Business Law Page 2

MAKING A CONTRACT

The significance of an offer, as opposed to negotiation, is that once an offer has been made, the party may become bound to the contract, based upon the actions of the other party (i.e., the acceptance of that offer). If the offer is left open for only a certain period of time, the other party must accept within that period of time in order to make a contract. If the offer is not explicitly left open for only a certain period of time, then it is deemed to be left open for a “reasonable time.”

 Exactly what constitutes a “reasonable time” depends upon the facts and circumstances of the particular situation. If the offer is submitted in a certain manner, it is usually required that the offer be accepted in the same manner; for example, a written offer must be accepted in writing.

In order to avoid confusion, and to avoid entering into an ill advised contract unintentionally, you should be very clear in your communications prior to entering into contracts. If you are making a formal offer to enter into a contract, but the price quoted by your suppliers could fluctuate, you should explicitly state that the offer will remain open only for a certain amount of time and make sure that the suppliers’ contract will be good for that period of time.

If you are attempting to negotiate a contract, but do not have enough information from the owner, architect, general contractor, your suppliers, or others, you should explicitly state that “this letter is for negotiation purposes, and does not constitute a formal offer.” It is always better to be explicit and direct, regarding your intentions so that there will be no dispute later.

The offer, when accepted (as discussed below), may become the contract. Therefore, the offer should contain some essential elements, including the following items:

·  the date of the offer and a specific time limitation for acceptance of the offer;
· the contractor’s name, address, telephone numbers, and person to contact;
·  the owner’s name, addresses, and telephone numbers;
·  the location of the construction site and a brief description of the work to be performed;
·  reference to or identification of the drawings, specifications, and any other documents describing the work to be performed by the contractor;
· the total contract amount to be paid by the owner and the manner in which payment is required;
· the starting and completion dates of the work together with incidents such as “an act of God” that will automatically extend the completion date; and
· a clear and concise statement that you are offering to perform the work as shown on the documents for a specific sum. The offer may be a lump sum, cost of construction plus a percentage of the total cost for your fee, or a specific fee for your services regardless of the cost of construction. The offer, when accepted (as discussed below), may become the contract. Therefore, the offer should contain some essential elements, including the following items:
·  the date of the offer and a specific time limitation for acceptance of the offer;
· the contractor’s name, address, telephone numbers, and person to contact;
·  the owner’s name, addresses, and telephone numbers;
·  the location of the construction site and a brief description of the work to be performed;
·  reference to or identification of the drawings, specifications, and any other documents describing the work to be performed by the contractor;
· the total contract amount to be paid by the owner and the manner in which payment is required;
· the starting and completion dates of the work together with incidents such as “an act of God” that will automatically extend the completion date; and
· a clear and concise statement that you are offering to perform the work as shown on the documents for a specific sum. The offer may be a lump sum, cost of construction plus a percentage of the total cost for your fee, or a specific fee for your services regardless of the cost of construction.

Acceptance
Once a true offer is made, the other party can accept it. The acceptance can be as simple as, “I accept your offer,” but usually must be in the same form as the offer (as noted above). At that point, the contract is formed and both parties are bound. It is too late for either party to change his or her mind. It is important to note that the acceptance cannot change any of the terms of the offer. If it does, it is considered a counter-offer, which the other party may accept or reject. No contract is formed until both parties agree to all of the terms of the contract. This is commonly referred to as a “meeting of the minds.” In other words, both parties agree to the same terms.

Consideration
Consideration simply means that each party must get something of value for the contract. For example, when John promises to build Al’s deck, Al is receiving consideration. When Al promises to pay John, John is receiving consideration. This issue is much more likely to come up in other situations, such as donations, than it is in the context of a construction contract. However, it is possible for this issue to arise in the construction business. For example, if after Al and John have signed a contract for the deck, Al says, “If you do a good job and finish on time, I’ll pay you an extra thousand dollars,” this is not a contract. Al is receiving nothing in return for this promise. John was already obligated to do a good job on the deck and finish it on time. Therefore, John could not force Al to pay the one thousand dollars at the end of the contract because Al received no consideration for his promise to pay the extra one thousand dollars.


