A LACK OF SOPHISTICATION WITH THE CONSTRUCTION CONTRACT CAN PLAY OUT IN AN UGLY DISPUTE

There are times where a lack of sophistication can come back to haunt you.  This is not referring to a lack of sophistication of the parties.  The parties, themselves, could be quite sophisticated. This is referring to a lack of sophistication with the construction contract forming the basis of the relationship. While parties don’t always want to buy into the contract drafting and negotiation process, it is oftentimes the first document reviewed.  Because contract terms and conditions are important.  They govern the relationship, the risk, scope, amount, and certain outcomes with disputes.  However, a lack of sophistication can play out when that contract that should govern the relationship, the risk, the scope, the amount, and certain outcomes doesn’t actually do that, or if it does, it does it poorly.  An example of how bad a dispute can play out when it comes to the lack of sophistication on the front end is Avant Design Group, Inc. v. Aquastar Holdings, LLC, 2022 WL 6852227 (Fla. 3d DCA 2022), where a cost-plus contract was treated as a lump sum contract.

Here, an owner planned to perform an extensive interior build-out to a residential unit.  The owner had an out-of-country architect; because the architect was not licensed in Florida, the owner hired a local architect/designer to oversee construction and obtain goods and services for the residential interior build-out.  The contract was nothing but a proposal of items and costs.  The proposal stated the owner “would pay the cost of goods and services of the vendors, plus pay a ‘20% Interior Design & Administrative Fee’” to the local designer.  Avant Design Group, 2022 WL at *1.  The proposal further stated, “This preliminary budget of the Client’s construction costs include [sic] anticipated costs for construction materials, labor and sales tax.  Any other cost, including but not limited to freight, cartage, shipping, receiving, storage and delivery are not included in the preliminary budget and will be invoiced separately.” Id., n.2.

The owner and its local designer executed 92 proposals for purposes of the interior residential build-out.  Think about this: 92 proposals.   Collectively, all of these so-called proposals formed the basis of the contractual arrangement between the owner and local designer.  Terms and conditions, however, appeared to be skimpy at best.  The bigger issue, mentioned below, is the application of the 20% fee, as the language would suggest it is a cost-plus contract where the fee of 20% was on top of actual costs.

A dispute arose.  The owner thought it was being over-charged so it terminated the local designer. The local designer thought it was underpaid so it recorded a lien.  Then, the inevitable lawsuit. At trial, the owner had a forensic expert that testified that the owner was overcharged by over $500,000.  This was based on the owner’s position that the contract was actually a cost-plus contract.  The local designer claimed it was lump sum.  The type of contract—whether it was cost-plus OR lump sum—formed the basis of the dispute, and it mattered a lot.  A cost-plus arrangement meant that the local designer would be entitled to a cost of the goods and services plus its 20% fee markup.  A lump sum meant that actual costs did not matter–in other words, all of the proposals were simply mini-lump sum arrangements that could factor in the 20% fee markup.

Generally, absent a finding of ambiguity, parol evidence is not admissible to assist the factfinder regarding the parties’ intent.”  Avant Design Group, supra, n.10.  Stated differently, expert testimony and the testimony of the parties is irrelevant when the contract is unambiguous.  While here, the trial court did not render any findings that the contract was ambiguous, “both parties, without objection, elicited expert testimony regarding the nature of the parties’ contract.”  Avant Design Group, supra, n.10.  Both parties viewed the type of contract to be a factual issue and the trial court ruled that the contract was a cost-plus agreement.  “As ample evidence supports the trial court’s finding that the parties entered into a cost-plus contract that limited [owner’s] payment obligation to the 20% Fee, we affirm the trial court’s principal conclusion regarding the contract’s payment terms.”  Avant Design Group, supra, *4.

The determination of whether the contract was cost-plus or lump sum was really the dispute and determined the outcome.  It was the dispute. This determination meant that the local designer was overpaid by over $500,000, its lien was fraudulent, and its lien should be discharged.  Had the determination been that the contract was lump sum, the entire outcome of the case should have been different.  Keep this in mind.  If your intent is lump sum, make that intent clear.  Conversely, if it is cost-plus, it is a completely different contract relationship and contract administration because you cannot add your markup to what you are already marking up as that is double dipping.  Notably, the case of Avant Design Group has a number of interesting issues to be discussed.  Those will be probably be discussed separately in shorter postings.  The key, though, is that the dispute centered on a cost-plus contract being treated as lump sum, when that was clearly not the case.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

Spread the love
Posted in Contract Drafting and tagged , , , , , , .