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Missouri Appellate Court Adopts Spearin Doctrine

in Columns/Law

By Jim Keller Herzog Crebs LLP

James R. Keller

In one of the most comprehensive and important construction decisions in years, the Missouri Court of Appeals for the Eastern District has found the Spearin doctrine applies in Missouri.  This is the first Missouri appellate court to definitively reach this conclusion.

The Spearin doctrine stands for the proposition that when a governmental entity includes detailed specifications in a contract, it impliedly warrants that if the contractor follows those specifications, the finished product will not be defective or unsafe and if the finished product turns out to be defective or unsafe, the contractor will not be liable for the consequences. The Spearin doctrine is widely accepted around the country, but no previous Missouri appellate court has specifically adopted or rejected this doctrine in a published opinion.

The case is Penzel Construction Company, Inc. v. Jackson R-2 School District, decided February 14, 2017.

This sweeping appellate opinion also discusses expert qualifications and the measure of damages through a total cost approach or modified total cost approach.  Missouri construction lawyers will be citing this case for years to come.

Penzel Construction Company, Inc. on behalf of Total Electric, Inc. brought a breach of contract action against Jackson R-2 School District based on breach of implied warranty for allegedly furnishing deficient and inadequate plans and specifications.

The District had entered into a contract with WNB Architects to build an addition to the Jackson High School. During the bidding process, the district furnished the plans and specifications for the project to Penzel, who gave a copy of the plans to Total Electric.

Neither Penzel nor Total Electric noticed any errors in the plans at the bidding stage. Based on the plans, Total Electric submitted a bid of $1,040,444 to Penzel to furnish and install electrical work for the project.

The district then entered into a contract with Penzel to be the general contractor. Penzel entered into a subcontract with Total Electric to provide electrical work.

Penzel’s claim at the trial court level pursuant to the Spearin doctrine was that the district impliedly warranted that the plans it furnished were adequate for completing the project and that the district breached the contract by providing inadequate and defective plans and specifications.

Alleged defects in the plans included inadequate low voltage switching and wire design affecting the gymnasium and some student areas, incorrect kitchen drawings, failure to specify emergency ballasts, failure to depict all the water heaters and circulating pumps requiring wiring, outdated products, non-compliance with building codes and an incorrect depiction of some site electrical work that actually was to be performed by others.

Total Electric’s claim was for labor loss of productivity and a 16-month delay in reaching substantial completion. Total Electric alleged that its damages were compounded by slow responses from the district and WNB as problems arose. Total Electric argued that it frequently had to wait weeks to months for a response.

This caused inefficiencies requiring Total Electric to pay workers for being on the project site with little or no work available to be performed. Total Electric also claimed higher hourly costs for manual labor due to trade labor wage escalation.

At the trial court level, the district brought a third-party claim against WNB.  The trial court granted motions for summary judgment on behalf of the district and WNB.

In reversing, the Eastern District concluded pursuant to the Spearin doctrine that if a contractor makes a bid in reliance on a governmental entity’s representations of what a project would entail, that contractor should not be punished—and the entity should not receive a windfall—because the entity’s renderings were defective.

The Eastern District also decided that Penzel was not required to use expert testimony to prove the plans were substantially deficient. Rather, testimony that the plans omitted critical components, called for outdated or non-existent products and failed to comply with building codes were issues that a layperson (or a juror) without any technical training could understand.

Also, Penzel could use two witnesses with 40 and 60 years of construction experience to testify that the electrical plans and specifications were deficient, even though neither one was a registered architect, licensed electrician or licensed engineer.

To prove Total Electric’s loss of productivity claim, Penzel used the total cost method or modified total cost method.

The total cost method requires proof of four elements: 1) the nature of the particular loss makes it impossible or highly impractical to determine any loss with a reasonable degree of accuracy; 2) the contractor’s bid or estimate was realistic; 3) the actual costs are reasonable; and 4) the contractor is not responsible for any added costs.

The modified total cost method is more flexible by allowing for adjustments to the total calculation of damages. The four-prong test is still used; however, it is merely a starting point and subject to adjustments to aid in proving the actual losses.

The appellate court concluded that the total cost method or modified total cost method may be an avenue to establish damages in this case.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator.

Missouri’s Supreme Court Reverses $8,000,000 Punitive Damage Verdict

in Columns/Law
James R. Keller

By James R. Keller

Missouri’s Supreme Court weighed in on another construction case in 2016 by a reversing a jury verdict in favor of the City of Harrisonville of $8,000,000 in punitive damages.

