Oral Agreements

Thomas Tripodianos
January 11, 2011 — 1,651 views  

Question. Does a general contractor waive the requirement of a signed formal written agreement by verbally awarding a contract to a proposed subcontractor for a particular price and verbally instructing a proposed subcontractor to proceed with its work according to an expedited schedule?  A preliminary term sheet previously supplied by the contractor to proposed subcontractors specifically addressed such an occurrence of events and provided that such events would not give rise to liability against the contractor, the contractor did not make any statement, either written or verbal, expressly waiving that condition, and the contractor otherwise did not engage in any conduct inconsistent with its reliance on the term sheet.

Answer. NO.  General contractor did not waive requirement of signed formal written agreement by verbally awarding contract.  It is well settled that, if the parties to an agreement do not intend it to be binding upon them until it is reduced to writing and signed by both, they are not bound and may not be held liable until it has been written out and signed.  In this case, in which subcontractor claims the general contractor revoked an alleged oral award of a subcontract, undisputed documentary evidence establishes that the general contractor advised the subcontractor -in writing, and in terms that left no room for doubt-that defendant did not intend to be contractually bound to hire the subcontractor until both of these highly sophisticated parties had signed the contemplated written agreement. Specifically, the general contractor plainly and explicitly notified the subcontractor, in a preliminary term sheet that the potential subcontract would not be binding on the general contractor, even after any initial award of the job to the subcontractor, and even after the subcontractor's signing of the contemplated written agreement, until the general contractor had also signed that agreement, an act the general contractor reserved the right to do (or not do) until a specific date in the future.

This dispute arises from the effort by the general contractor to obtain and then perform the contract to build a steel hangar and technical operations facility. The project required the general contractor, through its subcontractors, to both design and build the hangar. Before it was awarded the contract, the general contractor solicited bids from several subcontractors, including this subcontractor to design and construct the hangar's structure and cladding, which was the largest component of the project.

This subcontractor submitted a competitive bid, and negotiations between the general contractor and the subcontractor commenced in the summer. In the course of these negotiations (and before the general contractor allegedly told the subcontractor it had been chosen), the general contractor sent the subcontractor, among other documents, the aforementioned term sheet.

The subcontractor alleges that, in July, a conference call was held between the general contractor and the subcontractor. Prior to that conference call, according to the subcontractor, the parties had agreed on all material terms of the subcontract except for price. During the conference call, the parties agreed that the subcontractor would perform the subcontract for a price of $3.9 million. After that agreement was reached, the subcontractor alleges, the general contractor's representatives, in the same telephone conversation, "advised the subcontractor that it had been awarded the structure/cladding subcontract," and "directed the subcontractor to proceed with its design development work, to accommodate the Project's ‘fast track' schedule."

Promptly after the July conference call, the subcontractor commenced the design work (there is no claim that physical construction was performed) called for by the term sheet.  A "kickoff meeting" for the project was held in July, which was attended by representatives of the subcontractor and the general contractor. The representatives of the subcontractor left that meeting believing it had gone well.

Only two days later, however, the subcontractor's president attended a meeting with the general contractor at which he was told that the general contractor was terminating the subcontractor's involvement in the project, and the (as yet unwritten) subcontract was being transferred to a competitor).  Although the competitor was originally, regarded as the preferred vendor of steel building components, the competitor's bid for the subcontract had been rejected because it was priced substantially higher.  After the July meeting the general contractor had turned over the subcontractor's work product to the competitor and had persuaded the competitor to take over the subcontract at the price and terms to which the subcontractor had agreed. The next day, the general contractor sent the subcontractor a letter confirming that the job was being awarded "to a subcontractor that more closely meets the requirements of the contract documents and schedule."

The term sheet means exactly what it says, namely, that the general contractor did not intend to become bound by any subcontract until that subcontract had been memorialized in a complete, formal writing and the general contractor itself had signed that writing-a condition that was never satisfied.  A manifestation of mutual assent by both the general contractor and the subcontractor was required to create a binding agreement between them.

There is no reason to allow the subcontractor, a sophisticated corporate entity, to seek to have the benefits of a putative contract judicially bestowed on it based on a set of circumstances that the subcontractor had been told, in the plainest of terms, would not give rise to an agreement binding on the general contractor. To do so would be to negate the general contractor's prior express limitation of its intent to contract, thereby making, by judicial fiat, a contract that the parties never made for themselves. In this regard, it should be borne in mind that the concept of freedom of contract includes the "[f]reedom to avoid oral agreements," a freedom that "is especially important when business entrepreneurs and corporations engage in substantial and complex dealings."

If the subcontractor, before it commenced work on the project, wished to have a real assurance from the general contractor that the general contractor in fact regarded the requirement of a signed writing as a technicality that had been superseded, the subcontractor easily could have requested that the general contractor expressly waive the conditions of the term sheet. Having chosen to begin work at a point when it knew that neither party was contractually bound (neither having executed a subcontract), the subcontractor voluntarily assumed the risk that the general contractor would ultimately enter into a subcontract with another company.

Thomas Tripodianos


Thomas S. Tripodianos received a Bachelor of Arts degree from St. John's University with a major in Government and Politics and dual minors in Philosophy and Psychology. He went on to obtain a Juris Doctor from Hofstra University School of Law. He is admitted to practice law in the State of New York, as well as the U.S. District Court for the Northern, Southern and Eastern Districts with admission pending in the State of Pennsylvania, and the State of Massachusetts.