When Are Oral Construction Contracts Enforceable?
Most people have heard the old joke that, “oral agreements aren’t worth the paper they’re not written on.” But the fact is that we make oral commitments and “handshake deals” to each other all the time. Sometimes those commitments involve large sums of money and complicated commitments involving construction projects without a written contract. And even parties have a written contract they orally change those contracts (e.g. change orders, deviations from plans, scope changes). If a dispute should arise what happens?
There’s No Written Contract
Many people assume that if there’s is no written contract, there’s no contract. But that assumption is not correct. If there is an offer –“I will pay you to build me a patio.” and an acceptance: “Sure, I’ll do it!” Then there is an enforceable contract.
The problem is that oral contracts are susceptible to “he said, she said” disputes. For that reason, it is certainly advisable to use written and proposals and written contracts. (Note: some types of contracts must be in writing but that is a different article). Despite the challenges of oral contracts, they can be proven and enforced by a variety of different means–the credibility of witnesses, past interactions, and documents as the case may be.
Construction Contracts Provisions
Most construction contracts will contain two important provisions to prevent parties from later claiming that the deal had changed or was something different than was contained in the writing.
The first important provision is called an “integration clause,” “merger clause,” or an “entire agreement provision.” A typical integration clause looks like this:
“This Agreement contains the entire agreement between the Parties to this Agreement relating to the settlement and transactions contemplated hereby, and supersedes any and all prior agreements, understandings, representations, and statements between the Parties, whether oral or written. The Parties are entering into this Agreement based solely on the representations and warranties herein and not based on any promises, representations, and/or warranties not found herein.”
“This Agreement may not be amended, modified, changed or extended except by a written instrument signed by both parties.”
The purpose and intent of this provision in construction contracts is to prevent parties from claiming non-written change orders or backcharges changed the deal.
Oral Modification of a No Oral Modification Provision.
One of the cruel ironies in construction law is that even a contract containing a “no oral modification” provision can be orally modified in some circumstances. Wisconsin law provides that even if the contract prohibits the oral modification, contracts still may be modified by the parties’ conduct.
The following (simplistic) examples demonstrate when contracts may be orally modified and when they may not be modified:
Scenario 1: The general contractor and the subcontractor execute 5 written change orders. The subcontractor then claims that he got oral approval to performed additional work from the general contractor’s project manager but did not obtain a written change order.
Likely outcome: The no oral modification provision is enforced and the subcontractor does not receive payment for the additional work.
Scenario 2: General contractor and subcontractor execute 3 written change orders subcontractor performs additional work on two later occasions and invoices the general contractor. The general contractor pays the subcontractor on all occasions. The subcontractor then claims that he performed additional work that was authorized by the general contractor’s project manager but did not obtain a written change order.
Likely Outcome: No Oral modification provision is likely not enforced. Based on the Parties’ conduct, the trier of fact hears the evidence and determine whether the parties’ agreed that the additional work was part of the deal.
The takeaway from these examples is that if you want your contract to be enforceable, you must follow the contract in all circumstances.
Oral contracts can be enforceable and lead to big disputes. Smart businesses practices require contractors should have written contracts that address the potential future risks and possibilities that may be encountered during the performance of the contract. But more importantly, once those contracts are drawn up and executed, the parties must actually follow their written deal.