Daily Development for Monday, January 3, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

CONSTRUCTION LAW; CONSTRUCTION AGREEMENTS; REQUIREMENT OF AN EXECUTED AGREEMENT: Where owners of LLC guarantee construction agreement with contractor, but LLC itself never executes such agreement,, an actual contract (not just quantum meruit) may be formed nevertheless where the contractor commences work with guarantor’s knowledge and guarantors are liable for LLC’s failure to pay for work.

 Marett v. Brice Building Co., 603 S.E.2d 40 (Ga. App. 2004)

Mr. and Mrs. Marett were the owners of all the interests in an LLC formed to own and operate some commercial buildings.  In addition, they owned, individually or jointly, the land on which the buildings were to be constructed.   The LLC had employees who did much of the direct work in dealing with contractors.  These employees negotiated a contract for the construction of the buildings, and further were negotiating with tenants to occupy the buildings, who at the time were demanding rapid completion of construction.

Although there apparently were no binding contracts with the tenants, and the LLC had no other real assets, the contractor agreed to proceed with rapid construction if the Maretts would personally guarantee the construction agreement.  They did execute the guarantees, which stated that they were executed to induce te contractor to enter into and commence work under the construction agreements.

The prospective tenants failed to get financing and the contractor was never paid, although contractor allegedly performed $320,000 in improvements for which he sued both the LLC and the guarantors.

The trial court found on summary judgment that the contractor could recover on the claims in quantum meruit, and that the guarantors were liable on their guarantors on that obligation.  It further found, however, that there was no contract, and denied contract based damages.  Both sides appealed.

The Maretts argued that they should not be found to have guaranteed the quantum meruit obligation since the guarantees related only to the contract, which never came into existence.  They argued in part that they had no knowledge that the contractor actually was performing work before the tenants were committed, and that therefore they should not be bound for that work.  The court essentially pooh-poohed the Marett’s claims of ignorance, finding that there was no issue of fact that they didn’t know about the work, despite their testimony to the contrary.  Nevertheless, perhaps because the guarantees contained contradictory language as to whether obligations other than those arising by contract were in fact guaranteed, the court refused to affirm the trial court’s finding of damages on the guarantees on this ground.

But the court went on to conclude that in fact the contract with the LLC was formed, despite the fact that it was never signed, and that consequently the Maretts were liable on the guarantees of the contract claims.  The court found that all of the terms of the agreement were clear, and that the Maretts’ agents within the LLC had authorized the contractor to commence work on the understanding that indeed an agreement had been reached, even though the written expression of that agreement had not been signed.

"Parties may become bound by the terms of a contract, even though they do not sign it, where their assent is otherwise indicated, such as by the acceptance of benefits under the contract, or the acceptance by one of the performance by the other.”

Comment 1:      This does not appear to be a Statute of Frauds case, although arguably we had “part performance” that would have taken the contract out of the Statute.  Apparently construction agreements do not have a writing requirement in Georgia.

Comment 2: Nevertheless, where the parties do reduce their agreement to writing, anticipating that the agreement will arise upon execution, it is problematic to find an actual agreement existed.  It’s not simply a problem of insuring that the contractor not get cheated.  Quantum meruit typically will take care of that problem (even if it might not have done so here).  The contractor, presumably could claim damages for loss of a beneficial contract that could far exceed the value of the work that the contractor has performed.

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