Opinion
NO. 2015-CA-000333-MR NO. 2015-CA-000374-MR
02-24-2017
T+C CONTRACTING, INC. APPELLANT/CROSS-APPELLEE v. LOUISVILLE AND JEFFERSON COUNTY METROPOLITAN SEWER DISTRICT APPELLEE/CROSS-APPELLANT
BRIEFS FOR APPELLANT/CROSS-APPELLEE: Gerald L. Stovall Brian A. Veeneman Louisville, Kentucky ORAL ARGUMENT FOR APPELLANT/CROSS-APPELLEE: Gerald L. Stovall Louisville, Kentucky BRIEFS FOR APPELLEE/CROSS-APPELLANT: Richard M. Sullivan Kenneth A. Bohnert Jennifer Fust-Rutherford Louisville, Kentucky ORAL ARGUMENT FOR APPELLEE/CROSSAPPELLANT: Kenneth A. Bohnert Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL and CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE JAMES M. SHAKE, JUDGE
ACTION NO. 12-CI-006235 OPINION
AFFIRMING IN PART, VACATING IN PART AND REMANDING
** ** ** ** **
BEFORE: DIXON, JONES, AND J. LAMBERT, JUDGES. LAMBERT, J., JUDGE: This appeal and cross-appeal arise from litigation related to the construction of a sewer project in Jefferson County. T+C Contracting, Inc. (T+C), the general contractor, has appealed from the final judgment and several pretrial rulings of the Jefferson Circuit Court, including a summary judgment dismissing its breach of contract claim, and Louisville and Jefferson County Metropolitan Sewer District (MSD) has cross-appealed from the final judgment and the order denying its motion for a judgment notwithstanding the verdict. Having carefully reviewed the record and the parties' respective arguments in their briefs and at oral argument, we affirm on MSD's cross-appeal and vacate and remand on T+C's direct appeal.
This contract action began with the filing of a verified complaint and request for declaration of rights by T+C in the Jefferson Circuit Court on November 28, 2012. T+C is a Kentucky corporation with a principal place of business in Louisville. MSD is a joint metropolitan sewer district created pursuant to Kentucky Revised Statutes (KRS) 76.010, et seq., and it also has its principal place of business in Louisville. T+C alleged that on January 20, 2011, it entered into a contract with MSD to provide labor, material, and equipment for construction of a project called the Broad Run Interceptor, Contract No. 15526/AP#273364 (the Project). The Project called for the installation of more than 9,400 linear feet of sewer pipe as well as manholes and other appurtenant work. MSD's standard specifications required that sanitary pipes be tested for leaking after installation. Scott Thornberry signed the contract as T+C's Secretary.
The provisions of the contract pertinent to our review are as follows: Article 7 of the contract provided that MSD would pay T+C $2,327,500.00 for its work on the Project. Article 6 of the contract also provided that T+C would commence work on February 1, 2011, and reach substantial completion on or before January 31, 2012. That article provided for a schedule of liquidated damages depending upon the contract amount, which would be assessed if T+C's delay in reaching substantial completion was unexcused. The amount per day for the contract amount in this case was $600.00. Article 10 addressed the duties, obligations, and responsibilities of the contractor, and subsection (E) included a warranty from the contractor "that the product of such labor shall yield only first-class results, that all materials and equipment provided shall be new and of high quality, [and] that the completed Work will be complete, of high quality, without defects[.]" Article 13 detailed claims by the contractor and the resolution of disputes:
(A) All CONTRACTOR claims, disputes and other matters in question against MSD arising out of or related to the Contract or the breach thereof, specifically including without limitation claims in respect to changes in the Contract Price or Contract Time, shall be initiated by a written notice of claim submitted to MSD. Such written notice of claim shall be received by MSD no later than ten (10) days after the event, or the first appearance of the circumstances, causing the claim, and same shall set forth in detail all known facts and circumstances supporting the claim including the specified amount claimed. The CONTRACTOR agrees and acknowledges that its failure to provide written notice of a claim as set forth herein shall constitute a waiver of any claim for additional compensation or time extension related thereto;
. . .
(G) . . . . Any claim for an extension by the CONTRACTOR shall strictly comply with the
requirements of this Article 13. If the CONTRACTOR fails to make such claim as required in this Paragraph 13(G), any claim for an extension of time shall be waived.
. . .
(J) No later than thirty (30) days after the date of the written notice of claim, the CONTRACTOR shall submit a formal written claim which shall include at least the following information: (1) a concise statement of the occurrence(s) supporting the claim, dispute or other matter, and the relief sought; (2) identification of the facts giving rise to the claim, dispute or other matter; (3) the date the party discovered the occurrence(s); (4) a detailed schedule of values identifying all costs resulting from the claim, dispute or other matter; (5) documentation supporting the schedule of values; (6) identification of any impact the claim, dispute or other matter has on the critical path schedule; and (7) all correspondence, internal memoranda, progress notes, and other documentation relation to the events which form the basis of the claim dispute or other matter. Other information or documents shall be submitted to MSD within ten (10) days after written request by MSD. The failure to provide a claim as set forth herein, or the failure to provide such other documents or information requested by MSD within ten (10) days after the written request shall constitute a waiver of any claim for additional compensation or time extension related thereto;
. . .
(M) The formal written decision of MSD on such claim, dispute, or other matter will be final and binding upon the CONTRACTOR unless, within ten (10) days after issuance of the decision, the CONTRACTOR appeals the decision by delivering to MSD a written request for executive negotiation. Failure of the CONTRACTOR to appeal the decision to executive negotiation, within ten (10) calendar days of its delivery, shall render the decision final and binding. . . .
. . .
