Dealing with Ambiguities in Design-Build Contracts
January 2005
Some public owners are under the misconception
that design-build eliminates virtually any responsibility they might face for
ambiguities over the scope of work—since the designer-of-record is working for
the contractor. Not so.
by Michael
Loulakis
Wickwire Gavin,
P.C.
Familiar construction law doctrines imposing liability on owners, including
the rule of contra proferentem (construing
ambiguities against the drafter of a contract) and the Spearin doctrine (imposing liability on
owners for defective bidding documents), do not disappear simply because design-build
is used. Rather, recent case law supports the view that an owner retains liability
to the design-builder when it provides faulty or ambiguous information to bidders.
Record Steel v United States
This principle is well demonstrated by a recent case before the U.S. Court
of Federal Claims, Record Steel and Construction v United
States, 62 Fed Cl 508 (October 19, 2004). The dispute in this case involved
whether a design-build contract required foundations to be over-excavated. The
design-builder argued that the contract unambiguously made over-excavation a
design recommendation—not a design requirement. In the alternative, it argued
that if the contract was ambiguous, then the ambiguity was latent and should
be construed against the government.
The government argued that the contract expressly and unambiguously required
the design-builder to over-excavate the foundation. After carefully examining
the relevant contract provisions, the Court of Federal Claims found the contract
to be latently ambiguous and saddled the government with the financial responsibility
of the over-excavation.
The Corps of Engineers (Corps) awarded Record Steel and Construction, Inc.
(Record Steel), an $8.8 million design-build contract for a dormitory at Offutt
Air Force Base in Bellevue, Nebraska. Part of the request for proposal (RFP)
contained a foundation analysis report, with a section entitled "Subsurface
Recommendations." Included in the recommendations was the following.
- Due to the anticipated column loads for a multistory building, it is
believed that improving the site is more viable than reducing the bearing
pressure to a very low value…. The recommended improvement program is outlined
below.
The recommended program contained statements that materials be undercut and
"should be excavated" from below the bottom elevation of all building footings.
In response to the RFP, Record Steel submitted a price proposal informing
the Corps that it did not believe over-excavation for the foundations would
be required but, if it was ultimately determined that over-excavation was needed,
Record Steel committed to performing this work at no additional cost. The need
for over-excavation was discussed during several design meetings both prior
to and after contract award. The parties agreed that Record Steel's geotechnical
firm was to conduct field investigations and tests and provide such information
to both Record Steel and the Corps. If the resulting data was satisfactory,
then Record Steel would proceed with its design without conducting over-excavation.
The geotechnical firm ultimately concluded that the native soils were adequate
to support the building's footings without over-excavation. However, the Corps
apparently reevaluated its position and refused to issue a notice to proceed
for the footings unless Record Steel agreed to conform to "the requirements
of the subsurface recommendations of the Foundation Analysis Report." Record
Steel complied with the over-excavation order and submitted a claim for approximately
$188,000 for the costs associated with this effort.
The court first looked at the reasonableness of each party's contract interpretations.
In finding that Record Steel's interpretation was reasonable, it first noted
that Record Steel, as the designer-of-record, was expected to exercise its professional
judgment in designing the dormitory and had to defer only to specific requirements
contained in the RFP—not recommendations. The court then examined how the "requirements"
in the RFP were expressed in terms of words like "shall," "may," and "should."
It found that the most critical aspects of the foundation report used the word
"should" instead of "shall"—and that this expressed a desire for action, but
not a binding requirement.
The court also looked to the fact that the foundation report stated that
the Corps "believed" that over-excavation was "more viable" to improve the site,
and couched its report in terms of a "recommendation" rather than as a requirement.
The court also found Record Steel's interpretation to be reasonable based on
the fact that the Corps' initial borings were not conducted within the actual
footprint of the dormitory's location.
The court also concluded, however, that the Corps' contract interpretation
fell "within the zone of reasonableness." It looked to the fact that the RFP
used the verb "shall" in connection with incorporating the foundation report's
recommendations into the contract, and that, by referring to the terms "over-excavation
and compaction requirements," there was an argument that the RFP expressly converted
the foundation report's recommendations into requirements.
The Court Looks to Contra Proferentem
Faced with two reasonable contract interpretations, the court then looked
to the rule of contra proferentem for guidance
in who should bear the risk of these ambiguities. The four-part test associated
with this rule places the risk of the ambiguities on the government when:
-
The contract specifications were drawn by the government;
-
The language used therein was susceptible to more than one interpretation;
-
The intention of the parties does not otherwise appear; and
-
The contractor actually and reasonably construed the specifications in
accordance with one of the meanings of which the language was susceptible.
The court found that all of these conditions were satisfied. It also refused
to apply the exception to the general rule of contra
proferentem (i.e., the patent ambiguity doctrine), which resolves ambiguities
against the contractor where the ambiguities are "so 'patent and glaring' that
it is unreasonable for a contractor not to discover and inquire about them."
This ambiguity was not deemed obvious, particularly since the Corps had not
indicated its view of the mandatory nature of these so-called requirements until
many predesign meetings between the parties had taken place.
Lessons Learned
There are several "take-aways" from the Record Steel case. Owners who use competitive procurement processes—like the Corps of Engineers
and other public agencies—have to remember that proposers get the benefit of
the doubt if there is something wrong with or unclear about an RFP document
furnished by the owner. The fact that the over-excavation concept was expressed
in terms of a "recommended" process started the potential for ambiguity, and
the "should," "may," and "shall" verbs contained in the foundation report sealed
the deal for the conclusion that there was an ambiguity. If the Corps wanted
to mandate over-excavation, it should have said so explicitly.
Equally important, however, is that Record Steel did the right thing by advising
the Corps during the proposal phase that it did not intend to undercut unless
soil conditions required it to do so. These actions demonstrated that Record
Steel actually relied on its interpretation of the ambiguity, which is one of
the predicates to recovery under the contra proferentem rule. The result of this case might have been different if Record Steel saw
the ambiguity but never informed the Corps of its interpretation during the
proposal process.
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