Contract documents

January 31, 2024

When contractual terms are unambiguous, courts are unlikely to consider outside agreements or circumstances that may show how the parties ultimately reached their agreement. To avoid delays and save costs, it may be tempting to enter into an agreement while simultaneously having certain “understandings” on the side that are not memorialized in the contract. This scenario can have dire consequences, as the side agreement may not be enforceable, or even considered, by an adjudicator after a dispute arises.

An example of this recently occurred during a project in Louisiana. In City of Ruston v. Womack & Sons Construction Group, Inc.,[1] the City of Ruston awarded a contract to build the Ruston Sports Complex to Womack & Sons Construction Group, Inc. in anticipation of hosting the 2019 Dixie World Series. This event was expected to bring substantial economic impact to the City.

The parties entered into A101-2007, Standard Form of Agreement between Owner and Contractor. The contract contained both A201-2007 General Conditions of the Contract for Construction and supplementary conditions that set forth terms related to change orders, among other things.[2] The supplementary conditions stated, “[a]greement on any change order shall constitute a final settlement of all matters relating to the change in the Work which is the subject of the Change Order, including…all direct and indirect costs associated with such change and… adjustments to the Contract Sum and the Contract Time.”[3]

The project’s design originally called for compacted dirt, topped with a geomembrane liner, drainage pad, and rock. The turf was to be placed on top of the subsurface. After installation of the geomembrane liner, a leak was discovered on several fields, which prevented the turf from being laid over it. The parties disputed whether the cause of the wet subsurface liners was the rainy weather or poor workmanship.[4]

Despite the parties’ disagreement over the cause, a change order was issued directing Womack to modify its scope of work, and increased contract time and the contract sum. The City paid the change order amount to Womack. Subsequently, the City filed suit alleging breach of contract and seeking a refund from Womack, including the change order amount paid. The City argued that the change order was not a settlement or release. Additionally, the City argued that it paid the change order amount so that Womack could pay its subcontractor, “with the understanding that Ruston and Womack would ‘get square’ later.”[5]

In affirming the lower court’s decision in favor of Womack, the Court of Appeals of Louisiana addressed whether the contract was correctly interpreted. The Court found the terms of the contract to be clear and unambiguous.[6] Specifically, the supplementary conditions unambiguously stated “that an agreement to a change order constitutes a final settlement of all matters relating to the change order.”[7] The Court stated that “[u]nexpressed intentions or desires, not including in the written agreement of the parties, do not create an ambiguity.”[8] The Court further stated that the City’s decision to execute a change order, rather than pursue other remedies under the contract, was a business decision relating to the City’s need to have a completed project in time for the Dixie World Series. Despite the City’s awareness that a disagreement about the cause of the change order work existed, the City nevertheless executed the change order.[9] The contract makes clear that the issuance of a change order resolves all issues related to the change order work between the parties.

The City also argued that at the time Womack disclosed the problem, the City had no practical alternative to the change order work, which amounts to financial duress.[10] This argument was dismissed on the basis of the sophistication of the parties. The City had the same, if not greater, bargaining strength than Womack. Economic stress to timely complete a project, by itself, does not constitute duress.

Ultimately, it is good practice to include all terms of an agreement in the text of the contract itself, including modifications, exhibits, and addenda. Though projects may have strict deadlines that are interrelated with costs and profit, relying on terms or conversations that are not memorialized in a contract can put a party at risk. A prudent construction professional includes all terms that relate to the agreement in the text of the contract, even when time constraints may be a primary concern.

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AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.  

[1] 374 So.3d 311 (La.App. 2 Cir., 2023)

[2] Id. at 314.

[3] Id. at 315.

[4] Id. at 316.

[5] Id.

[6] Id. at 319

[7] Id.

[8] Id.

[9] Id. at 320.

[10] Id. at 321.