The case is City of Harrisonville v. McCall Service Stations d/b/a Big Tank Oil and the Missouri Petroleum Storage Tank Insurance Fund, 495 S.W.3d 738 (Mo. 2016), decided August 23.

The project was the cleanup from underground petroleum storage tanks at a service station in Harrisonville. An upgrade of an adjacent sewer system for the City prompted the cleanup.

Missouri, by statute, established the Missouri Petroleum Storage Tank Insurance Fund per Section 319.129. This Fund provides insurance to service station owners for the cleanup costs from spills and leaks from underground petroleum storage tanks.

McCall Service Stations d/b/a Big Tank Oil owned a service station. McCall informed the Fund in 1997 that significant gasoline had leaked into the soil around its tank system.

McCall and the Fund hired Bob Fine, an environmental engineer, to determine the extent of the leak. Fine notified the Missouri Department of Natural Resources that the leak was moving toward a nearby creek.

Fine prepared a plan to contain the leak by installing monitoring wells on streets next to the site. McCall thereafter sold the service station to Fleming Petroleum Corporation.

In 2003, Harrisonville decided to upgrade its sewer system given a growth in population. The City awarded a construction contract, after competitive bidding, to Rose-Lan Construction for a multi-million dollar sewer upgrade per a bond issue for this work.

During construction, Rose-Lan encountered contaminated soil next to Fleming’s service station and notified the Department of Natural Resources.

Fine, who had been monitoring the situation since 1997, confirmed that the underground storage tank was the source of the leak. He suggested that the most cost-effective approach would be to leave the contaminated soil in place and install petroleum-resistant pipe and fittings.

The City’s engineer estimated that to completely remove and replace the contaminated soil would cost more than $500,000. BV Construction submitted a bid of $190,226.38 to install the petroleum-resistant pipe per Fine’s approach.

The Fund obtained a lower bid of $175,161.41 from Midwest Remediation.

There were several discussions between the City and the Fund about the remediation and who would pay for it. Three representatives for the City felt based on the meetings that the Fund would reimburse the City for the remediation costs.

After these discussions, the City’s attorney sent a letter to the Fund’s representative that the City was going forward with Midwest in reliance on the “promise” that the Fund would pay the full amount of Midwest Remediation’s costs. The City then authorized Rose-Lan to subcontract with Midwest Remediation to install the petroleum-resistant pipe.

The Fund did not reimburse the City for the work—thus the lawsuit.

The City sued the Fund for fraudulent and negligent misrepresentation.  The City alleged it hired Midwest Remediation in reliance of the Fund’s representative’s express promise that the Fund would pay for the cost of Midwest’s work.

During trial, the City established that it incurred increased costs of $172,100.98 to complete the sewer upgrade project as a direct result of the contamination caused by McCall and Fleming. None of these costs would have been incurred had the City not encountered petroleum-contaminated soil.

The jury returned a verdict for the City of $172,100.98 in compensatory damages against McCall, Fleming and the Fund, $100 in punitive damages against McCall and Fleming and $8,000,000 in punitive damages against the Fund.

Regarding the Fund’s liability, Section 319.131 states that the Fund will pay all of any participants’ cleanup costs that are greater than $10,000 but less than $1,000,000 per occurrence and the Fund shall provide coverage for third-party claims involving property damage or bodily injury caused by leaking petroleum storage tanks.

The Missouri Supreme Court decided the City’s claims against the Fund did not fall within the statutorily authorized claims set out in Section 319.131.  The Fund is not authorized to provide coverage for claims that do not constitute a participant’s cleanup costs or involve third-party claims. The City’s tort claims were beyond the coverage provided by the Fund.

Despite this finding, the Supreme Court left in place the award of compensatory damages solely because the Fund had not appealed this portion of the jury’s verdict.

But the Supreme Court decided that since the City did not have a claim against the Fund for compensatory damages, even though they were awarded, the City could not recover punitive damages from the Fund.

There must first be actual damages to support the award of punitive damages.  Since the actual damages were not allowed by statute, the punitive damages could not be allowed either, the high court concluded. Thus, the Supreme Court reversed the $8,000,000 punitive damage award.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Subcontractor Denied Bond Claim Against St. Louis County

in Law

By James R. Keller

James R. Keller
James R. Keller

The Supreme Court of Missouri recently ruled that a subcontractor cannot pursue a bond claim against St. Louis County, but may pursue its mechanic’s lien claim against the leasehold interest of a company that acted as St. Louis County’s agent. The Missouri Supreme Court rarely decides construction cases involving bonds and mechanic’s liens, making this decision significant in how subcontractors will pursue future claims.

