Risk Management Articles

Verbal Agreements: Is There a Contract?
By Werner Sabo, FAIA, CSI and James K. Zahn, FAIA, CSI

A common issue in law revolves around the existence of a contract between parties and what it may entail. Consider this common scenario: An architect meets with a potential client, and submits an American Institute of Architects (AIA) contract to be signed by the client. The form is filled out based on prior discussions between the two, and the client tells the architect to proceed with the work yet, he never bothers to sign and return the written contract.

If litigation starts, you need to know whether the unsigned document is the contract or not.

This is a problem normally seen on smaller projects, whereas the typical problem on larger projects involves changes to the contract. A written contract is the norm on larger projects, but once changes start to occur, the parties can get sloppy about modifying the contract. A properly signed change order modifies the contract, but what about a change order request by the contractor - that is not signed by the owner - for work he has already done? This is where attorneys really earn money.

Contractors are not immune to the unsigned contract problem. For instance, in Mendelson v. Ben A. Borenstein & Co., (608 N.E.2d 198 [Ill.App. 1992]), the owner entered into a verbal contract with the contractor for construction of a strip shopping center. Afterwards, the parties drafted a written contract to formalize the terms of their verbal agreement, which was never signed. In this case, the trial court found that the written contract accurately set forth all of the terms of the parties' verbal agreement. The verbal agreement was the actual contract, whose terms could be found by reading the written (and unsigned) agreement. This makes sense and provides some easy answers, but what happens when the dispute is whether the written agreement spells out the verbal agreement between parties?

Where there is no signed contract, the issues are often difficult to straighten out. Typically, the person that fails to sign a proposed agreement will argue he did not sign the document because it was not an accurate reflection of the agreement. Should the court accept this argument, then the question becomes, What was the verbal agreement? This is difficult, if not impossible, to uncover. By their very nature, verbal agreements will not cover most of the terms of a typical written contract. For example, it is unlikely parties will cover issues such as arbitration or copyright in their discussions, let alone the precise duties to be performed by a contractor or architect-yet, these are the types of issues the courts address in most lawsuits.

Clarity is key

Clarity of contract specifically defines what each party is to do. These duties can be extremely important, not only in litigation between parties, but in litigation with others. Consider a situation where a pedestrian trips on the sidewalk. The architect and general contractor (and others) will probably be sued. As the architect or contractor, one way of defending the case is to demonstrate there was no contractual duty regarding the sidewalk. If the court is convinced there was no duty to design the sidewalk, the architect will probably get out of the lawsuit early on. With a verbal contract, on the other hand, that is highly unlikely. The same is true for a contractor. This demonstrates the importance of a written contract even in situations where you completely trust the other party, because the contract may affect what happens with strangers to the contract.

Safety is normally covered in written contracts, but not in verbal agreements. When a worker is injured, the written contract will guide the court in determining who is responsible for safety. In this case, a written contract is invaluable for the defending architect.

In a more extreme situation, consider a verbal agreement between an architect and owner to design a house. What happens when the owner does not want to pay the architect? The answer is simple: all he has to do is find something about the house that he can raise as a breach of contract by the architect. For example, the owner has difficulty parking his large sports utility vehicle in the third stall of his three-car garage. Was the architect supposed to design a three-car garage, or not? Was each space supposed to accommodate average cars or trucks, or oversized vehicles? The possibilities are endless. With no written contract or other clear evidence of the contract, the architect will have problems with this case.

Another variation on this issue is where an existing written agreement is subjected to verbal modifications. Even though the written contract may prohibit such modifications, as with his provision in AIA Document B 141 1997, Standard Form of Agreement Between Owner and Architect: "1.4.1 ... This Agreement may be amended only by written instrument signed by both Owner and Architect" you cannot depend on it. The law in virtually every jurisdiction permits parties to verbally modify contracts, regardless of provisions to the contrary.

The major problem with these modifications, of course, is proving what the modifications were, as each party will likely derive their own interpretation. Verbal modifications should always be avoided.

Some contracts are in writing while others are verbal. Business relationships are contractual relationships, and if the relationship is important, ensure all crucial terms are clearly spelled out in a written, signed document. If you send out a proposal, do not do work until you get the signed copy back.

Werner Sabo, Esq., CSI, FAIA, is an architect, attorney, and partner with the Chicago law firm of Sabo & Zahn.

James K. Zahn, Esq., CSI, FAIA, is also an architect, attorney, and partner with Sabo & Zahn, as well as a member of the AIA National Documents Committee.

Reprinted with permission of The Construction Specifications Institute, 99 Canal Center Plaza, Suite 300, Alexandria, VA 22314, from The Construction Specifier (December 2001).

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