A project manager buried in a supplier buyout asked himself, “Why can’t I just pin these offers on the back of our sample order and submit?” The short answer is, you can, but you can go to what is required by law Be tied to gap fillers drawn up by a number of law professors or, worse still, to the supplier’s standard terms included in its offer. Module Construction is one deployment method that is likely to encounter such a situation. In order to avoid the introduction of unforeseen or undesirable conditions in a hybrid delivery / service contracting vehicle, ConsensusDocs recently published its first standard “Subcontract” form for modular construction – 753 Standard Agreement Between Constructor and Prefabricator (“ConsensusDocs 753”). This article covers some of the intricacies of ConsensusDocs 753 and explains why putting a quote on the back of an order is a terrible idea
You may be wondering why the term “subcontract” is in quotation marks above. That answer lies in the function of the Uniform Commercial Code (UCC). All states have adopted Article 2 of the UCC in some form. Article 2 of the UCC applies to contracts for the sale of goods – not services – and basically provides a gap filler. If an order and the offer contained in the order have gaps or conflicts, the UCC excludes conflicting provisions and fills the resulting gaps. The only mandatory information is the quantity and a description of the goods. The UCC will fill in the rest – even the price.
The UCC was created to accelerate trade – not to protect contractors with upstream common law contractual liability. The common law regulates service contracts and differs in many aspects from the UCC. The resolution of a contractual dispute may vary depending on whether Common Law or UCC applies.
Modular building typically encompasses both aspects of construction performance and the sale of goods. Disputes over mixed contracts for the sale of goods and services pose a puzzle in determining the competent authority. Courts analyze the transaction holistically. The conclusion is often subjective. Most courts will try to determine the overriding purpose of the contract. Courts have usually found that construction contracts predominantly cover services or real estate and that common law is applied. Conversely, if the primary purpose of a contract is to purchase and install a specific device (e.g. a water heater), the courts will usually turn to the UCC in enforcing the parties’ contractual rights and obligations.
In the mixed (or hybrid) world of modular building, there is little precedent for predicting which law to apply to disputes with “subcontracting” modular building. The prevailing presumption is customary law. ConsensusDocs 753 is a sub-contract in form and content and contains a tick section where the parties can choose which agency governs the underlying contract. This is not the end of all, but it can convince a court to apply the law that the parties agreed in the contract. To reinforce the importance of the UCC’s legal power, many courts are likely to apply the UCC to contracts for the sale of goods, even if the parties agree to common law in the underlying contract.
The answer to the question of which authority is advantageous for the contractor depends on the underlying facts of a specific dispute and the national law applicable to the contract. For example, statute of limitations (SOL) for contractual actions varies from state to state and depends on whether it is a contract for the sale of goods. For example, in Georgia, the statute of limitations for written contracts is six years from the cause of the cause of action (usually substantial completion) and four years for contracts for the sale of goods – but the parties can shorten it but not extend it to no less than one year (unless the written contract is signed with a seal). In South Carolina, on the other hand, the SOL is three years for written contracts and six years for contracts for the purchase of goods and may not be contractually shortened. Such restrictions present potential problems for contractors with upstream common law contract liability. To the extent possible, it is important to downgrade the SOL periods applicable to upstream contracts in purchase orders. If the supplier’s offer is included in the purchase order, contractors can assume risks that could otherwise have flowed to the supplier. If an upstream party sues the contractor after the SOL is executed on the PO and before the SOL runs on the upstream written contract, the contractor could “hold the bag”.
The UCC also includes loss risk fillers. According to UCC, the risk of loss passes from the seller to the buyer when the seller fulfills his delivery obligations. In particular, an infringing party assumes the risk of loss even if the injury is unrelated to the problem that caused the loss. ConsensusDocs 753 compensates by placing the risk of loss on the paver during transport and delivery and on the person responsible for assembling the work after delivery. Most providers indicate the risk of loss in their offers. If the quote is included in the order, contractors have likely assumed the risk of loss – even if the sample order contains a language that assigns that risk to the supplier.
Acceptance and rejection of the goods and / or services are often a hot topic. Under common law, a party must essentially meet its obligations. Building is in many ways an endeavor of tolerance. Substantial compliance can be a mushy and subjective way of defining acceptable levels of performance. Upstream construction contracts often address this problem by providing more details in terms of quality, cost, and time commitments. According to UCC, contractors can refuse goods due to deviations in quality, quantity or delivery. Suppliers often mitigate these risks in their offers. If the offer is contained in the order, the contractor can assume a liability gap between the obligations of the contractor from the upstream contract and the obligations of the supplier according to his offer.
ConsensusDocs 753 balances this out by allowing the contractor to reject non-compliant work, regardless of whether it was manufactured, installed, or completed, while also establishing the contractor’s duties to inspect the work. The contractor is obliged to submit a QA / QC plan to the prefabricator for mutual approval prior to production. ConsensusDocs 753 also requires that the contractor confirm that the components comply with the subcontracting documents and that all QA / QC protocols have been met before the components are delivered to the project.
The differences between common law, UCC, language in quotations and PO provisions can lead to unpredictability if the parties do not take the time to properly compile the PO ConsensusDocs into the world of modular building. Contractors should include solid merger and flow-down clauses in all purchase orders, mixed contracts, and subcontracts. It is just as important to refrain from including the supplier’s offer in the order. Buyout can be a strenuous process, but when a problem arises it pays off in the time contractors spend creating and negotiating the terms. It is worth entering the inclusions and exclusions in the order and leaving the offer in a file. Like most things, buyout is not the place to compromise.