United States: Contractors And Owners Beware: Your Contracts May Limit Your Recoverable Damages

Last Updated: January 16 2015
Article by Cassidy R. Rosenthal

Complex construction cases are rarely tried to a jury in Kentucky.  Following eight years of litigation and a lengthy jury trial, last Friday, the Kentucky Court of Appeals issued an unpublished opinion that vacated a judgment and remanded the case.  Dugan & Meyers Construction Co v. Superior Steel, Inc., et. al., 2012-CA-000440-MR

The Court of Appeals' decision highlights the time-consuming frustrations of litigating construction disputes and the significance of industry standard contract clauses for every tier of project participants.  As the concurring opinion wrote:  "each party to this case has remedies under its respective contract, although some contracts provide better remedies than others.  The parties negotiated those contract relationships and generally should be bound by those terms." 

The case arose from construction of the Ascent, a 21-story, 72 unit condominium and garage project in Covington.  Ascent, the owner, contracted with design builder, Corporex Development Management, LLC ("Corporex").  Corporex contracted with Dugan & Meyers Construction Company ("DM") to provide construction management services. DM contracted steel fabrication and erection to Superior Steel for a lump sum fee of $1,841,000.  Superior Steel subcontracted the steel erection of Ben Hur Construction, Inc. ("Ben Hur") for $444,000.

Issues arose between Superior Steel and DM related to extra work due to changes in the roof design and scope.  DM and Corporex directed Superior Steel to perform extra work and to keep track of the additional time and costs.  DM later refused to pay for the extra work and refused to release retainage.  Superior Steel and Ben Hur filed suit and alleged multiple contractual, tort and equitable claims.  Ascent and Corporex cross claimed against DM, and DM crossed claimed against Ascent and Corporex.

After months of legal briefing and argument, final judgment was entered by the trial court in favor of Superior Steel and Ben Hur on February 3, 2012, for the total sum of $603,456.19 in damages, plus pre-award and post-award interest, plus reimbursement of $349,241.70 in attorney fees.  The judgment has now been vacated and remanded.

The parties' contracts contained many industry standard construction clauses.  Owners, contractors and subcontractors should take note because contract clauses that were often taken for granted may be enforced on remand and may have costly results.

Pay-if-Paid Clauses

Pay-if-Paid clauses are common subcontract terms that make payment from the Owner to the Contractor (or Construction Manager in this case) a condition precedent to payment from the Contractor to the Subcontractor.  For years, these clauses have been enforced in other jurisdictions, but there has been little Kentucky case law.  The Court of Appeals wrote:  "pay-if-paid provisions are essentially conditions precedent to performance under the contract." 

DM's contract with Superior Steel contained a pay-if-paid provision.  The Court of Appeals held that DM did not waive the pay-if-paid provision by agreeing to pay for extra work and that the jury should have determined if DM's obligation to pay Superior Steel ever arose.  Specifically, the jury should have decided if DM breach the subcontract, or if DM was not obligated to pay Superior until DM first received payment from Corporex.  The result of this question will have important implications on remand, specifically on the prevailing party attorneys fee provision.

Prevailing Party Attorneys' Fees Clauses

In Kentucky, attorneys' fees are not recoverable as a cost or damage in the absence of a statute or an express contractual  provision.  Here, Superior Steel's subcontract with DM allowed the prevailing party to recover attorneys' fees.  The trial court awarded Superior Steel $349,241.70 in attorneys' fees as the prevailing party.  The Court of Appeals vacated the attorneys' fee award and remanded for the jury to first decide if DM breached the subcontract due to the pay-if-paid provision. 

If attorneys' fees are ultimately awarded Superior Steel, DM's ability to recover attorney's fees from Corporex on remand may be limited by the parties' indemnity provision.

Indemnity

Indemnity clauses are common in construction contracts and are generally enforceable, with the exception of a Kentucky statute that limits a party's ability to recover for a party's own negligence.  In this case, the lack of an indemnity provision between DM and Corporex may limit DM's ability to recover amounts due its subcontractors.

DM did not have a prevailing party provision in its contract with Corporex.  The trial court held Corporex liable for Superior Steel's extra work claim and attorneys' fees through an indemnity claim.  The Court of Appeals reversed because DM was not entitled to contractual indemnity.

Extra work

Construction contracts commonly contain clauses governing claims for extra work, and related adjustments for compensation and time.  In this case, the Court of Appeals remanded the subcontractor's judgment against the owner for an equitable remedy, unjust enrichment, and held that the parties' contracts governed their extra work claims. 

We will all stayed tuned to see where this complex construction case heads next.  It is unknown whether or not the parties will petition the Supreme Court for discretionary review or what will happen in a new trial, but the case is a good reminder that all construction participants are well advised to carefully read and negotiate their contracts before signing on the dotted line.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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