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National Construction Law Manual - 4th Edition

National Construction
Law Manual



Contractor's Plain-English Legal Guide
Contractor's Plain-English Legal Guide

Contractor's State License Guide - Law & Business Exam
Contractor's State License Guide - Law & Business Exam

National Construction Law Manual 4E

CHAPTER 1 - Contracts

1.01 What is a Contract

In its classic legal definition, a contract is simply a promise that the law will enforce. In the business of construction, a contract is usually easily recognized, consisting as it does of a preprinted text labeled "contract", "subcontract", "agreement", or "purchase order". Yet an enforceable contract may also be formed in other ways, without writing, without a handshake, over the telephone, or even without words.

Construction contract promises deal with the performance of work and the payment of money. If we take as an example a contract to build a hospital, the contractor promises to build the hospital according to drawings and specifications and the owner promises to make the jobsite available and to make progress payments to the contractor as the work advances. The contract documents, including drawings and specifications, may run to 1,000 pages or more, each page containing an assortment of promises that work will be performed as specified. The specifications almost always refer to codes, standards, ASTM's and technical reports that contain thousands of pages more, all of which are incorporated into the contract documents as promises of the contractor.

As we shall see, and as experienced contractors know very well, despite these thousands of pages of technical writing and hundreds of thousands of words supported by drawings, sketches, and illustrations, it still seems impossible to give a completely accurate and unambiguous description of the physical characteristics of a complicated building. Therefore, even the most elaborately articulated contract is subject to interpretation. Moreover, judges are not satisfied merely to enforce the promises explicitly included in the contract documents, but the law implies additional conditions that seem necessary to carry the intentions of the parties into effect.

One would expect that a prime contractor and a subcontractor dealing with an $11,200,000 sheet metal job would be pretty sure whether they had entered into a contract or not. In the case of Allied Sheet Metal v Kerby Saunders, 619 NYS2d 260 (AD 1994), they were not. The subcontractor had prepared a document entitled "scope sheet" dated November 26, 1986 that dealt with the fabrication and installation of a heating ventilation and air conditioning system in a hospital. The scope sheet was signed by the contractor's vice-president and identified the project, the work to be performed, the job number, and the contract price. The court held that the scope sheet was not a contract, since there was no indication that the document was intended to be anything more than a memorandum of the work that was covered by the subcontractor's bid. The court pointed out that parties would not ordinarily commit themselves to an $11,200,000 project without a formal writing.

1.02 Competent Parties

An enforceable contract requires at least two parties, and they must both be competent to contract. Children, insane and intoxicated persons are not competent to enter into an enforceable contract. A corporation whose charter has been revoked for failure to pay taxes is not competent to contract. A person who has no authority to act on behalf of another party cannot bind that other party to a contract.

The superintendent of a park district and the president of an engineering company agreed that the engineering company would perform inspection work for the park district and prepare drawings for the repair of a building. The superintendent, however, had no authority to bind the park district because the Park District Code prohibited contracts without approval of the park district board. The court therefore held that the supposed contract was void from the beginning, and the engineering company had no right to be paid for its work even though the park district may have benefited from the work. DC Consulting Engrs, Inc. v Batavia Park Dist, 143 III App 3d 60, 492 NE2d 1000 (I986). The court said:

When an employee of a municipal corporation purports to bind the corporation by contract without prior approval, in violation of applicable statute, such a contract is utterly void ... such a contract cannot be validated by principles of ratification or estoppel.

1.03 Legal Object

For a contract to be enforceable, it must have a legal object. A contract to ship cocaine, or to divide the loot from a bank robbery, could be unenforceable. A contract to build a structure in violation of the zoning laws would be unenforceable. A contract by an unlicensed contractor or uncertified or unregistered architect or engineer may be unenforceable by the unlicensed person. A contract to fix prices, or refrain from competition, is illegal and unenforceable.

In Richmond Co. v Rock-A-Way, Inc., 404 So 2d 121 (Fla. Dist Ct App 1981), two contractors were contemplating bidding for a recreation project. Let us call them Alpha and Beta. Alpha proposed that Beta refrain from bidding the job as a prime contractor, but submit a subcontract bid to Alpha. Alpha then agreed that if it was the low bidder, and was awarded the contract, it would sub the work to Beta rather than to any of Beta's competitors. Beta welshed on the deal, and bid the job as a prime contractor. The court dismissed Alpha's claim against Beta for breach of contract. Anti competitive agreements between contractors are void. Such agreements are against public policy because they tend to extinguish competition.

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