By: Alexander A. Miuccio Published: January 2013

Court Rules Contractor Not Bound To Unsigned Subcontract

Under New York law, if the parties verbally agree on all of the terms of a proposed contract, they may be bound to the oral agreement even though the parties plan to enter into a formal written agreement. 

In the recent case of Moulton Paving, LLC v Town of Poughkeepsie, an appellate court addressed the question of whether the contractor and subcontractor entered into a binding contract notwithstanding the failure to reduce the agreement to a formal signed agreement.

Background 

Marquise Construction was the general contractor on a road improvement project for the Town of Poughkeepsie. Marquise's prime contract required the Town's engineering consultant to approve all subcontractors it intended to use on the project. Marquise submitted an unsigned subcontract to Moulton Paving. This proposed subcontract provided that Marquise is not bound to the agreement unless and until it was signed by Marquise, and that Marquise only intended to be bound to the agreement upon its complete signing. Two weeks later, after a meeting with the Town, Marquise and Moulton, Marquise advised Moulton's representative that Moulton had been terminated because the Town rejected Moulton as a subcontractor. 

Moulton sued Marquise alleging that it had breached the subcontract by preventing Moulton from performing the work set forth in the subcontract. Marquise moved to dismiss the contract claim based on the language in the form subcontract requiring a complete signing of the agreement by an officer of Marquise, and the undisputed fact that the agreement was never signed by anyone. In opposition, Moulton argued that because it commenced work on the Project, Moulton can rely on a provision in the proposed subcontract that the agreement is "considered accepted by both parties as is, as if signed", even if the subcontract remained unsigned by Marquise. 

The lower court decided in favor of the general contractor, holding that there was no valid contract in existence between Marquise and Moulton Paving. The subcontractor appealed the decision.

Decision

The appellate court affirmed the decision. After reciting the principle of law that a party can indeed be bound to a verbal agreement if its intent to be bound is clear, the court found that the language of the contract was explicit in setting forth Marquise's intent not to be bound to the agreement until such time as it was fully signed.

The court rejected Moulton's reliance on the contract provision which stated that the unsigned subcontract was considered accepted as is, as if signed, when Moulton commenced work on the project. The court interpreted this provision to provide that once an agreement is signed by an officer of Marquise and was delivered to Moulton, the agreement would be considered accepted by both parties as is, as if signed, once Moulton commenced work on the project, without Moulton having to sign the agreement.

Comment

Parties may enter into a verbal binding agreement where they agree upon the essential terms. The key to enforceability is the intent of the parties and their intent to be bound to the oral agreement. This case demonstrates that if the parties do not intend to be bound by an oral agreement until it is in writing and signed, then there is no contract. The courts will respect such intent and no contract will be found until then. 

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