Contractors may be contracting wrong.
By Dredeir Roberts, Esq.
Working as in-house counsel for an active design/build firm gifts me with new revelations daily. Each day I learn about the exhaustive work it takes to finance, design and build lasting buildings. As the lawyer, the magic of architecture always amazes me. One other thing amazes me too: many of the design/build players do not fully understand contract law. If you’re an architect, engineer or contractor, the previous sentence might have offended you. I mean, you’ve been doing this for years.
I hear the “in my 20-plus years of experience, we have always done it this way” mantra often. However, if you ask any attorney, they will tell you most people do legally questionable things their whole lives. The only time it comes up is in a big dispute. A dispute that goes beyond verbal and written resolution between the actual players. A dispute that unfortunately for everyone will involve lawyers. And if things escalate past that, the dispute will involve one particular kind of super lawyer: a judge.
What many contractors, engineers and architects fail to understand, is that if the dispute ever leads to a judge, it is minimally relevant what you personally have done for the past 20-plus years in your profession. The only thing that matters is the law, and how the judge interprets the law. And let me tell you, a judge might find pleasure in telling you, that you have doing “it” wrong for the last 20-plus years. And even worse, because of “it” you owe “them” hundreds of thousands of dollars.
So the important question is what do judges think of how design/build players contract from day-to-day? The answer is many things. But I want to highlight three big rules that judges will use to analyze your day-to-day contracting. They will compare their rule with your conduct. And if they do not see compliance, your 20-plus years of design/build experience will unfortunately not carry the day. Therefore, I suggest remembering the following three general rules when you are out in the field:
1. RFPs are “invitations for offers” and proposals are offers – Let me explain. A contract is formed when a person makes an offer to another person and that person accepts the offer. The offer and the acceptance will functionally be agreement to exchange promises. (I promise to sell you 10 apples for $10, you promise to give me $10 for the 10 apples).
Applying the logic above, you may think that the RFP should be the offer, and thus sending the proposal in response to the RFP is the acceptance. However, the law treats the formation of contracts in the construction industry differently. When owners send out RFPs, the law understands this as the owner requesting contractors to send the owner offers. Therefore, when a contractor submits a proposal in response to the RFP, the contractor is sending the owner the offer.
2. An offer gives the other party the power of acceptance – This matters for several reasons. Once an offer is sent, the receiving party has the so-called “power of acceptance.” Once a party with the “power of acceptance” accepts, a contract is formed and neither party can back out of the deal (terms, price, timing, etc.).
Unfortunately, many general contractors and owners receive proposals and sign them, with the full intention of sending that contractor or subcontractor “the real contract.” However, the “real contract” is the proposal they signed. On the flip side, contractors and subcontractors send proposals to owners, with the intention of fleshing out the details in the “real contract;” such as timing and price. But again, whenever the owner gives affirmation that the proposal is accepted, the contract is formed. In fact, whenever a legitimate offer is sent to a specified party that has the “power of acceptance,” and that party accepts, a legally binding contract is formed.
3. You can enter into a contract without a contract – Hear me out. The elements of a contract are offer, acceptance, consideration (exchanged promises). Meaning, the elements can be achieved in a document titled “Contract” or in an email exchange. That’s alarming. Many busy contractors (read all contractors), might negotiate projects valued over hundreds of thousands of dollars via email and accidentally form a binding contract.
You may say that is ridiculous. Well, the judge will determine whether it really is ridiculous. The judge will look at whether it was unreasonable for the party to believe that they were entering into a legally binding contract. Some of those factors will include the medium of communication, but it will also include questions like: “were all the important terms discussed?” (Price/timing/scope of work) and “was the language used definite or hypothetical?” Here’s a fun game: go through your email and find all of the legally binding contracts you probably formed – this week.
So now that you’re in the know of what a judge thinks of how you’ve been doing business for the past 20-plus years, what do you do? If you’re worried about Rules No. 1 and No. 2 and you’re an owner, send a binding contract in response to the proposal.
This will be understood legally as a counteroffer. That way, any negotiation of the “contract” will happen over your own contractual document. If you’re a contractor submitting a proposal, do not cut corners in your proposal. Send all of your terms, conditions and dates. That way, if the owner signs your proposal, they have agreed to your terms.
If you’re concerned about Rule No. 3, try adding speculative and conditional language to you emails. Make sure it’s clear that nothing in your conversation is confirmed and all terms discussed are a precursor to you formally sending them a contract with the final proposed terms.
Knowing how a judge thinks will help you refine your 20-plus years of experience. Not only will you continue doing what you do best, you will limit a judge coming in and telling you the unthinkable: that you’re wrong.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Dredeir Roberts, Esq., serves as in-house counsel for a national design-build firm Core States Group where she drafts and negotiates contracts for the day to day design/build process. She has a passion for helping business professionals navigate the murky areas of the law so that they can quickly get back to doing what they do best: work.