26.3 Formation of Subcontracts and Purchase Orders

• Library: Virginia Construction Law Deskbook (Virginia CLE) (2019 Ed.)

26.3 FORMATION OF SUBCONTRACTS AND PURCHASE ORDERS

26.301 Fundamental Elements of Contract Formation. Under Virginia law, an enforceable contract requires competent parties, a legal subject matter, valuable consideration, and mutual assent. ¹⁰²

A. Competent Parties. In the construction context, competency of a party typically relates to the authority of the person entering into or administering the contract at issue. For example, as between public and private owners and their general contractors, Virginia public bodies are not responsible for the unauthorized acts of their employees in forming and administering public contracts. ¹⁰³ In contrast, a private project owner can be liable for the unauthorized acts of its employees and representatives in forming or administering the private project contract. ¹⁰⁴

Because subcontractors and lower-tier suppliers do not contract directly with public owners, the nonbinding effect of acts by unauthorized public employees is typically not an issue for them. Nonetheless, the issue of authority and competency of the persons acting in the formation and administration of a subcontract or purchase order should always be considered.

B. Legal Subject of the Subcontract or Purchase Order. In Virginia, a contract becomes the law of the case between the parties unless the contract is repugnant to some rule of law or public policy. ¹⁰⁵

[Page 1304]

C. Mutual Assent by Parties. Mutual assent of the parties or "meeting of the minds" on all material terms is an essential element of a contract. ¹⁰⁶

Virginia courts "ascertain whether a party assented to the terms of a contract from that party's words or actions, not from his or her unexpressed state of mind." ¹⁰⁷ In Richmond Engineering & Manufacturing Corp. v. Loth, ¹⁰⁸ the Virginia Supreme Court specifically addressed the elements of mutual assent and valuable consideration. In Richmond Engineering, the prime contractor was unable to complete the project or pay its subcontractors for work and materials already provided. On behalf of the project owner, the architect issued a letter to the subcontractors and materialmen to induce their continued performance, stating that all money due would be paid directly by the owner. The subcontractors and materialmen complied with the letter and continued performance thereafter. When it was discovered that the general contractor had diverted money the owner had previously paid, the owner argued that it had not agreed to pay all sums due but only the balance due under the prime contract. The Virginia Supreme Court disagreed with the owner and found that there was mutual assent to payments due the subcontractors and materialmen:

Therefore, whether we regard the promise contained in the letter as within or without the statute of frauds, the conduct of the promisees [subcontractors and materialmen] in furnishing the material and labor in accordance with the terms of and with intent to accept the promise, constituted the acceptance of the promise, and consummated the completed contracts between the defendant [owner] and the promisees, respectively, who thus acted. ¹⁰⁹

D. Valuable Consideration. A fourth fundamental element in contract formation is valuable consideration. However, this principle will not

[Page 1305]

necessarily be applied by Virginia courts to relieve a contracting party because it struck a bad bargain. ¹¹⁰

In Richmond Engineering & Manufacturing Corp. v. Loth, ¹¹¹ the project owner's promise to pay the debt of its prime contractor to subcontractors and suppliers in exchange for the subcontractors' and materialmen's continued performance constituted new and valuable consideration. ¹¹² In other Virginia cases, giving up or promising to give up prosecution of a wellfounded or doubtful claim, sometimes referred to as forbearance, is valuable consideration. ¹¹³ In contrast, giving up a worthless or invalid claim will not be considered valuable consideration. ¹¹⁴ In Hooff v. Paine, ¹¹⁵ the general contractor had failed to pay the two plaintiff subcontractors. The subcontractors notified the defendant project owner that unless he gave the subcontractors a negotiable note for the general contractor's debt, the subcontractors would record a mechanic's lien on the property. The project owner erroneously thought the subcontractors had a right to file a mechanic's lien and therefore wrote a letter to the subcontractors agreeing to execute the note to prevent them from filing the lien. At the time of giving the letter to the subcontractors, however, the project owner owed nothing to the general contractor and the subcontractors had no right under Virginia law to file a mechanics' lien. Upon subsequently learning that the subcontractors did not have mechanics' lien rights, the owner demanded the note back. Importantly, all materials had been supplied before the owner's giving of the negotiable note. When a subcontractor initiated suit on the note, the project owner defended on the basis of lack of consideration. The Virginia Supreme Court ruled in favor of the project owner, stating:

