Analyze this scenario: An owner calls you because of your enticing advertisement.

“No job too big or too small.”

“Over 20 years of satisfied customers.”

“All of our electricians are highly trained.”

Your sales representative makes a house call, listens to the owner’s demands (and looks at the owner’s inept sketches), and sends in a written proposal. The owner writes, or calls, asking that you scale back the scope of work to save money and tells you to start. In the meantime, you send the owner your standard contract, which the owner never bothers to sign.

What is the agreement?

The Uniform Commercial Code (UCC) applies to the sale of goods, and not necessarily to service (that is, construction) contracts. But the courts often look to the UCC for guidance, in large part because it is so comprehensive in defining rights and obligations.

Under the UCC, an “agreement” means:

. . . the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance . . .

This definition is wonderful in its conciseness. And it has importance for what it does not say.

For example, there is no reference to a writing. If you break this definition down to its elements, you will understand basic contract theory.

The bargain of the parties

Contract law requires five elements to form a contract: an offer; an acceptance; consideration; legal capacity; and legal purpose. If any of these elements are missing, there is no contract.

“Legal capacity” simply means the person who enters into the contract has authority to bind the party. The president or vice president of a company, for example, has the legal capacity to bind a corporation. “Legal purpose” is normally not a problem. A contract to wrongfully burn down someone’s house is unenforceable. “Consideration” is something of value, also usually not a problem. For example, you are offered $10,000 to wire some office space.

So now we come to the heart of the bargain: offer and acceptance. If the offer and acceptance of the offer are not identical, there is a problem.

Go back to the example we started out with, which is fairly typical. What do you think constitutes the “bargain in fact as found in their language or by implication from other circumstances?”

Some suggestions: The advertisement may be part of the bargain. The owner saw it and maybe relied on it. The telephone calls also are in the bargain as they helped to define the scope of work. The correspondence and the proposal are also a part, as they reflect the proverbial “meeting of the minds.” But maybe the standard contract form is not part as there is no apparent acceptance of its terms by the owner.

What about “implication from other circumstances?” Your silence when asked a question about whether some electrical change could be done may be an “implication.” Or, your statement of “no problem, we can take care of that later” may be enough. Depending on the circumstances, there may be other “implications.”

How to limit the “agreement”

Certainly, you should be careful about what promises and information you put in your flyers and advertisements. In some states, there are treble damages for false advertisements.

The law is vague on this advertising issue. Many statements in ads are considered to be mere “puffery,” a word I love but don’t get to use very often. For example, “we aim to satisfy” would likely be considered puffery. Other advertising phrases may just be illusory promises that cannot be enforced, like “we always complete our jobs on time and under budget.”

Some advertising pitches, though, can cause a problem. “All of our employees go through a rigorous training.” Be careful what you say and what you put in writing. You may have to prove it.

A simpler and more direct approach is to have a “merger” clause placed in your proposal. This clause merges all precontract agreements in the one final and entire agreement. For instance:

This Proposal represents the entire agreement between the parties. There are no representations, warranties, promises or other understandings unless expressly included herein.

Contract language alone, however, is not a cure-all. Using the UCC again as an example: Every contract or duty... imposes an obligation of good faith in its performance or enforcement.

Finally, we come to “course of dealing.” You can change the agreement orally, in writing or by your actions. For example, if you regularly accept late payments without complaint, you may have modified your prompt-payment clause. Similarly, the owner may have waived the “change orders must be in writing” clause by paying for orally approved changes.

Conclusion

We are a litigious society. Avoidance of being sued is an important goal, but equally important is limiting your exposure if you are sued. An honest, straightforward approach to contracting, coupled with well-drafted contract terms, can create great benefits to both customer relations and financial health.

Your scope of work should be clearly defined and, during performance, changes and problems should be documented. In this way, the “bargain of the parties” will be on solid ground. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.