By Christopher L. Grant
Christopher Grant practices law in Washington, D.C., and serves as general counsel to NPCA. Visit www.lawgrant.com for more information.
Many manufacturers provide their customers with written quotations that state little more than a specification of the product or scope of work, the price and a delivery date. That is a mistake. In fact your price is probably based upon certain unstated assumptions; you make those assumptions when you calculate your price, but you do not spell them out to your customer.
Your customer needs to know those assumptions, and to know that, if those assumptions change because of something that is not your fault, your price must change. Your quotation should state those assumptions expressly. Instead of saying, “I will perform this specified work for $1,000,” your quotation should state, “I will perform the specified work for $1,000 if I am permitted to commence the work on schedule and to complete it without interference from others; if my obligations of warranty are limited to what I normally offer; and if I can count on payment within 30 days.” If your quotation does not state the assumptions that in fact underlie your calculation of price, then you may find yourself forced to accept a price that does not compensate you for all of the goods and services that you have provided and the risks that you have taken.
I appreciate that lawyers and law can become altogether too influential in our lives. Normal, everyday life is intended to be governed by common understanding and expectations, common sense, common courtesy, customs, habits and etiquette. You are supposed to be able to run to your life and your relationships in business more or less without reference to legal issues.
You are supposed to be able to do your ordinary business on a handshake. And I believe that you still can 80 percent to 90 percent of the time. But you can’t ignore the other 10 percent to 20 percent. Unexpected events happen often enough so that these issues are worthy of regular, serious attention.
We don’t know everyone we deal with personally. We may not know for sure whether they are especially good at what they do. We may not know how durable their honesty will prove to be when tested by difficult circumstances. We may not know, in this recent time of economic growth, whether they have overextended themselves, taken on more work than they can really handle, or worked their line of credit up to the limit so that a minor problem becomes amplified by a lack of resources to deal with it promptly.
When you are dealing with so many strangers and such a high volume of business, you must have a backstop to limit the damages that an unexpected event can cause. A good contract can serve as your backstop.
A good contract should do two things for you. First, a good contract should identify all foreseeable problems in the relationship, and it should establish rules that solve these problems ahead of time. Second, since in the construction industry there are many problems that are not foreseeable, a good contract should establish efficient rules and procedures for dealing with unforeseeable problems when they occur.
What are the foreseeable problems? Let’s say our company is called “XYZ Products.” We are located in Columbus, and we want to sell precast concrete pipe to a utility contractor in Albany, where there will be a lot of reconstruction after recent flood damage. The utility contractor is called Albany Construction. Unless Albany Construction is willing to pay us in advance, we are going to have to extend the company credit. So we have to decide if it is creditworthy. The first order of business in drafting our quotation form is to accurately identify the purchaser with whom we are dealing, to whom we intend to look for payment. The individual with whom you deal on the telephone may own four corporations, so you need to make sure which corporation you have contracted with and that the subordinate company has good credit. The law allows an individual to hide behind corporations, so you have to make sure that person or entity to whom you look for payment can’t hide from you.
So when we say that we are dealing with Albany Construction, is this Albany Construction Inc. or Albany Construction LP or Deadbeat Inc. d/b/a Albany Construction or who? You have to know, because otherwise your credit information may be for the wrong entity and useless.
A client of mine, a mechanical contractor, a few years ago purchased a couple of boilers from a manufacturer in Iowa. The boilers were delivered, my client installed them, they worked poorly, and finally the owner of the project shut them down and hooked up the old boilers. Now we have a big dispute on our hands. We wrote a letter to the manufacturer to insist that he participate in resolving the dispute, and he sent us a letter back that said, “I’m sorry, the company that you dealt with was recently sold, and the new owners put it out of business.” We went back to the contract to see what company was named there, and it showed: “Magnificent Boiler Corporation.”