In this case the note sued upon represented a debt which the defendants [owners] were under no obligation to pay. It was not their debt and the execution and delivery of the note did not cause any detriment to the plaintiffs [subcontractors]. They simply agreed to waive

[Page 1306]

their right to file a mechanic's lien, a right which they did not have. ¹¹⁶

26.302 Issues in the Bidding and Quoting Process.

A. Bids, Quotes, and Acceptance. Subcontractors' bids and sellers' quotes are offers to perform subject to the terms of the offer, which upon acceptance will typically form a contract ¹¹⁷ unless terminated or voided by operation of law. A bid or quote can be fixed in time for acceptance, ¹¹⁸ and the power to create a contract by accepting an offer terminates at the time specified in the offer. ¹¹⁹ If no time for acceptance is set, then acceptance must be within a reasonable time or the offer will be deemed to have expired without notice of withdrawal. ¹²⁰ What constitutes a reasonable time for acceptance is a question of fact, taking into account the nature of the contract, the work to be performed, the materials to be supplied, weather conditions, coordination of the work to be done, and usage and custom of trade. ¹²¹ A federal court in Virginia, considering the issue of reasonable time of acceptance, found that the custom in the trade ". . . requires the successful bidder, i.e., the prime contractor, to notify the successful or selected subcontractor whose bid he wishes to accept within a period of 30 days after the prime contractor has been advised of his acceptance of his bid, unless a different time was specified in the bid." ¹²²

Acceptance may be by words or conduct, ¹²³ but the acceptance must be communicated to the offeror. ¹²⁴ In the absence of circumstances from

[Page 1307]

which an acceptance may be implied, an acceptance will not be presumed from a mere failure to decline a proposal. ¹²⁵ In Piland Corp. v. REA Construction Co., ¹²⁶ the court held that a general contractor's use of a subcontractor's bid when bidding on a prime contract did not constitute acceptance of the subcontractor's bid and imposed no obligation on the prime contractor to accept the subcontractor's bid. ¹²⁷

In Showcase Woodworking, Ltd. v. Fluor Daniel, Inc., ¹²⁸ the plaintiff subcontractor contended that the contractor's letter of intent to award to the subcontractor a subcontract for certain millwork constituted a completed contract. The court rejected the subcontractor's contention based on the terms of the letter of intent:

By its clear language, the letter states that the parties intend to contract, not that they have entered into a binding contract. Once again, an intent to enter into a contract falls short of a binding agreement. It is simply a proposal to contract in the future. ¹²⁹

There is a noteworthy difference between Virginia common law and Virginia's Uniform Commercial Code on the circumstances of acceptance sufficient to form a contract. Under the common law, which applies to subcontracts for construction services, an acceptance of an offer or bid must mirror the terms of the offer or bid to be a valid acceptance; otherwise there is no meeting of the minds necessary to form a contract. ¹³⁰ In contrast, under Virginia's Uniform Commercial Code, an acceptance that does not mirror the

[Page 1308]

offer may be sufficient to create a binding contract. ¹³¹ For example, section 8.2-206 of Virginia's Uniform Commercial Code provides, in part:

Unless otherwise unambiguously indicated by the language or circumstances . . . an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.

Section 8.2-207 further provides:

(1)	A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2)	The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
	(a)	the offer expressly limits acceptance to the terms of the offer;
	(b)	they materially alter it; or
	(c)	notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3)	Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under

...