A reminder from the Idaho Supreme Court for parties to a construction contract:  the plain language of the parties’ contract governs the obligations between them in the absence of ambiguity.  In City of Meridian v. Petra, Inc., No. 39006, 2013 WL 1286014 (Idaho Apr. 1, 2013), the Idaho Supreme Court reviewed a construction dispute between the City of Meridian and its construction manager, Petra.  Not atypically, unfortunately, a project ballooned from $12.2 million in 2006 to over $21 million by October 2008 for a variety of reasons.  As the project progressed, Petra, pursuant to its contract with the City, notified the City of the proposed increased costs of construction and the City approved them, or often the City directed the changes itself.  During this same time, Petra notified the City of Petra’s right to an equitable adjustment to Petra’s fee based on the changing nature of the project. At that time, Petra agreed to wait until the final project value was determined before submitting the fee request. Thereafter, Petra managed the project for the City through occupancy.  Approximately six months prior to occupancy, Petra issued a change order requesting an equitable adjustment in the amount of 4.7% of the excess of the original base contract, which was the same percentage used for the original fee and a significant change order previously. The City denied the request.

  When mediation didn’t resolve the dispute, the City filed suit against Petra for declaratory relief and alleged breach of contract, among other claims.  Although the case itself addresses a number of related and interesting topics regarding evidence at trial, evidentiary issues relating to the claimed breach by Petra, and attorney fees, the foundational issue addressed by the court is the clarity of the contract and the allowance of the equitable adjustment.  On that score, the trial court found against the City on all but the lesser claims, and awarded Petra $595,896.17 in costs and $1,275,416.50 in attorney fees, in addition to its requested (as adjusted) fee of almost $325,000.  

After a thorough review of the record, the Idaho Supreme Court agreed with the trial court, focusing on the plain and ordinary language of the parties’ contract, holding that only the “additional services” and not the “additional fee” required the City’s pre-approval.  Accordingly, the equitable adjustment naturally followed such approval of the services by the City.  The Supreme Court found the following language of the AIA Construction Management agreement persuasive:

“Except as otherwise set forth in this Agreement, if any of the above circumstances materially affect Construction Manager’s services, Construction Manager shall be entitled to an equitable adjustment in the Schedule of Performance, the Construction Manager’s Fee and/or the not-to-exceed limits for reimbursable expenses, as mutually agreed by Owner and Construction Manager. Prior to providing any additional services, Construction Manager shall notify Owner of the proposed change in services and receive Owner’s approval for the change. Except for a change due to the fault of the Construction Manager, a change shall entitle Construction Manager to an equitable adjustment in the Schedule of Performance, Construction Manager’s Fee, and/or the not-to-exceed limits for reimbursable expense as mutually agreed by Owner and Construction Manager.”

Meridian, 2013 WL 1286014, at *7 (emphasis in original) (quoting agreement).

The Idaho Supreme Court also noted that the City’s interpretation of the contract – that both the additional services and additional fee required the City’s pre-approval – was not equitable, citing prior Idaho law in equity.  See Climax, LLC v. Snake River Oncology of E. Idaho, PLLC, 149 Idaho 791, 796, 241 P.3d 964, 969 (2010)  (“‘In its broadest and most general signification, equity denotes the spirit and habit of fairness, justness, and right dealing which would regulate the intercourse of men ….’” (citation omitted)).  Noteworthy along the same lines, the Idaho Supreme Court found that the parties’ course of dealings had reasonably established the use of the 4.7% figure for the fee increase.  The court stated in part:

Moreover, the proper time for haggling over the adjustment metric was during contract formation. As a sophisticated party, the City took a risk, ex ante, by not specifying how the adjustment would be calculated. It could have drafted its own preferred metric, but for whatever reason it did not. It thus cannot credibly argue now, ex post, that the adjustment chosen by the district court is unsuitable.

Meridian, 2013 WL 1286014, at *9.

Finally, the Idaho Supreme Court also directly dispatched the City’s defenses of breach of contract and alleged fiduciary obligation by Petra, as well as the assertion that Petra’s claim was barred under the Tort Claims Act, noting that the trigger of the claim commenced upon the City’s denial of the request and not Petra’s completion of the additional work authorized by the City.

The court’s findings are both refreshing and cautionary. Those assisting owners and contractors in drafting agreements need to be very aware of what has and has not been negotiated by the parties, while understanding that a reasonable approach in enforcing the project terms as well as project resolution may serve the parties best.