(O) Subject to the foregoing procedural requirements of this Article 13, all appealed or unsettled claims, disputes, or other matters between MSD and CONTRACTOR arising out of or relating to the Contract or the breach thereof shall be submitted in writing directly to the Chief Engineer of MSD, with a copy to the Project Manager, provided that no such submission shall be made later than ten (10) days after the date the executive negotiation has been declared unsuccessful by MSD or the CONTRACTOR; and the failure to submit in writing a claim, dispute or other matter to the Chief Engineer within said ten (10) days' period will result in the decision of MSD becoming final and binding upon MSD and the CONTRACTOR. The Chief Engineer or his designee(s) may review and evaluate whatever information he deems necessary, and may adopt any procedures he deems proper, to evaluate and to decide an appeal. The Chief Engineer, or his designee(s), shall issue a written decision within sixty (60) days after submission of the request for such a decision. A copy of the decision shall be mailed or otherwise furnished to the CONTRACTOR. If the Chief Engineer, or his designee(s), fails to issue a written decision within sixty (60) days, the parties shall proceed as if a written decision adverse to the CONTRACTOR has been issued. The decision shall be final, conclusive and binding, absent intentional misconduct, fraud or bad faith;
(P) Any legal action to show intentional misconduct, fraud, or bad faith shall be brought in Jefferson County, Commonwealth of Kentucky, not later than one (1) year after the date the decision of the Chief Engineer or his designee(s) is issue or is due, whichever is sooner, and shall be tried by the court sitting without a jury. All defenses in law or equity, except the defense of government immunity, shall be preserved to MSD;
. . .
(S) MSD and the CONTRACTOR agree that all decisions of MSD that are not appealed to the fullest extent provided herein are final, conclusive and binding, and cannot be appealed to or challenged in any forum or court. . . .
In mid-February 2012, T+C advised MSD that the pipe installation had passed the test as required by the specifications and that the Project was ready to be finally inspected. Later that month, T+C advised MSD that it had completed work on the Project and in early March sent a letter to MSD requesting that it declare the Project to be substantially complete per the contract. By letter dated March 5, 2012, MSD notified T+C that it had inspected the pipe system and had discovered leaks. In mid-March, T+C sent another letter to MSD stating that the known leaks had been repaired and again included a request that it declare the Project to be substantially complete. About a week later, a representative from MSD removed a manhole lid and saw water in the pipe invert. In early April, MSD responded to the March 16th letter, stating that it had not accepted the pipe and the Project was not substantially complete. The letter also stated that T+C had not provided adequate conditions to inspect the pipe.
After T+C completed its work and the sewer pipe had passed low-pressure air testing, T+C discovered cracks in the concrete pipe under four creek crossings, which allowed groundwater to infiltrate the pipes. T+C repaired the pipe at three of the four locations and had to replace the pipe at the fourth location, causing it to incur additional costs for labor, materials, and equipment. Before replacing the pipe at the fourth location, T+C retained independent consultants to observe its work and inspect the cracked pipe and concrete encasement as they were removed. These consultants could not determine what generated the large lateral forces that would have caused the cracks in the concrete pipe and encasement, but they indicated that they were not caused by a failure to properly install the pipe. T+C alleged that in April 2012, MSD had suspended its approval or use of 24-inch to 48-inch diameter reinforced concrete pipe for sanitary sewer applications on future projects to allow it to evaluate the source of leaking and poor acceptance testing results and to address these concerns. MSD ordered T+C to repair and replace the failed concrete pipe at the creek crossing at its own expense. MSD rejected T+C's offer to have MSD meet with it and the consultants to discuss potential causes for the cracks. At MSD's direction, T+C submitted a claim for $108,542.41 it had incurred due to additional testing and the repair and replacement of the cracked concrete pipe and encasements that failed for reasons beyond its control. MSD denied this claim and failed to respond to its request for executive negotiation as set forth in the contract.
Based upon these allegations, T+C sought a declaration of rights that Article 13 of the contract violated KRS 371.405(2)(a) of the Kentucky Fairness in Construction Act of 2007 and the Kentucky Constitution by requiring unsettled claims and disputes to be submitted to MSD's Chief Engineer for final, binding resolution, and was therefore void and unenforceable. T+C also alleged breach of contract for MSD's failure to pay $108,542.41 for the work it performed to test, repair, and replace the concrete pipe on the Project. Additionally, T+C sought prejudgment interest and costs, including attorneys' fees.
MSD filed an answer disputing T+C's claims, and it specifically alleged as a defense that T+C failed to timely and completely comply with the dispute resolution provisions in the contract, which barred its claims. MSD also filed a counterclaim seeking damages for breach of contract due to T+C's delay in reaching substantial completion and its failure to perform a portion of the contract's scope of work, which therefore caused it to not achieve final completion. MSD sought liquidated damages in the amount of $600.00 per day for the unexcused delay for a total of $106,800.00 (178 days) as well as liquidated damages of $300.00 per day for every day past August 17, 2012, that T+C failed to achieve final completion of the Project. At the time MSD filed its counterclaim, it alleged that the Project had not reached final completion. As a result, MSD retained $106,800.00 for delays from February 21, 2012, through August 17, 2012, as well as $135,830.00, which was 200% of the reasonable costs necessary to complete the Project. T+C disputed MSD's counterclaim, asserting that its retention of funds violated the Kentucky Fairness in Construction Act of 2007, that the liquidated damages were not reasonable approximations of the damages MSD allegedly sustained, and that MSD's claims were barred by its past conduct, including its defective design of the Project.
This was later identified as T+C's failure to reconstruct and line a pond on private property adjacent to the Project.
This date is 60 days after the date substantial completion was achieved.
