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

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

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

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.

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

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

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.

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

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

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

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.

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)

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