Assumptions will get contractors into trouble

When negotiating business deals, it is hard to pin down each and every point. Frequently, contracting parties agree in concept, with details to be worked out later. A New York contractor learned the hard way that if you want to enforce your agreement later all of the issues must be covered. Hercules Construction Corp. was awarded a contract to demolish and reconstruct a subway car repair barn in New

When negotiating business deals, it is hard to pin down each and every point. Frequently, contracting parties agree “in concept,” with details to be worked out later. A New York contractor learned the hard way that if you want to enforce your agreement later all of the “critical” issues must be covered.

Hercules Construction Corp. was awarded a contract to demolish and reconstruct a subway car repair barn in New York City. After award, it solicited bids for demolition work.

Cleveland submitted a bid to Hercules of $980,000 based on the assumption and assurances by Hercules that access would be permitted via a temporary road across New York City Zoo property.

Hercules and Cleveland met, “shook hands” and agreed that a letter of intent would be issued immediately, and a contract would be prepared as soon as Hercules got approval for the access road.

Hercules did not get approval for the access road, and rather than continue to negotiate a new price based on more difficult access, it chose to award a subcontract to another firm.

Cleveland sued, claiming that it had the right to do the job and that Hercules was obligated to negotiate a new price with Cleveland.

In Cleveland Wrecking Co. v. Hercules Construction Corp., 23 F.Supp.2d 287 (E.D.N.Y. 1998), the federal court went into a long discussion about what types of “agreements to agree” were enforceable and what types were not. Two types emerged.

First, the situation in which all terms are worked out and all that remains is to put it on paper. In this case, the court found that the agreement was already made and enforceable and either party could sue the other to honor the contract.

In the second situation, not all terms are agreed upon, but the parties at least reach a “preliminary agreement.”

“Notwithstanding this convention, such agreements are typically not subject to future negotiation on price, unless price can be readily established through industry standard or a prior course of dealing, or was expressly subject to future negotiation.” 23 F.Supp 2d at 297.

In this case the price was greatly affected by the access route (Hercules actual subcontract cost was $1,580,000), so that there was no “meeting of the minds” on a key issue.

If Cleveland had gotten an agreement from Hercules to determine the additional cost if Zoo access were denied, the decision could have gone the other way. The lesson is that parties can enforce informal agreements, as long as all key points are covered.