In the rush to begin work as soon as a public owner issues a Notice to Proceed, prime contractors too often allow subcontractors to begin work before formal subcontracts are executed.
In most instances, the parties subsequently sign a subcontract without issue. In other instances, the parties reach a stalemate, and things go downhill quickly.
Jatsek Constr. Co., Inc. v. Burton Scot Contractors, LLC, 2012 WL 3775989 (Ohio App., 8th Dist., Aug. 30, 2012) involved a lawsuit a subcontractor filed against a prime for unpaid sums in connection with a public contract for construction of a bike path. Soon after receiving notice of the lawsuit, the prime filed a motion with the court citing an arbitration clause in the subcontract and seeking a postponement of the case pending arbitration.
The subcontractor opposed the motion and argued that no agreement to arbitrate existed because although it had signed the written subcontract, the prime never did. The subcontractor thus argued that the agreement between the parties consisted of nothing more than the written quote it supplied to the prime. The trial court agreed, and the prime appealed.
The appeals court considered the undisputed evidence produced at the trial, which showed that the prime accepted the subcontractor’s proposal on Aug. 5, 2010, and on Sept. 17, 2010, it issued to the subcontractor a written subcontract. The subcontractor began working on the project on Oct. 18, 2010, and on Oct. 30, submitted its first invoice for work it had performed. Notably, a week later, on Nov. 7, the subcontractor executed and returned the written subcontract. In executing the subcontract, however, the subcontractor made handwritten modifications to certain provisions. The prime contended that the modifications were unacceptable, and it never consented to them in writing. The question for the appeals court was whether the subcontract between the parties was the subcontractor’s proposal or the written subcontract.
In reversing the trial court decision and ruling for the prime contractor, the court followed a similar case it had previously decided. In G. Herschman Architects, Inc. v. Ringco Mfg. Co., Inc., 1995 WL 277101 (Ohio App., 8th Dist. May 11, 1995), Herschman and Ringco entered into discussions regarding an agreement under which Herschman would provide Ringco with architectural services in the design of department store display stands. Pursuant to their discussions, Herschman faxed to Ringco a proposal, dated June 23, 1992, in which it outlined the scope of and fees for the project.
Herschman and Ringco engaged in negotiations of the June 23 proposal, and on June 29, Herschman sent a revised proposal to Ringco. The parties did not sign the revised June 29 proposal. Nevertheless, Herschman began work. When Herschman exceeded the number of hours as set forth in the June 29 proposal in performing its duties, the parties attempted to come to an agreement on the reasonable value of Herschman’s services. When they were unable to do so, Herschman filed suit. The matter proceeded to trial, and the trial court entered judgment in favor of Herschman.
On appeal, Ringco argued that the parties never agreed to Herschman’s June 29 proposal and, therefore, no written contract between the parties existed. The court disagreed and found that the “terms of the final agreement were reflected in the June 29, 1992 proposal,” reasoning that “conduct sufficient to show agreement, including performance, is a reasonable mode of acceptance” of an offer.
Applying the facts of Jatsek to the Herschman case, the appeals court held that by commencing work after having received a copy of the subcontract, the subcontractor consented to the written subcontract. Furthermore, since the arbitration provision was not one of the clauses the subcontractor attempted to modify, the agreement to arbitrate is enforceable.
This rationale is consistent with the decisions of other courts. When a contractor commences work after receiving a written agreement, it is deemed to have consented to the terms of the agreement. However, this case would have been more complicated had the subcontractor objected to the subcontract language before beginning work or if the objections concerned the arbitration provision. The best practice for both prime and subcontractors is to insist on fully executed contract documents before either party goes to work.