Const 150 Chapter 3 Questions and Answers

Chapter 3

1. What general rule is followed when one party to a contract wants to cancel the contract
even though the second party has already performed a portion of or all the obligations
under the contract?

Answer: As a general rule, when one party to a contract that is not fully executory (at least one
party has performed a portion of the contract obligations) wishes to cancel the contract, it is
barred from doing so. This is based on the premise that this party has already received some
benefits from the contract and must also honor its obligation to perform.

2. Give a construction example of a unilateral contract. Give a construction example of a

bilateral or mutual contract.

Answer: (Unilateral Contract Example) Suppose a contractor was excavating a basement for
a new house. A neighbor inquired about what the contractor was being paid to do the
excavation work. Upon being told that the rate was $60 per hour, the neighbor approached
the contractor and said, “I need some excavation work done in the drainage ditch along my
driveway. I won’t be here for the next two days, but if you can do the job, I’ll pay you $60
an hour for your time to shape the ditch like the one next to the driveway across the street.”
No contract exists unless the contractor actually performs the work. Once the work is
performed, a unilateral contract has been created and the neighbor will be obligated to pay
for the work done.

(Bilateral or Mutual Contract Example) A neighbor saw a contractor excavating a

basement next door and asked the contractor about the possibility of shaping a drainage ditch
next to her driveway. The contractor told her that he charged $60 an hour for his equipment
time. She then asked what the total cost would be to shape the drainage ditch to the
specifications that she described. He told her it would take about 4 to 5 hours to do the job
right. She then asked him, “Would you accept $250 to shape the drainage ditch as I have
described it to you.” To this, the contractor responded, “Yes, I would. I will be finished with
the basement work later this morning. I will then work on your drainage ditch and complete
it as you have described. I’ll have it finished by dark.” Note that the nature of the work was
similar to the previous example. Had the contractor not responded to the neighbor, he would
have had no obligation to perform the work. However, the contractor did respond, and this
effectively made it a mutual contract.

3. Give an example of a contract in which the parties to the contract are bound jointly.
Give an example of a contract in which the parties are bound severally.

Answer: (Example Where Parties are Bound Jointly) Several contractors were intending to
bid on a particular pipelaying project in which the subsurface conditions were not accurately
described in the bid documents. Four of the contractors agreed that a hydraulic excavator
(backhoe) would be hired by them to dig some test holes along the piping route. They further
agreed that they would equally divide the cost of the excavator. It was agreed that a
contractor, who had an equipment yard nearby, would supply the backhoe to dig the test
holes. The hourly rate for the digging was acceptable to all four contractors. In the
meantime, one of the four contractors went bankrupt and was unable to make payment.
Under the principle of joint contracts, the other three contractors would be expected to
provide restitution to the firm providing the backhoe. The contractors are bound jointly as no
specific benefit was received by one and not the others. Even if one of the four contractors
 Const 150 Chapter 3 Questions and Answers
had been the low bidder on the contract, the benefit of the information obtained from the
digging operation is shared equally by all.

(Example Where Parties are Bound Severally) A vinyl siding company met with six
homeowners in a neighborhood to describe their product. The company made a special offer
to the homeowners stating that a 15 percent discount would be offered to them if each of
them agreed to have vinyl siding installed on their homes. This was agreeable to all and
vinyl siding was installed on the six houses. When one of the homeowners failed to pay, the
siding company requested the remaining five homeowners to cover the balance. They all
refused, contending that they were bound severally. In fact, the benefit received by each was
truly identifiable and unique to each house. The charges for the vinyl siding were not
identical for each of the homeowners as some houses were larger than others and there was a
mixture of one-story and two-story houses. The neighbors were thus bound severally.

4. Discuss bilateral and unilateral contracts in relation to express and implied contracts.

Answer: Bilateral contracts can be express or implied. Unilateral contracts can be express or
implied. The examples given in the response to question 2 were both express in their form,
however, the examples could have been altered to make each an implied contract. Note that
with bilateral contracts an implied contract exists if either the offer or the acceptance (or
both) is inferred. With unilateral contracts, only the offer must be inferred as the acceptance
will be by performance (this cannot be inferred). Suppose a man walks up to a garage sale
and notices a book that is for sale. The book is marked $5. The man picks up the book,
reaches into his pocket, and without saying a word, hands the attendant $4. The attendant
sees that this is less than the requested $5 but nonetheless takes the $4 as payment. The man
leaves with his book. Essentially, the man rejected the express offer of $5 for the book and
responded with an implied counteroffer of $4, which was accepted. This might be regarded
as an implied mutual agreement. Others might argue that it is an implied unilateral
agreement as the acceptance was created in the act of taking the $4. In most cases, however,
the agreement would be considered to be an implied mutual agreement.

