April  5, 2002



Bulletin #55, The Two "Contracts" (April 5, 2002)

ZZZ Sheet Metal had been through more than its share of contract disputes. It had slugged it out with general contractors under AIA subcontract forms, AGC subcontract forms, and general contractors’ specially developed forms. It did not seem to matter what form was used, ZZZ found itself with the short end of the stick.

ZZZ management met to discuss dealing with this contracting dilemma. The subcontractor needed work. It always seemed a condition to obtaining the work that ZZZ signed an outrageously one-sided contract document. When the subcontractor tried to negotiate, it was told that the forms could not be changed. The subcontractor could “take it or leave it.” However, the consequences of “taking it” had proven less than ideal.

In the course of the discussion among management personnel, the ZZZ president asked: “What good do any of these contracts do us anyway? We sign them, and the general contractors then use them against us whenever a dispute arises. Wouldn’t we be better off with no contract at all?” What started out as a question evolved into a plan. ZZZ would, as a matter of corporate policy, attempt to avoid signing contracts whenever possible. The subcontractor had long observed how many architects managed to be involved in projects from beginning to end without being under any formal contract, and concluded that there must be a legal advantage to avoiding a contract. If the best ZZZ could do was a lousy contract, having no contract had to be preferable. The management personnel all agreed to carry out the plan. The first chance to implement the plan came several weeks later when a request for bids arrived on the HVAC system for a hotel complex. After some back and forth with the general contractor, ZZZ submitted its formal bid, and its pricing was accepted. A week later four originals of a subcontract form arrived in the mail with a cover letter from the general contractor. The subcontract forms had not been signed by the general contractor. The subcontractor was to sign the subcontracts, and send them back to the general contractor. The general contractor would return one fully signed original to ZZZ. The project manager spoke with the president of ZZZ to confirm that the subcontractor was not to sign. This was affirmed. The project manager looked over the subcontract form, and saw a number of one-sided provisions (i.e., no damages for delay, waiver of mechanic’s lien, dispute resolution with the architect as sole judge, etc.). He nervously placed the contract forms in his desk drawer, and waited to see what would happen next. Communications with the general contractor over the ensuing weeks related to scheduling, and a few minor modifications to the plans. There was no mention of the subcontract forms. ZZZ was six weeks into the project when a phone call came following up on the subcontract forms. The person taking the call at the subcontractor’s office indicated that he would look around, and try to figure out what happened to the subcontracts. He also indicated that he would call the general contractor back. That call was never made.

Meanwhile, a second large project came in. This one involved a shopping center, and ZZZ’s bid pricing again had been accepted. Several days after the bid was approved, ZZZ received four originals of a proprietary subcontract form signed by the general contractor along with a cover letter. The cover letter requested that all four originals be signed, and that ZZZ retain one original for its files. The other three originals were to be returned to the general contractor as soon as possible. The project manager briefly looked over the contracts. He saw a number of one-sided terms and unacceptable conditions. These included unit pricing that would require ZZZ to perform additional work at a loss, a waiver of lien rights, and a ridiculously unfair arbitration clause, which made the subcontractor responsible for all fees and costs. With a sigh of relief, the project manager threw the forms into the desk drawer pursuant to the corporate plan. Several weeks later, a representative of the general contractor called to follow up on the forms, and was told that they were “floating around somewhere,” and would be tracked down. The project gained momentum, and the subcontract forms became a distant memory. All of these developments were reported to ZZZ management. Obviously, the plan had worked. Instead of having unfair contracts, ZZZ would operate on something akin to a “purchase order” basis for its labor and materials, and still maintain its lien rights and other remedies available under law. The subcontractor’s management team congratulated each other on having achieved a simple solution to a serious ongoing problem.

Each project moved reasonably well toward completion with only occasional “bumps in the road.” When ZZZ’s work was complete, and accepted for each project, the subcontractor submitted its final application for payment. On both projects, the final payments came back with large deducts for accrued set-offs and backcharges. The total hold-back in each case was well in excess of $100,000. ZZZ filed mechanic’s liens on both properties, and sued each of the general contractors.

Each of the general contractors responded to the lawsuits in a similar manner. Both claimed that ZZZ was bound to the terms of the subcontract documents. The subcontractor had received the documents, had not objected to their terms, and had understood that it was a condition to acceptance of the work that ZZZ commit to perform under the terms of those documents. The fact that the subcontractor successfully “bobbed and weaved” to avoid signing the subcontracts should not be permitted to justify its escape from its legal obligations. Each of the subcontracts contained an arbitration clause, and a waiver of mechanic’s lien rights. The general contractors asked that the liens be discharged, and the lawsuits terminated, with the parties resolving their disputes in arbitration under the dispute resolution clauses. ZZZ responded that it never signed the subcontracts, never agreed to the terms, and had been performing each of the projects under the terms of its bid without any objection by the general contractor. The subcontractor emphasized that its bid had not included any acknowledgment of a waiver of lien rights, and none of the bid package materials indicated the right of the general contractor to set off or impose backcharges. The subcontractor had also not agreed to arbitrate under some absurdly one-sided dispute resolution provisions. ZZZ was confident that, between its liens and its lawsuits, its plan would be validated. Each of the cases went to court.

The subcontractor could never have guessed at the results that would be forthcoming. The court in the first case found in favor of ZZZ. It indicated that the general contractor’s delivery of an unsigned contract form did not constitute a formal commitment of the general contractor to those terms. There was no actual offer of contract terms that ZZZ could accept. In the absence of agreed-upon contract terms, the court would rely on the bid, which did not preclude the filing of a mechanic’s lien or pursuit of a lawsuit. Therefore, the court upheld ZZZ’s lien, and its right to pursue its claims in court.

The results of the second case were equally surprising. The court threw out ZZZ’s lawsuit, and voided its mechanic’s lien. The judge held that the subcontractor was bound to the terms of the subcontract form delivered to it even though ZZZ had never signed it. In receiving the signed subcontracts, and placing them in the drawer, ZZZ had not indicated a rejection of the terms. In the absence of a rejection or counteroffer, the court found that the subcontractor’s performance of work constituted an “acceptance by performance” of the subcontract terms, and that ZZZ was bound to those terms. The subsequent arbitration went poorly for the subcontractor, and the set-offs and backcharges were upheld by the architect. Attorney fees were awarded to the general contractor. The “don’t sign” plan was then shelved, and it was back to the drawing board for ZZZ management.

There are many definitions of what constitutes a contract; one of which is “an agreement, upon sufficient consideration, to do or not do a particular thing.” A contract can come into existence through an oral agreement, a written agreement, or the actions of the parties. From the subcontractor’s perspective, no written contract may seem a preferable alternative to a horribly one-sided contract. However, the subcontractor’s failure to sign a contract does not mean that the terms will be ignored in future disputes. In fact, it might be found to be as binding on the subcontractor as if the form had been signed, notarized and sealed in blood. It is always the preferable alternative for a subcontractor on a significant project that there is a written subcontract clearly defining the rights and obligations of the party. Negotiate the contract. Push hard for appropriate changes. Attach an addendum when you send the contract back. However, if you would rather spend most of your time on a jobsite, rather than in court, do not throw the contract in the drawer and start the project.

 

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