Are You Sure That Agreement Must Be In Writing?

By Henry L. Goldberg

Construction historically has been an informal business. Unlike Wall Street, millions, perhaps billions, of dollars regularly pass through the hands of men in construction boots, not pinstripe suits. It is for this reason that we regret the trend we have increasingly observed towards greater formality and "legalistic" assessments of the rights of parties in construction disputes.

Take, for example, the situation where the parties had indicated in a "preliminary term sheet" that, for any eventual contract to be enforceable, it must be in writing and signed by the general contractor. Do "inconsistent subsequent actions" taken by the parties change the result? Should they?

In a classic demonstration of the lack of understanding of the construction context, a New York appellate court was confronted with just such issue with dire consequences for the subcontractor.

Often, parties to an agreement do not intend it to be binding until it is reduced to writing and signed by both of them.

In this particular appellate case, the plaintiff subcontractor sued the defendant general contractor claiming that an oral award and other post-contract actions changed such a written understanding.

The GC defendant plainly notified the subcontractor in a "preliminary term sheet" that the potential subcontract would not be binding on the GC, even after an initial award of the job to the plaintiff, and even after signing of the contemplated written agreement, until, and only until, the GC had also signed the agreement, which the GC had the right to either do, or not do, by a certain date.

The appellate court reasoned that this expressly reserved the GC's right to withdraw from the deal regardless of its subsequent contradictory actions.

The lower court had, in the appellate court's opinion, correctly granted the general contractors motion to dismiss the subcontractor's lawsuit for lack of a binding contract. This was based on the language of the term sheet that "until general contractor executes this subcontract, general contractor would not be bound by any of the terms or conditions herein."

However, the subcontractor's complaint alleged that the general contractor's representatives, during a conference call between the parties, advised subcontractor that it had been awarded the subcontract and directed the subcontractor to immediately proceed with its design development work to accommodate the project's "fast track" schedule. Promptly after an "all hands" conference call, and relying on the instructions of the general contractor's representatives, subcontractor immediately commenced its design work in conjunction with its joint venture partner. Furthermore, a kickoff meeting for the project was held and attended by all parties.

The court held that the parties' clearly stated intention not to be contractually bound until they had executed a formal written agreement was determinative, and that the requirement of the signed writing was not only unequivocal, but it was never expressly waived by the contractor.

Interestingly, although the appellate court found for the general contractor, it acknowledged that the GC's conduct was not to be considered "exemplary business practice." Regrettably, however, it didn't have the good sense to do anything about it.

In an in-depth, vehemently argued, dissenting opinion, one of the appellate judges on the panel made clear what was obvious to this writer: that the critical factors that should have determined the outcome of this appeal turned on events occurring after the documents were exchanged and signed by the parties, and that the subcontractors allegations regarding the conference call referred to above.1 The above referenced "kickoff" meeting with the contractors representatives in Texas only further supports these subsequent facts. As the subcontractor alleged, the contractor's representatives acknowledged that it had communicated to the subcontractor that it was awarded the subcontract and conceded that the subcontractor relied upon that representation.

Fundamentally, this case was not, as the majority held, about whether the agreement is not to be binding until it has been reduced to writing and signed by both parties, but rather about considerations that the majority gave short shrift: whether a party to a proposed contract, having initially taken the position that it would not be bound except by written agreement, may thereafter waive that position, i.e. change position and manifest a new and different intention to be bound. The dissenting judge (along with this writer) certainly believes such post-agreement waiver by the GC would have been the correct finding here.

As the dissenting judge pointed out, such agreement to be bound only by a written contract hardly creates an "insuperable barrier to the validity of a subsequent oral agreement." Stated differently, "...even where both parties originally contemplate the execution of a writing, a subsequent agreement, manifested by mutual acts, may dispense with the required writing." The subsequent conduct of the parties themselves should be decisive as to whether a contract had been made and whether it was enforceable.

The subsequent conduct of the parties may constitute a tacit waiver of the terms previously agreed upon, even though the understanding at first had been that the execution of the formal document was necessary. A waiver could and should have been found.

At the "all-hands" meeting, the parties had an agreement on price that was communicated by the contractor's representatives. In addition, as stated, the contractor's representatives directed the subcontractor to immediately begin work under the subcontract to help recover the schedule. Finally, the contractor gave these assurances and instructions knowing that it had previously taken the position that it would be bound only if it signed a written agreement.

G&C Commentary

So there you have it. The bad guys won. The valiant (and correct) dissent was in the minority, and not determinative.

There is no question that there was "doubling dealing" and less than fair play in this situation. It's also clear that the majority of the appellate court went strictly "by the book" in an excessively legalistic fashion. It did the subcontractor no good that the majority of the appellate court found that the contractor's "dealings with the subcontractor [ ] left much to be desired." That egregious understatement was of no help.

So what are the lessons learned? Firstly, that while subsequent oral statements and other symbolic actions may, in fact, be found to constitute a waiver, the presumption is always going to be in favor of the signed written agreement. In other words, formality will usually trump informality, and such required formalities are the bane of any party managing a construction project. Secondly, Goldberg's Law applies: "If it isn't in writing, it never happened nor was ever said." And, finally, that some judges, even appellate court judges, while being disgusted with the behavior of parties, will be excessively legalistic. While other appellate judges understand the "real politic" of the construction site, not to mention human nature, and will be not be blinded by legalistic formalities from doing the right thing... Just don't count on it. Know your contract.

For more information on protecting your rights, contact the STA directly at (212) 398-6220 or

Henry L. Goldberg directly at (516) 764-2800 or by email at

hlgoldberg@goldbergconnolly.com.

©Goldberg & Connolly 2017

This article has been prepared for informational purposes only. It is not a substitute for legal advice addressed to particular circumstances. You should not take or refrain from taking any legal action based upon the information contained herein without first seeking professional, individualized counsel based upon your own circumstances. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

1 Following a nine hour meeting between the representatives of both parties the day before, at which the parties reached an agreement on all terms and conditions of the subcontract other than price, and then subsequently agreed on price with not one, but two of the contractors representatives advising the subcontractor that had been awarded the subcontract.