Subcontractor Ordered to Repay Contractor for Faulty Construction Plus Lost Profits

in Columns/Law

By JAMES R. KELLER

James R. Keller

Missouri’s Southern District Court of Appeals affirmed on July 30 the decision of the trial court ordering a subcontractor to repay in full its contractor for faulty construction. The subcontractor also has to pay the contractor’s lost profits of 15 percent even though the owner had removed the work and never paid anything for the project.

The primary issue on appeal was whether the trial court applied the wrong measure of damages in the contractor’s breach of contract claim. The court of appeals determined the trail court correctly determined the damages.

The end result is that the owner paid nothing and received nothing of value. The contractor obtained an award for more than it paid the subcontractor, but of course it will have to pursue recovery if not voluntarily made. The court ordered the subcontractor to repay more than it had received.

The case is Fox Creek Construction, Inc. v. Opie’s Landscaping, LLC, 2019 WL 3423236, July 30, 2019.

The trial court, after a bench trial, ordered subcontractor Opie’s Landscaping, LLC. to pay $40,250 to contractor Fox Creek Construction, Inc.

The project was home remodeling for Mike and Annette Ensley. The opinion does not disclose the homeowners’ location, but it was somewhere in the Southern District of Missouri.

One portion of the remodeling project involved the construction of a waterfall outside Annette’s home library window.

The contract between the owners and their contractor was a cost-plus contract. This required payment to the contractor for the actual costs of the work plus an additional 15 percent as the contractor’s profit. (Many cost-plus construction contracts separately provide pricing for contractor overhead in addition to profits. In this case, the Southern District’s opinion only referenced profit.)

The contractor subcontracted with Opie’s to build the waterfall. Opie’s hired a specialist to do the work. The subcontract between Opie’s and Fox Creek was oral.

Oral construction contracts can be enforceable under Missouri law; they are not unusual. Their enforceability depends on the type of contract, its terms and circumstances. In this case, the appellate court did not know the terms. They were not part of the record on appeal. This did not seem to affect the final appellate decision.

Opie’s provided an estimate of $35,000 to build the waterfall. It took approximately one month for Opie’s to complete the work. The contractor paid Opie’s the $35,000 estimated price.

 

The homeowners returned from vacation shortly after the work’s completion. They experienced problems with the waterfall. First, the waterfall was in the wrong location. Opie’s addressed this problem by adding a second, smaller waterfall that could be seen from the library.

The homeowners discovered water flying down their driveway. The waterfall leaked so much that the pumps could not keep the waterfall flowing.

The leak was serious. Two months after the waterfall’s completion, the homeowners’ well pump was running 24 hours a day. This resulted in large electric bills during the summer months of June through August.

Unlevel rocks in the waterfall created another problem; they moved around instead of being stationary. The appellate court noted that someone described the workmanship as looking “shoddy.”

The subcontractor acknowledged it had used the wrong pumps, the wrong floats and the reservoir was too small. It claimed that all of these deficiencies could and would be fixed. The subcontractor also contended that natural evaporation of the water was the sole explanation for any water loss.

Frustrated, the homeowners contacted another contractor with extensive experience in water features, Fitzwater Design. Its owner looked at the waterfall. He noted that the problems included that the liner was showing, the water was falling over natural rock, a water hose was running continually and the reservoir size was too small.

Fitzwater recommended removing the waterfall and building a new one at an estimated cost of $35,000 to $40,000.

After a few more months, the homeowners told the subcontractor to remove the waterfall. Opie’s did this.

The homeowners neither paid the contractor the $35,000 nor the 15 percent additional profit that the contract called for if the waterfall had functioned correctly.

When the subcontractor refused to reimburse the contractor for the $35,000, the contractor filed a breach of contract lawsuit seeking $40,250. This represented $35,000 that had been paid to the subcontractor plus the contractor’s 15 percent lost profit.

Opie’s raised three points on appeal. The thrust of the subcontractor’s argument was that the trial court applied the wrong measure of damage.

Opie’s argued that the correct measure of damage under Missouri law was the costs to repair. The appellate court noted that the “fundamental flaw” with this approach was that Opie’s treated its damage claim as if it had contracted with the homeowners, when in reality its contract was with the contractor.

The appellate court rejected Opie’s argument that the contractor was only entitled to recover $2,500. Opie’s expert estimated this to be the cost necessary to repair the waterfall. The court stated that the cost to repair as a measure of damage is appropriate only when the subcontractor has substantially performed with some defects.

The trial court “implicitly” found that that was not the situation in this case. Opie’s had not substantially performed.

Rather, the trial court decided that Opie’s had breached its contract with the contractor. Opie’s did not contest this finding on appeal. The appellate court considered this concession important in its decision.

Because it was an uncontested fact that Opie’s had materially breached its contract, the contractor was entitled to cancel the contract and sue Opie’s for a total breach of contract.

Had Opie’s constructed a satisfactory waterfall, the homeowners would have been obligated to pay the contractor $40,250. Instead, they paid nothing.

Since the subcontractor did not return the $35,000 to the contractor, the contractor was entitled to recover $40,250 as full compensation for Opie’s breach.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He is also an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

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