March 14, 2011
Lawyers often confront the mythology of the law, for example, a party who boldly (or perhaps hopefully) declares, "I don't have a contract. I never signed what they sent me." Although dependent on the facts of a particular situation, the case law in Colorado and other states says otherwise. Consider the recent Colorado Court of Appeals case of E-21 Engineering, Inc. v. Steve Stock & Associates, ___P.3d___, 2010 WL 3035168. E-21 sent Stock a letter of intent that it would contract with Stock for portions of construction of a seed storage facility, and directed Stock to begin assembling its submittals. E-21 sent Stock its subcontract, which neither E-21 or Stock ever signed. Stock went to work on the submittals and applied for its bonds, only to have E-21 rescind the letter of intent a few weeks later on the grounds that, "no executed subcontract exists between our firms,..."
Following a somewhat tortured series of events, including a demand for arbitration, protracted settlement negotiations, and a court case, the matter made its way to the Colorado Court of Appeals. The issue there was primarily whether the unsigned E-21 subcontract, which contained an arbitration clause, was binding on the parties. The appellate court directed the case back to the trial court for an evidentiary hearing, but the holding in the case suggests that the likely outcome will be that E-21 and Stock will be arbitrating and that signed or not, the subcontract tendered by E-21 will govern the rights and obligations of the parties.
This is a good cautionary tale for parties that contract. Common law (judicial opinions) governs formation of contracts, and the common law in Colorado and most states is that oral agreements, and as here, an unsigned written agreement, are enforceable. Keep in mind that this is a two way street. Here it was E-21 that wanted to ditch its subcontractor. It is also common for a subcontractor who has a "change of heart" to take the position that it has no contract because nothing was signed. Depending on what has transpired between the parties, there may be a contract. In the E-21 case, it was important that E-21 had sent the letter of intent and that Stock commenced work. Had there only been a letter of intent with ongoing negotiations of contract terms, a better argument could be made that the parties had not formed a contract. It is also worth noting that different types of law, for example, commercial transactions under the Uniform Commercial Code, have differing rules for what is and is not a contract.
So what is the upshot of a breach such as the one in the E-21 case? Depending on terms of the subcontract, if E-21 were found to have wrongfully terminated the agreement, it could be potentially on the hook for Stock's costs to date and other direct losses plus its lost profit on the unperformed work. In the opposite scenario-if Stock commences work following the notice of intent then decides it doesn't like the subcontract, and declines to go forward, Stock could be responsible for E-21's excess costs to contract with a replacement and possibly indirect expenses such as delays to the work during reprocurement.
The bottom line? Even without a signed agreement, you may be under contract, and refusing to perform could put you in breach.
Please let us know if you need further information by contacting our Construction team: George Berg, Rick Greenleaf, Giovanni Ruscitti, Dan Gross, Tom Merrigan, Melissa Heidman, Judy Snyder, Justin Berg, Mark Changaris, and Jason Pink.