VERBAL AGREEMENTS ARE JUST AS GOOD AS WRITTEN CONTRACTS (ALMOST)

I have often heard many people say that they did not have a contract and/or change order when they actually meant that they did not reduce their agreement to writing and/or sign a written document. Whenever someone performs work in exchange for a promise of payment, they have a legally enforceable agreement. The question is whether the contract was verbal or written.

There are two areas where the issue of not having a fully executed written agreement repeatedly arises in construction. The first is when the parties exchange a written contract but do not fully execute it, and the second is when the parties ignore the requirement in their contract that any changes in the work only be performed pursuant to a written change order. In both these cases, there can still be an enforceable verbal contract.

As you might expect, having a written contract is often better than a verbal, which is why there are many publicly available forms that can be obtained for construction projects. The American Institute of Architects (AIA) produces the most well-known and widely used forms of agreement, but there are competitors that offer similar (if not better) products. The point is that there is no excuse for not having a signed written agreement for any construction project, but there is still much work being done without a written contract and/or signed written change order.

In theory, a verbal contract is just as good as a written contract. Legally, they are both equally as binding. The problem is that, in the case of a dispute, the plaintiff has the burden of proving the elements of a legally enforceable agreement. In order for there to have been an enforceable contract, there must have been a “meeting of the minds,” i.e., each party must have had an identical understanding as to the terms of the agreement. Obviously, it is much easier to satisfy that burden when the terms of the agreement have been written down and signed by the parties. Conversely, there is also less opportunity for either party to dispute those terms when they are contained within a signed writing.

Notwithstanding the foregoing, far too many construction projects are performed without fully executed written contracts and/or change orders. Even where there are written contracts between the owner and general contractor that require the general contractor to enter written subcontracts with its subcontractors and/or require change orders to be in writing, these provisions are often ignored.

The problem of the unsigned written contract can be overcome if the parties operate as if it had been signed. Under the right facts, a court may find that the parties had a verbal agreement where the terms are found in the unsigned writing. In essence, if the parties acted as if the unsigned contract governed their agreement, the court will enforce it as if it had been signed.

The problem of not having a required written change order is more difficult but can still be overcome. There is substantial caselaw which states that, if the parties routinely ignore a written change order requirement, then the parties will be deemed to have waived the written change order requirement by their conduct. It does seem that, if the parties develop a history of making oral agreements to modify the written contract, then it would not make sense or be fair for a court to refuse to enforce the 10th oral modification to the written contract if the parties acted as if that provision did not exist on the nine (9) prior occasions. Of course, there is no exact number of times the parties can ignore the written change order requirement before the court will no longer require it to be enforced. In fact, depending upon the judge, the written change order requirement may be found to have been waived the first time the parties ignore it.

There are many obvious reasons why it would be preferable to have any contract in writing, but having change orders in writing can be more important. For example, there are any number of people on a site that may have “apparent authority,” whose words, actions or possibly inaction can be interpreted as authorizing a change to the work. For that reason, the standard AIA forms often require the parties to identify a representative who has the power to bind the party and to whom all notices shall be sent. Of course, once you start modifying the contract by conduct, the court may not stop at allowing unwritten change orders to be enforced and may start finding that anyone who appears to have management responsibility may authorize additional work. Obviously, such a situation can lead to many unintended results.

In light of the foregoing, best practices is to always follow contract formalities, but the reality of the project may not always allow that to happen.

If you should have any questions regarding the enforcement of a verbal contract or change order, please give me a call.

Scott Orenstein
(203) 640-8825

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