Legal Aspects of Contracts

Construction Case Study

Case Overview

Oliver Owner has decided that it would be a good investment to build a large suburban office building on some unimproved land that currently owns. However, since he does not know much about construction, he has hired a professional project manager firm, CMI, to manage the project. However, when Mr. Owner was away for personal reasons, CMI exercised its authority to select an electrical contractor from three pre-authorized contractors that were selected. When Mr. Owner returned, he accused CMI of exceeding its authority by signing a contract with the electrical firm on his behalf. Other problems also arose from the contracts related to the electrical work to be done of the suburban office project such as a request to retract a proposal as well as a misunderstanding about what the security deposit that the contractors entailed. This analysis will provide a brief background in legal considerations that the owner, project manager, and electrical contractors are dealing with in this scenario.

Project Management Contractual Agreements

There are several different forms of agreements that parties can use to form a working relationship with a project manager on any construction project. The most common form of a contractual arrangement is that a project or construction manager acts in an advisory role to the owners or investors who have hired them to work on the proposed project. The case alludes to the fact that Mr. Owner signed an AIA form authorizing CMI as a construction manager that had the authority to enter into negotiations with contractors on their behalf.

However, the case fails to mention exactly which AIA contract was used and there are several different contracts that AIA offers. The AIA has been drafting contracts since 1888 and has become a popular option for individuals or companies to use for contracts that are related to construction, architectural, surveying, service work, and an array of related professions and professional arrangements (The American Institute of Architects, N.d.). The appeal of using a standardized approach to contractual agreements is that it can save a significant amount of time and money that would otherwise be spent on the legal fees necessary to draft such a contract. Furthermore, since the AIA contracts represents contracts that have been largely standardized, these contract can also improve the level of understanding between the parties simply because they parties are already familiar with the contracts; however, this is not the case in our specific case study. But in general, standardized forms often create an agreement between parties that result in fewer misunderstandings in routine agreements.

However, at the same time, there are often many disadvantages of using standardized contracts for different types of projects. One obvious disadvantage of using a standardized contract is that it might not fit well in a unique or custom project that varies in some way from the typical standardized construction agreement. Furthermore, even in routine contractual agreements, there often have to be many customizations made to the standardized contract to make it fit the specific circumstances. Furthermore, some people have argued that these standardized contracts are drafted in favor of the members of the trade union that prepares these documents. As one attorney explains (MacDonald, 2010):

"In considering whether a standard form contract is appropriate, and which one to use, you should keep in mind that because they have been developed by trade groups, the contract terms can, in subtle and not so subtle ways, favor the membership of that trade organization. For instance, the AIA documents are widely used and, in general, are well-balanced documents. However, the AIA contract documents provide a significant project role for the project architect, which may or may not fit your project delivery system."

Given the information presented in the case and the statement that Mr. Oliver Owner does not have experience in the construction industry, it is reasonable to assume that he may have not understood the provisions in the contract in their entirety.

The case states that CMI does have the authority to negotiate with trade contractors and the firm does so with three different electrical contractors. CMI use standard documents from the Construction Management Association of America (CMAA) to officially hire an electrical contractor. The case states that CMI "sealed the deal with Evelyn by preparing CMAA Document A-2 and attached to it CMAA Document A-3, inserting Oliver's name as owner in the first part of the form, typing in Oliver's name at the end, and under that typed name, signing his name as project manager." The CMAA offers many standard forms, similar to the AIA, and the two contracts mention in the case are described by the CMAA as (CMAA, 2011) compatible with these CM agreements are:

CMAA Document A-2 Standard Form of Contract Between Owner and Contractor

CMAA Document A-3 General Conditions of the Construction Contract;

Owner-Contractor Contract

The legality of the contracts that CMI entered into on Mr. Owners behalf would depend solely on the terms that were in the original AIA contract.

Buzzy & Sons was not given the opportunity to clear up the issues in their original proposal and the project was quickly awarded to Evelyn Electric. Since there were issues with each of the contractors' proposals in the first round of bidding, it is unclear whether Mr. Owner, represented by CMI, would have to renegotiate with each of the parties that submitted proposals. However, since there were significant issues in each of the proposals presented, it is reasonable to believe that this change or eliminate the terms of the bidding arrangement. If the agreement for the bidding process allowed for revisions to be made in the event of issues, then Buzzy & Sons may have the rights to file a claim against Mr. Owner; or CMI if they were not deemed as authorized to officially act on Mr. Owner's behalf.