When not to sign a contract

This month I would like to share the recent experience of a subcontractor client that encountered a situation where it did not make sense to sign the contract, at least not the one presented by the general contractor. My hope is to address a few learning points and perhaps raise your awareness of a situation where you might want to reconsider the typical advice about signing a written contract.

You're probably used to hearing lawyers say to put the deal in writing, preferably before you start work. This makes sense, of course, because then both parties know the terms of the agreement: the scope of work, the price, and any other terms about how the parties will conduct themselves on the project. And, with a written contract, there is proof of those terms in case of a later disagreement. So it's always a good idea, as a general rule, to have a written contract before you start work. Nothing I say in this column is intended to suggest otherwise.

As a practical matter, though, this doesn't always happen. Sometimes subcontractors start work without a formal written contract, sometimes without anything in writing at all. When this happens, the general rule of getting the deal in writing may not always be possible, or it may not always be a good idea.

This month I would like to share the recent experience of a subcontractor client that encountered a situation where it did not make sense to sign the contract, at least not the one presented by the general contractor. My hope is to address a few learning points and perhaps raise your awareness of a situation where you might want to reconsider the typical advice about signing a written contract.

Here's what happened. The GC directed the subcontractor to start work on a project before the GC could get its act together on the form contract it wanted to use. So, against what would have been my better judgment had I been asked, the subcontractor started the work without signing the form contract. In fact, the GC had not even presented the form contract by this time. But the subcontractor was smart enough to submit a proposal by e-mail, outlining the scope of its work and the price, and wait for the GC to acknowledge the proposal, which it did by responding to the e-mail and agreeing to the scope and price.

The subcontractor then starts work, and the GC pays monthly for completed work. Then, after a couple months, the GC decides it wants a signed agreement, and sends its form contract to the subcontractor. The terms were very unfavorable for the subcontractor, but the GC refused to modify any of the terms. The GC also insisted that the subcontractor sign the form contract. And so the question was, halfway through the project: should the subcontractor sign? My response was another question: why would you?

The subcontractor already had a written agreement. It was the proposal, which set out the scope of work and the price, and was accepted by the GC. That's what the law typically calls a contract. Missing terms, like the completion time, would be read into the agreement if there was a dispute. Most courts would impose a reasonable time for completion, whatever that might turn out to be based on the evidence. And while there were no provisions about changes to the work or delays or dispute resolution, or any of the other typical details, who cares? These provisions don't generally help the subcontractor anyway. Not to mention there are also no blatantly adverse clauses like "no damages for delay," restrictive notice provisions, or pay-when paid clauses.

But doesn’t starting work accept the terms of the GC's form contract? Not in this case. The work started under the terms of the proposal, and only later did the GC send along its form contract. Had it been the other way around, the situation could have been very different.

What happened next is a not a flattering picture of the GC. After I informed the GC's lawyer that the subcontractor would not be signing because the terms were too one sided, the GC changed its tune a bit. The GC agreed to modify some of the offending terms, yet continued to insist the subcontractor sign the form contract. The subcontractor declined, finished the job, and then sought final payment. And that's when we realized why the GC was so anxious to have its form contract signed.

As it turned out, the GC was having cash flow problems, and wanted a way to refuse payment. It even tried to rely on the draconian notice provisions in the form contract (that were never agreed to) as a basis for refusing final payment or payment for the costs of additional materials. We reminded the GC that the terms of the contract were contained in the proposal e-mail, and did not include anything about notice, so the law reads in a requirement of "reasonable" notice, which the subcontractor provided with respect to its costs for additional materials.

So the story ends with the following learning points:

  • Try to have an agreement in writing before you start work. As you can see, this can be more important for the party trying to restrict the other party's rights.
  • Even a written proposal, containing the key terms, can form the written contract once accepted by the other party.
  • Watch out for acceptance by performance. Had the subcontractor started work after the GC provided the form contract, and without some indication that the terms were not accepted, this case might have turned out much differently.
  • Don't automatically feel the need to sign a form agreement halfway through the project if the terms you've been performing under are acceptable and the proposed terms are not advantageous.
  • Beware of the contractor trying to force you sign their form contract near the end of the job.

By the way, this occurred on a federal job. The U.S. Army Corps of Engineers was not pleased with the GC's conduct. Neither was the GC's surety.

Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation.

TAGS: Law