Contract formation

1
Contract formation

• Review notes form Chapter 5 of the book
• Each contract carries a promise and performance
  expectation
• Legal enforcement promotes economic efficiency
  (lowers risk)
• Without a contract, no recourse to enforcement
• In USA, contracts are usually enforced under
  assumption of autonomy and equality of power
  between parties
• Must have capacity to contract (fiscal agency,
  accurate information, etc.)
• Contracts can be expressed (expectations
  detailed) or implied (expectations implied from
  actions of other party)
• Different commercial exchanges have different
  contract guidelines
• Land sale
• Sale of goods (UCC)
• Loans and mortgages
• Leases
• Money handling (investment accounts)
• Services (design, construction, etc.)
• Insurance

2
Contract formation

• Bargaining position sometimes dictates whether
  contract is negotiated (equal power) or adhesion
  (take-it-or-leave-it, like you contract with the
  cable company or the gas company for service to
  you house) Well discuss contract types over the
  course of the term
• Contracts are formed when there is mutual
  agreement on performance and promises, or offer
  and acceptance
• Offer and acceptance can be via correspondence or
  phone or conversation, but there must be
  reasonable certainty of terms for contract to be
  enforceable- best to have documentation
• When documentation is not possible and
  uncertainty exists (like early in a project),
  parties can have pre-contracting agreements such
  as good-faith bargaining (agree to agree later),
  memorandum of understanding, or letters of intent

3
Contract formation

• Problems arise when there is
• fraud or misrepresentation by one of the parties,
• one parties agrees under duress
• there are mistakes in the offer (bid mistakes)
• there are unconscionable or exculpatory terms
• formation defects in the contracting process
• Consideration- not all promises are enforced-
  must contain consideration to fall under legal
  review
• Bargain- must be value for both sides
• Reliance- one party must act on the assumption
  that the other party will comply with terms
  (borrow money to begin construction)
• Past consideration or make-good clauses can
  qualify
• Promises under seal- left over from days when
  many people couldnt write. Adds enforceability
  or corporate authority in certain types of
  contracts, but seals are losing legal importance
  over time

4
Contract formation

• Requirements of writing- certain contract types
  (almost all in construction) need to have
  evidence of writing (cant be oral)
• Land purchases
• Debt instruments
• Agreements for commitments exceeding one year
• Sale of goods over a certain value (500 in most
  states)
• Real estate (in many states)
• Estates and wills (in many states)
• Home improvement contracts (in many states)
• Agreements by married couples.
• If evidence of writing is required, must be
  signatory by both parties
• Non-writing can be enforced (evidence of writing
  can be waived) under certain conditions, such as
  advance payments, extreme burden, unjust
  enrichment.

5
Project Relationships

• Employment contracts
• Typically at-will
• Employer assumes liabilities
• Employee has limited power (fiscal agency)

6
Project Relationships

• Subcontracts
• Written legal agreement for performance of a
  segment of the work
• NOT considered at will
• Can have furnish only, furnish and install,
  install only, or design, furnish and install
  subcontract

7
Project Relationships

• Uniform Commercial Code
• Stipulates the rights and responsibilities for
  buyers and sellers of goods
• Doesnt apply to services contracts
• Codifies shipping, title, insurance, transit
  risk, etc.

8
Bidding Mistakes

• Contract formation is
• Offer-Acceptance-Consideration (payment)
• Offer to perform is accepted, offer to pay is
  accepted
• Must have legal capacity and be for a legal
  purpose, entered into without fraud or force
• Bid is an offer- can be withdrawn prior to
  acceptance. Once accepted verbally or in
  writing, it becomes binding

9
Bidding Mistakes

• Acceptance must reflect terms of the offer
• If changes are made, it becomes a counteroffer
• Consideration is value given to party in return
  for performance
• Whenever scope changes, consideration changes

10
Bidding Mistakes

• Legal capacity- 18 years, chartered, tax ID,
  mental fitness, fiscal agent
• Legal purpose- contract must be for a legal act
• Fraud- nondisclosure or misrepresentation with
  intent to deceive (must be reliance and damage)
• Force- offer accepted under duress
• Voidable contract can be rescinded

11
Bidding Mistakes

• Mistakes
• Unilateral- one party mistake, wont alter the
  contract unless patent
• Mutual- both parties mistake, voidable by
  either party
• Transcription error- oral agreement not
  accurately reflected in written version- can be
  reformed, but there is a high burden of proof.

12
Bidding Mistakes

• Mistakes in the bid
• Federal- rescission or reformation
• State rescission only (major error, before start
  of construction)
• Subcontract governed by states only- majority
  make bids irrevocable for a reasonable time if
  used by the contractor in their bid (promissory
  estoppel)

13
Bidding Mistakes

• Promissory estoppel allows for bud shopping,
  which is technically legal but very unethical
• A few jurisdictions allow subcontracts bids to be
  revoked prior to acceptance
• California- bid is revocable unless contractor
  makes a conditional acceptance
• Telephone bids are valid offers accept for
  material purchases over 500