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Even "Industry Standards" Must Be Spelled Out in a Contract

Whenever you contract for a specific product or service, it is important to spell out exactly what you expect to receive from the other party. A contract should not be ambiguous or vague on these points. To give a simple example, if you sign a contract to purchase a house, you would expect there to be a specific description of the property. You would not sign a contract to buy “that house over on Elm Street near the woods.”

The importance of specificity in a contract becomes even more apparent if there should be litigation between the parties. One party may argue they did exactly what the contract said, while the other claims that was not what they bargained for. As a general rule, New York courts will not read into the contract any terms not specifically contained within the document.

Mary Imogene Bassett Hospital v. Cannon Design, Inc.

Here is a recent example from a case in upstate New York. In 2002, a hospital in Otsego county wanted to make a “seismic retrofit” to one of its buildings. A seismic retrofit involves making structural enhancements to an existing building so it can better withstand earthquakes. The hospital hired a firm to design and construct these enhancements.

The architect was supposed to construct a structural system composed of four steel plate “shear walls.” Only three of these walls were built. Construction of the fourth wall was delayed, and before it could begin, the hospital fired the architect, claiming its overall design was defective.

The hospital then sued the architect for breach of contract and professional malpractice. After several years of litigation, a Supreme Court judge, trying the case without a jury, entered judgment for the hospital. But on April 9 of this year, the Appellate Division, Third Department, partially reversed the trial court's decision, holding the architect was liable for professional malpractice, but not breach of contract.

The core of the hospital's case was that the architect failed to follow “industry standards”—specifically, the International Building Code (IBC)—in designing the shear walls. At trial, an expert witness presented by the hospital testified that by failing to follow IBC standards, the architect's “design was defective because the other elements of the design were not stronger than the shear walls, which would cause those elements to fail and collapse before the shear walls, contrary to a proper design.”

This was sufficient to establish the architect's professional malpractice, the Appellate Division agreed, but not a breach of contract. Even though the parties agreed the IBC standards were applicable here, “the IBC is not mentioned in the contract itself and the contract prohibits any oral modifications.” Therefore, as a matter of New York law, the Third Department concluded there was no breach of contract.

Of course, the hospital will still recover significant damages on its successful malpractice argument. But the lesson here should be clear: Always get every important term of a contract in writing. Even if all parties involve orally agree to certain standards, unless it is written in the final agreement it may not hold up in court. If you need assistance from an experienced New York business attorney in drafting or reviewing a contract, please contact our office right away.

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