NEWARK, N.J. – I learned to think of a contract as basically being a handshake, though I am in no way saying that detailed contracts are not needed. In that regard, I always think of Robert Frost, and how “good fences make for good neighbors.” My thought of the handshake simply goes down to keeping in mind that a contract is a mutual agreement.
We go into contracts knowing that there are mutual goals to be achieved. One side needs a highway that will be used by its taxpayers and will last for many years. The other side wants to build that highway and be paid a fair amount for its services. Simple.
Very few of us enter into a contract with the expectation of issues, let alone unanticipated issues. While this will inevitably lead to a discussion of risk shifting, I keep returning to the old-fashioned handshake. There was a time a decade or so ago that it was popular to use the term “partnering.” I like the concept, but for too many it turned into “whoever is the first to bring in an attorney is a jerk.”
In many states, my concept of the handshake is expressed in a legal theory referred to as the implied covenant of good faith and fair dealing. I really like this legal theory. It is simple. Treat each other fairly and act in good faith. Said like that – it does sound simple. It is in the application that this basic principle is tested.
We have recently gone through several tests. One was obviously the unexpected occurrence of Covid-19. Another was the unexpected occurrence of massive and substantial increases in the cost of materials and gasoline. To me, when these unexpected occurrences happen, we need to treat each other fairly and act in good faith. They happened and were not caused by either party. So, our analysis needs to move further and our behavior consider the unforeseen circumstances.
What happens if we look at what would have occurred if both parties knew at the time of entering into the contract that these events or changes would occur? This turns into a cost, risk and benefit analysis. For unexpected material increases it is a somewhat easier analysis. If both sides knew, then the contractor would have charged more and the owner would get and pay for the increased costs of materials.
The concept that there was a risk shifting and that the contractor should entirely bare this risk is simply not fair. Why should the contractor bear this risk? It is the owner that is getting the benefit of materials that cost more. Why should the owner get that windfall? It was not bargained for. The contractor was not in the position of adding substantial monies into its bid for unknown contingencies.
I recall case law that looks at this basic concept of understanding that a contractor cannot build large contingencies into its bid for the unknown. Indeed, the concept of placing large amounts of money into a bid for contingencies is just the opposite of what most owners want. The owners want the lowest bid, and not for the contractor to allocate monies into its bid for things that may or may not happen. If they do, then all is well. Then there is money in the contract to pay for unanticipated occurrences. But if they do not, then those unrealized contingencies becomes a windfall for the contractor – an unexpected gain/profit. This was some of the basic reasoning expressed by wise judges when the basics of law about differing site conditions was developed, which states that if something happens and the conditions are unexpected then the contractor should be paid for those unexpected site conditions.
For my two cents, I think that any of these circumstances need to be reviewed in this same manner. What is fair? I really don’t think that is too much to ask for parties to consider.
Michael F. McKenna is a partner at Cohen Seglias Pallas Greenhall & Furman PC, Newark, N.J.