In September 2013, T+C moved the circuit court to compel MSD to respond to its discovery requests with respect to the actual damages it suffered due to the alleged delays. MSD had refused to answer those requests, although T+C claimed this information was integral to its defense to the delay claim in MSD's counterclaim. In response, MSD stated that it was seeking liquidated damages as set forth in the contract, not actual damages, and it was not required by law to provide this information. It explained that it could not easily calculate its actual damages, which is why the parties used the graduated liquidated damages schedule in the contract. On October 23, 2013, the circuit court entered an opinion and order ruling on the motion to compel discovery. The court granted the motion, citing Mattingly Bridge Co., Inc., v. Holloway & Son Constr. Co., 694 S.W.2d 702 (Ky. 1985), and noting that "if [T+C] is to attack the enforceability of the liquidated damages provision of the contract with MSD, it must know the amount of 'actual loss.'" (Emphasis in original). The court considered a spreadsheet MSD provided to T+C, which included estimated costs to complete the work T+C did not perform, to discern this information. The court determined that T+C was entitled to this information under oath, and it further directed MSD to provide any supporting documents, including invoices and canceled checks, to T+C.
On December 3, 2013, T+C filed a motion for partial summary judgment, requesting the court to dismiss Count 1 of MSD's counterclaim. In support of this motion, T+C argued that MSD had not suffered any actual damages and was not entitled to withhold liquidated damages from it, pointing out that liquidated damages cannot be assessed unless that amount is a reasonable estimation of actual damages suffered. T+C cited Mattingly Bridge, supra, in support of this argument to contend that the liquidated damages claimed would amount to a windfall and constitute an unenforceable penalty. In response, MSD pointed out that T+C is a sophisticated contractor and that it willingly accepted the liquidated damages provision of the contract. MSD also argued that it did not have the burden to prove that the contract provision was enforceable; the burden to prove it was unreasonable was on the challenging party. MSD went on to argue that there was evidence in the record regarding the elements of damage MSD would reasonably expect to incur due to delayed performance by a contractor.
In an opinion and order entered February 4, 2014, the circuit court ruled on the motion for partial summary judgment. After considering the case law, the circuit court denied T+C's motion and found that the liquidated damages clause was valid and enforceable. The court held:
Clearly, it is the law of this Commonwealth that liquidated damage clauses are enforceable without dollar-for-dollar proof of actual damages. The standard is simply proof that the party has been damaged and that the damages claimed are not excessive.
There is evidence of record which demonstrates that MSD has incurred damages. The affidavit of Gregory Clayton Bostic, Construction Engineer employed on the Board Run project, states that MSD has incurred "continued supervision and administration costs." The deposition of John W. Braun, former counsel for MSD contains a lengthy explanation as to how the liquidated damage amounts contained in MSD's contracts were calculated. In so doing, Mr. Braun relied
on information from inside MSD and outside, including other government agencies as well as construction trade organizations. This testimony demonstrates that the amount claimed is not excessive. [Emphasis in original.]
In a response to discovery requests filed December 18, 2013, T+C admitted that it had not completed a pond as provided for in the contract by providing a lining. It stated that the pond and its dam were not disturbed during construction, and the property owner had advised T+C that additional work was not required.
On October 1, 2014, MSD filed a motion for partial summary judgment on its breach of contract counterclaims to establish that the date on which the Project should have reached final completion was October 16, 2012. It stated substantial completion was achieved on August 17, 2012, based upon T+C's August 24, 2012, letter, and the contract set forth that final completion was to be sixty days later. In response, T+C argued that this motion was related to a finding of one fact and did not dispose of any asserted claims. Furthermore, there were relevant facts to decide regarding the dispute as to the date of final completion, including which party was responsible for delays in meeting completion dates. An affidavit from Michael Caruso, T+C's Project Administrator for the Project, provided that the August 17, 2012, letter of substantial completion addressed additional work MSD required, not the original work.
The same day, MSD filed a motion for summary judgment on T+C's breach of contract claims, arguing that T+C waived its claim by failing to follow the contractual requirements regarding notice and that T+C's faulty design theory was only speculative. T+C disputed the motion, arguing that many genuine issues of material fact remained to be decided. In addition, it claimed that it had provided timely notice to MSD of its intent to file a claim and attacked the reasonableness of the requirement that it must file a formal claim within thirty days of providing notice. T+C also relied upon the Spearin Doctrine to argue that it was not its obligation to determine the cause of the cracking. Under this doctrine, T+C argued, if a building defect is caused by the design, whoever supplied the design specifications cannot transfer the cost of correction to the contractor who has the role of executing the design. T+C maintained that it provided evidence that it was not at fault for the cracks and that it did not have to prove who was at fault. In reply, MSD asserted that T+C's claim related to the reasonableness of the dispute resolution process was a new claim that did not conform to its complaint and that MSD did not therefore have the opportunity to defend against.
United States v. Spearin, 248 U.S. 132, 39 S.Ct. 59, 63 L.Ed. 166 (1918). --------
On October 8, 2014, T+C filed a motion to compel MSD to designate and produce a corporate representative pursuant to Kentucky Rules of Civil Procedure (CR) 30.02(6) to testify about the actual damages MSD sustained as a result of delay in achieving substantial completion. T+C continued to argue that this information was an integral part of its defense to MSD's counterclaim. T+C asserted that the testimony the court relied upon in the prior order ruling on its motion for partial summary judgment did not show that the liquidated damages MSD claimed were not excessive and did not establish what damages MSD may have suffered. MSD objected to the motion, noting that the court's prior orders were proper and settled the issue.
On November 26, 2016, MSD filed a motion in limine to exclude a memorandum dated April 16, 2012, authored by Steve Emly, who had been the Interim Director of Engineering at MSD when he wrote the memo. The memo read as follows:
Due to recurring problems with quality control issues and problems associated with excessive leakage and poor acceptance results, MSD is temporarily suspending the approval or use of reinforced concrete pipe (RCP), ranging in sizes from 24" to 48", for sanitary sewer applications on future projects. This suspension is due to continuing problems with leakage, quality control and testing issues on the Broad Run Interceptor and the River Road Interceptor, both of which involve the installation of 36" RCP. MSD Standard Construction Specifications are to be revised accordingly.
