a conciliatory manner to ensure prompt resolution, and be reasonable in responding to the contractor. However, a contractor does not have a claim simply because the owner is pressuring for rapid completion of the work.

An owner’s failure to pay attention to implied obligations on construction projects can result in claims and unsatisfactory results. Careful planning in light of the issues outlined above can contribute substantially to the success of a project.