Wednesday, November 28, 2007

Too Bad, Tough Luck, Oh, WELL!

An article in today’s New York Law Journal by Glen Banks, Esq., discusses the recent decision by the Appellate Division, First Department, in Jordan Panel Systems, Corp. v. Turner Construction Co., 841 N.Y.S.2d 561 (1st Dep’t 2007). Essentially, the case holds that if a party clearly expresses its intention not to be bound until it executes a written agreement, no contract will be formed prior to such execution unless the party specifically retracts or waives its expressed intention.

In Jordan Panel, a general contractor sent a term sheet to a subcontractor (with which it had prior dealings), concerning the construction of a commercial airline facility at Kennedy airport. The term sheet set forth all terms except price, and contained a clause stating that the general contractor would not be bound by any subcontract unless it executed the document. The parties later agreed on a price of $3.9 Million for the work, and the the subcontractor was later advised verbally that: (a) it had been awarded the subcontract for the project; and (b) it was to proceed with design and development work pursuant to a “fast track” schedule.

The subcontractor complied, but was soon informed that the subcontract was being awarded to another firm. The subcontractor sued for breach of contract, but the general contractor’s Motion to dismiss was granted on the ground that the contract claim lacked merit since the term sheet stated that the general contractor would not be bound until it executed the subcontract. The trial court gave no weight to the subcontractor’s argument that the general contractor’s words and actions, subsequent to issuance of the term sheet, constituted a waiver of the term sheet’s provisions and evidenced an intent to be bound without formal execution of a subcontract document. The subcontractor appealed.

The Appellate Division affirmed the dismissal. I’ll spare you all the minutiae and legal mumbo jumbo. In short, the appellate court (in a 4-1 decision) held that the lower court’s reasoning was correct and that the subcontractor knew there was no intent to be bound absent a signed agreement. So, the general contractor’s directives to the subcontractor that it had been awarded the subcontract and to proceed with certain preliminary work became meaningless, despite the subcontractor’s ostensibly reasonable reliance based on the parties’ past dealings. In my view, the dissenting opinion correctly reasoned that a waiver existed; the general contractor’s actions after issuance of the term sheet constituted an express, verbal contract and the parties’ prior course of dealing was such that it was common for the subcontractor to begin work without an executed agreement.

This case may have a broad impact in the construction industry where things tend to get done on a “handshake” and many subcontractors begin work in anticipation of a later, formal contract. I’m not too happy with clients who do that, but it is an unfortunate fact of business life. Based on the holding in Jordan Panel, contractors would do well to review any preliminary documentation issued to them before performing work without a fully executed agreement. Even better would be to refuse to do any work until a signed, written agreement is in place [wishful thinking, I know].

I think this one deserves review by the Court of Appeals.

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