Understanding the Duties Owed in a Relationship of “Trust and Confidence” in Construction Contracts
Category | Briefing Papers
By Kylee A. Evans
Kylee is a member of the firm’s Construction Law Department. She can be reached at 612.359.7668 or kevans@fwhtlaw.com.
In many standard AIA contracts, particularly A103-2017 and A102-2017 between the owner and a contractor in a cost-plus agreement, the contractor agrees to:
[A]ccept[] the relationship of trust and confidence established by this Agreement and covenants with the Owner to cooperate with the Architect and exercise the Contractor’s skill and judgment in furthering the interests of the Owner… .
See, e.g., AIA A103-2017, Article 3 (emphasis added). This language is commonly found in cost-plus contracts based on the potential for cost overruns and inefficiency. However, courts across the country continue to disagree about the meaning of the relationship of “trust and confidence” in such contracts. Minnesota has yet to rule on the meaning of the language, so we must look to other jurisdictions to understand what the implications of that language might be.
Some jurisdictions hold that such language proscribes something similar to a fiduciary duty, in which the contractor must put the interest of the owner above its own. Others find that the language creates no heightened duty to the owner at all. However, most jurisdictions find that the language requires a heightened duty of care to the owner, but that duty does not translate to a true fiduciary duty. In general, courts seem to focus on the practical reality of the owner-contractor relationship to determine if the owner truly relied on the contractor’s expertise, or if the owner instead relied on the architect/engineer to be its proxy.
This article will explain the duties expected in a fiduciary relationship and detail the various opinions regarding the “trust and confidence” language found in AIA contracts to allow contractors and owners alike to make informed decisions when they negotiate this language in their own contracts.
Fiduciary Duty Explained
A fiduciary duty is “the highest standard of duty implied by law” in Minnesota. Swenson v. Bender, 764 N.W.2d 596, 601 (Minn. Ct. App. 2009). It requires the fiduciary to “act for the benefit of another person on all matters within the scope of their relationship.” Id. This duty is much higher than what is traditionally expected in even a heightened standard of care between contractors and owners which could surprise contractors if they find themselves in a dispute with the owner.
In Minnesota, a fiduciary relationship exists when there is “superiority of knowledge of one party and confidence reposed by the other.” Vacinek v. First Nat. Bank of Pine City,416 N.W.2d 795, 799 (Minn. Ct. App. 1987). However, arm’s length negotiations between businesses do not generally establish a fiduciary relationship. Shema v. Thorpe Bros., 62 N.W.2d 86, 91 (Minn. 1953). Traditionally a fiduciary duty is implied to relationships like attorneys and clients, trustees and beneficiaries, and limited partners and general partners. Thomas B. Olson & Associates, P.A. v. Leffert, Jay & Polglaze, P.A., 756 N.W.2d 907, 914 (Minn. Ct. App. 2008). “Such a relationship transcends the ordinary business relationship which, if it involves reliance on a professional, surely involves a certain degree of trust and a duty of good faith and yet is not classified as ‘fiduciary.’” Carlson v. SALA Architects, Inc., 732 N.W.2d 324, 331 (Minn. Ct. App. 2007). However, in cases that don’t include these relationships, Minnesota courts look to whether the relationship, in practice, is a fiduciary one. For example, Minnesota has refused to automatically imply a fiduciary relationship between an architect and its client, but will look to the relationship between the parties to determine if one nevertheless exists. Id.
Fiduciary Duties in the AIA Contract
Minnesota courts regularly use the language “trust and confidence” when discussing a fiduciary relationship. See, e.g., Lipinski v. Lipinski, 35 N.W.2d 708, 710 (Minn. 1949) (“The relationship between partners or joint entrepreneurs is one of mutual trust and confidence, and the law imposes upon them the highest standard of integrity and good faith in their dealings with each other.”); Venier v. Forbes, 25 N.W.2d 704, 708 (Minn. 1946) (same). This may signal that a Minnesota court would find there to be a heightened or fiduciary relationship created by Article 3’s language. However, Minnesota has never squarely ruled on how that language applies in a construction contract, which does not traditionally fall within the common categories of fiduciary relationships, and therefore is not fiduciary per se. Instead, we must look at how other jurisdictions have handled this issue to infer the range of potential duties Article 3’s relationship might impose.
Some jurisdictions will infer a heightened duty of care in cost-plus contracts, even without Article 3’s language above, because of the aforementioned potential for cost overruns and inefficiency. However, that duty generally amounts to a requirement that the contractor/construction manager keep adequate records of costs and changes and communicate those to the owner in a timely fashion. However, they do not require the contractor to operate at a loss in an effort to save the owner money or to otherwise put the owner’s interests above the contractor’s interest in making a profit. For example, in Hitt v. Smallwood, the court found that there is an implied duty in all cost-plus contracts to “keep accurate and correct accounts of all material used and labor performed, with the names of the materialmen and laborers, so that the owner may check up on the same,” as well as a duty to “use the same skill and ability in the extra work as he uses in contract work for a gross sum.” 133 S.E. 503, 506 (Va. 1926).
