Volume 42, Issue 11 - November 2007

Glaziers Guild

When is a Contract Not a Contract? 
How Payment Possibilities Are Squandered
by Richard D. Kalson, Esq. and Lauren C. Rodriguez, Esq.  
 
Many times an opportunity to make a profit on a construction project is unknowingly squandered prior to any work being performed. These errors committed during the contract negotiation and execution process can prove to be quite costly. In order to avoid such problems, it is essential for parties to understand when and how a contract is formed under the law and recognize three common errors that can be avoided.

While laws will vary among states, the essential elements of a contract are universally recognized as the competency of the parties to contract, subject matter, legal consideration, mutuality of agreement and mutuality of obligation. The downfall of many potential construction contracts lies in the failure to achieve the fourth element, mutuality of agreement. This can occur as a result of three easily corrected mistakes: failure to reach an actual agreement, failure to have a contract signed and reliance on industry standards concerning firm offers. 

Failure to Reach an Actual Agreement
In order to have mutuality of agreement or a “meeting of the minds,” the acceptance of an offer must be identical to the offer. (The law is different with respect to contracts regarding the sale of goods, which this article does not cover.) If the terms of the offer and acceptance do not match, then the purported acceptance is merely a counteroffer and a contract is not formed. Even if the parties begin to act as if they have a contract, they will not be governed by the terms of either the offer or the counteroffer because there was no mutuality of agreement. This situation often arises when parties exchange competing form contracts with similar but not identical terms, when parties reserve the essential terms of the contract, such as specifications or price, to a future determination, or when the offering business retains the right to reject an acceptance. 

For example, in Bascetta v. Advantage Equipment Leasing,1 the court found that a contract was not formed because the terms of the proposal and purported acceptance were not identical and the offering party retained the right to revoke its offer. Parties should always read the terms of the writings exchanged between them to ensure that a “meeting of the minds” has been reached.

Failure to Have a Contract Signed
A written contract need not always be signed in order to be binding. What is critical is that a mutual assent was reached in order to be bound. However, “the fact that parties contemplate the execution of a final written agreement effects a strong inference that the parties do not intend to be bound by earlier negotiations or agreements until the terms are settled” and memorialized in a writing.2 Even when a party acts as if there is a contract, the failure to have a signed writing can preclude that party from recovering or receiving the protections offered under the terms of the writing.3 Therefore, in order to ensure the enforceability of a written contract, parties should make every effort to have such contract signed.

Reliance on Industry Standards Concerning Firm Offers
It is well understood in the construction industry that subcontractor’s bids that are incorporated into a general contractor’s bid are “firm offers,” meaning that the subcontractor submits the bid with the expectation that it will be held to its terms. However, a recent federal court decision held that when a subcontractor clearly states that it will not be held to the terms of its bid, this language controls over industry practice. In that case, the court held that because the subcontractor expressly disclaimed its intention to be bound, there was no mutual assent and thus no contract.4 Rarities should never assume that a contract has been created when such assumption is contradicted by the plain language of a subcontractor’s bid. Contractors that are wary of the pitfalls described above will be more likely to obtain the mutual agreement necessary to create a binding contract and be ensured of payment. 

1Bascetta v. Advantage Equipment Leasing, LLC, 2006 Wash. App. LEXIS 700 (Wash. Ct. App. 2006)
2TLT Constr. Corp. v. RI, Inc., 484 F.3d 136 (1st Cir. 2007).
3See Paul v. Merit Constr., Inc., 2007 Tenn. App. LEXIS 397 (Tenn. Ct. App. 2007).
4 Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247 (3rd Cir. 2007).

GANA member Richard D. Kalson, Esq. is a partner and Lauren C. Rodriguez, Esq. is an associate with Thorp Reed & Armstrong LLP in Pittsburgh. Questions about this column can be sent to rkalson@thorpreed.com or lrodriguez@thorpreed.com. Mr. Kalson’s and Ms. Rodriguez’s opinions are solely their own and do not necessarily reflect the views of this magazine.


USG
© Copyright 2007 Key Communications Inc. All rights reserved.
No reproduction of any type without expressed written permission.