The case is Brentwood Glass Company v. Pal’s Glass Service, Inc., Clayco, Inc., Cornerstone VI, LLC, St. Louis County, National City Bank of the Midwest, N.A., Paul M. Macon, UMB Bank, N.A. and Victor Zarilli, 2016 WL 4444039, decided August 23.

St. Louis County had purchased property known as Six CityPlace Drive in Creve Coeur, Missouri, which the County had planned to develop as the headquarters of Smurfit-Stone Container Enterprises, Inc.

The County entered into a contract with Cornerstone to construct the project on the County’s behalf. Cornerstone acted as the County’s agent.

Clayco, Inc. was the general contractor for the project. Clayco entered into a subcontract with Pal’s Glass to supply glass and glazing work. Pal’s Glass entered into a sub-subcontract with Brentwood Glass for some of this work.

No contractor on the project obtained a bond that would comply with Section 107.170.2 of the Revised Statutes of Missouri. This section provides that all public entities (such as St. Louis County) must require every contractor for work on public property to furnish a bond to cover materials and labor.

Brentwood Glass filed a mechanic’s lien on the property in the amount of $1,061,464.08. Brentwood Glass then filed a nine-count petition against Pal’s Glass, Clayco, Cornerstone, St. Louis County, as well as various banks and individuals, seeking recovery on its mechanic’s lien and in one count pursuing an action against St. Louis County for its alleged failure to require a payment bond under Section 107.170.

Pal’s Glass admitted it owed $593,261.47. It consented to a judgment for that amount plus costs.

Because the property was owned by St. Louis County at the time Brentwood Glass began working on the building, Brentwood Glass could not pursue its mechanic’s lien against the County. Public property is not subject to a mechanic’s lien.

Cornerstone, however, held a leasehold interest in the property. Cornerstone is a private company and not a public entity.

The Supreme Court reversed the decision of the trial court and found that Brentwood Glass could pursue its mechanic’s lien against Cornerstone’s leasehold interest. The Supreme Court of Missouri sent back for further consideration by the trial court whether Brentwood Glass’s lien statement properly complied with Missouri law, which requires a “just and true” account of any money that is due.

The lien statement included potentially non-lienable items. Brentwood Glass admitted that its statement incorrectly included efforts to recover for payments that Clayco had paid directly to Brentwood Glass’s subcontractors and material suppliers.

The Missouri Supreme Court determined that the trial court must decide whether these non-lienable items were included in the lien statement with an intent to defraud or were honest mistakes. If honest mistakes, presumably the trial court will determine that the mechanic’s lien is proper.

Regarding the public bond claim against St. Louis County, Section 107.170.1 requires a bond for any “contractor” that “provides construction services under contract to a public entity,” but not a party that merely arranges for such services to be provided by others. The Supreme Court decided that Cornerstone did not provide construction services under its contract with the County. Therefore, Cornerstone was not a contractor within the meaning of Section 107.170.1.

The Supreme Court of Missouri also decided that even if this section required a bond, Brentwood Glass’s claim must fail because it did not name as a party in its lawsuit any individual officials of St. Louis County, but instead named as the defendant only St. Louis County. The court held:  “The decisive fact is that the County—a political subdivision—is immune from suit under the doctrine of sovereign immunity.”

The Missouri Supreme Court’s decision was far from unanimous. Two of the Justices, including the Chief Justice, filed concurring/dissenting opinions.  They believed that Cornerstone was a contractor within the meaning of the statute and therefore Brentwood Glass should have been able to pursue its bond claim. They also believed that Brentwood Glass should have been given the opportunity when the case is sent back to the trial court to amend its petition to name individual officials as defendants.

Three other Justices filed a different concurring/dissenting opinion. They believed that Brentwood Glass did not demonstrate substantial compliance with Missouri’s mechanic’s lien statute that requires a “just and true account.”  These three Justices believed that Brentwood Glass should not have been allowed to pursue its mechanic’s lien claim.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

 

The Sun Does Not Shine on Homeowner’s Solar Panels

in Columns/Law
James R. Keller
James R. Keller

By James R. Keller

After three trials and one appeal, a homeowner must remove part of its solar panel system, because the homeowners’ association did not approve it, and pay up to $56,000 in attorney fees to the association.

The case is The Lake at Twelve Oaks Home Association, Inc. v. Hausman, 2016 WL 1579124 (W.D. Mo. April 19, 2016).

In July 2012, Matthew and Stacy Hausman installed a photovoltaic solar array system on various roofs and on the ground of their home, which is located within a subdivision in St. Joseph, MO.  The subdivision was part of The Lake at Twelve Oaks Homes Association, Inc. Homeowners were subject to a declaration of covenants, conditions and restrictions for the subdivision.

