Be Wary of “Gentlemen’s Agreements” in Construction

Melissa Dewey BrumbackFor this week’s Guest Post Friday here at Musings, we welcome Melissa Dewey Brumback.  Melissa is a litigation partner at Ragsdale Liggett PLLC in Raleigh, North Carolina where she focuses on construction law issues.  She maintains a blog for construction professionals called  Construction Law in North Carolina.  She can be reached at mbrumback@rl-law.com or on Twitter @melissabrumback.

“He’s an honest guy.”

“I’ve always done business this way.”

“I trust her.”

All those statements may be true.   Relying on handshake agreements (or, the more old-fashioned “gentlemen’s agreements”) is a risky business in the construction field.  Written contracts are crucial to enforcing binding agreements once the dirt begins to turn.  However, a contract is more than a written recital of previously-agreed upon terms.  A contract has the ability to change the terms between the parties, often without one of the parties realizing it.  And, as Chris has previously noted, the [written] Contract is King.

A written contract often contains a “merger clause” (also called an integration clause).  A merger clause is a statement that the contract is a complete statement of the agreement and replaces, or supersedes, prior terms, oral or written representations, or any side agreements. All of those negotiations are deemed merged into the written document, and the written contract has the (rebuttable) presumption that it represents the final agreement between the parties.

An example of such a clause:

This Agreement contains the entire agreement of the parties, and supersedes all prior negotiations, agreements and understandings with respect thereto. This Agreement may only be amended by a written document duly executed by all parties.

The purpose of such a clause  is to ensure that the contract is a complete agreement, and that there will be no claims made later of additional terms or that existed.  The merger clause effectively takes all those side agreements, representations, and statements and says: “If the terms are not in the contract, we don’t care:  they don’t exist.”

While there are certain exceptions to the application of the merger clause (as, for example, when application of the clause would frustrate the parties’ true intentions), as a general rule, such a clause will be enforced.

A party entering into a contract which includes this type of language should make sure that all promises and agreements are actually included in the written contract, as otherwise it may be impossible to enforce those unwritten promises.

A corollary to the rule that “contracts are king” is that Warranty Deeds do just that– warrant that the property being sold is free from all encumbrances other than those listed in the deed.  A warranty deed supersedes any verbal, unwritten “understandings” about the state of the property being conveyed.

In a recent North Carolina case, the state Court of Appeals applied this rule with a harsh result.  In War Eagle, Inc. v. Belair, a corporation had actual notice of a DENR (Dept of Environment and Natural Resources) buffer violation when it purchased a lot on Lake Norman. It thought the violation was minor and would be minimal to fix.   The deed used to convey the property was a Warranty Deed, with no exception for the violation. When the corporation later learned that the violation was more significant than it anticipated, it sued the seller under a breach of warranty deed theory.

The NC Court of Appeals held that the actual knowledge of the violation was not enough to void the covenants contained in the deed.  Quoting an earlier case, the Court stated that acceptance of the prior knowledge argument “would render completely meaningless all of the covenants in defendants’ deed.  If defendants did not mean to be bound by their covenants, they should not have included them in their deed.”  Thus, the sellers were forced to pay for the complete costs to repair the property to DENR standards, even though the buyer was well aware of the DENR buffer violation when he purchased the property from the seller (and presumably paid a lesser price for the property because of the violation).    Harsh justice, indeed!

The moral of the story: never trust anything but a carefully drafted, written contract or deed.  Or, if you prefer, to borrow from President Ronald Reagan, “Trust but verify.”   While courts will sometimes look for equitable remedies in cases where parties acted outside of the written agreement,  never throw yourself on the mercy of the court.  Instead, make sure your contracts and deeds express exactly what the terms are, and the entire and complete understanding between the parties.  After all, it is hard to overthrow the King.

Melissa and I welcome your comments below.  Also, please subscribe to keep up with this and other Guest Post Friday Musings.

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19 Responses to Be Wary of “Gentlemen’s Agreements” in Construction
  1. [...] on over to Construction Law Musings today to read my guest post on why you should never rely on a “gentlemen’s agreement” for a construction project.  Handshakes are well and good, but put it in writing.  Same [...]

  2. Melissa Brumback
    Twitter:
    August 6, 2010 | 10:09 AM

    Thanks Chris for the opportunity to post! I’d be interested in anyone else’s thoughts or comments on my article.
    Melissa Brumback recently posted..Those Pesky “Gentlemen’s Agreements”My Profile

  3. Kathy_a
    August 6, 2010 | 10:22 AM

    I absolutely agree. Working as a project manager for years, I know that if it isn’t in writing, it didn’t happen. And when I send an email and never get a written response back – only on the phone – I know there is a problem!

