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) We’ll 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
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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
couldn’t 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 (can’t be oral)
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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
– Doesn’t 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, won’t 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