ORAL VS. WRITTEN
Although oral contracts are normally binding, many types of contracts must be in writing, such as those transferring or encumbering real estate. In any case, oral contracts are never as good as a written document. The old saying, “An oral contract isn’t worth the paper it’s written on”, is quite true. Most standard form contracts contain an “integration” clause that clearly states that the written contract supercedes any written or oral negotiations or agreements that are not contained in the written contract.
As mentioned above, a contract must include all the terms of an agreement. Without a written document spelling out all the terms and conditions of the agreement, if a misunderstanding or dispute arises over what the agreement was, it is extremely difficult to prove what those terms and conditions were. It is extremely important to have the terms, exactly as you understand them, put into a written document and signed by all parties. Otherwise, you are at the mercy of the memory and honesty of the other party.
This becomes even more important if the disagreement goes to court. In court, when a written agreement exists. the terms of that written agreement are the terms of the contract. The general rule (with limited exceptions) is that no oral agreements or modification can be used to contradict the terms of the contract. Therefore, it is vital that you get all of the terms written down in the agreement. This especially includes things like how and when you are supposed to receive payment and the party responsible for obtaining permits, insuring the work site, and supplying the materials. The most common dispute arises when the owner presents a verbal “change order” and tells the contractor to change or depart from the written contract. These kinds of things may be understood or discussed, but it is still necessary to write them down.
It is obvious that no contract can cover every possible contingency that may arise. There is a presumption that every contract will be carried out in good faith by both parties according to the norm in the industry. For example, the contract may not specify that you are to use a certain type of material, but it is presumed that you will at least use material that is standard in the industry. Additionally, the contract may not specifically state how you are to be paid, but it is presumed that you will be paid in American money or by some valid, negotiable item, such as a check.  However, every item which is left unsaid leaves room for disagreement in the future. If the owner or customer wants only the highest-grade materials, this should be specifically stated in the contract, so that it can be accounted for in the price. If the contractor only wants to be paid by certified funds, delivered to his or her office, the contract should specifically provide as much.
There are two more things that you must have for a contract: a lawful object and capacity.

Lawful Object

The object of a contract is basically the reason the parties are making the agreement. For instance, the object of John and Al’s contract is to have a deck built on Al’s house. The law requires that all contracts have a lawful object. That means the purpose of the contract cannot be an illegal act. For instance, if the object of John and Al’s contract is to build a swimming pool in Al’s yard and a swimming pool is not allowed in Al’s subdivision, the contract is voidable. If the object of the contract is not lawful, then the contract can be voided and is not binding.

Capacity

Capacity is just the ability to make binding contracts. To have capacity, a person must be mentally competent and have reached the age of majority. Basically, capacity requires only that the person be mentally and legally able to give a reasonable, rational consent to the agreement. Although the issue of the capacity of a party to enter into a contract will rarely occur in the contracting field, a related issue often arises:

Authority. 

Although a person may have the capacity to contract, he or she may not have the authority to enter into the contract in question. This is most likely to occur if you are contracting with an entity, such as a corporation, partnership, limited liability company, or governmental agency.

The person who signs on behalf of the entity must have the authority to represent that entity. If the entity is a corporation, the person who signs must have a corporate resolution authorizing him or her to sign the contract. The other entities have their own form of a resolution authorizing their representative to sign the contract. If there is any question about the person’s authority to represent the entity, you should always confirm his or her authority by requiring a resolution that authorizes him or her to enter into the contract on behalf of the contracting entity. Remember, it is virtuous to trust, but wise to confirm. When in doubt, always require a resolution to confirm the person’s authority to act for the entity.


The lump sum or fixed price contract is the most common type contract and requires the contractor to pay special attention to all costs and uncontrollable incidents that may affect the final cost of construction.

The contractor agrees to complete the job for a stipulated sum and must bear the expense of any additional labor, material, and site improvement costs. He or she also has to bear the expense of other difficulties such as labor disputes, inclement weather, theft, and other troubles not in his or her control. At the same time, the contractor gets to keep any cost savings that result from productive work or shrewd shopping. Of course, most owners prefer the lump sum contract, as it tells them exactly how much the job will cost. The contractor should avoid this type of contract unless the plans and specifications are such that the final cost can be easily determined in advance.

The cost plus contract is popular when the owner knows the contractor and is comfortable with the contractor’s experience and workmanship. Usually, the owner and contractor will negotiate either a percentage of the actual cost of materials and labor for the contractors’ markup or a fixed fee based upon the projected cost of labor and materials. The parties agree upon bonuses, based upon cost savings and early completion of the job.

The unit price contract is a form of the fixed price contract, but instead of giving the owner a lump sum price for the whole job, the contractor gives a price for each unit of work. For example, the contractor may agree to perform excavation for five dollars per cubic yard and place compacted fill for ten dollars per cubic yard. The final amount to be paid to the contractor is the sum of all the individual unit prices times the quantities of work done for each unit. This type of contract is usually reserved for projects where the exact quantities are not precisely known at the time of contract. Each unit price determined by the contractor in his or her bid contains enough money to cover his or her overhead and profit


CONTRACTING METHODS
Traditional  In the traditional method of contracting, the owner contracts with a designer, usually an architect or engineer, who prepares the plans and specifications. The owner then contracts with a general contractor to build the project. The general contractor may do some or all of the work with his or her own hourly workers, or he or she may subcontract some or all of the work to subcontractors.


Design/Build  In the design/build method of contracting, the owner contracts with g a single firm to perform both the design and the construction of the project. The design/build company is traditionally a general contractor who either has in-house design capabilities or who retains an outside architect or engineer.


Turnkey  A turnkey project is a special kind of design/build project where the contractor supplies all of the requirements of the project including project financing, permitting, and land. When the contractor is complete with the work, the owner is handed the key.

Construction management   The owner typically retains a designer to design the project along with a construction manager. The construction manager consults with the designer, helps the owner take bids for the work, and coordinates the work in the field. The construction manager acts very much like a general contractor who subcontracts all of the work, with one major exception. The various subcontractors contract directly with the owner; therefore, they are prime contractors.

