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Alleging shoddy workmanship, fear that its contractor wouldn’t finish the project, and a lack of detailed accounting under the cost-plus contract, the owner made only a partial payment on a draw requested by the contractor. Contractor and its subcontractors filed construction liens and filed suit against homeowner for unpaid fees. The court found the defects were merely punch list type items not entitling the owner to withhold payment and it found the demanded cost accounting details demanded by the owner were not required by the contract. Because the contract didn’t explicitly contain language such as “relationship of trust and confidence,” the court rejected the owner’s assertion that the contractor owed it a fiduciary duty. The owner’s failure to pay constituted a breach of contract entitling the contractor and subs to file and enforce liens for payment. Goes v. Vogler, 304 Neb. 848 (Supreme Ct. Nebraska, 2020).

Quoting at length from the court decision is the best way to present the reasoning of this decision.

“No Special Fiduciary Duty of Builder Under Cost-Plus Contract in the Absence of Agreement.

The Voglers claim that even assuming the parties were subject to a cost-plus contract, a contractor in a cost-plus contract has additional fiduciary duties to a homeowner as a matter of law, and that the district court erred by not explicitly discussing whether Shelton breached these duties and, consequently, the contract. As we noted above, we have stated that the “amount owing the builder should be computed on the basis of the amount actually spent for labor, materials, and supplies which go into and become a part of the finished structure, including the amounts paid to subcontractors.” Robison v. Madsen, 246 Neb. at 27-28, 516 N.W.2d at 598. The Voglers contend that given the law just quoted, it necessarily follows that a contractor must provide prompt, detailed accountings of actual costs incurred before taking progress payments and, furthermore, must inform the homeowner of potential cost overruns. The Voglers overstate the obligations of a contractor in general and, given the contract, in this case in particular. We reject this assignment of error.

Although there is case law to suggest that occasionally a cost-plus arrangement may place additional burdens upon a contractor, this is typically recognized where the contract language provides that “the contractor accepts a ‘relationship of trust and confidence established’ between it and the owner.” 2 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law § 6:81 at 641 (2002). For example, in a Maryland appellate case relied on by the Voglers, the contractor accepted a “ ‘relationship of trust and confidence’ ” with the homeowners and explicitly agreed to further their interests by performing “ ‘the Work … in the most … economical manner consistent with’ ” their interests and to “ ‘keep … full and detail[ed] accounts.’ ” Jones v. J.H. Hiser Constr. Co., 60 Md. App. 671, 676, 484 A.2d 302, 304 (1984). Given these provisions, the court held that there was a relationship of trust and confidence between the parties, i.e., a fiduciary relationship grounded in the explicit language of the contract. Jones v. J.H. Hiser Constr. Co., supra.

The contract between the Voglers and Shelton does not explicitly contain **197 language creating a fiduciary relationship. As a general matter, it has been observed and we agree that “ ‘[i]n any cost-plus contract there is an implicit understanding between the parties that the cost must be reasonable and proper.’ ” Forrest Const. Co., LLC v. Laughlin, 337 S.W.3d 211, 223 (Tenn. App. 2009) (quoting Kerner v. Gilt, 296 So. 2d 428 (La. App. 1974)). However, other than those already required by law and by the parties’ contracts, we decline to impose further fiduciary duties on contractors as a matter of law.”

Comment: Note how important the contract language is to deciding whether the contractor had a fiduciary duty. In the absence of language expressly establishing a a fiduciary duty, the court explains that no such duty typically exists for a contractor. To create such a duty, the court says wording like the following would be needed:

1) “the contractor accepts a relationship of trust and confidence established between it and the owner.”

2) “the contractor agrees to further the interests of the owner by performing the Work in the most economical manner consistent with the owner’s interests and to keep full and detailed accounts.”

When reviewing contracts for design professionals and contractors, it is wise to eliminate wording such as “relationship of trust and confidence.” We advise our clients that this wording may create a fiduciary duty that would not be imposed at common law under normal contract law principles, and that this could very well create uninsurable risks and losses.   Several standard form contracts in the construction industry have unwisely incorporated fiduciary wording such as “relationship of trust and confidence.” Whenever we see that, we strike it out and replace it with “good faith and fair dealing.”   The reason for this change is that whenever one enters into a contract, the common law will automatically impose a responsibility of “good faith and fair dealing” between the parties, and that is perfectly acceptable.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 4 (April 2020).

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