Construction Contract Terms Matter. Be Careful When You Draft Them.

In a prior post, I discussed the case of Fluor Fed. Sols., LLC v. Bae Sys. Ordinance Sys in the context of the interplay between fraud, contract, and statutes of limitation.  Some cases just keep on giving.  This time the case illustrates the need for careful drafting of those pesky, and highly important, clauses in your construction documents.

In the current iteration of this ongoing saga, the Court considered the contractual aspects of the matter.  As a reminder, the facts are as follows:  In May 2011, the United States Army (“Army) awarded BAE Systems Ordnance Systems, Inc. (“BAE”) a contract to design and construct a natural gas-fired combined heating and power plant for the Radford Army Ammunition Plant (“RAAP”). On October 7, 2015, BAE issued a request for a proposal from Fluor Federal Solutions, LLC (“Fluor”) to design and build a temporary boiler facility at a specific location on the RAAP property. On October 13, 2015, the Army modified the prime contract to change the location of the boiler facility. On December 10, 2015, the Army modified the prime contract to require BAE to design and construct a permanent boiler facility. On December 30, 2015, Fluor and BAE executed a fixed-price subcontract for Fluor to design and construct the temporary boiler. Throughout 2016, BAE issued several modifications to Fluor’s subcontract to reflect the modifications BAE received from the Army on the prime contract. On March 23, 2016, BAE directed Fluor to build a permanent – rather than temporary – boiler facility. On March 28, 2016, Fluor began construction of the permanent facility and began negotiations with BAE about the cost of the permanent facility. On September 1, 2016, the parties reached an agreement on the cost for the design of the permanent facility, but not on the cost to construct the permanent facility. On November 29, 2016, the parties executed a modification to the subcontract, officially replacing the requirement to construct a temporary facility with a requirement to construct a permanent facility and agreeing to “negotiate and definitize the price to construct by December 15, 2016.” The parties were unable to reach an agreement on the construction price.

Based upon these facts, Fluor filed a complaint alleging among other items (some of which were dealt with in the opinion set out in my prior post linked above) breach of contract and declaratory judgment.  Unsurprisingly, BAE filed a counterclaim for breach of contract and declaratory judgment.  Also as no surprise to anyone, Fluor moved to dismiss the BAE counterclaim.  The Court granted Fluor’s Motion to Dismiss regarding the declaratory judgment count, stating that the declaratory judgment count was duplicative.  The more interesting analysis found in the opinion is that relative to the breach of contract action.

In its motion to dismiss, Fluor argued, along with the typical failure to state a claim, that BAE failed to meet a contractual condition precedent to litigation of negotiation prior to filing suit.  The Court disagreed that there truly was such a condition precedent and stated that the language stating that the parties agreed to negotiate in good faith absent certain language did not create one.  The Court further went on to state (citing multiple cases under Virginia law):

Under Virginia law, whether the parties intended a contractual provision to act as a condition precedent or a mere promise, general rules of contract interpretation govern and the plain meaning of the contract controls. The law generally does not favor conditions precedent, but courts construe a contract as conditional if its plain language compels them to do so. BAE and Fluor agreed to negotiate in good faith to resolve any claim, dispute, or cause of action, but the plain language of the subcontract did not make this agreement a condition precedent to litigation. Fluor argues that the statement — “to the extent that such negotiations fail”— indicates that negotiations are a condition precedent to litigation. However, this language is not as explicit as the “prior to” and “only if” language forming conditions precedent in [other cases finding such conditions (citations omitted)].

The Court then went on to point out that the parties had been in negotiations for years so even if such a condition precedent existed, BAE had met it.

The takeaway?  Had the language of the contract more precisely stated what Fluor wanted, namely a condition precedent, the Court would have had to enforce it.  Failing to make explicit the requirement of negotiation prior to suit kicked the legs out from under the argument in the first instance even in light of the facts surrounding the claim.  Once again, a Virginia state or federal court looked at the exact language of a construction contract and ruled according to the plain meaning of the words on the page.  Cases such as this emphasize the need for careful negotiations of your construction contract terms with the assistance of experienced construction counsel.

I recommend the opinion for your reading and invite your comments below.

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