The intent of this suspension is to allow time for staff and manufacturers to evaluate the source of the problems, and put in place measures, either in terms of improved quality or revisions to current MSD specifications, which address the current concerns. Projects currently under construction utilizing this product will be allowed to continue to completion.
While in the past these issues have been of lesser importance, MSD is currently under a wet weather Federal Consent Decree. We are attempting to convey and treat, eliminate or minimize existing inflow and infiltration in our system through an $850 million investment; the projects that we build as part of this investment should not contribute excessively to the problem.
Please pass along to staff.T+C was attempting to rely upon the memo as evidence that MSD knew of the recurring problem with the quality of the concrete pipe it specified, but it still ordered T+C to repair and replace the failed pipe in four places. MSD asserted that the memo should be excluded because T+C's experts found nothing wrong with the pipe used on this Project. MSD also objected to the introduction of testimony related to its actual damages, or lack of actual damages. By orders dated October 23, 2013, and February 6, 2014, the circuit court previously found that MSD had sustained a sufficient amount of actual damages to support its claim for liquidated damages per the contract.
T+C objected to both parts of the motion in limine. It first discussed the contents of the internal memo and its acknowledgement that the design of its reinforced concrete pipe was flawed and the specifications would have to be revised. It went on to state that its experts did not address the problems that were identified in the memo, but rather testified that the pipe material was not deficient. They did not testify about MSD's plans or specifications or that the design was adequate. Related to actual damages, T+C continued to argue that there was no evidence identifying any amount of damages to substantial or final completion. To determine whether liquidated damages are enforceable, the amount must be reasonable at the time of contracting and as measured by the actual damages suffered.
In its trial memorandum, MSD listed the issues of fact to be decided as the amount of liquidated damages it was owed due to T+C's failure to achieve final completion; whether the pipes T+C installed were defective and required additional testing, remediation, or correction; whether the defects in the pipes were a consequence of a defective design; T+C's alleged damages; and whether T+C failed to mitigate its damages by seeking recourse against the supplier of the pipes. In its trial memorandum, T+C listed issues of fact related to substantial completion, notice, the construction of the pipe under creek crossings, the reasonableness of the amount of liquidated damages claimed, whether T+C breached the contract by not reconstructing the pond located on private property, and the amount of damages T+C sustained. At the time these were filed, the court had not yet ruled on several substantive motions.
On December 11, 2014, the circuit court entered its rulings on the motion in limine, the motion to compel, and the motions for summary judgment. In the first order, the court addressed MSD's motion in limine related to the memo written by Steve Emly. After (incorrectly, see above) noting that T+C had not filed a response, the court granted the motion for the reasons set forth in MSD's motion.
In the second order, the court addressed the remaining pending motions. Related to the motion to compel, the court reexamined its prior rulings on the issue of liquidated damages and essentially upheld its decision, stating that "[i]t is the fact that these damages were incurred which invokes the liquidated damages provision, not their amount. To compel MSD to prove the amount of those damages would fly in the face of the reasoning behind such a clause, to reduce litigation over delays." Related to MSD's motion for partial summary judgment on the date of final completion, the court found that the date of substantial completion was August 17, 2012, which called for a final completion date by October 16, 2012, and thereby granted a partial summary judgment. Finally, the court granted MSD's motion for summary judgment on T+C's claims, finding that pursuant to the contract, T+C had agreed to provide "first class work" at "no cost" to MSD. After reviewing the provisions of the contract, the court noted that T+C had attempted to file the formal claim 95 days after providing notice and 60 days after the last pipe was replaced and that the contract provisions included a waiver for untimely notice and filing of claims. The court went on to reject T+C's Spearin Doctrine argument based upon the terms of the contract calling for T+C to submit claims pursuant to Article 13 as well as T+C's argument that the dispute resolution provisions were unconscionable and one-sided because this was a contract between two experienced, commercial entities. It then rejected T+C's argument that the Fairness in Construction Act of 2007 invalidated the agreement because the parties had contracted for alternative dispute resolution and T+C had failed to follow the terms of the contract. The circuit court did not address MSD's contention that T+C failed to show any defect in the design of the Project that would have excused T+C from meeting its obligation for achieving final completion. T+C moved the court to reconsider its orders, which the circuit court denied.
The matter proceeded to a jury trial on the remaining portion of MSD's crossclaim commencing December 16, 2014. At trial, MSD sought the following damages: 1) $106,800.00 in liquidated damages ($600.00 per day from February 21, 2012, through August 17, 2012); 2) liquidated damages at a rate of $300.00 per day from October 17, 2012, the date final completion was required, until the date of the judgment (the current amount due was $220,500.00); 3) $67,915.00 in costs to complete the construction (the pond work); and 4) reasonable attorneys' fees and costs. The factual issue to be decided was whether there was an agreement between T+C and property owner Janie Witten that eliminated T+C's contractual duty to replace and line the pond on her property. MSD contended that it would currently cost $67,915.00 to complete the work on the pond.
The first witness to testify was Steve Emly, the Chief Engineer for MSD. He testified about the January 20, 2011, contract as well as the addendum to the contract. Emly testified to all of the following: Changes with respect to land acquisition were addressed in the addendum. Ms. Witten owned property the sewer line needed to cross, and MSD reached an agreement as to an easement over her property. The special condition that was added was the reconstruction and lining of the pond on Ms. Witten's property. This work was included in the bidding process, and T+C was ordered to do this work. However, T+C did not complete this work nor did T+C obtain or seek a deductive change order that would not require them to do the work on the pond. Everything other than the pond work had been completed on the Project. Therefore, T+C had not reached final completion on the Project. MSD retained more than $67,000.00 in funds that would be needed to complete the work as liquidated damages. On cross-examination, Mr. Emly said that MSD did not have any plans scheduled to replace Ms. Witten's pond and had not discussed this with her. He believed it was still in T+C's scope of work to complete this work on the pond.