Other courts are hesitant to infer even a heightened standard of care on a cost-plus contract without clear contractual language. A New Jersey court found that “an owner-contractor relationship is not one of the traditional fiduciary relationships, and [therefore it found] no reason to infer a fiduciary relationship.” Avon Bros. v. Tom Martin Const. Co., No. A-1681-99T1, 2000 WL 34241102 (N.J. Super. Ct. App. Div. Aug. 30, 2000). The court noted that the reality of the owner-contractor relationship was that the owner relied on its in-house project engineer to make decisions, rather than the “superior power, knowledge or control over the terms of [the change orders]” of the general contractor. Id. Thus, there wasn’t a true relationship of “trust and confidence” because the owner had its own agent to make decisions on the project. Similarly, in Munn v. Thornton, the court “decline[d] to create a fiduciary relationship between contractor and owner under a cost-plus contract” absent any contractual language. Munn v. Thornton, 956 P.2d 1213, 1220 (Alaska 1998).
When courts have considered the impact of the AIA contract language regarding “trust and confidence,” they have also been split. Some have used the language to infer that there is a heightened duty of care, similar to a fiduciary duty, though not exactly equivalent. In Henson v. James M. Barker Co., the court found that “although [the AIA relationship provision] did not create a true fiduciary relationship in the classic sense,” it did still impose “certain duties that would not otherwise be imposed under the concept of caveat emptor [buyer beware] generally applicable to an independent contractor dealing completely at arm’s length.” 555 So. 2d 901, 906 (Fla. Dist. Ct. App. 1990). Those duties include: a duty to “deal openly and fairly with the [owners];” a duty to “make full disclosure to the owner of all problems encountered that may affect the progress of the work and its value to the owners, including all corrections the contractor deemed necessary and the cost thereof;” and “a duty to construct the building free of material defects, and a duty to disclose, and thus not conceal, any latent defects in the construction that would materially impair the value of the structure.” Id. These duties seem to more closely align with those found in Hitt and the general principles of good faith and fair dealing. They do not necessarily mirror a fiduciary duty.
Other courts have found that the language creates a fiduciary duty outright—though their description of the duty is more closely aligned with a heightened, but not fiduciary, duty. For example, Maryland courts refer to the relationship created by the “trust and confidence” language as a fiduciary relationship. In Jones v. J.H. Hiser Const. Co., Inc., the court found that the lay owners of a construction contract were entitled to rely on the contractor’s opinion about costs and necessary changes. 484 A.2d 302, 304–05 (Md. Ct. Spec. App. 1984). Because the contract created a “trust and confidence” relationship, the contractor had a fiduciary duty to “protect [the owners’] pocketbooks” and at the very least “be aware of incipient overruns and to inform the [owners] about them so that [they] could make informed decisions about how far they wanted to go.” Id. at 305. However, in another Maryland case, the court found this duty was fulfilled when the owner was part of the regular decision-making process. Kahle v. John McDonough Builders, Inc., 582 A.2d 557, 559–60 (Md. Ct. Spec. App. 1990). In that case, the owners were in “constant contact” with the contractor who would disclose prices of subcontractors, changes, etc. and were given updated cost estimates throughout the process. Id. Therefore, the contractor did not need to look out for the owner’s pocketbook above all else, because the owner or its agent was involved in the decisions on the project.
Still other courts have found there to be no heightened duty at all between parties when they have an arm’s length relationship, regardless of contractual language. In Eastover Ride, L.L.C. v. Metric Constructors, Inc., the court held that despite the language of “trust and confidence” found in the contract, there wasn’t a fiduciary relationship in practice. 533 S.E.2d 827, 831–32 (N.C. App. 2000). The court focused on the phrase “to cooperate with the Architect” in the same provision of the contract to demonstrate that the owner did not rely on the advice of the general contractor. Id. at 832. Based on the fact that the owner hired its own Architect who had extensive duties and responsibilities to the Owner, the court concluded as a matter of law that “the architect’s constant, close involvement in the project belies any claim that a ‘relation of trust and confidence’ existed between plaintiff and defendant giving rise to a fiduciary relationship.” Id.
Essentially, the divided case law amounts to the oft-dreaded lawyer answer, “it depends.” There is a possibility that a contractor’s relationship with the owner is one in which a fiduciary duty is implied. However, there is abundant case law that supports merely a heightened duty and even some cases that find there is no heightened duty at all.
Conclusion
Although there are a variety of court splits on this issue, generally courts have found that the “trust and confidence” language in the AIA may create a heightened duty of care. Some describe the relationship in comparison to a fiduciary relationship, but largely do not require the true duty of loyalty implicit in all fiduciary relationships. Regardless, contractors and owners should be aware of this language in their contracts and contact an experienced construction law attorney to help them understand how it may impact their respective duties on the project.
Announcements
Fabyanske, Westra, Hart & Thomson, P.A. attorneys Mark Becker, Elise Radaj and Leon Wells are speaking on the upcoming HalfMoon Education Inc.’s webinar “Current Issues for Minnesota Engineers” Tuesday, May 13th at 9:00 AM Central Time. For more information, including details and how to register, click here.
Robert L. Smith is speaking at the upcoming National Business Insitutes’s seminar “Constructing Clarity: Legal Paths When Change Orders Are Refused” Friday, May 30th at 12:00 PM Central Time. For more information, including details and how to register, click here.