HOW AN ENFORCEABLE CONSTRUCTION

The tender process, memorandums of understanding, and letters of intent

How an enforceable construction contract can (unexpectedly) arise

By Tyler Galbraith, Jenkins Marzban Logan LLP

Abinding contract requires a meeting of the minds. Determining whether there has been a true meeting of the minds is not a question of merely identifying the subjective beliefs or expectations of the parties. The test for determining whether the parties formed the necessary consensus is an objective one, requiring a consideration of the outward expressions of the intent of the parties. In the construction context, the fact that the parties have agreed to work together on a building project is not, in and of itself, enough to create a 1/4 Page Vertical Ad - 3.375” x 4.625” legally enforceable contract; however, there is ample authority for

When it comes to complex construction issues, it helps to have experience on your side.

Jenkins Marzban Logan LLP, serving VICA members since 1994

Suite 900 Nelson Square 808 Nelson Street Vancouver, BC V6Z 2H2

604 681 6564

Tyler Galbraith 604 895 3159 tgalbraith@jml.ca

jml.ca

the proposition once there is agreement as to the nature of the construction, the timeline for completion, and the price there is an enforceable agreement. Accordingly, where each of these requirements exist, a construction contract may be formed unbeknownst to the parties and irrespective of whether a formal agreement has been signed.

A construction contract may be formed by operation of the tender process itself. Under the law of tender, a call for tenders constitutes an offer by the owner to consider the bids it receives and to enter into a construction contract to complete the work where a bid is accepted. A bidder accepts that offer by submitting a bid that complies with the requirements set out in the tender documents. However, a bid also constitutes an offer by a bidder to enter into Contract B (i.e. the construction contract) with the owner. Where a bid is accepted by an owner Contract B arises, the terms and conditions of which are contained the bid documents. In these circumstances, and subject to the terms and conditions of the bid documents, once the owner accepts a bid, Contract B is formed between the parties without the necessity of executing a formal agreement.

After bids have been received and reviewed, it is not uncommon for a bidder to receive a letter of intent from an owner advising that the bidder was successful, and the owner intends to enter into a construction contract with the bidder. The letter of intent may also provide the agreed price, scope of work and schedule, contain directions for the successful bidder to proceed with planning, mobilization and procurement, and request certain documentation like insurance certificates and WorkSafe BC clearance letters. Depending on its wording, the letter of intent may constitute acceptance of a bid thereby forming Contract B under tender law or may form the basis of a construction contract itself where it contains agreement as to the nature of the construction, the timeline for completion, and the price. This is true even where the letter of intent provides for the subsequent issuance of a construction contract.

Similarly, parties may enter into a memorandum of understanding setting out their understanding regarding the pursuit of

a particular project or the performance of certain work. While “an agreement to agree” is not an enforceable contract, and neither is a list of guiding principles to be negotiated into specific rights and obligations, if the parties have agreed on all essential terms (i.e. the nature of the construction, the timeline for completion, and the price) and merely intend to incorporate those terms into a future formal agreement, there may be an enforceable agreement. On this point, the fact that a memorandum of understanding (or letter of intent) contemplates the execution of a subsequent construction contract is not determinative of the existence or absence of a binding construction contract. The question is whether the execution of a future construction contract is a condition precedent to there being an enforceable contract or merely an expression of the parties’ intention regarding how the transaction will be carried out.

What is clear is that the mutual assent of the parties essential to the formation of a construction contract is determined objectively, not based on the subjective belief or understanding of the parties. As can be imagined, there are significant legal and practical consequences that flow from the subjectively unintended formation of a construction contract for all involved. It is therefore imperative that the parties express themselves clearly and unambiguously in their tender documents, letters of intent and memorandums of understanding in order to reduce or eliminate the risk of whether or not an enforceable construction contract has been formed. n

Wherever you may need a steel building erected we will be there

Cell: 1–604–219–5515 | bruce@whatasteelerector.com whatasteelerector.com

Self framed Pre-engineered Structural

A Leaky Roof Lets In More Than Just Rain

604-882-9734 rcabc.org