5. A drywall subcontractor named Jack Munster performed work for Ace Contractors, a
general contractor. The value of the work was $1,500. When he did not receive
payment, Munster sent a letter threatening a lawsuit if prompt payment was not made.
Soon thereafter, Ace Contractors sent a load of drywall to Munster’s business address.
This material, which was labeled as being in fulfillment of the debt, was accepted
without protest. Six months later Munster sued Ace for $600, the balance that he had
determined remained on the debt. Discuss the strength of Munster’s case from the
standpoint of consideration.

Answer: By not protesting when the drywall materials were delivered with the clear label that
this was for the payment of the debt, Munster essentially gave up any future opportunity to
collect any additional funds. The courts are reluctant to try to assess the value of materials.
If the label stated, “payment in full”, acceptance without protest will not permit any
subsequent collection on the debt. The drywall materials are regarded as full consideration.
Checks (with the amount being less that the true indebtedness) are occasionally sent to
creditors with the indication that the amount constitutes “payment in full”. Will acceptance
of the check bar any future recovery of the balance? State laws vary on this point. In many
states, an appropriate endorsement placed on the check will permit the creditor to accept the
check while retaining the legal rights to the balance due.
 Const 150 Chapter 3 Questions and Answers
6. Give an example of an implied contract in which estoppel will prevent one party from
canceling the contract.

Answer: In a formal agreement, John Wills leased his pasture (for cattle grazing) to a farmer,
Helmut Schriner, for $10,000 a year, payable in advance on January 1 of each year. In the
agreement, a five-year lease was drafted which stated that either party could cancel the lease,
but that the cancellation would not be effective until 12 months after the cancellation notice
was received by the other party. After the five years had passed, Schriner sent a check for
$10,000 to Wills for the lease in the sixth year. The check was deposited by Wills. This was
repeated for four more years. At the beginning of the next year, Schriner sent Wills a check
for $10,000, which he deposited. Then, at the first of March, Wills sent Schriner a letter
notifying him that he would have to remove his cattle from his pasture by the end of March.
He stated in the letter that the lease agreement had long expired and that he had included a
check for $7,500 to cover the unused nine-month portion of the lease. According to estoppel,
Schriner cannot be forced off the property on such short notice. Since Wills deposited the
$10,000 check each year, even after the formal lease period had ended, he essentially
acknowledged that the lease was still in effect. This lease included all of the terms of the
original lease, not merely the annual payment of $10,000.

7. Give an example of a practice in bidding that may be contrary to public policy and thus
may constitute invalid grounds to enforce a contract.

Answer: Two contractors (Alpha Company and Beta Company) mutually agreed that on two
upcoming projects to be bid that each would only bid on one project. One project was a
school building on which Alpha agreed to bid and Beta agreed not to bid. The second project
was a courthouse addition on which Beta would be the only bidder with Alpha not being a
bidder. Both firms prepared estimates on their respective projects. Alpha submitted a bid on
the school project but was not the lowest bidder. The next day, bids were opened for the
courthouse project. Beta submitted its bid but discovered that Alpha had also submitted a
bid. Alpha felt compelled to submit a bid when it realized it would not receive the contract
for the school project. Regardless of the rationale, Beta has no recourse to force Alpha to
withdraw its bid. In fact, to disclose that this type of agreement had been made would
subject both firms to charges of collusion, a public offense.

8. Discuss the significance of a bid being an offer rather than an acceptance.

Answer: By regarding a bid as an offer, the owner of a project to be constructed is left with the
control of when a contract is consummated. It would be confusing to regard a bid as
acceptance if several bids were submitted. If a single bid was submitted, this would mean
that the sole bidder had accepted the offer of constructing the project. Instead, bids should be
regarded as offers to construct projects under stated conditions. Bids are a construction
firm’s acceptance of an owner’s request to make an offer to the owner.