Clay Bostic was the next witness to testify. He is a consultant with MSD as a project administrator and was brought in on the Project. He estimated the cost of completing the work as $63,675.00. He discussed the letters detailing the need to complete the work on the pond. On cross-examination, Mr. Bostic stated that MSD had discussed the completion of the work on the pond over the last summer and the hiring of a replacement contractor to complete it.
After two other witness testified, MSD closed its case. T+C moved for a directed verdict on liquidated damages due to MSD's failure to mitigate its damages. The court denied the motion.
Don Thornberry was the first witness to testify for T+C. He is T+C's president. He did not see any reason to rebuild the pond because it was never breached in the construction process. He said the removal of the pond work from the scope of work of the contract was discussed and agreed upon.
At the beginning of the second day of trial, MSD raised an evidentiary issue related to a document containing e-mail communication between Mr. Caruso and Ms. Witten. MSD objected to testimony as to what Ms. Witten might have said as it constituted hearsay. T+C responded that the document was not being offered for the truth of the matter asserted, but for the purpose of showing that T+C had met the requirement MSD set out to take the pond out of the scope of work. It also claimed the document was admissible as a business record. The court ruled that the e-mail records were admissible as non-hearsay, but that the business records did constitute hearsay and were excluded.
Scott Thornberry is the general manager of T+C. He testified that the original construction layout would have gone through the dam of the pond and destroyed it. He said the original contract included reconstructing the pond, and the addendum added the liner. The pipe line was moved by the supervisor, and it went around the pond. He assumed MSD approved this movement of the alignment. The pond was not rebuilt, and he said this had been discussed during a meeting. The direction he took was that T+C would issue a credit and they had to procure a writing that Ms. Witten was in agreement with this. T+C received written authorization for this. No credit was ever issued because a disagreement arose with relation to the Project, and litigation ensued. He expected the change order for not rebuilding the pond would be discussed during the final reconciliation process, which did not happen in this case.
Michael Caruso is a project manager for T+C. He had limited responsibility for the Project. He attended progress meetings, including one on May 17, 2012. In his notes from that meeting, he indicated that Ms. Witten's pond was discussed. The pond had not been disturbed, and MSD directed him to contact Ms. Witten and obtain her written authorization that T+C did not have to perform the contract work on the pond. He did not recall who was there for MSD at the meeting. After a bench conference, the court admonished the jury that the e-mail exchange between Mr. Caruso and Ms. Witten was evidence that T+C had obtained documentation of the agreement per MSD's request. Mr. Caruso's August 6, 2012, e-mail to Ms. Witten read as follows:
Janie,
I wanted to set out the things we had talked about this morning, 8-6-2012, regarding the pond at 7708 Broad Run Road. This will serve as a draft to make sure we get things correct.
We discussed the pond restoration and the suspected leak at the south west end of the pond. We also discussed the overflow at the north end and the constant trickle of water in it throughout July and August of this year. We discussed the pond restoration process; pump out the water, remove the bottom, place new clay material and re-compact it into place, and let the pond fill by rain water and the natural spring. You mentioned that T+C would not need to restore the pond as it had never been disturbed. You would evaluate the need for restoration in one year. You mentioned that you would only bush hog the western bank of the pond twice per year. You asked T+C to maintain the brush on the western bank of the pond to allow you to monitor it more closely. I replied that I would have to get my superior's OK to authorize that. You offered to let T+C use your pastures from the street as access to get in with bush hog equipment. I agreed that if we needed access from the street through your property, we would give notice before arriving on site.
T+C will agree to trim back the saplings and the weeds on the western bank of the pond that borders the construction easement. T+C will agree to provide notice of 24 hours prior to accessing your property from the street should the need arise. T+C will agree to re-evaluate the pond and the need for restoration in one year from today. At that point, if the pond needs no restoration, T+C will be released from the responsibility to trim the weeds along the western bank and the responsibility to perform any restoration to the pond.Ms. Witten's August 11, 2012, responsive e-mail read as follows:
Let me know if the summary of the meeting this morning is accurate and if the terms are agreeable.
One clarification: in reference to item 5 below - I shared that typically we use the bush-hog twice per year to the fields in this area of the property - not that I just only did the pond perimeter. Other than that slight change, yes you have captured our discussion and hopefully with getting the brush trimmed back from this area of the pond we can more closely assess if there is actually a leakage from the pond and any need for a full restoration. Thank you for your walk-through with me on this matter.Mr. Caruso inspected the pond in late 2013 and saw that the levels were the same and the pond was still overflowing. He went back in the summer of 2014, and the pond was still overflowing through the overflow and everything was still grown up.
On cross-examination, Mr. Caruso admitted that he never obtained a written agreement signed by Ms. Witten or a written agreement with MSD to change the scope. He agreed that the e-mail thread between him and Ms. Witten was preliminary. However, he testified on redirect examination that he and Ms. Witten had reached an agreement as to the final terms of their agreement. He discussed the e-mail with Gary Feldkamp, the onsite inspector for MSD, and the fact that Ms. Witten had agreed that the pond did not have to be rebuilt.
MSD called two rebuttal witnesses, who testified that they were not aware of the e-mail exchange between Mr. Caruso and Ms. Witten prior to the first day of the trial.
