The Job is Substantially Complete, the Subcontract was Never Signed, the Subcontractor Wants to be Paid—Now What?

A recent case in North Carolina illustrates the types of problems created when a general contractor accepts a subcontractor’s bid and then allows the subcontractor to perform the work without obtaining a signed subcontract.[i]  In this case, the general contractor (Choate Construction Company – “Choate”) accepted a bid from a foundation subcontractor (Southeast Caissons, LLC – “SEC”).  Choate sent the subcontract to SEC.  SEC provided its changes in a “Proposed Addendum” to the subcontract stating, “[SEC] hereby accepts the terms of the attached Subcontract, subject to and conditioned upon Choate[‘s] acceptance of the terms set forth in this Addendum[.]”  After that, Choate called SEC and exchanged emails concerning the subcontract terms, but did not reach an agreement.  SEC then performed its subcontract and sought payment, and acknowledged it had not signed the subcontract.  Choate agreed it owed SEC something, but refused to pay because SEC did not have a signed subcontract, asserting the subcontract was not binding on Choate.

When, after repeated demand, Choate failed to pay SEC, SEC sued Choate in a county other than the one set forth in the written, unsigned subcontract.  The issue at trial was whether the unsigned subcontract venue clause controlled; that is, whether SEC was in anyway bound by the terms in the proposed, unsigned subcontract.

The trial court held that SEC was not bound by the subcontract and, therefore, could bring its lawsuit in a county other than the one mandated by the written terms of the unsigned agreement.

Choate appealed the case to the Court of Appeals.  There is an old saying among grizzled construction lawyers: “Oral contracts are as binding as written contracts, but oral contracts are harder to prove.”[ii]  The court held that the parties had an implied in fact contract.  Mutual assent was established by the parties’ conduct.  Choate allowed SEC to perform the subcontract, and in light of that conduct, it was reasonable to presume that the parties intended to contract with each other.  That implied in fact contract, however, did not include any provision regarding venue, and, thus, SEC was fully within its rights to file in a county other than the one set forth in the unsigned agreement.

Comment:  The lesson to be derived from this case is that parties who do not take the time to get the paperwork in order before performance begins can find themselves in a mess, particularly where, as here, there were negotiations back and forth regarding subcontract terms with no agreement being reached before the performance started.  The court was left to sort out the mess at great expense to both parties.  In this instance, as in most similar situations, the subcontractor was in a better position by not having signed the subcontract than it would have been if it had signed the subcontract.  By not signing the subcontract, the subcontractor was free to file in the court that it wished to, rather than the one mandated by the unsigned subcontract.  Other subcontract terms, such as notice provisions and mutual waiver of consequential damages, could be similarly affected.  Without a signed subcontract, none of those written provisions would be binding on SEC.  General contractors in particular should draw a “lesson learned” from this case.

[i] Southeast Caissons, LLC v. Choate Const. Co., 784 SE.2d 650 (2016). The idea for this article came to us courtesy of Stan Martin at Common Sense Construction Law, LLC.  Read his article from April 25, 2016 on the subject, here.

[ii] Stated more artfully: “Failing to memorialize an oral contract does not invalidate the agreement, but instead merely affects the mode of proving the terms of the contract.”  See, Southeast Caissons, LLC at 665.

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