By: Alexander A. Miuccio Thomas H. Welby Published: December 2008

Court Rejects Owner's Claim That Contractor was Required to Bond Project

Generally, in the construction industry, when a bid is accepted on private work, it becomes a legally enforceable contract. Before a contract can exist, however, there must be a meeting of the minds of the two contracting parties as to the essential terms. If its essential terms are missing or too uncertain, there cannot be a meeting of the minds and no contract will exist.

In determining whether a binding contract exists, courts would look to the course of conduct and communications between the parties, which may indicate their true intent to create a binding contract.

In the recent case of Wallkill Medical Development, LLC v. Sweet Constructors, LLC, the court looked to the actions of the parties to determine if their course of conduct showed a mutual intent to be bound to a contract.

Background

Sweet Constructors, LLC, a design-build firm, entered into a binding written contract with Wallkill Medical Development, LLC, as owner, to provide design services for the construction of a medical office building located in Dutchess County, New York. The parties also discussed entering into a contract for the construction of the project, however, no written agreement was ever entered into. The contractor was terminated from the project because it failed to obtain payment and performance bonding for the project. Despite the absence of a written agreement for the project’s construction, the owner argued that a verbal agreement was reached, which required the contractor to build the project and obtain payment and performance bonds.

According to the owner, the contractor’s failure to obtain payment and performance bonds was a breach of the parties’ construction agreement, which caused the plaintiff to rebid the construction work and sustain damages as a result of the project’s delay. The contractor argued that the parties intended to enter into a written contract for the construction of the project, separate from the written contract for the design of the project. Since the written design contract contained no bonding requirement, and the parties never entered into an agreement for the construction of the project, the contractor argued that it was not required to obtain payment and performance bonds, and its refusal to do so was not a breach of any contract.

The owner sued the contractor, seeking to recover its damages for project delay, claiming that the contractor’s failure to obtain payment and performance bonding was a breach of the parties’ contract. Both the contractor and the owner moved for summary judgment. The trial court denied the motions, holding that a question of fact existed as to whether a contract requiring the contractor’s supply of payment and performance bonding existed. Both parties appealed.

Decision

The appellate court ruled in favor of the contractor, holding that the parties never came to a complete agreement on the essential terms of anything other than the design contract, which did not contain a bonding requirement. According to the court, essential contract terms, such as the dates for commencement and substantial completion of the work, along with the contract price, were never agreed to. The court also found that the parties, by their actions, showed mutual intent not to be bound until the execution of a formal written construction contract. Accordingly, the court held that no enforceable obligation or agreement for the construction of the project existed. Since no contract existed requiring the contractor to obtain bonding, the owner was not entitled to delay damages for the contractor’s refusal to obtain the bonding.

Comment

Only in a limited number of circumstances is an agreement required to be in writing to be enforceable. However, when an agreement is not in writing it becomes much more difficult, after a dispute has arisen, to prove what the parties did or did not agree to. In this case, the court had no credible evidence before it that the contractor agreed to build the project or provide payment and performance bonding. Since the court had no evidence that such an agreement existed, the contractor’s failure to obtain bonding was not a breach of contract. Although the contractor prevailed in this case, a prudent contractor should reduce his agreements to a writing, so as to minimize any dispute as to whether the parties entered into a contractual agreement and what were its terms.

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