A construction contract is the backbone of any project, it governs all of the rights and obligations of each party. But what constitutes an actual, legally binding contract? Construction projects take time and planning well before the shovel hits the dirt. When construction companies prepare to take on a job, they should ensure that they have a signed contract in case things go south. A Wisconsin subcontractor learned this lesson the hard way after they cleared their business schedule based on the GC’s letter of intent. Unfortunately, the court found that they never had an actual, valid construction contract.
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Basic contract law formation
Although the specific requirements and regulations vary by state, as do most things in the legal world, there are some basic elements that must be met. To form a legally binding contract, all four of these elements must be present:
- An offer
To break this down into simpler language, there must first be a promise to do something in exchange for something of value. The other party must agree to it, and both must understand that the agreement constitutes a binding contract.
Once a contract is formed, each party has certain obligations that they must meet. Failure to do so can result in a lawsuit for breach of contract. This is an incredibly powerful remedy for those who lose money for a party’s failure to abide by the terms of the contract: the key word being contract.
In the construction bidding process, it’s common for the party soliciting bids to send a “letter of intent” to indicate bid acceptance. However, parties who receive a letter of intent shouldn’t start purchasing materials quite yet. It doesn’t not necessarily mean that all parties have agreed to the same terms.
A valid agreement doesn’t have to have “contract” stamped at the top. In fact, something like a signed purchase order can meet the definition of a contract. Even a letter of intent could meet the requirements for a contract if it contained certain language. But contractors should be careful when assuming that a document equals a contract. If any of the four contract elements don’t exist, then courts aren’t likely to support your claim in a dispute.
In a recent US Court of Appeals case, a subcontractor assumed that when the GC sent a letter of intent, they had a valid contract. When the general contractor decided to go with another sub, they filed a lawsuit. Unfortunately, the court found that their bid acceptance letter didn’t meet the basic legal requirements for a contract.
Subcontractor relied on letter of intent as a contract
The case in question is Skyrise Construction Group, LLC v. Annex Construction, LLC
- Owner: University of Wisconsin-Oshkosh (University)
- General Contractor: Annex Construction, LLC (Annex)
- Subcontractor: Skyrise Construction Group, LLC (Skyrise)
University hired Annex as the prime contractor for the construction of housing units near campus. Annex then solicited bids for a number of subcontractors. One of which was for the framing and window installation work on the project. Skyrise submitted a bid for the project totaling around $950K.
After some preliminary discussions, Annex emailed Skyrise a Letter of Intent stating that it was their intention to “enter into a contract with Skyrise,” and informed Skyrise that they would “work on getting you the contract documents in the near future.”
Skyrise assumed that they had already won the contract based on Annex’s emailed bid acceptance. Skyrise immediately blocked off their calendars. They decided not to pursue or accept any other work during that period of time. Shortly thereafter, Annex emailed a proposed contract to Skyrise for review. Nearly two months later, Skyrise returned the proposed contract with handwritten edits, which Annex never executed.
At this point, the project scope had expanded, and Skyrise submitted a revised proposal. Annex subsequently informed Skyrise that they would be choosing a different framing contractor who could handle the expanded scope of the project. Skyrise filed suit.
Subcontract sues for lost profits
Skyrise’s lawsuit was based on breach of contract, negligent misrepresentation, and violations of deceptive business practices, among other things.
The sought damages based mainly on lost profits; the profits they could have taken on if they hadn’t cleared their schedule. Skyrise maintained that a contract was formed either when the bid proposal was accepted or when they sent the revised contract documents to Annex. Therefore, they were entitled to damages.
In response, Annex filed a motion for summary judgment dismissing all claims. The trial court granted the motion, and the appeals court affirmed the decision. Skyrise, once again, appealed the decision.
Court: Letter of intent is not a contract
The Appeals Court decision focused on what constitutes a legally binding contract. The acceptance of the bid was merely a proposal. Skyrise had admittedly been reviewing the contract documents, and the bid proposal specifically stated that it would be incorporated into the contract that the parties may eventually execute.
As for the returned proposed contract documents, this was also rejected as a binding contract. Any changes made to a proposed contract is considered a rejection and counteroffer under Wisconsin (and most other states) laws. The fact that Skyrise relied on these documents as a contract, and blocked off work for that time period is meaningless.
The court applied similar reasoning to the rest of Skyrise’s claims. There were no false statements made by Annex. Nor was there any indication that an agreement had actually been made. Skyline should have anticipated that those negotiations could have broken down without an agreement.
The court quoted a previous case stating that “secret hopes and wishes count for nothing.” The appeals court affirmed the lower court’s decision, and dismissed Skyrise’s claims.
Don’t start work without a signed contract
This case serves as a good lesson for anyone submitting bids for construction projects. Understandably, when a bid gets approved, the natural reaction is to make preparations to begin work. However, bid acceptance or a letter of intent are not contracts. Unless there is a specific representation that the parties intend to enter into a binding agreement, there is no binding contract. And, any money spent preparing for a project will be lost without one. Always get your contracts in writing and signed.