At the conclusion of the testimony, the parties discussed the proposed jury instructions. MSD objected to the mitigation instruction under Instruction No. 3. In addition, MSD moved for a directed verdict based upon Mr. Thornberry's admission that T+C did not finally complete the contract. Because the contract was not completed, it was breached. In response, T+C argued that the Project was not completed because of MSD's actions. Conditions on the Project changed during the course of construction, and MSD agreed that they would provide a credit if T+C obtained an agreement from Ms. Witten that she did not want the work on her pond to be done. MSD argued that T+C only obtained a preliminary agreement, and it was never sent to MSD. But T+C pointed out that the e-mail thread contained the final terms of the agreement. The court denied the motion for directed verdict and let the parties argue the issue to the jury.
At the conclusion of the trial, the jury returned a verdict in favor of T+C under Instruction No. 2, which provided as follows:
It was the duty of the Defendant, T+C Contracting, Inc., under its contract with the Plaintiff, Louisville and Jefferson County Metropolitan Sewer District, to rebuild Ms. Witten's pond as shown in the plans and
specifications, unless there was a later agreement that this work was not to be performed.The unanimous jury answered "Yes" to the question, "Are you satisfied from the evidence T+C Contracting, Inc. was relieved of the obligation to rebuild Ms. Witten's pond and entitled to a deductive change order from Louisville and Jefferson County Metropolitan Sewer District?" Therefore, the jury found for T+C on MSD's claim on Verdict Form A.
If you are satisfied from the evidence that the Defendant was relieved of the obligations to rebuild Ms. Witten's pond and was entitled to a change order to is contract with the Plaintiff, you will find for the Defendant and against the Plaintiff's claim for the cost to rebuild the pond and for liquidated damages for delay in final completion, and award the Plaintiff a credit of $7,113.00. Otherwise, you will find for the Plaintiff.
MSD filed a CR 50.02 motion for a judgment notwithstanding the verdict, arguing that the court should have granted its motion for a directed verdict that the evidence was insufficient to support T+C's contention that it had obtained an agreement relieving it of the obligation to rebuild Ms. Witten's pond and satisfying the contract provisions for final completion. In its response to the motion, T+C argued that MSD misstated the facts upon which the jury based its decision and that there was evidence to support its verdict, not a complete absence of proof. On January 14, 2015, the court entered an opinion and order ruling on MSD's motion. It denied the motion, agreeing with T+C that there was evidence on the issues presented to the jury, including an e-mail exchange between Mr. Caruso and Ms. Witten.
The court entered a final judgment on February 10, 2015, detailing all of the rulings entered in this case:
1. In response to Count I of Plaintiff's Verified Complaint, the Court declared that Article 13 of the Defendant's contract does not violate Kentucky Revised Statute §371.405(2)(a) of the Kentucky Fairness in Construction Act of 2007 and Sections 7 and 14 of the Bill of Rights of the Kentucky Constitution, and is "statutorily enforceable";The court ultimately entered a judgment in favor of MSD on Count II of T+C's verified complaint and dismissed that count. The court also entered a judgment in favor of MSD on Count I of its counterclaim related to delay in achieving substantial completion and awarded MSD $106,800.00. The court entered a judgment in favor of T+C on the portion of Count I of MSD's counterclaim for delay in achieving final completion and dismissed that portion of the claim, with T+C owing MSD a credit of $7,117.98. The court entered another judgment in favor of T+C on Count II of MSD's counterclaim and also dismissed that claim with prejudice. The court ordered MSD to pay T+C the balance of the contract it owed ($322,727.93), less the amounts of $106,800.00 and $7,117.98, for a total owed of $208,809.95. Finally, the court ordered each party to be responsible for its own attorneys' fees. T+C has appealed from the December 11, 2014, orders and from the February 10, 2015, judgment. MSD has appealed from the January 14, 2015, order denying its motion for a motion notwithstanding the verdict and from the February 10, 2015, judgment, and has specifically indicated that it was appealing from the denial of its motion for a directed verdict and the instructions provided to the jury.
2. Count II of the Plaintiff's Verified Complaint for Breach of Contract was dismissed; and,
3. So much of Count I of the Defendant's Counterclaim for Breach of Contract - Delay Claims that sought damages for delay in achieving substantial completion was granted.
The remaining claims in this Action, including so much of Count I of the Defendant's Counterclaim for Breach of Contract - Delay Claims that sought damages for delay in achieving final completion and Count II of the Defendant's Counterclaim for Breach of Contract - Failure to Perform Scope of Work were tried, and the Jury rendered its verdict on Wednesday, December 17, 2014, in favor of the Plaintiff, subject to a credit due to the Defendant in the amount of $7,117.98. The verdict was unanimous and was signed by the Foreperson. Upon conclusion of the trial and return of the verdict, a poll of the members of the Jury was waived by counsel.
MSD'S CROSS-APPEAL
We shall first consider the two issues raised by MSD in its cross-appeal. It argues that the circuit court should have granted its motions for a directed verdict and for a judgment notwithstanding the verdict and that Jury Instruction No. 2 misstated the law.
On the first issue, MSD contends that there was a complete absence of proof that T+C was excused from completing the project. It argues that there was no agreement with Ms. Witten or proof that T+C sought a change of the scope of its work on the pond. It further argues that the e-mail correspondence between Mr. Caruso and Ms. Witten should have been excluded as hearsay.
Our standard of review on this issue is well-settled:
On a motion for directed verdict, the trial judge must draw all fair and reasonable inferences from the evidence in favor of the party opposing the motion. When engaging in appellate review of a ruling on a motion for directed verdict, the reviewing court must ascribe to the evidence all reasonable inferences and deductions which support the claim of the prevailing party. Meyers v. Chapman Printing Co., Inc., Ky., 840 S.W.2d 814 (1992). Once the issue is squarely presented to the trial judge, who heard and considered the evidence, a reviewing court cannot substitute its judgment for that of the trial judge unless the trial judge is clearly erroneous. Davis v. Graviss, Ky., 672 S.W.2d 928 (1984).Bierman v. Klapheke, 967 S.W.2d 16, 18 (Ky. 1998). In addition,
In ruling on either a motion for a directed verdict or a motion for judgment notwithstanding the verdict, a trial court is under a duty to consider the evidence in the strongest possible light in favor of the party opposing the motion. Furthermore, it is required to give the opposing party the advantage of every fair and reasonable inference which can be drawn from the evidence. And, it is precluded from entering either a directed verdict or judgment n.o.v. unless there is a complete absence of proof on a material issue in the action, or if no disputed issue of fact exists upon which reasonable men could differ. See Sutton v. Combs, Ky., 419 S.W.2d 775 (1967).Taylor v. Kennedy, 700 S.W.2d 415, 416 (Ky. App. 1985).