We looked at the letter we had just received, and it said Magnificent Boiler Works Inc. Did we have a right to make a legal claim against Magnificent Boiler Works Inc.? Probably not. We had a claim against a different corporation called Magnificent Boiler Corp., and unless we could find that corporation with assets, we were out of luck. The fact that the same individual was running a different corporation in the same line of work would not likely help us, except in extraordinary circumstances such as fraud.
So the first solution of a foreseeable problem that your contract should deal with is to accurately define your purchaser after confirming that as a specific legal entity it has solid credit. Often the written documents do not make absolutely clear which entity is obligated to pay you.
Last year I worked on litigation in which the main issue wasn’t so much that we were entitled to be paid, but whether we could bind any entity that had money. My client, a manufacturer of electronic controls, had negotiated its deal with a huge corporation that was renovating one of its plants. We sent a purchase order to that company for signature. What came back, however, was not our document signed by that company, but a purchase order on a different form signed by a subsidiary of that company, a limited partnership. We shipped the products and installed them, and when the dispute arose over nonpayment, our purchaser took the position that we had a contract only with the subsidiary. The only problem was that the subsidiary had gone into bankruptcy. We had failed to be diligent to make sure that the entity whose credit we had checked – and on which we were, in our minds, relying for payment – was the entity whose name showed up on the purchase order.
We did ultimately get paid, but only after a furious legal battle that we might easily have lost. We could have avoided the problem altogether with care in the way our contract was stated. We could, for example, have acceded to our customer’s wish that we do business with its special purpose subsidiary, but we could have insisted that the parent company sign the contract as a guarantor.
We are trying here to identify all foreseeable problems. The first problem that we foresaw was nonpayment, and the disappearance of the legal entity with which we thought we were dealing. The second problem that we could foresee might be slow payment. Your contract should make it clear that you are entitled to payment within 30 or whatever number of days you choose, and that it does not depend upon the purchaser’s receipt of payment from his customer. Payment is due within 30 days without regard to whether your purchaser has received payment from the owner of the project or whoever is his customer. You may be aware that contracts often include language such as, “Payment by the owner to the general contractor is a condition precedent to payment by the general contractor to the subcontractor.”
Your contract must not include such language, unless you are prepared to finance the project.
In order to avoid such language, you must win what law professors call the “Battle of the Forms.” Do business on your own form. Your form should state something like, “Seller’s offer is limited to the terms of this contract, and Seller does not agree to any other terms. Different or additional terms that appear in any document are rejected by Seller. Seller’s agreement to a contract with Purchaser shall be expressed only by Seller’s signature upon this form, and no oral words or conduct in the absence of such signature shall constitute a contract.”
It may not be apparent which documents constitute the contract! In my law practice I often see several documents with inconsistent or directly conflicting terms, all of which appear to be part of the parties’ understanding. Make sure that your contract includes a clear definition of what documents comprise the contract. If other documents are incorporated into your contract by reference, such as terms from the prime contract, then get a copy of them and read them. Otherwise you’re agreeing to conditions that you have not even seen.
What is the next problem that we can foresee? Perhaps a delay in your performance was caused by your purchaser. You have a manufacturing plant to run. You hope for a steady flow of work at a high level of your plant’s capacity, and this is what you plan for as you negotiate contracts. Your prices reflect this efficiency of operation. If the work of a given contract is delayed by three months, it may cause ripple effects through all of your relationships with other customers. Customer A, who caused the delay, wants you to deliver his product when he now needs it, but you have other customers who were waiting in line; moreover, your plant was idle during the month in which you had planned to do Customer A’s work. You need language in your contract that states that your agreement is to manufacture the product for this customer in March 2007 and to deliver it March 30, and that if this schedule is delayed by the customer, your obligation is to reschedule his work as best you can without neglecting other customers. Perhaps you want to say that you are entitled to extra compensation for the idleness caused by such a delay. Or perhaps the nature of the work is such that you can manufacture the work as scheduled and simply store the product somewhere until the customer is ready for it. Your quotation/contract form should specify that the customer is liable to pay for any such storage. You may want to state that if the customer delays the manufacturing process by so much time, you may terminate the contract altogether.
