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There are hundreds of examples: no written contract for a small commercial repair or home improvement; a “letter of intent” so you can start work; verbal direction to perform extras; your written contract not signed by the owner. Do you have an enforceable contract?
The Statute of Frauds
Somewhat like the Holy Roman Empire, which was neither holy nor Roman, the “Statute of Frauds” began life as neither a statute nor strictly involving frauds. The most basic statement of the “rule” is that oral contracts either exceeding $500 in value or lasting longer than one year are not valid. So, when the contract is significant, it must be in writing and signed by the party against whom it is applied.
There are many exceptions to this rule, but you don’t want to confront them. Why? Although verbal agreements may be legally valid in certain cases, unless the terms are written down, the actual agreement between the parties may be undefined, vague or ambiguous. In court, disagreements over oral contracts are known as a “liar’s contest.”
Case 1: The one-sided modification. The owner sends you a contract form for your signature. After your review, you delete objectionable clauses, initialing your changes. For example, you strike a no damages for delay provision, or you insert an arbitration clause. You return the form, but the owner does not sign it. What are the contents of the contract?
By allowing you to proceed, has the owner implicitly accepted the changes, or does the absence of a corresponding signature or initials on the changes indicate a rejection? If your changes go to the heart of the agreement, do you have a contract at all or have you merely submitted a counter-proposal? On what bases does a judge decide if a dispute arises?
Once you have performed work or there are further acts that clarify or confirm what the parties agreed upon, it becomes a matter of analyzing the situation and researching judicial decisions to determine the legal relations of the parties. But there are precautions you should take before you proceed.
If deletions or additions are important to you, send a cover letter with the modifications, then call the owner and work out your differences. Do not begin work until you have a fully signed contract.
Case 2: The contractor who disappeared. Close to the end of the project, the general contractor vanishes. The cause might be a default termination by the owner, or financial distress of the contractor. In any event, the owner or surety asks you to carry on towards completion, and you do. With whom do you have a contract?
Some owner/general contractor agreements contain a clause permitting the owner to take over subcontracts in the event of default. Many do not.
It is a difficult situation, made more complex if the general contractor was paid for your work and did not compensate you. In that case, the owner will not be enthusiastic about paying twice.
On the other hand, you may be in a very good negotiation position to redefine your contractual relationship with the owner. Where there is a payment bond, the surety should also be contacted immediately for past and future compensation. Nevertheless, you should attempt to get a new written agreement, and preserve your rights to outstanding claims.
Case 3: The illusive “Letter of Intent.” Contract law is founded on present rights and obligations, not on expressions of future expectations. For example, some courts had difficulty in upholding a contract lien waiver clause, reasoning that it is impossible to waive a lien at contract signing when the lien right does not yet exist. This is somewhat like the letter of intent.
For example, an owner does not yet have all its financing in place, or the drawings are incomplete, but the owner wants to start the work without the full legal commitment. So the owner issues you a letter stating its intention to award you the contract once the contingencies are resolved, and you begin work.
Without more, you probably do not have a contract. What you need to do is write to the owner expressing your understanding that you will be paid. Even better, send the owner a time and material agreement listing your rates pending a final contract.
Case 4: The postponed contract. This situation tends to occur with industrial jobs. After months of negotiations with the owner of a design/build project, agreement is reached on the scope of work. There are preliminary specifications and drawings, detailed exceptions to scope, pricing data and a preliminary schedule. The owner wants you to move forward and so signs a simple purchase order, which incorporates the above understandings. However, the owner wants its standard terms and conditions to apply, and states that “the contract” will be sent later. Missing from the purchase order but in “the contract” are clauses on insurance, changes, delays, payment and all the other fairly standard general conditions.
Months later, when “the contract” arrives, you find a number of unacceptable terms. Negotiations begin to address your concerns about “the contract,” but more important is finishing the job. At completion, you still have not signed “the contract.” What is your legal position?
Generally, to be enforceable, a contract must show agreement on the scope of work and the price. In my example, you have that. Most of these other clauses are not required by law. Because there were disputed contract conditions, the unsigned “contract” probably never came into existence.
Accordingly, your contract is the signed purchase order, with the general conditions either undefined or nonexistent. So long as there was sufficient mutual understanding of each party’s obligations, there is a deal.
There are tens of thousands of cases where the courts have had to decide whether there was a contract and, if so, what it covers. Those judicial decisions ask whether individual provisions are “the intention of the parties,” or whether the agreement is a result of a “meeting of the minds,” or, “Do the writings sufficiently describe the agreement?” These and other phrases simply mean that the court is trying to figure out what happened and what makes sense, so it ultimately can rule on what the parties must do.
Best advice: Avoid being one of those cases in court. When in doubt about the terms of your contract, consult with your attorney. One piece of advice your attorney is sure to give: “Get it in writing” and eliminate the phantoms. EC