Why do so many of our articles focus on contracts? As Joe Canterbury, the dean of Texas construction lawyers, said: “Essentially, construction law is the law of contracts.” That quotation has been on the first page of his “Texas Construction Law Manual” since its first edition in 1992.

Despite some grumbling, we think most contractors recognize the value of contracts. We certainly do, because we’ve seen cases where there wasn’t a contract — or much of a contract — and that can cause headaches for everyone. So, our focus this month is on contract formation.

We all have law school classmates who practice in the law of negligence. Whether they’re trying fender-bender cases or professional malpractice cases, they’re living the non-contractual world of tort law. In this world, liability is determined by whether one or both parties failed to exercise the duty of reasonable care expected of that party in that situation. In a fender-bender, that might boil down to care in driving. In a medical malpractice case, what medical action or inaction should we expect from the specialized doctor treating that condition at that time and place? Opposing counsel will each bring experts to court to explain their competing versions of what one or more parties should have done in the situation they found themselves in. And, as you can imagine, sometimes those opinions vary wildly.

This negligence exists because the parties didn’t have any contract. The drivers in the fender-bender likely didn’t even know each other. Their relative fault is measured by the general rule of expected behavior — as exemplified by the standard of reasonable care. This standard is subjective.

To us, the world of contracts is a better place. The contracting parties do know each other, at least to some extent. And their contract is an opportunity to spell out their expectations so that performance will be judged objectively. Reasonable rebar installers might use different methods to complete their work, but we typically don’t judge them by their methods. We judge their work and whether it meets the requirements of the plans and specifications.

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Closner Equipment Co Inc
Closner Equipment Co Inc

There is still some subjectivity, to be sure. Contracts typically say that construction will be done in a “workmanlike fashion.” Later disputes might include competing views of what defines workmanlike. However, that contract will also contain objective requirements, and the workmanship would presumably be judged in the context of those standards.

But that opportunity has a cost: there must be a contract in place. As we begin a series of articles going back to basics on contracts, this first piece focuses on whether there is a contract. It’s no coincidence that this is also the place where a first-year law education begins — with the doctrine of contract formation.

We’re a construction law firm. That’s essentially all we do. So, we can say with some confidence that in most construction disputes, we don’t have to worry about contract formation. There might be an argument about a particular clause or specification — the contract’s intent — but typically no dispute about whether the contract exists.

However, that’s not always the case, and we urge you to make sure that you don’t have to pay your lawyers to argue over the existence of a contract.

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CLM Equipment Co
WPI
CLM Equipment Co
WPI

I (Curt) had this issue in one of the first cases that I ever handled. A Fortune 100 company had completed construction on its private aircraft hangar when the contractor asserted — for the first time — that he should be paid on a cost-plus basis. He filed suit, and the owner called us for help. As we sat down with the client, we asked to see the contract. The client executive was a bit embarrassed as he explained that there was no contract.

Yes, the company had a form contract for construction, drafted by one of the largest law firms downtown. It was a strong contract, he said. Why hadn’t they used it? Well, it was so strong that nobody would ever sign it, and the hangar construction went forward without a contract.

But we found a contract. Each party had mailed their own two- or three-page letter to the other. (Remember letters? And the mail?) The letters used different language, but they each recited that they agreed that a) the contractor would build a building b) starting and completing on certain dates, c) for a certain price, and d) complying with something called the “Contract Manual.” When we saw a copy of the “Contract Manual” we found that it contained an AIA contract, directions on access to the site, and perhaps 100 or 200 pages of project requirements and specifications, which in turn referenced drawings.

While the letters used different language, there was no question to us that the parties had expressed a meeting of the minds on those four topics. Each party had agreed on the price, the time, and what was to be done — the latter in some detail.

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WPI
ASCO Equipment
Kirby-Smith Machinery
WPI
ASCO Equipment
Kirby-Smith Machinery

We told the client’s executive that they did in fact have a contract in our view. They had reached it by a circuitous route, but we explained what first-year lawyers learn: contracts are formed by a “meeting of the minds,” sometimes occurring by offer and acceptance if those communications show assent to the “essential terms” of the bargain. These essential terms typically include the scope of the undertaking, the time of completion, and the price — or consideration — to be paid for the work. Although the parties had not signed the same document, their writings showed their mutual assent to the hangar construction as if they had one contract document with two signatures.

There are other circumstances where a court or arbitrator might find a contract without the traditional two-signature document. One might be where the parties had performed all or most of the work. The builder had built and billed for all (or most) of the required scope, and the upstream party had paid for all (or most) of the work.

Another nontraditional contract might occur where the subcontractor received, signed, and returned the contractor’s form subcontract and began work without seeing the contractor’s signature on the agreement. If the contractor allowed the subcontractor to continue work, we could understand judicial decision that the form subcontract “offer” was “accepted” by the subcontractor, or that the subcontractor’s offer of performance was accepted by the contractor.

But we have seen other cases in which — before performance started — the parties had negotiated, but not resolved, all the terms of their bargain. In those circumstances, we think a judge or an arbitrator might find no contract formation, as there is an absence of a complete meeting of the minds.

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Closner Equipment Co Inc
Closner Equipment Co Inc

You might have a contract without two signatures. That’s certainly a possible result, but it’s not by any means certain. Do you want to pay your lawyer to find out the answer? There’s a different moral to this story.

You should work out the details before work begins and get the contract signed by both parties. It’s the best practice. When I ran a construction company, our controller wouldn’t process pay applications from subcontractors if she didn’t have a two-party signed contract.

And here’s one more reason to have a signed contract. If you’re contracting with the party who will perform work, you’ll want your contract to require completion operations coverage to protect you in the event of a claimed defect, and you’ll want to have additional insurance status. That additional insurance endorsement is likely to have language granting coverage to “any person whom you have agreed in a written and executed contract ... be added as an additional insured on your policy.” Without a signed written agreement, you may not be covered by the insurance that you thought you bought.

Get those contracts signed and look forward to the next few months when we’ll discuss whether contracts must be in writing, what information contracts should include, and how unclear contract language might be interpreted. If you have questions, or particular interest in a topic, contact us at pecklaw.com.