Legal Formalities in Contracts Can Be Perilous Pitfalls

In the hurly-burly world of construction, it’s not uncommon for parties to cut corners in their haste to enter into contracts. Although some legal formalities are less important than they once were, parties should not disregard legal formalities generally in favor of expediting their projects. Some formalities are legally necessary, while others may reduce the likelihood of unintended consequences and increased legal fees if a dispute arises. Following are several categories of legal formalities that should be observed in preparing construction and design contracts.

Correct Legal Entity Name
One of the most common mistakes parties make is not using the correct entity name or otherwise not entering into a contract with the correct party. Usually, the mistake is minor, such as inserting (or omitting) a comma before the “LLC” or “Inc.” However, occasionally the error is more serious.

In a recent arbitration, we represented a party that was contracted to provide design services to a project owner. The contract listed a nonexistent limited liability company as the “owner” and was signed by its “manager.” Because the named entity did not exist and the manager did, we sued the manager for unpaid invoices. To the manager’s surprise, the arbitrator held him personally liable for the debt of the nonexistent entity. This result and the significant legal fees that were expended by both sides might have been avoided if the parties had checked with the Oregon Secretary of State. In doing so, they likely would have discovered that the named entity did not exist and, as a result, could have used a proper entity name when they entered into the contract. Although this is an extreme example, it illustrates the importance of determining whether an entity name provided by a party actually exists and using the correct entity name.

Correct Signature Block
Depending on the type of entity (partnership, LLC, corporation, etc.), there are commonly accepted signature block formats that should be used. The primary purpose behind an accepted signature block is to clearly set out the chain of legal authority that permits an individual to sign on behalf of a contracting entity. When accepted formats are not used, there can be confusion—or worse, disputes—about which individual or entity entered into the contract and the authority of the individual signing the contract.

Document Execution
Although exceptions exist, certain legal documents must be signed to be effective. This rarely is an issue when the value of the contract is significant. More commonly, one party will issue a purchase order, change order, or contract amendment and fail to require the other party to sign it. Later, if a dispute arises, the nonsigning party may argue that the document is not enforceable. If the stakes are high enough, the issuing party may incur significant legal fees attempting to establish that, despite the other party’s failure to sign, there was a binding agreement. These disputes can easily be avoided by diligently insisting that the other party return signed documents.

Proper Signing Authority
Even if a legal document has been signed by both parties, there can be questions about signing authority and whether the person has sufficient authority to bind an entity on whose behalf the person is signing. Generally, if a document is signed by the president of a corporation or the manager of a limited liability company, there is at least apparent authority to sign and bind the entity, although for a significant transaction you may want to confirm that authority. On the other hand, a person signing as an authorized signer or in a lower-level or undefined capacity may or may not have been granted authority to sign. If there is any question about the authority of the individual signing the contract, you can request that the other party provide documents establishing the signer has power of attorney or has otherwise been delegated the legal authority to execute documents and bind the contracting party.

Attach Contract Exhibits
Construction and design contracts frequently include one or more exhibits, such as written descriptions of the scope of work, lists of drawings and specifications, and construction schedules. A complicating factor is that the content of these exhibit documents is often in flux both before and after the contract is executed. For example, a contractor may issue several construction schedules leading up to the contract’s execution. As a result, unless these exhibits are physically attached to the contract or referenced in sufficient detail, it may be difficult (and expensive) to later prove which of several versions of a document was incorporated into the contract.

Delivery
Even assuming that the above formalities have been adhered to, a fully executed contract should be delivered to the other party. We typically recommend the parties execute two or more duplicate original copies of the contract (including exhibits and other attachments). Once the contract has been signed by both parties, each retains a fully executed original.

Although courts and arbitrators are inclined to enforce contracts despite a party’s failure to strictly comply with legal formalities, disputes about them are often costly and may lead to unpredictable outcomes. Accordingly, parties to construction and design contracts would do well to observe the above legal formalities when entering into their contracts.

“Legal Formalities in Contracts Can Be Perilous Pitfalls” was originally published on October 17, 2014, by the Daily Journal of Commerce.