A recent court case reminded all contractors, especially those working in the paving and asphalt industry, of the importance of conditioning bids and contract prices on a reasonable time to complete their work. A Tennessee appellate court held a paving contractor responsible for a bid it submitted to an owner almost a decade prior, despite a nine (9) year delay in the middle of a development project. The contractor had not included language in its contract limiting its contract price to a specific time for performance. Because of that oversight, the contractor was required to perform its work at a much lower price than the current market rate, and at a loss.

The Project

The facts of the case might seem familiar to some. In 2003, Highways, Inc., a Tennessee-based asphalt paving contractor, submitted a lump sum bid of $46,000 to a subdivision developer for placement of an asphalt road consisting of a 6” base, 2” binder and 1-1/2” top coat. The work was to be completed in two phases, with the base and binder work occurring in the first phase, and the top coat of asphalt to be placed in the second. Highways, Inc. installed the base and binder coat in 2003, and the developer paid the contractor a sum of $37,200, or approximately 80% of the total contract price. An unpaid balance remained $8,800 to install the final 1-1/2” top coat of asphalt.

The second phase of the work was then postponed until 2012 or over nine (9) years at no fault of the contractor. When the project finally resumed, the asphalt contractor refused to provide the top coat at the originally agreed-upon price of $8,800. At 2012 prices, that work, according to the asphalt contractor, would cost $38,000. Because Highways, Inc. refused to place the top coat of asphalt for the lower price, the developer sued the contractor for its cost overrun over the agreed-upon $8,800 price.

Court Holds Contractor Responsible for Cost Overrun

In a decision issued in early December of 2015, the Tennessee court found the contractor responsible for the developer’s cost overrun, awarding the developer a sum of $29,200. The contractor argued that the developer should be prevented from holding the contractor responsible for a contract price submitted over nine (9) years in the past. Ultimately, however, the court rejected that argument, requiring the contractor to prove that the owner was negligent, or failed to exercise reasonable care, in postponing the project for nine (9) years and then requesting that the contractor perform work at a much lower rate than current market prices.

The court concluded, however, that “[a] mere hiatus in seeking performance of a contract — here, one which did not have a stated term or deadline for performance — does not equate to negligence in seeking to enforce the right to recover for breach of the contract.” Because the contractor could not prove the developer failed to exercise reasonable care under its contract, the court concluded that the contractor must be held to its original price.

Suggested Contract Language

Important to the decision was the fact that the contractor could have easily protected itself through simple contract language. All construction bids and contract prices should be limited to a specific time for performance in which the contractor’s prices are valid. At a very minimum, prices should be subject to adjustment in the event a project is delayed for a material length of time due to factors outside of the contractor’s control. Some version of the following form contract language likely would have changed the result of the case:

  • Specific Time for Performance: Owner and Contractor agree that the Contractor’s obligation to perform the Work under this Agreement shall expire after a time for performance of __ years. Contractor will have no obligation to perform after that time for performance unless the Project is delayed as a direct result of the actions or inactions of Contractor or those under its control.
  • Adjustment to Contract Price: Owner and Contractor agree that in the event the Work is materially delayed through no fault of the Contractor, the Contract Price will be adjusted to compensate Contractor for changes in its material costs, labor costs and other costs incurred in completing the Work.

While it is far from certain that other courts, including courts in Ohio, would come to the same result as the Tennessee court did in Avery Place, LLC v. Highways, Inc., 2015 Tenn. App. LEXIS 957 (Dec. 7, 2015), it is still a best practice to avoid the issue entirely by including basic language in bids and in all contracts limiting your time for performance.