Here, we disagree with MSD that there was a complete lack of proof that T+C had met the requirement to be excused from its work on Ms. Witten's pond. The court properly permitted the introduction of the e-mail communication between Mr. Caruso and Ms. Witten solely to establish that T+C had met MSD's direction to obtain a written agreement from Ms. Witten that she did not want her pond to be replaced. This was not hearsay, but was submitted only to establish that T+C had done what MSD asked it to do. The e-mail thread and Mr. Caruso's testimony constituted at least some evidence to support T+C's argument, and we specifically reject MSD's allegation that there was no proof on this issue. It was proper for the circuit court to permit the jury to decide this factual issue.
Next, MSD contends that Jury Instruction No. 2 incorrectly stated the law because it did not include a specification of with whom the agreement must be in order for T+C to be discharged from its obligation to repair and line the pond and implied that a stranger to the contract could unilaterally discharge a party's duty under the contract. Our standard of review is set forth in Toler v. Süd-Chemie, Inc., 458 S.W.3d 276, 288 (Ky. 2014), as corrected (Apr. 7, 2015), reh'g denied (May 14, 2015):
On appeal, we consider allegations of erroneous jury instructions as questions of law to be reviewed under a de novo standard. Instructions must, of course, "be based upon the evidence[,] and they must properly and intelligibly state the law." Generally, the rule is "an erroneous instruction is presumed to be prejudicial to appellant, and the burden is on appellee to show affirmatively from the record that no prejudice resulted[.]" We only reverse if we "cannot determine from the record that the verdict was not influenced by the erroneous instruction." That said, "[i]f the statements of law contained in the instructions are substantially correct, they will not be condemned as prejudicial unless they are calculated to mislead the jury." [Footnotes omitted.]We agree with T+C that the instruction properly stated the law as to this case by asking the jury to decide whether T+C was entitled to a change order on the Project because it had met MSD's requirements to obtain one. The question asked by the instruction did not imply that Ms. Witten had the power to change the terms of the contract; rather, the instruction required the jury to determine whether T+C had met MSD's requirement to obtain a change order. We further reject MSD's assertion at oral argument that there should be a retrial on the issue of mitigation on MSD's part.
Accordingly, we find no error in the circuit court's denial of MSD's motions for a direct verdict or for a judgment notwithstanding the verdict, or in the jury instructions. Therefore, we affirm on the issues raised in MSD's cross-appeal.
T+C'S DIRECT APPEAL
We shall now turn our attention to T+C's direct appeal from the final judgment and several pretrial rulings. These issues address the cement pipes, liquidated damages, and application of the Fairness in Construction Act.
We shall first address T+C's argument that the contract's dispute resolution procedure violates the Kentucky Fairness in Construction Act of 2007 because it gives MSD's Chief Engineer the right to make a final and non-appealable decision on claims. In a similar argument, T+C contends that the contract's dispute resolution provision is arbitrary and unenforceable because it requires a contractor to submit a final claim within thirty days after giving notice of its intent to do so. MSD argues that these arguments are moot because T+C brought its claims before the circuit court. However, the circuit court dismissed T+C's breach of contract claim because it failed to follow the dispute resolution provisions of the contract, which it held were enforceable. The matter only went to trial on MSD's counterclaim.
KRS 371.405 provides for the enforceability of construction contracts and provides in relevant part as follows:
(2) The following provisions in a contract for construction shall be against the public policy of this Commonwealth and shall be void and unenforceable:
(a) A provision that purports to waive, release, or extinguish the right to resolve disputes through litigation in court or substantive or procedural rights in connection with such litigation, except that a contract may require binding arbitration as a substitute for litigation or require nonbinding alternative dispute resolution as a prerequisite to litigation;
In the present matter, Article 13(O) of the contract requires disputes arising from the contract to be submitted to the Chief Engineer, who would then issue a "final, conclusive and binding" decision. Article 13(S) also provides that "all decisions of MSD that are not appealed to the fullest extent provided herein are final, conclusive and binding, and cannot be appealed to or challenged in any forum or court." These provisions of Article 13 clearly violate KRS 371.405(2)(a) and are against public policy. The statute carves out binding arbitration and nonbinding alternative dispute resolution as a substitute for or as a prerequisite to litigation. Because Article 13 calls for an alternative dispute resolution, not arbitration, and set forth that the Chief Engineer's decision was binding, we hold that it is therefore void and unenforceable.
Next, we shall address the circuit court's summary judgment dismissing T+C's claim for breach of contract related to the condition of the cement pipes. Our standard of review in an appeal from a summary judgment is well-settled in the Commonwealth. "The standard of review on appeal when a trial court grants a motion for summary judgment is 'whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law.'" Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001), citing Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App. 1996); Palmer v. Int'l Ass'n of Machinists & Aerospace Workers, 882 S.W.2d 117, 120 (Ky. 1994); CR 56.03. "Because summary judgment involves only legal questions and the existence of any disputed material issues of fact, an appellate court need not defer to the trial court's decision and will review the issue de novo." Lewis, 56 S.W.3d at 436, citing Scifres, 916 S.W.2d at 781; Estate of Wheeler v. Veal Realtors & Auctioneers, Inc., 997 S.W.2d 497, 498 (Ky. App. 1999); Morton v. Bank of the Bluegrass & Trust Co., 18 S.W.3d 353, 358 (Ky. App. 1999).
