Financial Obligation Can Exist Even with Unsigned Contract
By John S. Mrowiec

Participants in the construction industry often dispute an obligation to make payment.
Frequently, one participant will say "We didn't sign the contract." Under that circumstance, how does one determine whether any rights, remedies or obligations exist and, if so, what they are?

One such dispute was recently decided by a Wisconsin appeals court in Federal Insurance Co. v. Grunau Project Development, Inc., 2006 Wis. App. LEXIS 486 (Dist. One, June 6, 2006).

Renovating a Bottling Plant The Brewery Works Inc. owns most of Schlitz Park in Milwaukee. The owner wanted to renovate an old bottling house that had been used as commercial office space by one tenant for use by a new tenant.

The owner hired an architect, and the architect, in turn, contracted with a structural engineer.

The owner-architect relationship was based on a heavily negotiated American Institute of Architects Standard Form Agreement. The owner made many revisions to the standard form but never changed the owner's obligations to provide builder's risk insurance with a waiver of the insurer's subrogation rights.

The owner also hired Grunau Project Development Inc. as general contractor and authorized the contractor, without restriction, to hire subcontractors. The contractor prepared the American Institute of Architects A111 Standard Form of Agreement and A201 General Conditions of the Contract, dated them June 1, 2001, and signed and delivered them to the owner.

The owner did not sign the contract but did not object to it either. The A201 General Conditions required the owner to procure builder's risk insurance (or allow contractor to purchase with change order if owner does not) with waiver of subrogation rights.

The owner had worked with the contractor on other projects. Commonly, the owner allowed work to progress without a signed contract.

The contractor signed subcontracts with various subcontractors. The subcontracts contained waiver of subrogation clauses and referenced owner's obligation to procure builder's risk insurance. The subcontract also incorporated the prime contract and stated it was available for the subcontractors' inspection.

Work commenced June 2001 for a completion in December of the same year. The contractor submitted monthly payment applications on AIA forms, and the owner made the requested progress payments. The owner signed change orders employing AIA forms that referred to the Owner-Contractor agreement.

Nearly $1 Million in Damage On Sept. 29, 2001, a load-bearing wall was demolished, leading to a partial collapse of the building causing $900,000 in damage. A damage claim was submitted to the owner's builder's risk insurer, Federal Insurance Co., who paid the claim.

During the adjustment of the builder's risk claim, the insurer submitted a statement for the owner's signature, and the owner signed the statement.

It said: "at no time did" owner "execute a written agreement, or come to a meeting of the minds" with the contractor "concerning the terms and conditions for the renovation and remodeling work to be performed at this location except that [contractor] would perform and be paid for the work" Grunau Project Development, 2006 Wis. App. LEXIS 486 * 6-7.

The owner did not disclose the signing of the statement, and work progressed.
Ultimately, subcontractors signed subcontract change orders compromising certain extra work and backcharges.

Eventually, the insurer and owner sued the contractor, the structural engineer and two subcontractors for subrogation for the amount paid by the insurer. After discovery, the defendants moved for summary judgment arguing that the relevant contracts contained waivers of subrogation.

Oral Contract Contention The owner and insurer submitted the affidavit of the owner's treasurer. The owner's affidavit contended there was merely an oral contract which did not contain a waiver of subrogation.

The trial court held an evidentiary hearing. The trial court first struck the owner's affidavit as a "sham."

It held that there was a contract, even though not signed, adopted by the parties which contained the waiver of subrogation. The trial court relied heavily on the signed change orders which referred to the specific written contract. The trial court entered summary judgment against the insurer and owner.

The insurer and owner appealed, and the appellate court affirmed.

The appellate court first set forth the governing legal principle: "It is quite fundamental that parties may become bound by the terms of a contract even though they do not sign it, where their intention to do so is otherwise indicated" Grunau Project Development, 2006 Wis. App. LEXIS 486 * 15 quoting Chudnow Constr. Corp. v. Commercial Distribution Corp., 48 Wis. 2d 653, 657, 180 N.W.2d 697 (1970).

The Grunau Project Development court found that the "evidence in the record is overwhelming" and "there is only one reasonable inference" that the owner "by its conduct, clearly intended that this project would be governed by the standard industry contracts, particularly the A111 and A201, which sat for weeks unsigned on [owner's] desk. The fact that [owner] never actually signed the document does not render the contract ineffective or unenforceable" Grunau Project Development, 2006 Wis. App. LEXIS 486, * 14 citing Zeige Distribution Co. v. All Kitchens, Inc., 63 F.3d 609, 612 (7th Cir. 1995).

The owner's "subsequent, subjective, self-serving statements" would not override owner's conduct on this project and practices on other projects with this contractor that the standard AIA language should govern (Grunau Project Development, 2006 Wis. App. LEXIS 486, * 18.)

The Grunau Project Development decision is consistent with court decisions throughout our readership area holding that an unsigned written contract can bind parties by their performance in accordance with the writing.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.