What Happens When the Construction Contract is Not Signed and the Work is Underway?

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Although it seems self-evident that participants to a construction project would not want to commence work without first obtaining signatures on a written contract, it happens all too frequently, even on big projects. At times, the parties simply fail to sign the contract out of inadvertence. Other times, the parties begin performance while exchanging drafts and never get to a final agreement on which document expresses the agreement. When that happens, and disputes arise regarding what terms and conditions, if any, bind the parties, frustration is inevitable. Beyond that, and more importantly, the parties are often held to terms and conditions and assumptions of risk they believe they neither bargained for nor agreed to regarding the project.

There are a couple of situations where this potential for added risk becomes evident. The first arises when the agreement is simply not executed. The second occurs when work is begun while the parties are still exchanging drafts, and the parties never come to an agreement regarding which writing will control. Under both sets of circumstances, the parties face liabilities that perhaps neither expected. Moreover, the parties may face additional legal costs while counsel argues over what terms, conditions and assumptions of risk control. Some cases from Colorado and elsewhere illustrate these risks.

No Signed Contract

At the outset, it should be pointed out that, notwithstanding the lack of a signed writing between the parties, an enforceable contract may exist. Common law contract principles allow for the formation of contracts without the signatures of the parties bound by them. E-21 Engineering, Inc. v. Steve Stock & Assoc., Inc., 252 P.3d 36 (Colo. App. 2010) (enforcing the terms of an unsigned subcontract supplied by a general contractor). Thus, if both parties mutually assent to the essential terms of the agreement, a contract may be legally enforced, despite the absence of a signature. Lease Colo-Tex Leasing, Inc. v. Neitzert, 746 P.2d 972, 973 (Colo. App. 1987).

In E-21 Engineering, for example, a general contractor sent a subcontractor a letter of intent and a subcontract that included an arbitration provision. However, neither party signed the subcontract before the subcontractor began work. The general contractor subsequently attempted to rescind the letter of intent and claimed that an enforceable agreement did not exist because neither party executed the subcontract. The subcontractor argued that rescinding the letter of intent amounted to a breach of contract and sought to have the arbitration provision enforced. The Colorado Court of Appeals agreed with the subcontractor, finding that the subcontract was enforceable despite not being signed and enforced the arbitration provision. The court explained that the lack of a signature did not invalidate an otherwise enforceable agreement; if the parties mutually agreed to the terms prior to performance, the terms of the agreement govern.

The E-21 Engineering case teaches that a court may enforce in whole the terms of an unsigned document exchanged by the parties prior to performance. It further implies that if the court finds that the parties mutually agreed to a set of written terms immediately prior to commencement, the parties are bound to those terms, even if the writing is unsigned. Moreover, that unsigned writing could be as imprecise as a general letter of intent or even a memo expressing the barest outline of a contract. As long as the essential terms of an agreement are in writing, courts will supply missing terms by custom, implication or presumption. Winston Financial Group, Inc. v. Fults Management Incorporated, 872 P.2d 1356 (Colo. App. 1994).

Differing Drafts

E-21 Engineering also teaches that commencing performance without a signed contract can result in a party being held to terms to which it had not necessarily agreed. In other words, commencing performance without a written contract can be considered acceptance of unilaterally proposed contract terms. George Pridemore & Son., Inc. v. Traylor Brothers, Inc., 311 S.W.2d 396 (Ky. App. 1958); Am. Aluminum Products Co., Inc. v. Binswanger Glass Co., 194 Ga. App. 703, 391 S.E.2d 688 (1990).

In Pridemore, for example, a subcontractor submitted a bid for certain HVAC work with the express understanding that air conditioning would be omitted from the scope of the work. Before the subcontractor commenced performance, however, the general contractor issued a purchase order to the subcontractor that clearly and unambiguously included air conditioning work. The subcontractor did not sign the purchase order, but commenced work on the project without objecting to the purchase order’s terms. A dispute arose when the air conditioning was not installed and the subcontractor sued the general contractor, alleging that no valid contract existed because the parties had not mutually assented to the terms of the agreement. The court disagreed with the subcontractor and held that the subcontractor assented to the terms of the general contractor’s purchase order by commencing performance with knowledge of the terms contained therein.

Similarly, in Binswanger Glass, the Georgia Court of Appeals found that a general contractor’s purchase order containing terms at variance with a subcontractor’s initial proposal was a rejection and a counteroffer, not an acceptance. The court then found that the subcontractor accepted the counteroffer by commencing performance. Therefore, because the subcontractor did not object to the terms of the contractor’s purchase order before commencing performance, the general contractor’s purchase order constituted the binding contract between the parties. Indeed, an attempt to accept a bid on terms materially different than the original bid is simply a counteroffer, not an acceptance. Haselden-Langley Constructors, Inc. v. D.E. Farr & Associates, Inc., 676 P.2d 709 (Colo. Ct. App. 1983).

Conclusion

Commencing work prior to signing a contract can be hazardous, even when the parties have the best of intentions, as can be seen from the above-mentioned cases. The much better practice is to have a signed, written agreement in place before performance begins.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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