T+C raised a defective design theory pursuant to the Spearin Doctrine to explain that it was not its defective construction that caused the pipes to leak, but MSD's defective design. MSD argues that T+C was not able to introduce any evidence to establish that MSD's design was defective because none of its experts reached this specific conclusion. However, the circuit court did not reach the issue of the defective design theory because it decided the summary judgment motion on T+C's failure to comply with the terms of the contract. Because we have held that Article 13, detailing the contract's dispute resolution, is void and unenforceable, we must vacate the circuit court's ruling on this issue to permit it to make a decision on the merits. In doing so, the court shall further reconsider its decision related to the exclusion of Mr. Emly's April 15, 2012, memorandum.
Finally, we shall address T+C's contention that it has the right to conduct discovery into the actual damages MSD incurred and therefore the circuit court should have permitted it to conduct a deposition on this issue. T+C sought this information to establish that the assessed liquidated damages were excessive and therefore constituted an impermissible penalty. Article 6(B) sets forth the liquidated damages clause, in part, as follows:
The CONTRACTOR shall pay MSD the indicated sum per day for each and every calendar day of unexcused delay in achieving Substantial Completion beyond the date set forth herein for Substantial Completion. Any sums due and payable hereunder by the CONTRACTOR shall be payable, not as a penalty, but as liquidated damages representing an estimate of delay damages likely to be sustained by MSD, estimated at the time of executing this Contract.
In support of this argument, T+C relies upon the Supreme Court of Kentucky's decision in Mattingly Bridge Co., 694 S.W.2d at 704-05:
We adopt the language of the Restatement, Second, Contracts § 356(1) (1981) as a reasonable expression of the rule applicable to liquidated damages:
"Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty."
The Mattingly Court went on to recognize,
"Anticipated loss" refers to the time of the making of the contract. "Actual loss" refers to the circumstances upon occasion of the breach. These are two prongs, which apply alternately. If the award of liquidated damages exceeds any reasonable limitation by either one or the other, to such extent it is unenforceable.
In time the rule evolved that such devices would be recognized as a useful commercial tool to avoid litigation to determine actual damages. But two restrictions remain: they should be used only (1) where the actual damages sustained from a breach of contract would be very difficult to ascertain and (2) where, after the breach occurs, it appears that the amount fixed as liquidated damages is not grossly disproportionate to the damages actually sustained.Id. at 705, citing Fidelity & Deposit Co. of Maryland v. Jones, 256 Ky. 181, 75 S.W.2d 1057, 1060 (1934).
MSD disputes T+C's assertion that Mattingly entitles it to discovery in this case. MSD specifically relies on C.E. Pennington Co. v. B & H Elec. Contractors, Inc., 2005 WL 3487865 at *13 (No. 2001-CA-001242-MR) (Ky. App. Dec. 22, 2005), for the proposition that a "liquidated damages provision is an accepted tool to avoid litigation to determine actual damages." (Emphasis in original.) MSD also relies upon quoted language in Patel v. Tuttle Props., LLC, 392 S.W.3d 384, 387 (Ky. 2013):
[W]hile the authorities recognize that at one time courts looked with disfavor upon contracts providing for liquidated damages, that time has long passed, and the courts now are strongly inclined to allow parties to make their own contracts, and to carry out their intentions, even when it would result in the recovery of an amount stated as liquidated damages, upon proof of the violation of the contract, and without proof of the damages actually sustained.
[Coca-Cola Bottling Works (Thomas), Inc., v. Hazard Coca-Cola Bottling Works, Inc., 450 S.W.2d 515, 519 (Ky. 1970)] (citing United States v. Bethlehem Steel Co., 205 U.S. 105, 27 S.Ct. 450, 51 L.Ed. 731).
Having considered the parties' arguments, we agree with T+C that the circuit abused its discretion in denying T+C's motion to compel a discovery deposition in this case. While there was evidence in the record that actual damages would be very difficult to ascertain and that evidence detailed the type of costs that would be incurred as a result of a delay, including administrative and legal expenses, bond interest, and lost revenue, the court could not have followed the Mattingly test to compare the amount of anticipated and actual loss to the amount of liquidated damages that were sought. In other words, the court could not determine whether this assessment represented a penalty and would therefore be unenforceable. Therefore, we agree with T+C that the circuit court abused its discretion in not permitting it to conduct discovery on this issue.
We recognize that based upon the terms of the contract, any decision on liquidated damages for failure to reach substantial completion in this case is entirely dependent on whether the delay is unexcused or not. And whether the delay is unexcused is related to which entity is at fault on the concrete pipe issue, on which we have remanded this case.
Accordingly, we hold that the circuit court committed reversible error and abused its discretion on the issues raised by T+C in its direct appeal, and we must therefore vacate those orders.
For the foregoing reasons, the judgment and orders of the Jefferson Circuit Court are vacated, and this matter is remanded for further proceedings in accordance with this opinion, with the exception of the rulings on the cross-appeal, which are affirmed.
ALL CONCUR. BRIEFS FOR APPELLANT/CROSS-
APPELLEE: Gerald L. Stovall
Brian A. Veeneman
Louisville, Kentucky ORAL ARGUMENT FOR
APPELLANT/CROSS-APPELLEE: Gerald L. Stovall
Louisville, Kentucky BRIEFS FOR APPELLEE/CROSS-
APPELLANT: Richard M. Sullivan
Kenneth A. Bohnert
Jennifer Fust-Rutherford
Louisville, Kentucky ORAL ARGUMENT FOR
APPELLEE/CROSSAPPELLANT: Kenneth A. Bohnert
Louisville, Kentucky