Multiple Prime Any time an owner enters into a contract with a contractor, that contractor is a prime contractor. If an owner acts as his own general contractor, that is, he manages the work of several contractors or if an owner hires a construction manager to oversee the work, he enters into multiple prime contracts.

Phased or fast-track  If a single general contract is let, it is typical for the entire design to be complete prior to the bidding and, naturally, prior to starting Construction. Phased, or fast-track, construction utilizes multiple prime contractors. After the first work to be done is designed, that work is bid and commenced prior to the completion of the rest of the design. Likewise, after each phases’ design is complete, that work is bid and done. For example, after the site work has been designed, that work can be started while the structural design is being completed. Likewise, the foundation work can be started while the finishes are being decided upon. This type of construction allows the project to be completed much more quickly than the traditional method.


CONTRACT INTERPRETATION
Interpreting a contract is generally an attempt to figure out exactly what the parties intended when they signed the contract. This usually occurs when a dispute arises between the parties. To standardize that process, several rules have developed in the interpretation of contracts.

If a provision in a contract is clear and the words have a plain meaning, that is the meaning that they will be given. This highlights the importance of clearly and specifically spelling out every term in the contract. When the provisions are clear and plain, and all parties act in good faith, there are rarely disputes between the parties over meaning. This rule usually comes into play in legal disputes when one party claims that the disputed provisions of the contract are “clear and explicit”, while the other party claims that they are ambiguous. Therefore, you can see that this rule of interpretation of contracts is actually a statement of the obvious. The real question is whether or not the terms of the contract are actually clear and have a plain meaning.
In order to determine the plain meaning of words and phrases, it is sometimes necessary to check for special trade meanings or customary meanings. If a word has a special meaning in the construction trade, then that is the meaning it will probably be given in a construction contract. Sometimes it is also necessary to look at the context in which the word appears to determine its meaning.
If there is no plain meaning to a disputed provision by itself, then the contract must be looked at as a whole. When you consider the entire contract, the specific provision may have a clear meaning. Often provisions, which are confusing or ambiguous alone, make much more sense when you think about the general intent of the contract. These first two rules of interpreting contracts are basically common sense. Remember, the goal is to basically determine what the intent of each party was at the time when each party entered into the contract. Many provisions that seem confusing at first glance become very clear when one examines the entire context of the contract.
If the contract itself is vague on a specific point, you may find the true meaning based on the conduct of the parties. If both parties are acting as if the contract had a particular meaning on that point, then that is likely to be the interpretation given to that provision. For instance, assume John and Al’s contract said only “a deck beside the pool” but did not specify which side of the pool. If John has been building the deck on the north side of the pool for three weeks while Al watched, their conduct would indicate that they both intended the contract to mean the north side of the pool. Thus, if a dispute arose, the vague provision of the contract would probably be interpreted to mean the north side.
If nothing can be done to clarify the contract, then there is a general rule that the contract will be interpreted against the party who wrote it. This means that if you are providing the contract for the owner to sign, it is especially important to be very clear on the terms of the contract. If you use a standard contract form, as most contractors do, this rule will apply against you, and any ambiguity will be interpreted in favor of the owner.


BREACH OF CONTRACT
If any party fails to do anything required of him or her by the agreement, he or she has breached the agreement. There are two kinds of breaches — material and immaterial.

Material Breaches

A material breach of the contract is one that violates an essential aspect of the agreement: the owner refuses to pay. the contractor quits working on the project, or the contractor builds on the wrong site. These are the kinds of actions that qualify as material breaches. If one party commits a material breach, then the other party has some serious remedies available to him or her. First of all, he or she may refuse to perform his or her part of the agreement. You must be careful, however. If you refuse to fulfill your end because of a breach by the other party. you have to be sure it is a material breach. If it turns out to be an immaterial breach, then you are the one who has now committed a material breach. The non-breaching party may sue for monetary damages to pay for any loss he or she suffers as a result of the breach. This usually includes lost profits. In some cases, he or she may be able to sue to force the breaching party to perform his or her duty under the contract.

Immaterial Breaches

  If a party fails to perform a less important duty, it may be considered an immaterial breach. For instance, a delay in the work, rather than a refusal to work, may be considered an immaterial breach, depending on the length of the delay and whether the time of completion was specifically made an important aspect of the contract. In the case of an immaterial breach, the non-breaching party may sue for monetary damages if he or she can show that the breaching party owed the duty and that he or she suffered a loss as a result of that party’s breach of that duty. The non-breaching party cannot breach his or her duty by refusing to fulfill his end of the agreement. If he or she does, he or she is committing a material breach.

The issue of material versus immaterial breach can be a complicated and dangerous one. What may seem to be a material breach on the job may turn out to be considered immaterial if it goes to court. It is very risky to try to determine for yourself that a breach is material, and then to react as if it is.

The bottom line is that either party is entitled to seek damages for any type of breach of the contract by the other party. Therefore, you should only refuse to perform your part of the contract if the other party has done something to prevent you from performing your part, or if the other party has breached a part of the contract, which goes to the very heart of the contract.