By: Alexander A. Miuccio Published: August 2012

Subcontractor Allowed Recovery Under Letter of Intent

Letters of intent are frequently used and relied upon in the construction industry. They are used to outline the intentions of the parties before a final agreement is reached. For example, a letter of intent expresses an intention by a contractor to enter into a subcontract with a subcontractor for a project. Such an agreement to agree in the future is typically not enforceable because the court has no way of knowing what the ultimate contract would provide.

Under certain circumstances, however, a letter of intent may be legally binding and enforceable, depending upon the language of the letter of intent and the subsequent conduct of the parties. In the case of Minelli Construction Co., Inc. against Volmar Construction, Inc, a letter of intent was found to be binding based upon its specificity and the subsequent conduct of the parties.

Background

Volmar, a general contractor, and defendant New York City School Construction Authority (SCA) entered into an agreement for the renovation of a school in Queens. Minelli claimed that Volmar sent it a "Letter of Intent" which contained all of the essential terms of an agreement for Minelli to perform the work at the project which was set forth in the SCA's Project Bulletin No. 11. The Letter of Intent provided, among other things, that Volmar intended to enter into a subcontract with Minelli for the masonry repairs described in the Bulletin for a set price. The names of Volmar's and Minelli's principals were printed at the bottom of the Letter of Intent, but the Letter was not signed. Volmar defended against Minelli's lawsuit on the ground that the Letter of Intent contained a disclaimer that it and the future contract were contingent upon the SCA's approval, and the SCA ultimately never approved Minelli's proposal.

Decision

The Court, after reciting the general rule that a mere agreement to agree in the future is unenforceable as a contract, found that the Letter of Intent was a legally binding agreement. In doing so, the Court noted that Volmar could not identify any material terms which had been omitted or were otherwise missing from the Letter of Intent. The Court also found that even if the Letter of Intent could not be considered a contract in and of itself, it was, at the very least, Minelli's offer to perform the work described in SCA Bulletin No. 11 for a set price and by directing Minelli to go to work, Volmar evidenced its acceptance of Minelli's offer.

Finally, as to Volmar's argument that the Letter of Intent did not ripen into a contract because Minelli was never approved by the SCA, the Court noted that such a provision would effectively turn the agreement into a "pay if paid" agreement in violation of clear public policy. An unenforceable "pay if paid" clause specifically will state that payment to the general contractor by the owner is an express condition precedent to the general contractor's obligation to pay the subcontractor.

Comment

The Court allowed the letter of intent to serve as the actual contract for two reasons: it contained all of the essential terms which would have been in the final contract, and the parties' actual intent was evidenced by Volmar's direction to go ahead with the work, coupled with Minelli's full performance of the work.

A contractor who does not wish to be bound by a mere letter of intent is cautioned to refrain from making the letter so detailed that it could be substituted for the actual agreement. The contractor is also advised to refrain from taking any action which would indicate an intent to be bound by the terms of the letter.

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