One of the restrictions was that homeowners must submit written plans and specifications and obtain written permission from the Association’s Design Review Committee (DRC) prior to construction of any structure that materially changed the exterior appearance of that homeowner’s property. The Hausmans did not submit anything to the DRC.  Ironically, Matthew Hausman was a member of the DRC.

The Association demanded that the Hausmans remove the solar array as being in violation of the restrictions of the subdivision. The Hausmans did not remove the system. The Association filed a lawsuit seeking a permanent injunction.

In the first trial, the judge ordered the Hausmans to present their plans for the solar array system to the DRC for its review and approval in total, in part or not at all.

Shortly thereafter, the St. Joseph City Council enacted an amendment to its zoning ordinances regarding solar energy systems within the city limits.  It provided in part that no homeowner’s agreement could be more restrictive than the new city ordinance.

The DRC approved the portion of the system installed on the rear roof but rejected the portion of the system that included the panels installed on the side roof of the garage and the ground-mounted panels on the south side of the garage. The DRC’s decision was based on a provision within the Solar Guidelines previously adopted by the DRC that required panels to be constructed only within a fenced yard or patio at the rear of the main structure.

The DRC also based its decision on how the solar panels affected the character of the subdivision and considered individual homeowner complaints plus compatibility with surrounding properties and impact on the value of subdivision homes.

After a second trial, the court ordered the Hausmans, consistent with the DRC decision, to remove the part of the solar array system erected on the garage and the ground-mounted panels on the south side of the garage.

The trial court then set aside its own judgment, deciding that the parties should have included the city as an indispensable party given its new ordinance on solar panels.

After a third trial, the trial court again found in favor of the Association and ordered the Hausmans to remove the solar arrays not approved by the DRC. The court also determined that the city’s solar ordinances could not be applied retroactively to the Association’s Solar Guidelines and further found that the DRC’s decision was reasonable.

Finally, the trial court awarded attorney fees (provided in the subdivision declarations) to the Association.

The Hausmans argued on appeal that the trial court erred in upholding the DRC’s decision as being reasonable. They argued that sale prices for homes in the subdivision actually increased after the solar panels were installed.

By contrast, the DRC chair testified at trial that most members of the DRC did not find the solar energy system to be esthetically pleasing.  He further testified that the Association had received complaints from approximately 20 neighbors who expressed negative views regarding the appearance of the solar system and concern that its installation lowered the value of surrounding properties.

The Hausmans’ former next-door neighbor testified that the glare from the solar panels focused on his property four to five hours a day.  He further testified that he made $20,000 in concessions in the sale price of his home due to the negative impact of the solar system.

Another neighbor who lives in the home across the street from the Hausmans testified that the glare from the panels during the evening penetrated into his front window and negatively affected the value of his home.

The appellate court discounted evidence from the Hausmans that the DRC had approved a solar array system of another homeowner in the subdivision and thus by denying the Hausmans’ system the DRC had acted in an arbitrary and capricious manner. The Western District noted that the system for this other homeowner could not be seen by anyone and that there were no complaints from the neighbors.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Subcontractors’ Mechanic’s Liens Enforceable For Work at Allen Edmonds, Plaza Frontenac

in Columns/Law
James R. Keller
James R. Keller

By James R. Keller, Herzog Crebs LLP

Subcontractors Crafton Contracting Company and Vogel Sheet Metal & Heating, Inc. can proceed to enforce their mechanic’s liens against Plaza Frontenac Acquisition, LLC, owner of Plaza Frontenac shopping mall, general contractor Swenson Construction Company, Inc. and mall tenant Allen Edmonds Corporation. With this result, the Missouri Court of Appeals for the Eastern District reversed a trial court decision that found the liens were not valid.

The case is Crafton Contracting Company and Vogel Sheet Metal & Heating, Inc. v. Swenson Construction Company, Inc., Allen Edmonds Corporation, and Plaza Frontenac Acquisition, LLC, 2016 WL 1469981, decided April 12.

The Eastern District has now made clear that the size of an owner’s property (in this case, the entire mall) should not be the deciding factor in determining whether an agency relationship has been established for the purpose of Missouri’s mechanic’s lien statute.

The parties stipulated to the facts at trial. In 2012, Plaza Frontenac and Allen Edmonds entered into a 10-year lease for space at the Plaza Frontenac mall located at Lindbergh Boulevard in St. Louis County.

The lease required Allen Edmonds to make certain improvements. Allen Edmonds submitted and Plaza Frontenac approved plans for those improvements.

