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The Insurance Company of the State of Pennsylvania v. Don Siegel Construction, Inc.

A-0888-05T5 (N.J. Super. App. Div. 2006) (Unpublished)

CONTRACTS — Although there are instances in which an incomplete written recitation of a contract’s terms may nevertheless provide a basis for performance, where agreement has not been reached on all of the material terms and each is a linchpin to the entire understanding of the parties, a court will not find an enforceable contract.

A construction company entered into a contract with a municipality for water distribution improvements. An insurance company issued a performance bond guaranteeing the construction company’s performance. Subsequently, the construction company defaulted and the municipality demanded that the insurance company take action, as required by its bond, to complete the construction company’s obligations.

The insurance company then entered into negotiations with a subcontractor on the project to complete the work. The subcontractor proposed a starting and ending date for the work in exchange for a fixed fee. At the time of the proposal, however, the insurance company had not finalized a takeover agreement with the municipality—an essential requirement to the subcontractor’s performance. Anticipating a contract with the insurance company, the subcontractor discussed with another insurance company its issuance of a bond insuring the subcontractor’s performance. The second insurance company executed a performance and payment bond in favor of the first insurance company and forwarded it to the subcontractor for execution and delivery, if and when the contract between the subcontractor and the first insurance company was executed. Because negotiations between the subcontractor and the first insurance company, and between the first insurance company and the municipality had not concluded, the subcontractor returned the bond to the second insurance company. Again, believing negotiations would soon conclude, the subcontractor asked the second insurance company for a bond, which the second insurance company issued. The subcontractor advised the first insurance company that the delays in reaching a binding contract required that it raise the price for the contract. The first insurance company represented to the subcontractor that a takeover agreement was imminent. Subsequently, the subcontractor signed a completion contract, leaving blank certain material terms such as the effective date of the contract. The subcontractor then forwarded the document to the first insurance company. The first insurance company did not execute the completion contract until a month later.

The first insurance company then issued a notice to proceed to the subcontractor pursuant to the completion contract, however, only after the first insurance company received an acceptable performance bond in favor of both the first insurance company and the municipality. The subcontractor responded that due to the time delays, it would require adjustments to the contract.

Meanwhile, the first insurance company and the municipality finally executed a takeover agreement. However, neither the subcontractor nor the second insurance company delivered the bond to the first insurance company. Later, the first insurance company claimed that the subcontractor was in default and demanded performance under the second insurance company’s bond. The first insurance company filed a complaint alleging the subcontractor’s breach of the completion contract and the second insurance company’s breach of its obligations on the performance bond. The lower court reviewed the evidence and concluded there was no meeting of the minds of the parties because the time for performance was material and the delay in executing both the completion contract and the takeover agreement precluded any agreement on that point.

The Appellate Division explained that in considering the first insurance company’s claim of breach of contract, the lower court was required to determine whether the parties had entered into an enforceable contract. The Court pointed out that a contract arises from offer and acceptance, but it must be sufficiently definite that the performance to be rendered by each party can be ascertained with reasonable certainty. The Court also reiterated the maxim that it is fundamental that the essential element to the valid consummation of a contract is a meeting of the minds of the contracting parties and that until there is such a meeting of the minds either party may withdraw and end all negotiations. In light of those contract principles, the Appellate Division found that the discussions between the first insurance company and the subcontractor never ripened into an enforceable contract. The Court reasoned that the absence of a meeting of minds as to the starting and completion date for performance, which impacted upon an agreeable price for performance, precluded any certainty as to the benefits the parties would receive from their anticipated agreement.

The Appellate Division also noted that there are instances in which an incomplete written recitation of a contract’s terms may nevertheless provide a basis for performance. However, in this case, all the material terms were tied together, each being a linchpin to the entire understanding of all the parties. Thus, the Court found that all the provisions and circumstances remained uncertain and were never ultimately finalized.

As a result, the Court held that there was never an enforceable contract between the first insurance company and the subcontractor, and that, in the absence of an enforceable contract, the second insurance company was not obligated in any respect. Accordingly, the judgment of the lower court was affirmed.


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