Incorporation By Reference Provisions in Subcontracts

May Not Necessarily Preclude Claims by Subcontractors

By Andrew Richards, Co‑Managing Partner, Kaufman Dolowich & Voluck LLP

Andrew Richards
Co-Managing Partner (LI)
Kaufman Dolowich Voluck, Attorneys at Law Legal Counsel, STA

Unsurprisingly, sometimes oral agreements are generally binding if they do not violate the statute of frauds which is codified in New York as NY General Obligations Law § 5-701.  A part of this statute states that an oral agreement is void unless there is a writing signed by the party to be charged therewith if such agreement is not to be performed within one (1) year by the agreement’s own terms.

For example, if a general contractor hires a subcontractor to perform work and the oral agreement contains in part that the subcontractor’s work will be completed within eighteen (18) months, there must be a writing signed by the party to be charged with having entered into a binding agreement stating the terms of the agreement.

However, what happens if a general contractor retains a subcontractor, and they orally agree on the material components of an agreement including price and scope, the bid documents show that the construction and the subcontractor’s work will extend beyond one (1) year, and the subcontractor begins work?

In this case, part performance of the agreement may very well create a binding agreement upon both parties despite the statute of frauds.  In legalese, courts have held that part performance is invoked if the actions can be characterized as “unequivocally referable” to the oral agreement.  The doctrine of part performance is based upon the equitable principle that it would be a fraud to allow one party insisting on the statute as a defense to escape performance after permitting the other party, acting in reliance on the oral agreement, to substantially perform.

The act of part performance must have been those of the party insisting on the contract, not those of the party insisting on the statute of frauds.  Thus, the court must decide whether the party claiming the existence of a valid oral agreement performed sufficient services to preclude the other party from invoking the statute of frauds as a defense.