Allen Edmonds accepted the bid of general contractor Swenson Construction Company of $207,398.40 for construction work. Swenson subcontracted demolition, framework, drywall, carpentry and barricade work to Crafton for $67,023.00, and heating, ventilating and air conditioning work to Vogel for $15,975.00. Both subcontractors completed their work.

Allen Edmonds paid Swenson in full. Swenson did not pay Crafton or Vogel. Swenson went out of business in June 2013, prompting Crafton and Vogel to file mechanic’s liens and a lawsuit to enforce them.

Section 429.010 of Missouri’s Revised Statutes (Missouri’s Mechanic’s Lien Act) provides that a mechanic’s lien may be placed upon an owner’s property for “any work or labor” completed upon such land by anyone who contracts with the owner or “his agent.” The issue in this case was whether Allen Edmonds was Plaza Frontenac’s agent.

The Eastern District decided that the term “agent” as used in Section 429.010 must be interpreted broadly. The level of authority required to create an agency relationship is less for a mechanic’s lien action than is otherwise required. This is not a typical principal-agent relationship, but rather, a special, limited agency pursuant to Section 429.010.

The answer to whether there was an agency relationship, according to the appellate court, turned on what the lease required. If the lessee (Allen Edmonds, in this case) was not required to make improvements to the property or to make improvements on its own, no agency relationship exists.

The Eastern District concluded that Allen Edmonds was Plaza Frontenac’s agent. The lease required Allen Edmonds to make substantial and permanent improvements to the property, including that the premises could only be used as an Allen Edmonds store. Allen Edmonds was to submit plans for construction requiring Plaza Frontenac’s approval, and Allen Edmonds was required to perform a complete build-out of the lease premises to conform with Allen Edmonds’ other stores including installation of storefronts and storefront signs, entrance doors, flooring and interior decorating.

The lease also required Allen Edmonds’ contractor to post a security deposit with Plaza Frontenac in case the work was not completed, and provided that all of the improvements became the property of Plaza Frontenac upon lease termination.

The trial court compared the subcontractors’ work to the value of the entire mall. The improvements comprised less than one percent of the mall’s space. The value of the improvements was no more than two percent of the mall’s value as a whole.

The appellate court decided that the trial court’s use of a mathematical equation and its comparison of the leased space to the entire mall misapplied the law.

Instead, the Eastern District emphasized that the subcontractors’ work enhanced the value of Plaza Frontenac’s property. They replaced vacant tenant space with a shoe store, improvements the lease required.

Plaza Frontenac relied on a 1986 Missouri case to support the trial court’s use of a simple mathematical formula to determine agency. This case did not apply, the Eastern District decided. The lease in that case did not require improvements.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator.

Contractor and its Owners Liable for Damages and Attorney Fees

in Columns/Law

By James R. Keller

The Missouri Court of Appeals for the Southern District has upheld a trial court’s judgment in favor of a homeowner and against a contractor and its owners for damages and attorney fees.

The case is Rogers v. Superior Metal, Inc., SD 33696, 2016 WL 442773 (S.D. Mo. Feb. 4, 2016).  This decision may open new personal liability against owners of construction companies.

Superior Metal, Inc. is a construction company that installs metal buildings, roofing, siding and windows.  In 2013, Harley Rogers decided he wanted to build a shed on his property for storage.  He discussed the project with Randy Mueller, one of the owners of Superior Metal.  Mueller told him that “it would be a stand up product” and that “the building would be straight, free of defects, and would be good lumber.”

Rogers and Superior Metal entered into a written agreement for $13,500.00 for Superior Metal to build a pole barn on Rogers’ property.

During construction, Rogers noticed defects and mentioned his concerns to Jonathan Holtzman, co-owner of Superior Metal.

Once completed, according to the appellate court opinion, the building had numerous construction defects.  Rogers demanded his money back.  Superior Metal refused to issue a refund.

Rogers sued for breach of contract, unjust enrichment, fraudulent misrepresentation, negligence, and violations of the Missouri Merchandising Practices Act (MMPA).  Rogers also sued Mueller and Holtzman individually based on an allegation of fraudulent misrepresentation.

The trial was in front of a judge instead of a jury.  The trial court found for Rogers on all counts, awarding $23,500.00 in damages, $10,000.00 in attorney fees, and $1.00 for punitive damages.  The appellate opinion offers no explanation why the award was $23,500.00 when the original contract price was $13,500.00.

The contractor’s first challenge on appeal was that the owner did not present any evidence as to how the alleged construction defects diminished the value of his property.  In Missouri, there are two measures of damages regarding defective performance of a building contract.

