Imagine bidding on a large shopping mall project. With so many trades working at the same time in a congested area, you need a designated lay-down area. Site access is important, as temporary roads are being built by others. You will be laying underground conduit, so you need information about soil conditions.
The general contractor seems helpful, and he marked up a plot plan, showing new gravel roads and where you could store materials along with a field trailer. Based on his experience in the region, he told you there was good site drainage. This information indicated you do not need to adjust your bid, so you signed the subcontract.
None of what the GC told you was accurate. The roads were mud. Water collected on-site after every rain. Storage and field trailer locations constantly changed. When you complained, the GC answered that, because none of these precontract promises were in the subcontract, they are not enforceable. What can you do?
The old rule
Parties have many conversations before they sign a contract, ranging from comments on the design (“I have checked the drawings, and they are fine”) to what the field operations will be (“Sure, you will have access to the material lifts”). The comments may be general opinions, but they may also be more specific, such as whether specified lighting can have a substitution.
To decide what the parties have actually agreed to, courts look at the “four corners” of the contract. Precontract discussions may be inadmissible if they change (delete, modify, add to) what the parties have set down in writing. The reasoning is, without this four corners rule (known as the parol evidence rule), the written agreement would become vague as a full expression of the parties’ intentions.
The parol evidence rule has become somewhat eroded as courts have allowed information about precontract negotiations to “clarify” the intention of the parties or to establish past business practices between the parties. The courts also consider whether one party’s promises were innocently, though wrongly, made or whether representations were negligently made.
Enough court-created exceptions to the old rule have arisen to make it somewhat unreliable.
What’s done now?
You’ve seen the clause. It says something like: “There are no representations, promises, or warranties except those expressly set forth herein,” or “This contract constitutes the entire agreement and supersedes all prior negotiations and agreements.” This clause is known as an integration or merger. If the promise, understanding, hint, etc., is not stated in the contract, then it is not part of the contract.
With our shopping mall project example, the parol evidence rule may or may not have kept out the general contractor’s promises. Under a party-created merger clause, it is more likely that these precontract promises will have vanished. The courts look at these clauses as putting the parties on notice that if you want some element of the agreement to survive, you had better include it in the signed contract.
There are still exceptions
When the precontract promises can be characterized as fraudulent, other rules kick in. It takes a lot to prove fraud. It has to be shown that the representation or promise was false when made, not one that became false because of later events. More important, it has to be shown that the party knew the promise was false when given.
What can you do?
To minimize misunderstandings at the start and avoid claims at the end, clarify the contract parameters before you sign. List and/or attach your clarifications to the contract. Have an internal meeting with your estimator, project manager and others to discuss what needs to be added to the contract.
ECs can attach the following items to their contracts:
1. A list of the assumptions you made for your bid estimate
2. Precontract emails with the general contractor on clarifications
3. A list of verbal assurances, representations, and promises made by the general contractor
4. Precontract meeting minutes
5. An as-planned manpower chart
6. A sub-network schedule for electrical work showing dependencies on other trades
If you are not aware of the merger clause, or do not understand its broad scope, you can end up with unnecessary surprises and disputes. On the other hand, knowing what the clause does can cause you to more fully consider the assumptions and understandings you have and make sure that they are reflected, in writing, in the final contract.