Proposals and Contracts Defined
Most of the time, a proposal is not a contract. A proposal typically includes information about the cost of a project to allow a potential customer to compare proposals before choosing a contractor to do the work. An accepted proposal becomes a contract once the parties agree upon the pricing and terms, but a proposal without that agreement is not a binding contract. A proposal has been defined as: "an offer from one person or group to another (or in this case, a contractor to a potential customer) with the intention of obtaining a contract between them." Merriam-Webster. It is a plan that an individual or business develops and submits to a potential customer, usually offering to do work at specific terms (i.e., for a specified price). A proposal is often prepared after an interested customer requests bids for work on a project or even requests a proposal. In other words, the proposal essentially is a way for the contractor to offer to take on the project and its associated risks for a specific price. Thereafter, the customer would review the bids/proposals and may then select a contractor for the work. The offer generally must be accepted before it can convert into a contract. An offer is a proposal that is intended to be binding . It is an offer of taking on a job on certain terms and for a specified compensation. Once the customer accepts the offer, the parties are then bound by the obligations therein. A proposal is not a contract because formal acceptance has not occurred, but it may become a contract once the offer is accepted. More specifically, in many cases the offeror submits a proposal for some work, then another person receives that proposal and has the ability to accept it. If the offeror and the customer agree to the proposed terms, then an enforceable contract is born. In the "Proposal and Contract Clauses" subsection below, we discuss the unique contractual issues posed by the incorporation of proposal and bid documents by reference in contracts. These situations frequently result in proposals containing terms that are then incorporated into contracts by reference. As a result, there is an argument that the proposal becomes part of the contract. In short, proposals that become contracts—either by acceptance of a proposal, incorporation of proposal terms by reference in a contract, or otherwise—potentially are subject to contract construction principles, including among those the general rules of contract interpretation discussed earlier in this piece.
Key Components of a Contract
In addition to the fact that proposals are usually intended to invite negotiations between the parties, contracts and proposals are distinguished by essential elements of a binding contract. Those elements include: offer; acceptance; consideration; mutual consent; and legality. These elements must occur in order for an agreement to be enforced in the same way as a contract. This concept applies to proposals and contracts alike. For instance, unless the parties agree otherwise, a proposal typically must set forth the essential elements for an enforceable contract to form once the proposal is accepted. Otherwise, an agreement ensuing from an acceptance of the proposal may not be a valid contract but, instead, may be just that—a proposal intended to invite negotiations.
Proposal versus Contract Formation
A proposal does not become binding until there is acceptance and consideration. While there can be a binding contract even though the words "hereby agree" are not used, it is still necessary to find acceptance and consideration. An offer is what the proponent of the proposal makes and an acceptance is what the one for whom it is intended does. When the subject matter is certain and the terms of the proposal have been agreed upon by the parties, there must be something which indicates acceptance of the proposal. Silence does not imply acceptance unless circumstances imply an intention to accept. As long as something remains to be agreed upon, there is no contract – the proposal does not become binding. Sometimes negotiations do not lead to agreement. If either party, after an offer is made, acts on the assumption that a contract existed when it did not, that party may be liable for damages for relying on the offer. The general rule that a proposal is binding only when it has been accepted does not always apply. In some jurisdictions the courts have said that the proposal may become binding before acceptance. There may be circumstances in which some positive act alone indicates acceptance. Under some circumstances words spoken or written together with acts may indicate acceptance. A proposal may be accepted in part. If all the particulars are covered then the promise becomes binding. If any part is omitted the promise is not binding. Separate parts of a proposal can be taken as separate proposals – if accepted they may or may not amount to a contract. Also, a proposal may be amended or varied by acceptance. The law in contracting states that a proposal lapse if it is rejected. A counter-proposal results in a new proposal which renders the first proposal by the original proponent ineffective. In arbitration, a preliminary proposal which is appreciated may be the basis of a binding contract. In other cases, the proponent knows that it is not binding until accepted.
Legal Nature of Proposals
A proposal may be something other than a contract, but it does not mean there are no legal implications if one tries to treat a proposal as a contract. One example is an invitation to submit an expression of interest. The question is whether the party making the invitation is inviting submissions to be made on a "binding" basis, or is simply inviting submissions on an "expression of interest" basis.
In the case of Reid and Reid v SunMedia [2016] ONSC 5394 (CanLii), Justice Crighton addressed such a case. SunMedia terminated Reid and Reid’s contract for the maintenance of certain electrical power system equipment. Reid of Reid had submitted a proposal for the work. The proposal stated in part "I understand that this proposal will form the basis for further discussion between us relating to some type of service agreement for power system equipment maintenance and training thereafter… The undersigned proposes to do the above work for the consideration of $XXXX.00 plus transportation costs. Excluded from this cost is the price [] for any spare parts ordered by you. Also excluded from this proposal is any work done on project components that were not listed on this proposal. Please advise if you require any further information or if you have any questions." (paras 4-7)
Justice Crighton found that the words just quoted , and all words after them, "expressly create what is known as an "agreement to agree" which is at law no agreement at all… the words expressly contemplate the making of a subsequent agreement by the parties. The words indicate that the parties had not reached any agreement at all. The contract and any duties or obligations arising under it had not yet been expressed and must await a further contractual process. This is not a contract but a process." (para 18)
This case is a good warning against overreaching, such as trying to turn an invitation to submit a proposal into a binding contract. In my experience, clients frequently overlook this issue, and I have no doubt many other litigants do as well.
Creating Contract Status from a Proposal
To move a proposal along the path to becoming an enforceable contract, parties should follow these strategies:
Offer Acceptance in Writing. Suggest that a proposal expressly state that acceptance must come in writing. This provides certainty that both parties understand the terms and conditions that have been offered and accepted. Courts regularly enforce such an agreement.
Punctuating the Agreement. When a proposal is signed with a signature, it is typically seen as an acceptance in writing of an offer because it clearly states the terms that will be accepted. The party who signs the proposal may not be able to refute the terms because he or she established the contract by signing it.
Clarity. Draft proposals that do not contain ambiguity or vagueness. Write them in clear language. Leave no doubt as to the price, deadlines or work to include or complete. Specify the dates you will charge penalties or liquidated damages. Be specific about remedies if one side breaches the contract and the other side suffers damages as a result. For example, "the Contractor shall pay the Owner and Subcontractor Liquidated Damages in the amount of $_____ per calendar day for each calendar day during which the Calendar Days are exceeded." Remember, however, some courts do not enforce liquidated damages if they appear to be punitive rather than compensatory.
Legal Guidance and Considerations
When in doubt about whether a proposal will bind you or the other party, or about how the proposal will be treated once the other party begins to rely on it, consult an attorney as soon as possible after the proposal is submitted. In addition, since the particular language and intent of parties can vary significantly between proposals, if you intend for a proposal to be legally binding , make it clear in plain language that the document is an offer and it is intended to be accepted or rejected (and not further negotiated). If you want to require a specific action before the offer will become binding, such as a deposit or a signature, or if you want to limit the time the offer will remain open, say so in plain language. Likewise if you do not intend for the proposal to create legal obligations or the idea of acceptance to be like that in a contract, say so in plain language.