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Owner's Oral Promise to Pay Subcontractor Enforced by Massachusetts Court
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August 18, 2008
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Howrey LLP
National Amusements, Inc. contracted with Old Colony Construction Co. to build a movie theater complex. Old Colony subcontracted a significant amount of the work to Central Ceilings, Inc.
The original project completion date was June 28, 2000. Because of groundwater problems, the completion date was extended by the owner to September 3, 2000, which was viewed as highly aggressive, if not unrealistic. Additional problems arose as a result of Old Colony's failure to pay its subcontractors for the theater project and prior projects, including more than $1 million owed to Central.
The subcontractor refused to continue work without a guarantee of payment by the owner. The owner orally agreed to guarantee payment to Central but wanted the theater completed before Labor Day because of the large audiences expected over that weekend and in order to open before a competing theater complex opened. The subcontractor then accelerated its performance and completed its work by late August. The owner made a partial payment but refused to pay the subcontractor a balance due of $593,237.
Massachusetts law provides that no action may be brought upon a promise to answer for the debt or default of another unless the promise is in writing and signed by the person making the promise. Massachusetts General Laws Annotated, Chapter 259, §1. An exception to the requirement of a writing is the "leading object" or "main purpose" exception. If there is a fair inference that the leading object or purpose of the transaction was acquisition by the maker of the promise of some benefit to which he was not previously entitled, then the debt may be fairly deemed a debt of his own, and no writing is required. Ames v. Foster, 106 Mass. 400, 403 (1871).
In March 2001, the subcontractor sued the owner for breach of the oral agreement. A jury returned a verdict for the subcontractor, finding that the owner breached the oral promise, and awarded $593,237 in damages. The jury found that the main purpose of the agreement between the owner and the subcontractor was to bestow a benefit on the owner to which it was not previously entitled.
The owner's motions for judgment notwithstanding the verdict and for a new trial were denied by the trial judge. She found that the project was not realistically likely to be completed until Thanksgiving 2000. She found that the subcontractor agreed to greatly accelerate its performance in order to meet the owner's desired Labor Day completion deadline on condition that the owner guarantee payment of all past unpaid amounts plus all future payments owed.
The owner appealed, but the judgment in favor of the subcontractor was affirmed. Central Ceilings, Inc. v. National Amusements, Inc., 70 Mass. App. Ct. 172, 873 N.E.2d 754 (2007), rev. den., 450 Mass. 1101, 875 N.E. 2d 862.
The owner argued on appeal that the oral agreement was a promise to answer for the debt of another. Because it was not in writing, it was unenforceable under the statute of frauds. Massachusetts General Laws Annotated, Chapter 259, §1. The owner also argued that there was no evidence of consideration sufficient to bring the oral agreement within the "leading object" exception because the subcontractor already was obligated to perform it work.
The Court of Appeal wrote that under the leading object exception to the statute of frauds, an oral agreement can be enforced if the facts and circumstances of the transaction show that the promise was given primarily or solely to serve the promising party's own interest. The court concluded the owner's promise was not contingent on a payment default by the general contractor. The court determined that there was sufficient evidence that the owner wanted to capture the proceeds from the Labor Day weekend audience. Also, given the tight time frame and the worksite problems, only the subcontractor would have been able to complete the work within the time specified.
Accordingly, the subcontractor's agreement to accelerate its work in order to complete the project by Labor Day was for the benefit of the owner and constituted sufficient consideration. Thus, the owner was obligated to honor its promise to pay the subcontractor for its work.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2008 Howrey LLP
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