#22: Working Without a Signed Contract
I’ve seen it many times: a contractor hires a subcontractor, sends him its standard form contract to sign, and then lets him start work before a signed contract is returned. Sometimes this is a result of extended negotiations over particular terms coupled with the need to get started in a hurry. Sometimes it just slips through the cracks until the first pay requisition is submitted. And sometimes it’s never signed, with varying consequences as to payment and as to whether the sub is allowed to continue. I’ve even seen subs send in their insurance certificates and other required documents, but mark up the GC’s form in ways unacceptable to the GC, while the project continues to completion with the sub getting paid anyway. The form never gets signed, yet the parties treat it as though it was. Until something goes wrong.
If you think of this scenario as working without a contract, you’d be wrong. Laymen automatically think of the piece of paper as the contract. Lawyers know it’s not. A contract is an agreement, a meeting of the minds on bargained-for exchanges of performance by both sides. The piece of paper simply memorializes that agreement, but the agreement itself is the “contract,” and it can be verbally expressed or even inferred from conduct. As long as certain essential and material terms are agreed to (scope of work and price being the main ones), and as long as no statute prohibits the courts from enforcing an unwritten contract (lawyers call this the “statute of frauds;” it doesn’t apply to construction contracts capable of being performed within one year), the courts will enforce the deal―provided those legally essential terms can be proven. The value of the paper is twofold: making such proof easy, and expressing the parties’ assent on the legally non-essential terms of the deal (schedule, timing of payment, retainages, insurance, change order procedures, documentation, tests for acceptability of workmanship, lien waivers, dispute resolution mechanism, etc.)―terms which may be “essential” to one of the parties even if not to the court.
Sometimes an unsigned form can nevertheless bind the parties to its terms. Such “acceptance by conduct” can happen if the GC tells the sub “These are the terms on which I will hire you, and if you show up and start performing you will be deemed to have accepted all of them that I haven’t waived in writing – so if you have any reservations about any of them, either get my signature on something that waives it, or don’t show up.” In such a case, showing up becomes acceptance. This can work both ways. Suppose a sub sends a written proposal or quote to a GC, and the GC sends back a lengthy form subcontract that isn’t signed but the GC nevertheless allows the sub to work on site. The bare bones terms of the written proposal, which usually include the essential and material terms needed for legal enforcement of a contract, may end up governing.
Unwritten contracts are still contracts, and still require payment for performance. But it is not certain that they require partial payment for partial performance at regular intervals, even if an unsigned form provides for that. The usual legal rule in contract cases is that unless the parties agree otherwise, payment is due only upon full performance. This rule can be harsh when a project is lengthy, and courts often temper it by resorting to “custom in the industry” as an implied term. The custom in the construction industry is for regular (usually monthly) progress payments.
More generally, a covenant of “good faith and fair dealing” is implied in every contract, written or unwritten. That covenant will often be invoked by the courts to constrain one party from taking unfair advantage of the other, in ways often indistinguishable from enforcement of some of the terms in an unsigned form.
The bottom line is that a written contract, while always a good idea, need not be “signed, sealed and delivered” in order for legally enforceable rights to arise. Those three features were required hundreds of years ago when contract law was in its infancy. Today the phrase only applies if you’re marrying Stevie Wonder.