One is the cost-to-repair method, and the other is the diminished-value method.  The cost-to-repair method measures damages by the cost of repairing the defective work.  The diminished value method measures the difference between the value of the property before and after the defective work.

The Southern District noted that the cost method is the preferred method to recover damages and that the diminished-value measure should be used when the cost to repair method would cause “unreasonable economic waste.”  In other words, if the cost to repair far exceeds the diminished value of the property, then the diminished value of the property is the proper measure of damage.

In this case, once the landowner presented evidence on the cost to repair, the contractor has the burden to establish that the cost to repair is disproportionately high when compared to the diminution in value of the property.

The contractor presented evidence through an expert that it would cost only $445.00 to repair the defects in the building.  But the contractor presented no evidence regarding the diminution in the value of the property and thus the Southern District on appeal affirmed the trial court’s decision that the damages for faulty construction were $23,500.00.

The appellate court also decided that owners Mueller and Holtzman were individually liable given the trial court’s finding of fraudulent misrepresentation.  Their communications with Rogers, according to the court, were “affirmative participation in the actionable wrong and so justify imposition of individual liability.”  Their personal liability stemmed from fraud, not just breach of contract.  This result will trouble construction company owners.

Regarding attorney fees, the Missouri Merchandising Practices Act allows a trial court to award attorney fees based on the amount of time reasonably expended as well as punitive damages.  Defendants contended that there was no evidence to itemize any attorney fee time and thus no support for attorney fees.

The Southern District concluded that it is well within a trial court’s discretion, as an expert on attorney fees, as well as having familiarity with the case at hand, to decide what attorney fees are proper.

The Southern District also decided that on remand the trial court could determine what attorney fees should be assessed for the appeal since Missouri law allows that the award of attorney fees can include those attorney fees incurred on appeal.

There is no mention of the $1.00 assessed in punitive damages.  The trial court’s decision was affirmed on appeal.  It appears this award stood as well.  A $1.00 punitive damage award usually reflects a statement of disapproval with defendant conduct and is not intended to reflect plaintiff’s actual damages.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Manufacturer Not Liable; Followed MoDOT Plans

in Columns/Law

By James R. Keller 

A manufacturer that follows an owner’s plans, drawings and specifications for a construction project is not strictly liable when a person is injured by the product, Missouri’s Eastern District Court of Appeals decided on September 22.  The case is Hopfer v. Neenah Foundry Co., 2015 WL 5573965.  

In 2009, Norman Hopfer was severely injured when he lost control of his pickup truck after driving over an open drainage inlet on Hall Street in the City of St. Louis.  At least one of the grates covering the inlet was dislodged at the time. 

Hopfer’s lawsuit alleged that Neenah Foundry Co. was liable for his injuries under a strict products liability theory. Specifically, Hopfer alleged that the grates became dislodged due to design defects in that only two open-slot bolts were used to secure the grates.  

Neenah was a manufacturer of the cast-iron grates. Neenah’s normal grates have four bolts fastening each grate to a frame.  In this instance, the grates on Hall Street were modified to use only two-bolt holes. 

Neenah had manufactured the grate under a contract with the Missouri Department of Transportation (MoDOT).  MoDOT installed the grates as part of its road improvement program. 

After a jury verdict in Neenah’s favor, the Eastern District considered two points on appeal:  first, whether the trial court erred by allowing a jury instruction that contained the affirmative defense that compliance with the contract specifications absolved Neenah from liability and, second, whether the jury should have been allowed to consider that Neenah did not perform certain testing when designing the grates.  

Regarding the first point, Neenah contended at trial that MoDOT specified the same grates for the 2005 Hall Street project that previously were manufactured and used in a MoDOT 1999 retrofitting project. 

Hopfer conceded that the grates used in the Hall Street project were the same as those used in the previous 1999 retrofitting project. He argued that the plans for the Hall Street project did not specify the type of grates to be used.  He contended that MoDOT relied on Neenah to design and manufacture the two-bolt grate and to gauge the safety of this product, especially since it was a departure from the standard four-bolt grate typically manufactured by Neenah.  Hopfer also presented evidence that MoDOT does not design roadway grates. 

A Neenah employee and engineer testified that MoDOT and Engineering Design Source, Inc. (EDSI) asked Neenah to change its standard four-hole grate to a two-hole design.  The employee further testified that MoDOT was “controlling the show” with respect to the design and that Neenah “supplied what they asked for.” 

