When Do I Have a Contract? When Do I Have a Contract?

When Do I Have a Contract?

Whether drafting or reviewing an executed Memorandum of Understanding, Term Sheet or Agreement in Principle or working with a form AIA agreement, a recent case from the Indiana Court of Appeals provides guidance and some principles for construction, as well as cautionary principles.

An Architect entered into what it thought was an agreement for architectural services with a County-owner for a jail project. The agreement was memorialized in an AIA Form B102-2007 and an AIA Form B201-2007. These contract documents referenced the types of services to be provided during all phases of the project, but according to the Court, “made only general reference to the phases that would come after the Pre-Design Study was completed.”

The B102 also contained provisions with respect to termination:

§ 5.5 The [County] may terminate this Agreement upon not less than seven days' written notice to [Architect] for the [County's] convenience and without cause.

§ 5.6 In the event of termination not the fault of [Architect], [Architect] shall be compensated for services performed prior to termination, together with Reimbursable Expenses then due and all Termination Expenses as defined in Section 5.7.

§ 5.7 Termination Expenses are in addition to compensation for [Architect's] services and include expenses directly attributable to termination for which [Architect] is not otherwise compensated, plus an amount for [Architect’s] anticipated profit on the value of services not performed by [Architect].

This explicitly provided the owner with the right to terminate the contract at any time for any reason but would require the County to pay the anticipated profit “on the value of the services not provided” as a result of the termination.

The AIA B-201 contained a detailed description of the Architect’s obligations to be provided during the Pre-Design Phase and in subsequent phases: (1) the Pre-Design Study, (2) Schematic Design, (3) Design Development, (4) Construction Documents, (5) Competitive Bidding, and (6) the Construction Phase. But, apparently neither the B102 nor the B201 contained what the Court considered “a detailed scope of work or cost” for the phases that come after the Pre-Design Phase. The contract stated the detailed scope and cost “would be determined at a later date.” As a practical matter that would likely be true, as the scope would be an outcome of and dependent upon the Pre-Design Study. And cost would likely be dependent on the scope determination.

In the actual event, after completion of the Pre-Design Study, the Study’s recommendations were presented to the County’s County Council, which is the fiscal body for the County. The Council insisted the county issue an RFP for the remainder of the architect services for the project. A different architect was ultimately selected, and a lawsuit was filed.

The gist of the original Architect’s lawsuit is that it had an agreement for all phases of the project, which the County was within its legal rights to terminate, but the County was obligated by the contract to pay “termination expenses,” including the “anticipated profit on the value of services not performed.” The County, on the other hand, maintained the contract was enforceable only as the Pre-Design Services, which had been completed and paid.

The Court recited a number of legal axioms in its analysis, such as “a mere agreement to agree at some future time is not enforceable,” a seeming reference to the contract’s provision that scope and cost for further services would be determined at a later date. But also, “parties may make an enforceable contract which obligates them to execute a subsequent final written agreement” and “a well-known rule provides that mere reference to a more formalized contract does not void the presently existing agreement.” Ultimately, the Court decided it needed to determine two interrelated areas: “intent to be bound and definiteness of terms.”

Reviewing the four corners of the contract only, and not the extrinsic evidence provided by the transcript, the Court determined the parties intended that the Architect would provide architectural services for all phases of the contract. Thus, it found the first prong of the test had been met—the parties “intended to be bound.” It based this determination on the fact that the B201 provided a detailed description of the services to be provided under each phase and the additional services available throughout the project.

The Court then turned to the second prong of its analysis, “definiteness of the terms,” and began again with some statements of general application. “The terms should be so precise as neither party could reasonably misunderstand them.” Given the Court had already noted neither the B102 nor the B201 contained a “detailed scope of work or specific costs” for the later phases, a lay person might wonder what was left to decide. Though not cited, other instances of a contract existing without a detailed scope or costs exist. The Commercial Code, for example, has certain gap-filling provisions that allow the Court to infer implied term, including a fair price.  But ultimately, this was not a contract governed by the Commercial Code, and the Court determined there was no agreement to agree on the remaining terms and found the “essential” terms were wanting. The contract ultimately was found to not include two of the essential terms—scope and price.

This case illustrates the difficulty that exists in establishing an enforceable agreement for a series of related activities with each dependent on the outcome of the preceding activity.  Memoranda of understanding and agreements in principle can be enforceable, when the “contract” in the case was not. Essentially, drafters wanting an enforceable agreement need to pay attention to the principles of this case—establish and use language showing an intent to be bound and have scope and cost terms that are demonstrably “definite.”  See RQAW Corporation v. Dearborn County (Sept. 6, 2017, Ind. Ct. App).

Gary Dankert is an attorney with Ice Miller LLP. Ice Miller's Construction Practice is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Dankert practices construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Dankert can be reached at gary.dankert@icemiller.com or (317) 236-2203.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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