Make sure all agreements are spelled out

  • Wed Feb 5th, 2014 4:36pm

By Patrick Hussey Business of Law

In “Oliver Twist,” Charles Dickens famously wrote in 1838 — in more colorful language — that sometimes the law seems contrary to common sense.

Nevertheless, business owners should be cognizant of how the law treats their contracts and agreements, especially when disputes arise.

The Supreme Court of Washington recently decided a case dealing with an important issue impacting all business contracts and agreements.

The basic facts were these: Property owners hired an engineering firm to develop a piece of land. However, they suffered substantial financial losses and lost the property in foreclosure before it was developed.

They then turned around and sued the engineering firm for breach of contract and negligent misrepresentation. They sought significant monetary damages. The engineering firm put forth the argument that the owners’ negligence claims had to be dismissed because the damages sought were purely economic and were limited by the terms of their contract.

The contract limited the engineering firm’s professional liability to $2,500 or its professional fee, whichever was greater.

The engineering firm had assumed the managerial role over the project and worked closely with the other contractors, builders, and vendors, on the project.

The firm’s billing to the owners significantly exceeded its estimated fee. Preliminary approval expired and the project was still not complete. The engineering firm apologized, said that they had “screwed up” and they would make everything right. Before a new preliminary approval could be obtained, the property was lost through foreclosure.

It was not clear what professional obligations the engineering firm had assumed to the owners based upon certain oral representations, the parties’ written contract, and the engineering firm’s affirmative conduct. First, the court ruled that as professionals, the engineering firm had a legal duty to avoid any misrepresentations, which induced the owners to enter into the contract and that that duty was something separate and apart from the written agreement.

Second, it was not clear what exactly the scope of the engineering firm’s contractual duties were to the owners.

This was very important because to determine whether the professional had a duty independent of its contract, it was first necessary to know what duties the professional had assumed within the contract.

Here, the parties disputed the engineering firm’s duties regarding the development project because their written agreement was not clear.

The owners alleged that the engineering firm had orally promised to manage the short plat project and oversee the work of other subcontractors involved, and also to take care of necessary paperwork and permitting processes. The engineering firm denied this, saying that its services were outlined in its written agreement.

It was also unclear whether the engineering firm had assumed additional duties to the owners due to its affirmative conduct after the written agreement was entered into.

The parties’ written agreement did not have what is called a “merger or integration clause.”

That type of clause provides that the written contract supersedes any prior agreements or oral agreements between the parties.

Also, the parties’ contract did not contain any provisions stating that the owners were not relying upon any representations of the engineering firm except as set forth in their written agreement.

The Supreme Court concluded that if the engineering firm assumed duties to the owners that went beyond the terms of its written agreement then it could be liable for economic losses, and the limitation of damages in the written agreement would not apply.

What is the moral of this story? It is straightforward.

The parties to a written business agreement need to be very careful to ensure that all of the material and important parts of their agreement are set forth in their written contract.

And that written agreement has language under which the parties recognize that everything between the parties is spelled out in the contract.

Then, after that contract is entered into and performance starts, if there are any other changes or modifications, those should also be put in writing to avoid any argument that one party varied the contract by its performance and conduct.

The discussion in this article is not intended to be a substitute for specific legal advice in this area of the law.

Patrick Hussey is a partner at the Anderson Hunter Law Firm, P.S., in Everett practicing in the areas of commercial transactions and business insolvency. The discussion in this column is not intended to be a substitute for specific legal advice in this area of the law. The law firm provides representation in all civil matters. He may be reached at 425-252-5161 or phussey@andersonhunterlaw.com.