Neenah was not consulted about what type of grates to use in the Hall Street project.  MoDOT engineers decided that the Neenah two-hole grates originally created for the 1999 retrofitting project were to be used in the Hall Street project. After work was completed, a MoDOT engineer on the Hall Street project testified that he had accepted the work as complying with MoDOT specifications, including the two-hole grates. 

Hopfer’s legal theory was strict liability.  Strict liability focuses solely on whether the grates were unreasonably dangerous and therefore defective when made. 

Unlike negligence, a defendant’s conduct, standard of care, and fault in the manufacturing process are not relevant considerations for the jury.  The appellate court decided to uphold previous Missouri law that  compliance with contract specifications is a defense that shields the manufacturer from strict liability. 

On Hopfer’s second point on appeal, he argued that the trial court erred in excluding evidence of Neenah’s failure to conduct Failure Mode and Effects Analysis (FMEA) testing when designing the grate system.
The appellate court agreed that the trial judge correctly exercised its discretion to exclude testing evidence.
 

The court concluded that in a strict liability claim, the sole subject of inquiry is the defective condition of the product. Excluding this evidence was consistent with Missouri’s approach (not followed in many other states) that in claims of strict liability testing goes to defendant’s conduct in designing the grates, which is a consideration the jury should not be allowed to make in a strict liability case.  Such a consideration may be appropriate in a negligence case, but Hopfer only proceeded on the single theory of strict liability. 

The appellate court also declined Hopfer’s request to expand Missouri’s strict liability law to allow for application of the prudent-manufacturer test.  This test states that a product is unreasonably dangerous if a reasonably prudent manufacturer would not have produced and marketed the product in the condition that it was in at the time it was placed into the market.  To the extent other states follow this approach, this appellate court explicitly rejected it under Missouri law. 

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Three Contractors Denied Sales/Use Tax Exemptions

in Columns/Law

by James R. Keller

In three separate cases, the Missouri Supreme Court denied on January 13, 2015, the requests of two contractors and one subcontractor for exemptions from sales and use taxes for construction-related activities.

The cases are Ben Hur Steel Worx, LLC v. Director of Revenue, 2015 WL 161747, Fred Weber, Inc. v. Director of Revenue, 2015 WL 161751 and Alberici Constructors, Inc. v. Director of Revenue, 2015 WL 161935.  All three cases stem from hearings with Missouri’s Administrative Hearing Commission (AHC).

In the Ben Hur Steel Worx case, Ben Hur had applied for refunds of nearly $200,000 for 2008-2010.  Ben Hur contracts with commercial construction companies to provide labor, materials and equipment to furnish and install structural steel beams, plates, angles and other components for construction of large-scale commercial buildings and structures. Ben Hur buys steel beams and steel plates directly from steel mills.

Ben Hur modifies the steel beams according to project drawings and specifications to cut them to length, provide proper drilling holes and slots, bevel the edges, chamfer, curb, cope and cut the steel.

If the steel components that Ben Hur purchased were for a taxable construction project, Ben Hur paid tax on the components. If the project was for a tax-exempt entity, such as an educational institution or health care
organization, Ben Hur did not pay sales tax on the purchased materials. 

The dispute involved whether Ben Hur could seek tax reimbursement for materials purchased to fulfill construction contracts it had with non-exempt entities. 

Section 144.054.2 of the Missouri Statutes exempts the following from sales tax: electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product, or used or consumed in the processing of recovered materials, or used in research and development related to manufacturing, processing, compounding, mining, or processing any product.

Both the AHC and the Missouri Supreme Court found that Ben Hur as a subcontractor was using steel beams, plates and angles to fulfill contractual obligations to construct steel frames for commercial buildings. These activities were part of construction contracts, an activity not exempt under the language of Section 144.054.2. The Missouri Supreme Court decided that if the Missouri Legislature had intended for “construction” activities to be included in this section, it would have used words that included construction activities and no such words are in this section.

In the Fred Weber case, Weber in 2008-09 sold various paving companies approximately $2.6 million worth of rock base and asphalt. Weber applied for a sales tax refund under Section 144.054.2 of $139,654.62 for those sales. The AHC agreed with Weber. 

The Missouri Supreme Court, however, found that this section was meant to apply to large-scale industrial activities. The paving companies were not engaged in such activities. Instead, they were engaged in construction. 

Since the word “construction” does not appear in Section 144.054, the high court concluded the Missouri Legislature did not intend that such activities should be exempt from sales and use taxes.

In the Alberici Constructors case, the dispute was whether Alberici was entitled to a refund of $18,593.11 for use taxes it paid for rentals of cranes and a welder to construct manufacturing equipment at a new cement plant in Missouri and a use tax for the delivery of one of the cranes to the manufacturing job site.

