October  9, 1998



Bulletin # 21: What Is My Contract?

In a neat, textbook world, general contractors would send contracts to the subcontractors with all of the necessary schedules, exhibits, and information. The subcontractor would diligently review the forms, do its site inspection, and carefully assess the potential job. The general contractor and subcontractor would then sign the subcontract form and the job would proceed smoothly to completion. The subcontractor would be paid in full and on time. There would never be an issue as to the terms of the subcontract.

Unfortunately, very few projects follow the textbook model. Forms get sent back and forth, get marked up, addenda are attached, letters are sent, and the parties have ongoing conversations about the work. When a problem arises, all of these communications can create uncertainty as to what really constituted the contract between a general contractor and a subcontractor.

Acme Sheet Metal operates in anything but a textbook world. It finds itself in the middle of a manufacturing plant project in which it is installing the air-handling system, including sophisticated filtration and venting devices. As issues with the general contractor start to multiply, it becomes apparent that Acme and the general contractor disagree as to what terms apply to the subcontractor’s work. Acme management finds itself asking: "What is our contract on this job?"

The project had begun with the general contractor inquiring as to Acme’s willingness to submit a bid for the work. Acme indicated an interest and the general contractor provided draft plans and specifications covering the mechanical systems. Some of the specifications were blank and portions of the plans were still in the drafting stage. Acme prepared its bid off the materials supplied and received supplementary sheets almost daily until the date its bid was submitted. When its bid was accepted, the general contractor sent Acme a subcontract form. The subcontract was signed by the general contractor but contained some errors. The price was mistakenly set lower than Acme’s bid. The retainage was ten percent throughout the job, rather than the five percent that the subcontractor had expected. The date for completion of the work had been moved up by 60 days. The officer of Acme overseeing the job made handwritten changes to the subcontract, initialed the changes, signed the subcontract, and sent it back to the general contractor. Acme retained a copy of the subcontract for its files. Acme heard nothing more from the general contractor concerning the changes to the subcontract form.

As the job progressed, some further questions arose about whether the subcontract required modification. Clarification was required as to the scope of the work based upon the final, detailed plans and specifications. After several conversations with the construction manager, Acme sent a letter to the general contractor stating: "We will do Items A, B, and C under the terms of our subcontract, but we are not prepared to do X, Y, and Z without a price adjustment. This letter clarifying the scope of our work should be considered an amendment to the subcontract." Acme put a signature line on the bottom of the letter where the general contractor could sign to verify the proposed amendment. The letter was sent, but nothing was received back from the general contractor.

It was only when simmering disputes between Acme and the general contractor had become heated that Acme went back and checked its contract file. It discovered that the general contractor had never initialed the changes to the subcontract form and had never acknowledged the Acme letters. In fact, the general contractor denied having received the letters. Already embroiled in a significant dispute over the project scope, schedule, and payments, the parties were faced with the even more basic issue of what their contract really was under these circumstances. The uncertainty over the contract made it all the more difficult to deal with the specific problems.

Many states have laws that define the requirements to create a contract. There are also innumerable court cases dealing with how a contract comes into existence. However, the fundamental principles go back hundreds of years. In the most general sense, for a contract to exist, there should be a "meeting of the minds" of the parties as to the primary, important terms of the contract. There is usually an offer by one party and an acceptance of terms by the other. The general contractor’s act in submitting the subcontract form to Acme was an offer. However, Acme’s editing of the subcontract did not constitute an acceptance of the general contractor’s offer, thereby creating a contract. Instead Acme’s changes to and signing of the subcontract form created a counteroffer. The general contractor would have been within its rights to reject this counteroffer. The general contractor’s failure to respond to the counteroffer, while permitting Acme to start work on the project, would more likely than not be considered an acquiescence to Acme’s counteroffer. Therefore, Acme would have a good argument that its revised subcontract form should control. (Had the general contractor objected to Acme’s terms and Acme had still undertaken the work, the likely result would have been the opposite.)

As to the scope of the work that would be considered part of the contract, it would be likely that Acme would be found to have committed itself to perform all of the work in the plans and specifications that were available to it through the point at which it signed the subcontract. Therefore, the supplementary pages received by Acme would be considered in defining the scope of its work. Changes received after that date would be considered changes to the contract scope and Acme would be within its rights to request a change order.

Unfortunately for Acme, the impact of the letters it sent during the course of the job would not likely result in a valid amendment of the subcontract. Almost all contracts contain clauses which state: (i) that any amendment to the contract be in writing and signed by both parties and (ii) that all of the terms of the agreement between the parties are set out in the contract documents, rendering all outside agreements or discussions irrelevant. Therefore, Acme’s attempts to amend the contract by letter, if not signed off on by the general contractor, would most likely be found ineffective.

Conclusion

There are entire books whose sole subject is the formation of contracts. It is impossible, in a couple of pages, to define with precision how contract law will be applied to any particular circumstance. There are also differences from state to state in the requirements for contract formation. However, there are some general principles that should apply in all jurisdictions:

1. Insist upon a written subcontract on any significant job.

2. Make certain that you understand and review all of the "pieces" that fit together to make up the contract (i.e. plans and specifications as well as the subcontract form itself).

3. Try if possible to negotiate changes to the subcontract, rather than simply making unilateral changes and sending it back. If you have made changes, try to get the general contractor to initial the changes and return the initialed subcontract back to you.

4. If some terms cannot be negotiated to an acceptable resolution, you do have the option of making a change, initialing it, and sending the revised form back to the general contractor, even if the general contractor will not initial the change. However, you have to recognize that you are creating an element of uncertainty as to how the particular term will be evaluated in a dispute situation.

5. If your contract requires that any amendments be in writing and signed by both parties, push very hard to get the changes written down and signed off on.

6. Since the "meeting of the minds" is such an important element of a contract, you will still benefit from documenting your interpretation of any items in the contract that do not seem clear. Do not hesitate to send a memorandum or letter to the general contractor as to your interpretation of the contract and make certain that you retain a copy for your file.

 

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