Freedom to contract is a hallmark of our legal system. But while two parties are free, within limits, to establish the terms of their own relationship, they are not free to define the rights of third parties who have not signed the contract. For instance, in a construction context, a project owner and a prime contractor cannot abridge the statutory lien rights of a subcontractor. There are other examples.
A condominium developer and a constructor utilized AIA contract documents, which call for the project architect to certify the date of substantial completion of the work. Years later, the condominium owners association sued the constructor for alleged defects. The constructor argued that the claim was time barred; the AIA certificate, widely used and recognized in the industry, was determinative of the date of substantial completion. A California court ruled, however, that the owners association was not a party to that contract and the AIA certificate could not be used to extinguish the association’s claim.
Another case in this issue involves a contractor’s ability to recover unabsorbed home office overhead calculated using the Eichleay formula. The contractor’s burden of proof is not reduced in a termination settlement context. The contractor would still have to prove the precedent elements of Eichleay recovery.
The third case addresses the federal government’s duty to seek clarification of a competitive proposal that had been deemed technically unacceptable. While there is a duty to seek clarification of a suspected bid mistake in a sealed bid, there is no such duty in a negotiated procurement. The agency had reserved the right to award the contract without discussions and the agency could proceed accordingly.