Contracts in the construction industry usually state, “Time is of the essence.” Customers often take this to mean time is the essence of your performance. You may need to remind them that time is of the essence of their performance as well.
What about a sudden, enormous rise in the cost of a raw material? If this is a foreseeable problem, then you should deal with it in your quotation form; if your contract does not deal with it, you will be very unlikely to obtain relief.
What is the next problem that we can foresee? Perhaps an allegation by the purchaser that the product does not correspond to the requirements or does not perform in the manner desired. Make sure you do not undertake a performance spec in your contract unless you intended to. The more vague the spec, the more likely your payment will be withheld during a dispute over whether you satisfied it. Ideally the contract will establish exactly what you have agreed to do and have included in your price so that if anything different happens and it causes you increased expense, you have established a baseline against which to demonstrate your claim for compensation. Any claim for extra compensation requires a comparison between the work as promised to you by the contract and the work as it actually had to be done. Often the contract includes such a vague definition of the work to be done that it becomes very difficult to establish this comparison: You have no hard baseline against which to make the comparison, so it is very difficult to prove a right to extra compensation.
Avoid subjective criteria such as, “Product will satisfy Customer.” Put the fuzzy language in your promotional literature if you wish, but keep it out of your quotation/contract form, and exclude it from any document that becomes incorporated into your contract. Define acceptance as objective conduct or failure to object within a specified, short period of time. “Final acceptance occurs upon the customer’s taking possession of the product from the shipper unless written notification is given seller within three calendar days of any objection to the product as delivered.”
Finally, state your warranty in the plainest terms. Some limitations of warranty are required by law to be stated in capital letters (this varies from state to state). Try not to allow someone else’s definition of your warranty to be incorporated into your contract by reference to another contract or other document. One change that I often make to another person’s standard form is to delete any reference to a warranty of “fitness” for a particular purpose. I take the position that we agree to deliver what is specified: We did not write the specification, and we do not guarantee that the correct product was chosen for the purpose.
Those are probably the main categories of problems that we can foresee: definition of the legal entity whose credit we have checked and to which we are going to look for payment; definition of the contract documents; definition of an exact scope of work to which we are committed and no more; definition of an exact time when we are entitled to payment; definition of the time when our work is to be performed, so that a delay by our customer entitles us to a change in compensation or some other relief; definition of acceptance by the customer; and limitation of our warranty.
We have fulfilled the first function of a contract, which is to identify all foreseeable problems and solve them. The second function of a contract is to establish efficient procedures for the resolution of problems that cannot be foreseen. We need to establish efficient remedies. You may opt for arbitration, especially if you are the likely claimant, and you should specify that the locale of the arbitration will be your home town; in other words, arbitration or litigation should take place in your courts. You might require mediation before arbitration or litigation. You probably want to provide for your recovery of interest and attorney’s fees. Exposure to these can become a major factor and a major reason for settlement or at least a major bargaining chip.
After every project, or perhaps at the end of every quarter, and certainly after every dispute, ask yourself how you can improve your quotation/contract form in order to make sure this particular problem never happens again, or that, if it happens, you can solve it promptly.
Make sure you get copies of all of the documents that are incorporated into your contract. You have to assume that a court will enforce that contract as written, finding the intention of the parties as best it can. Don’t sign agreements that you have not read in their entirety, and don’t agree to terms that you think are not realistic.
If you have to use a form other than your own, there is no harm in asking for changes to the other party’s contract. Make your rules the rules of the game.
Your quotation form should set forth most or all of these provisions that I have mentioned, perhaps on the back of the page. If you use a quotation form that simply states the product or work to be delivered, the price and the date of delivery, then the rest of the terms of your contract will probably be imposed upon you by your purchaser. That is not acceptable.
A good, well-written quotation form with contractual terms is intended to protect you from the most important law in the construction industry: Murphy’s Law. Whatever can go wrong, will go wrong. On those transactions where everything goes right, you may never look at the contract. But where Murphy’s Law comes into play, it may be your contract that makes the difference between success and failure or payment and nonpayment.