In this case, the applicable exemption is in Section 144.030.2(5), which reads as follows: Machinery and equipment, and parts and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption.

The Supreme Court decided that the only question was whether the cranes and welder were materials within the meaning of this section. The court concluded that even if a dictionary definition of material could include machinery, machines such as cranes and welders do not appear to be what the Legislature intended by materials.

Alberici also sought a tax exemption for the delivery charge of $15,000.00 paid to Bulldog Erectors to deliver one of the cranes to the job site. The Supreme Court supported the AHC finding that it was the intention of Alberici and Bulldog Erectors that the delivery service was to be part of the crane rental and therefore the delivery charge was subject to the use tax.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Appellate Court Upholds Finding For Contractor Regarding Defective Work at Taum Sauk Plant

in Law

by James R. Keller

Missouri’s Eastern District Court of Appeals has upheld a trial court’s finding in favor of a general contractor and against a subcontractor for defective work the subcontractor performed at Ameren’s Taum Sauk plant. The case is Scheck Industrial Corp. v. Tarlton Corp., 2014 WL 3428402, decided July 15.

Tarlton Corporation had entered into a contract with Ameren to perform repairs at Ameren’s Taum Sauk hydroelectric power plant. The contract required Tarlton to cut eight drain access ports into the lower section of the plant’s penstock, weld steel collars composed of carbon steel around each port and install removable covers and doors over these ports. The penstock is a one-mile long tunnel, 18 feet in diameter, that transfers water from a water reservoir to turbines.

Tarlton did not have the requisite expertise to install the collars, so it entered into a subcontract with Scheck Industrial to perform these repairs of the penstock on a “time and materials” basis.

The upper portion of the penstock is comprised of A201 steel, but the lower portion where the drain access collars were to be installed is composed of T-1 steel. Scheck Industrial did not investigate whether that made a difference to welding procedures. When 85 percent of the welding on the drain access ports was complete, Scheck Industrial identified cracking in the penstock just outside the completed welds.

Ultimately, Scheck Industrial applied a recommendation from an outside engineering firm (Briem Engineering) on a welding procedure to repair and rework the faulty welds. This included the removal of all defective welds, fixing the cracks in the penstock and re-welding.

Tarlton sought a total of $733,416.00 from Ameren, reflecting the cost to complete the repair and rework of both Scheck Industrial and Tarlton. Ameren initially rejected the claim, but eventually Scheck Industrial received payment for all of its work on the project except $553,135.51 related to the repair and rework of the penstock.

Scheck Industrial filed a lawsuit against Tarlton for breach of contract and account stated and  sought $553,132.51. Tarlton counterclaimed for breach of contract, breach of warranty, and indemnification and alleged that it was owed $220,094.00 plus attorney fees for costs and expenses it incurred as a result of Scheck Industrial’s faulty work and breach of contract.

After a four-day bench trial, the trial court awarded Tarlton $220,094.00 for “labor and general conditions costs” and an additional $190,383.19 for attorney fees. Scheck Industrial recovered nothing on its claim.

The $220,094.00 broke down into $94,599.00 for “support labor and remedial work” and the remaining amount was for general conditions costs including project management time, forklifts, job trailer rental, trucks, fuel, amounts paid to the outside engineering firm, testing costs for re-welds and related items.

On appeal, the Eastern District noted the testimony of Scheck Industrial’s quality control consultant, who submitted Scheck Industrial’s welding procedures for the drain access collars. He testified that he never saw or asked for the drawings or specifications for the project and that in hindsight the welding procedures he submitted and that Scheck Industrial used were not appropriate for welding A572 carbon steel to T-1 steel and would cause the penstock to crack.

The appellate court also noted that the subcontract contained an indemnity provision that indemnified for liability and loss. The provision required Scheck Industrial to “indemnify and hold harmless [Tarlton] from and against any and all loss, claims, suits, causes of action, liability, damages, costs [and/or] expenses . . . incurred by [Tarlton] . . . as a result of . . . any work or operations under or in connection with this Subcontract.” The court found that this language was sufficiently broad that it supported Tarlton’s counterclaim for its damages and attorney fees incurred by Scheck Industrial’s improper work.

Rejecting Scheck Industrial’s argument that Tarlton failed to mitigate its own damage, the Court of Appeals noted that Tarlton acted promptly to cease further defective welding. Tarlton worked with Scheck Industrial for a reasonable amount of time to develop a solution and when one did not come about, Tarlton retained an outside consultant.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction

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