An early contract law principle was that a contract was only formed where the “acceptance” was exactly the same as the “offer.” The term of art used was the Mirror Image Rule.
So, for example, if one person offered to sell a book for $1 and the second person accepted that offer, there was a contract. If the second person did not mirror the offer, but instead said “two books for $1.50,” then the response was a counteroffer, which did not result in there being a contract until the new deal was accepted by the first person.
In construction, the circumstances are somewhat more complex. When an owner solicits bids, the solicitation is not an “offer” in the traditional sense, mostly because there is no price. When you submit your bid proposal, it is you who is making the offer, and to become a contract, the owner must accept your bid mostly as made.
Owners try to control this circumstance by instructing bidders that their proposal must acknowledge the owner’s terms and conditions as binding in the agreement to be reached. In essence, the owner drafts the form of the offer for you.
In real life, owners and contractors do not always play by the rules of contract law, and many do not know what the rules are. As a result, courts are often asked to determine whether a contract was, in fact, created and, if so, under what terms.
There are instances where a subcontractor’s quote contains language that adds to or changes the owner’s solicitation documents or that objects to certain clauses in the proposed contract. What happens when the owner does not respond but, instead, directs you to proceed? And what if the owner states that it does not accept your changes? Does that mean the original terms still apply?
A case in point comes out of Montana, although the problem discussed in the court’s opinion occurs regularly across the country.
In AAA Construction of Missoula, LLC v. Choice Land Corp, et al. (Mont. Oct. 25, 2011), AAA, a subcontractor, was asked to bid on a portion of a commercial project, which it did. When the bid was submitted, the general contractor deleted the words in the subcontractor’s proposal, which said “acceptance of proposal.” The contractor then wrote “Pending contract with owner. Final scope/subcontract to follow,” and signed the proposal as modified.
On its face, the general contractor’s note makes it evident that acceptance was conditional on the owner’s awarding the contract, and an agreement to the final contract terms and scope being made.
After AAA actually began its work, the general contractor, as expected, sent AAA the final subcontract form, with terms and conditions, and a new scope of work was included. AAA did not accept these new documents. Instead, AAA proposed an increased price. The general contractor rejected that new price.
Before this time, there were no terms and conditions except for the bid, which only defined the initial scope and price. Was there a contract? If so, what was it? What the court decided in answer to these questions was not necessarily predictable.
In its opinion, the court began with the Mirror Image Rule. “The parties must agree upon the same thing, in the same sense.” After that point, the opinion got confused. At the heart of the court’s ruling was a determination that AAA’s first bid became the contract as soon as the general contractor allowed the work to proceed. Any proposals and counterproposals thereafter were regarded as simply offers and counteroffers, which, without mutual agreement, led nowhere.
The court could have easily found that the contingent language of the general contractor, “Final scope/subcontract to follow,” prevented the contract from forming in the first place.
This Montana decision is not a reliable guide to the decisions other courts might make. Consider, for example, an instance where the subcontract terms include scheduling clauses, arbitration, indemnity obligations, insurances, etc. In Montana, presumably those terms would not be binding on AAA, but that conclusion would be unrealistic because it would leave important commercial terms undefined.
The case emphasizes the inherent confusion and dangers involved where the parties have not locked down the contract documents before the work begins.
For the sale of goods, such as when you purchase materials or equipment, similar rules apply. You call or email a supplier and request a price, and in return, your supplier may send you a purchase order (the supplier’s offer). If you sign the purchase order, or act on it even without signing, you have accepted any terms contained in the purchase order acknowledgment form.
What happens if you request a proposal from a supplier using your own document, one that contains your own terms and conditions? If the supplier sends its acknowledgment form back to you with different terms, whose contract terms prevail?
Some answers to these questions can be found in the Uniform Commercial Code. Where there is a “battle of the forms” between business people, all non-conflicting terms may end up becoming part of the contract mix. This result may ease the burden on a judge in deciding what is in the agreement but may not avoid confusion to you and the supplier.
Certainly, whether you are submitting a bid or receiving a supplier’s quote, the safe course of action is for you to make certain that both parties are in agreement to the same thing—that is, the same documents.
• If you have a standard form contract for suppliers, reject the supplier’s forms.
• When you submit a bid, make certain that you have—and are familiar with—all the documents that will become part of the final contract, e.g., the general contractor’s terms and, if incorporated, the owner’s terms.
• If your bid proposal contains its own terms and conditions and you object to the other party’s terms, assemble a final combined contract document and have that signed before you proceed with the work.