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Where a contractor brought a claim against a project owner’s bank that was funding the project, based on allegations that the bank made promises to the contractor that funds were available and would be paid to the contractor to complete the project, summary  judgment was granted in favor of the bank, with the finding no legal basis for the claims for breach of contract, promissory estoppels and negligent misrepresentation.  This case involved a contractor for construction of an ethanol production plant where the owner fell behind on monthly payments to the contractor and requested a formal payment deferral.  Before agreeing to the payment deferral, the contractor asked to meet with the projects debt and equity investors (hereinafter “bank’), and this was done.  Contractor alleges that the bank promised and assured it that it would be paid for the work on the plant, but that in fact $2.2 million worth of work performed after the meetings with the bank were never paid.  Since the project owner went bankrupt, the contractor sought to recover the unpaid balance of its contract from the bank.

The first issue the court considered in GEM Industrial, Inc. v. Sun Trust Bank, 700 F. Supp.2d 915 (D.C., N.D. Ohio, 2010)  was whether the case should be dismissed based on the statute of frauds since the contractor’s claim was based on the bank’s alleged oral promise to pay for amounts due for work under the contract to which it owed no obligation.  Pursuant to the statute of frauds, such a promise to “answer for the debt of another” must be in writing in order for it to be enforceable.  An exception to the requirement for written documentation exists, however, “when the promisor’s leading object is to subserve his own interest.”   In this case, the court found that to be the situation and, concluded therefore that the case would not be dismissed based on the statute of frauds.

Moving on to the question of whether there was an oral contract made by the bank with the contractor, the court stated this would depend upon whether there was evidence of mutual assent to the essential terms of the agreement.  Here, the court found that the evidence was too vague to support the existence of an enforceable contract.  The court considered the depositions and affidavits of the contractor’s managers concerning what statements were allegedly made to them by the bank representatives, and concluded that the alleged promises were only statements in very general terms that the contractor would be paid.  According to the court,

“This testimony contains no suggestion that Pirio or anyone else at SunTrust explicitly agreed to essential contract terms such as price, duration, or timing of payments during the April 28 phone conversation; it merely asserts that SunTrust promised to pay GEM for work at the plant. The other testimonial evidence submitted by GEM is similarly vague as to any affirmative promises made by SunTrust during the April 28 call. Without more, such broad assertions are too indeterminate to support an enforceable contract.”

The court concluded that uncertainty about the identity of the parties to the alleged oral contract and their relative obligations is fatal to the contractor’s contract claim.

Next, the court determined that even if there was evidence of an “implied-in-fact contract” between the bank and the contractor, after the date that the contractor claims to have entered into an implied-in-fact contract with the bank, the contractor nevertheless continued to send all its invoices for payment directly to the project owner and not the bank.  In any event, the claim based on implied-in-fact contract suffered the same problems as the oral contract claim in that the alleged contract did not clearly delegate responsibility for payment among the parties.

Promissory estoppel, as a cause of action was rejected by the court because it concluded that the first element of the four elements required under state law for proving promissory estoppels were not met – these being:

“(1) a promise clear and unambiguous in its terms; (2) reliance by the party to whom the promise was made; (3) the reliance was reasonable and foreseeable; and (4) the party relying on the promise was injured by its reliance.”  Here, the court found there was no evidence supporting the first element of a clear and unambiguous promise.

Finally, the court turned to the contractor’s claim against the bank on the basis of alleged “negligent misrepresentation.”   To be liable for negligent misrepresentation under the relevant state law, a party must:

“(1) in the course of his business, profession, or employment, or in any other transaction in which he has a pecuniary interest, (2) supply false information (3) for the guidance of others in their business transactions (4) causing pecuniary loss to the plaintiff (5) while the plaintiff justifiably relied upon the information (6) and while the defendant failed to exercise reasonable care or competence in obtaining or communicating the information.”

To satisfy the false information element there must be evidence that there was a representation as to “past or existing facts, not promises or representations relating to future actions or conduct.”  As explained by the court, “A tort claim for negligent misrepresentation is thus distinguished from a breach of contract claim, which is necessarily based on a promise of future conduct.”  In this case the allegations focused on a promise of future conduct with regard to future payment rather than a false statement of existing fact.  “An assurance of future payment for future work is quintessentially a contractual promise.”   There was no evidence of false statements of existing facts regarding project funding, but instead the alleged negligent misrepresentations all related to whether the contractor would be paid.  Even if such representations had been made by the bank, the court found that those statements would be irrelevant since as a matter of law, they would not support a claim for negligent misrepresentation.   For all these reasons, the court granted summary judgment against the contractor.

Comment: As the solvency of project owners and the ability to secure project funding continues to be a major problem, it is increasingly important that contractors take appropriate precautions to assure that they will be paid for their work.  Contract language can be drafted that gives the contractor the right to demand evidence of the project owner’s financial situation during performance of the contract.  Language can also be included that permits the contractor to stop work in the event of non-payment or even of failure of the owner to demonstrate an ability to continue making payment.  Such protective language is particularly important on large, complex projects like the one in this case, where large amounts of costs can be incurred by the contractor in a short amount of time and it is important to know that the owner can pay for the same.

From the reported decision, it appears the contractor genuinely believed that it had assurances from the bank that it would be paid for its work if it completed the project.  Unfortunately, as the court here explains, those assurances may not turn into an actionable claim in the absence of evidence that the elements of new contract were made between the contractor and the bank.  With this in mind, contractors may want to heed the warnings from this decision with regard to what is necessary in order to prevail against the owner’s lending institution.