We all know negotiating enforceable contracts is part of the game, but in case you forgot a few things, here’s a refresher.
In 1904, author Mark Twain wrote, “I am a pretty versatile fool when it comes to contracts, and business and such things. I have signed a lot of contracts in my time, and at some time I probably knew what the contracts meant, but six months later everything had grown dim and I could be certain of only two things, to wit: One, I didn’t sign any contract. Two, the contract means the opposite of what it says.”
Twain’s comments reflect the reason we want clearly written, signed contracts before starting any new project. When the deal goes sour, people begin to forget the terms agreed to, or deny ever making such an agreement. Contracts can be oral (“handshake deals”), or written, customized forms or industry standard forms, all of which are legal and binding. Even an email exchange or a signed cocktail napkin can form a legal contract. Here is a refresher on some things you should know about contracts that you may not have learned in school:
- Clear terms of the offer. The offer is a most critical part of every contract. It must be communicated in sufficiently clear terms to make any resulting agreement enforceable. Key elements include certainty as to the parties (which company or LLC is entering into the contract), scope, price and time of performance. The phrase “scope creep” is sometimes used to define a contract whose scope was left vague or ill-defined, resulting in more work or services being requested than originally contemplated. Lock in the scope, schedule and price in clear terms to avoid disputes with your clients and contractors.
- Counter-offers and acceptance. When an offer is made (by the “offeror”), this creates the “power of acceptance” in the other party (the “offeree”). The person receiving the offer has the power to either accept or to reject the offer. The offer may restrict the manner of acceptance, such as requiring signature by an officer of the company, or place a time limitation on acceptance before the offer expires. In such cases, the offer must be accepted in the manner required to form a valid contract. Silence alone is generally not deemed acceptance, but there are exceptions. Contracts are based on our outward actions, not secret intentions, so that acceptance must be communicated to the offering party to be valid. An exception can arise, however, where the parties have a course of dealing between them which leads the offeror to understand that silence means acceptance, or where the parties have agreed by contract that silence means acceptance. Many court cases hold that acceptance can be shown by a party’s actions, such as proceeding with work or accepting payment. Be careful about starting work or services without rejecting the terms of an unreasonable contract proposed by your client.
- Rejection. Offers are terminated by an express rejection. A “counter-offer” is common where one side makes an offer, by sending a proposal or contract, and the other side sends back a different proposal or a marked up contract. This is not an acceptance of the original offer, but it is a rejection of the offer coupled with a counter-offer. This now creates the “power of acceptance” in the original offeror, who can accept the counter-offer, or reject it. We normally see a series of offers and counter-offers before the parties eventually agree on a set of terms and price that they can live with. Until that time, however, there is no contract. Acceptance must be the “mirror image” of the offer, so that the terms match. This is also known as “mutual assent” or a “meeting of the minds.” If the two do not match, you have a counter-offer – not a contract.
- Bargained exchanges and adhesion contracts. The law prefers fair bargaining in contracts, where there is some give and take in the negotiations (offers and counter-offers). Contracts which are presented on a “take-it-or-leave-it” basis are known as “adhesion contracts” because the terms are merely adhered to by the weaker party, rather than negotiated. Adhesion contracts are usually pre-printed forms forced by a stronger party on a weaker party. This does not mean that all AIA, EJCDC, or DBIA contracts are unenforceable. To the contrary, courts only strike those parts of a standardized form which fail to live up to reasonable expectations and which are unconscionably unfair. Normally, there is unequal bargaining power involved as well, where the weaker party is compelled to sign under some economic duress. If an adhesion contract is so one-sided that no fair-minded person would view it as just or tolerable, that portion of the agreement which is unconscionable will be struck as adhesive if it is against public policy.
- Intent. The intent of the parties is sometimes an issue where one party thinks one thing and the other party thinks another. Our intent is judged by our outward conduct, not internal thoughts, as would be interpreted by the average reasonable person. Courts try to determine the intent of the parties by looking only at the “four corners” of the written contract. There is great reluctance to go “outside” the contract, because this opens the door to evidence that is not part of the contract terms. Such evidence is called “parol evidence” and is usually not admissible in court unless the contract is so ambiguous that the court cannot determine the parties’ intent without the aid of such evidence. For this reason, it is common to see an “integration clause” in contracts like: “This Agreement supersedes the parties’ prior proposals, offers and communications and constitutes the entire agreement.” It is, therefore, very important to include all relevant details of the scope of work, and fee and negotiations in the written agreement. Parties often do this by incorporating written proposals into the contract by reference, and attaching them as an exhibit.
In Abraham Lincoln’s 1861 first inaugural address he asked, once a contract is entered into, “can it, as a contract, be peaceably unmade, by less than all the parties who made it? One party to a contract may violate it – break it, so to speak; but does it not require all to lawfully rescind it?” The answer is “yes,” both parties can lawfully rescind a contract by mutual agreement. But more often, it is one party who breaches the contract and that is when you want to be sure you have a proper contract that protects you and your company. Get it in writing, negotiate acceptable terms, and don’t start work until both parties have signed!
William Quatman is an architect and general counsel at Burns & McDonnell Engineering Co. Contact him at firstname.lastname@example.org.