Onorato Construction, Inc. v. Eastman Construction Company

312 N.J. Super. 565, 711 A.2d 1363 (App. Div. 1998)
  • Opinion Date: June 22, 1998

CONTRACTORS; PROMISSORY ESTOPPEL; LIENS—Where a contractor promises to pay a sub-subcontractor directly, the promise may be enforceable if consideration can be found or if the elements of promissory estoppel can be satisfied.

A construction contractor engaged a subcontractor to perform certain site construction work. The subcontractor, in turn, subcontracted a portion of its work to a sub-subcontractor. The sub-subcontractor fully performed its work, resulting in an obligation by the subcontractor to pay it. By reason of a “personal problem,” the subcontractor was unable to pay the sub-subcontractor. Each of the two wrote to the general contractor and requested that the general contractor pay the sub-subcontractor either directly or with a joint check made payable to the sub-subcontractor and the subcontractor. The general contractor acknowledged this request and, in fact, stated that monies owed to the subcontractor would not be paid directly to it. Thereafter, the general contractor issued a joint check and the sub-subcontractor received the funds from that check. Nonetheless, this left an outstanding balance and the sub-subcontractor again contacted the general contractor noting that there was an outstanding balance due and requesting any help that the general contractor could give in getting the balance paid. The general contractor at no time disavowed its previous undertaking to pay the sub-subcontractor directly or to issue joint checks. Nor did it disavow its promise not to pay the subcontractor directly.

Eventually, the subcontractor submitted a final application for payment to the general contractor. The general contractor paid the subcontractor directly and, in direct derogation of its undertaking to the sub-subcontractor, this payment was not by joint check. The subcontractor was insolvent, leaving the sub-subcontractor without recourse other than filing suit against the general contractor. As various theories for its suit, the sub-subcontractor alleged that the subcontractor had assigned its payments to it; that the sub-subcontractor was a third party beneficiary of the general contractor’s agreement to pay; and, that there was a quasi-contractual relationship under which the sub-subcontractor should have been paid. The lower court rejected all of the sub-subcontractor’s theories based upon its own understanding that there was apparent lack of consideration for the general contractor’s undertaking to pay the sub-subcontractor.

The Appellate Division disagreed with the lower court and remanded the matter for further consideration. In the Appellate Division’s view, there were two possible ways in which consideration could be found. The first was that there was at least a factual issue that the sub-subcontractor’s forbearance from legal action against the subcontractor (to be followed by an execution against the funds) was sufficient consideration for a contractual remedy. Consideration may be either a benefit to the promisor or a detriment incurred by the promisee. Forbearance from legal action is well recognized as a detriment sufficient to support a contract. The second response to the claim of lack and consideration was that the general contractor can be found estopped from asserting such a defense by reason of promissory estoppel. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the part of the promisee or third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. Here, there was no question that the general contractor knew that a fixed sum that it held was payable to the sub-subcontractor. It acknowledged this in writing and agreed to pay the sub-subcontractor. It further knew from the sub-subcontractor that it had not been paid and that the sub-subcontractor was still looking to the general contractor to protect its rights. The Appellate Division clearly said that this was not an issue of creating a substitute or an “end run” around the mechanics’ lien laws. In its words, “[A]lthough generally a subcontractor or materialman has no right to direct payment from the general contractor or owner where the requisites of establishing a mechanics’ or materialman’s lien have been ignored, there are different operative facts before us.”