  4. Christopher G. Hill
    Twitter:
    August 6, 2010 | 11:21 AM

    Great thoughts Kathy. And good to hear from a project manager on the ground
    Christopher G. Hill recently posted..Thoughts of a Solo Construction Lawyer one month inMy Profile

  5. Danielle Humbard
    Twitter:
    August 6, 2010 | 11:34 AM

    This is a great article and it applies regardless of the state a contractor does business in. Sadly, many contractors, especially the smaller ones, are not using contracts at all, or the contracts that they are using are completely worthless!

  6. Christopher G. Hill
    Twitter:
    August 6, 2010 | 1:05 PM

    Thanks for stopping by Danielle

  7. Melissa Brumback
    Twitter:
    August 6, 2010 | 1:20 PM

    Thanks Kathy and Danielle for your comments. Too many people are “penny wise and pound foolish” as the saying goes. Money is tight so they don’t want the expense of a written contract, or fear insulting their client. But as Chris can attest, it is *much* cheapter to have a contract reviewed by a lawyer on the front end than fixing the matter on the backend (much like construction building itself) !
    Melissa Brumback recently posted..Those Pesky “Gentlemen’s Agreements”My Profile

  8. Charlie Russel
    August 8, 2010 | 2:11 PM

    Great post and reminder. Thanks Melissa and Christopher. As the founder (36 years ago) and CEO of a mid-sized custom home building and remodeling company, I painfully remember the times that I strayed from this advice and paid dearly for it. A sign on my office door, for all to see, nows reads “If it’s not documented it didn’t happen!”

  9. [...] Construction Law Musings- Richmond, VA [...]

  10. Christopher G. Hill
    Twitter:
    August 8, 2010 | 5:58 PM

    Thanks for all of the comments

  11. Home remodeling
    August 12, 2010 | 10:54 AM

    Well, gone are the days of “gentlemen’s agreement”. Today we live in a world in which legal contracts or agreements are essential for business security. Although it is kind of sad but this is reality, this post is an excellent reminder that we have to really make sure and be careful with our dealings.

  12. Melissa Brumback
    Twitter:
    August 12, 2010 | 11:29 AM

    THanks Homeremodeling for your comments! I have clients who have “gotten away” with a gentlemen’s agreement for 30+ years, so it can work out, but it is a risk that is not worth taking.
    Melissa Brumback recently posted..Follow your Change Order RequirementsMy Profile

  13. Alan Haley
    August 13, 2010 | 1:07 PM

    Melissa,

    I have been meaning to comment on this post for days! I cannot tell you how many clients come to us with some variation of “I trusted him …” or “It was a handshake deal … ” GREAT, GREAT POST!!!

    Alan

  14. Melissa Brumback
    Twitter:
    August 13, 2010 | 1:42 PM

    Thanks Alan for your comment! Just saw you plugged this post on your blog– thanks for that, too.
    Melissa Brumback recently posted..Follow your Change Order RequirementsMy Profile

  15. Scott Warga
    Twitter:
    August 16, 2010 | 4:45 PM

    Another great post on this blog.

    Thank you for sharing, I tell people this all the time, I hope you don’t mind but I posted the link to the blog in several areas to try and help consumers.
    I am at the other end of the country and I am not an attorney but rather a contractor and inspector that performs expert witness work.

    Feel free to check out my blog for ideas. http://acsillc.com/blog1

  16. Christopher G. Hill
    Twitter:
    August 16, 2010 | 4:55 PM

    Thanks Scott. I like to hear from readers. Guest Posters like Melissa sure add some good insight and depth.
    Christopher G. Hill recently posted..Construction Change Order Provisions- Sword and ShieldMy Profile

  17. Melissa Brumback
    Twitter:
    August 16, 2010 | 5:46 PM

    Thanks Scott for reading and commenting! I’ll check out your blog.
    Melissa Brumback recently posted..Follow your Change Order RequirementsMy Profile

  18. [...] it comes to your livelihood, don’t chance it to be nice.  Gentlemen’s agreements and saying “please” just don’t cut it any [...]

  19. [...] contracts (preferably written ones) are near and dear to my heart here at Construction Law Musings.  In a world where the contract is [...]

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About Musings

I am a construction lawyer in Richmond, Virginia, a LEED AP, and have been nominated by my peers to Virginia's Legal Elite in Construction Law on multiple occasions. I provide advice and assistance with mechanic's liens, contract review and consulting, occupational safety issues (VOSH and OSHA), and risk management for construction professionals.

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