By: Alexander A. Miuccio Published: April 2011

Contractor's Conduct Shows Acceptance To Terms Of Oral Contract

Construction contracts are usually formed by signing contract documents. The signature is a manifestation of assent to be bound by the terms of the contract. Contracts can also be formed orally, and by conduct.

Although oral contracts are enforced by the courts, it is risky to rely on them because it may be difficult to prove mutual assent to the terms of an oral contract. A contractor’s course of conduct may signify an intent to be bound to the obligations of a contract.

In the recent case of Minelli Construction Co., Inc. v. Volmar Construction, Inc., an appellate court held that a contractor’s course of conduct constituted acceptance of a subcontractor’s offer to perform the work for a fixed price.

Background 

Volmar Construction, Inc. was the general contractor on a project to renovate a school for the New York City School Construction Authority. Minelli Construction Company, Inc. was a masonry subcontractor at the project. During construction, the need for additional masonry work became apparent and the subcontractor submitted a written offer to perform the work for $498,000. In response, the contractor issued a letter of intent to enter into a subcontract for the $498,000. The letter of intent was expressly contingent upon approval of the subcontractor’s proposal by the SCA.

Though the subcontractor’s price was comparable to the SCA's own cost estimate for the work, the SCA tried to negotiate the price for the work. The subcontractor refused, stating in writing on several occasions that the $498,000 was non-negotiable and was the amount the subcontractor needed to perform the work. Discussions between the contractor and the SCA broke down, and, without the SCA having approved the subcontractor’s proposal, the contractor directed the subcontractor to perform the work.

The subcontractor performed the work. The contractor did not object the subcontractor’s first payment requisition, which stated a contract price of $498,000. The contractor also filed a notice of claim with the SCA to recover the sum of $498,000 for the subcontractor’s work, which amount the contractor described in a sworn affidavit as the "fair and reasonable value" of the work.

After the work was complete, the contractor refused to pay any portion of the $498,000 on the grounds that the letter of intent expressly conditioned payment on the SCA's approval of the subcontract for $498,000. The subcontractor sued the general contractor and moved for summary judgment. The trial court ruled in favor of the subcontractor and the general contractor appealed.

Decision

The appellate court upheld the award of summary judgment in favor of the subcontractor. The court stated that, under these circumstances, the letter of intent did not constitute a binding contract, but was merely an unenforceable agreement to agree.

The court held, however, that the general contractor's direction to the subcontractor to perform the work constituted an objective manifestation of assent to the subcontractor's quoted price. The court also stated that the general contractor’s failure to object to the subcontractor's first payment requisition, and the general contractor's submission of a claim to the SCA for the $498,000, presented further evidence that the general contractor agreed to the price term.

Comment

Letters of intent are frequently issued by a contractor in an attempt to get a subcontractor working on a particular project, prior to the execution of a formal contract. The letter of intent usually attempts to condition any obligation of the general contractor upon the execution of a written contract. Here, the court refused to permit a contractor to, on the one hand, direct work, but on the other hand, rely on a provision in the letter of intent to avoid paying the subcontractor. Though the court ultimately sided with the subcontractor, the prudent contractor should make every effort to enter into a written agreement prior to performing work.

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