Have you ever had a contract delivered to you that you haven’t signed because you felt it was unjust? Perhaps the terms were not favorable? But then because you needed the work done quickly, you chose to move forward with the services? It happens often in the consumer and business context. It is the way business gets done…but think again.
On April 13, 2007, the Alabama Supreme Court issued a broad opinion in Elizabeth Homes v. Cato on the interpretation and enforceability of contracts. The issue in the case was the enforceability of an arbitration clause. Commentators will view this case as an arbitration opinion. However, I think the portion of the opinion regarding contractual interpretation is significant and deserves attention.
In this situation, a consumer bought a home and had a construction company build a home. A contract was present, but no evidence of a signed contract was introduced. Instead, the contract contained a ‘performance equals acceptance’ clause. These performance equal acceptance clauses are becoming more common in contractual language. Here is a recent term that I found in a contract I reviewed last month:
Contractor agrees and acknowledges that…this Agreement shall be enforceable against Contractor without regard to whether or not Contractor has executed and delivered this document to Company.
The Alabama Supreme Court upheld the validity of this type of contract and the arbitration clause within the agreement. Here’s what the Alabama Supreme Court said
Because the Catos presented no evidence showing that Elizabeth Homes constructed the house pursuant to some other agreement or contract, whether written or oral, the Catos failed to meet their burden in showing that the arbitration provision in the purchase agreement does not apply.
Now, I do believe that performance can equal acceptance. If the homeowner attempts to get out of the contract simply because they did not have a signed contract, then neither the laws of contracts nor the laws of equity should allow such a party to escape performance (i.e. payment). However, in this situation we are examining a single clause in the contract that was not signed and allowing the enforceability of that clause.
This is a broad and sweeping opinion on the enforceability of contracts. What if the contract has onerous warranty clauses. What is that clause placed patently unfair obligations on the homeowner? What if the contract was allegedly delivered but never reached its intended designee? That opinion suggests you can enforce terms regardless of the negotiation.
An argument can be made that the homeowner should have buttoned down the contract. I agree with that to an extent, but with the use of increasingly complex form contracts, the onus of negotiation that the Supreme Court is putting on parties is going to be a detriment business.
I would hope that the courts develop more clarity on the enforceability of these clauses. I think they should be the exception and not the rule, and strict criteria should apply with respect to notice, fairness, and bargaining position before such a clause is enforced. However this law is flushed out. Ultimately, I think the best advice is to be sure that you have your contracts signed and are content with the agreements in place. While legal mumbo jumbo may complicate business, the Alabama Supreme Court is taking certainly taken a broad scope of enforceability.While businesses may rejoice over this opinion, my experience with businesses is that they have a tendency to get things done over ironing out their contract. This makes me believe that this opinion is more pro-lawyer than pro-business.
Mike Goodrich, Goodrich Law Firm, LLC