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Texas Court Holds Oral Change Order Agreement Unenforceable For Want Of Consideration
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S.M. Wilson & Company v. Urban Concrete Contractors
2007 Tex. App. LEXIS 3747, No. 04-06-00227-CV (Tex. Ct. App., May 16, 2007)
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| A Texas Court of Appeals held that an oral change order agreement to pay for work which was, in fact, within the scope of the original contract was unenforceable for lack of consideration.
S.M. Wilson & Company (“Wilson”) entered into a contract with the Target Corporation to construct a Target Store in Austin, Texas (the “Project”). Wilson then solicited bids from subcontractors for various aspects of the Project. Urban Concrete Contractors, Ltd. (“Urban”) submitted a bid to Wilson to perform concrete work on the Project. During the pre-bid process, Wilson sent a proposed contract including Work Package 03300, which identified the scope of concrete work that Urban would be responsible for. Work Package 03300 referred to two sets of plans describing the concrete work to be performed which were not included in the package but were available to Urban for review at no charge prior to bidding.
Urban reviewed one set of plans containing the building plans, but did not review the other set of plans containing the site plans. Urban believed that the construction plans included all concrete work to be performed on the Project. Relying on only the plans and specifications it had reviewed, Urban submitted a bid for the Project and was awarded the subcontract. The subcontract defined the work as Work Package 03300 which was attached to the subcontract as an exhibit.
After the work began, Urban became aware for the first time that it was expected to perform the site work for the Project. Urban informed Wilson that it was unaware that Urban was required to perform the site work in question. According to Urban, a representative of Wilson orally promised to pay a change order for the site work. When Urban submitted the change order for $115,350.35, however, Wilson refused to pay.
Urban filed suit for breach of contract, quantum meruit, violations of the Texas Trust Funds Statute and Texas Prompt Payment Act. A jury found that that an oral contract was formed and that Urban was owed $54,016.50 for completing the disputed work plus interest, attorney’s fees and costs.
Wilson appealed the verdict, asserting that there was no evidence of consideration to support the oral contract. The Appeals Court reversed the trial court’s holding. The Court found that Urban’s oral contract with Wilson to perform the site work was merely an agreement to perform what Urban was already bound to do under the original subcontract. For its part, Urban argued that it was not aware that it was required to perform the site work at issue. The Court, however, found that the subcontract clearly required that Urban perform the site work. Accordingly, the Court found that Urban’s promise to fulfill its pre-existing obligation could not constitute consideration for the oral agreement in question.
Click here to view full opinion as PDF (provided with
the permission of LexisNexis).
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NJ Court Holds Condominium Association Has Standing to Sue Contractors and Subcontractors for Consumer Fraud and Common Law Fraud
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Port Liberte Homeowners Association, Inc. v. Sordoni Construction Co.
2007 N.J. Super LEXIS 168, Docket No. A-2138-04T1 (App. Div. June 4, 2007)
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| The New Jersey Appellate Division was asked to consider whether a condominium and a homeowners association, not in existence at the time misrepresentations and fraudulent omissions were made to the developer of a condominium development, had standing to sue contractors or subcontractors who made such misrepresentations. Relying on the statutory scheme of the New Jersey Condominium Act, N.J.S.A. 46:8B-1 et seq., (“Condo Act”) and the Planned Real Estate Development Full Disclosure Act, N.J.S.A. 45:22A-21 et seq. (“PREDFDA”), the Appellate Division held that the associations had standing to sue.
Port Liberte Homeowners Association, Inc. and Port Liberte Condominium Association I (collectively, the “Association”) sued a variety of contractors, subcontractors and material suppliers for defects which were allegedly causing water and structural damage to the common elements of the condominium development run by the Association. The Association settled with all parties with the exception of Dryvit, a supplier of certain EIFS products. The Association moved to amend its complaint to assert claims against Dryvit for violations of the New Jersey Consumer Fraud Act (“CFA”) and common law fraud and the trial court permitted the amendments. Dryvit, in turn, moved to dismiss the amended complaint, in part, on the ground that the Association did not have standing to sue because the Association was not in existence at the time of the alleged misrepresentations or omissions. The trial court concurred with Dryvit and dismissed the Association’s amended complaint. The Association appealed from that decision.
On appeal, the Association argued that because the developer and original sponsor of the Project, Port Liberte Partners (“PLP”), had filed for bankruptcy and turned over the property to the Association, the Association had standing to sue because it “stepped into the shoes” of PLP. Dryvit argued that the Association did not have standing because the Association did not exist at the time of the alleged misrepresentations and therefore did not receive and could not have reasonably relied on the misrepresentations and omissions.
In reaching its decision in favor of the Association, the Appellate Division engaged in an analysis of the formation of a condominium development under New Jersey law. Under the PREDFDA, a developer of a condominium must register the condominium with the New Jersey Department of Consumer Affairs (“DCA”). This DCA registration process, the Court explained, serves as constructive notice to contractors and subcontractors that any representations made to the developer will be viewed as having been directed to the association once the association takes over control of the condominium. To hold otherwise, the Court said would be unfair and would be directly contradictory to the statutory scheme which expressly permits the association to institute suit on behalf of the association members for damages to association’s common elements. The Appellate Division also favorably cited cases in New Hampshire and California where the courts analyzed similar statutory schemes and in which those courts previously decided this issue in favor of associations.
The Court further explained that the CFA itself provided support for the fact that the Association had standing to sue Dryvit. Specifically, the CFA provides that any person who has “suffered an ascertainable loss” may assert a claim against a person engaged in unlawful actions under the CFA. Relying on prior interpretation of the CFA, the court explained that no direct contractual privity was required in order for the Association to sue Dryvit. Because of the legislative scheme of the Condo Act, the Association and PLP are considered one and the same once PLP turned the condominium over to the Association and, therefore, reliance by PLP is assumed by the Association. By virtue of PLP’s registration of the condominium with the DCA, Dryvit had construction notice that representations to PLP would be passed down to the Association as well as standing to sue. Accordingly, the Association had standing to sue for consumer fraud.
For similar reasons, the Court found that the Association had standing to sue for common law fraud. Explaining that the Association need not have heard the statement forming the misrepresentation in order to sue for common law fraud, the Court noted that the Association merely needed to demonstrate that it was an intended recipient of the misrepresentations. Again turning to the DCA registration process, the Court opined that the Association had standing to sue for common law fraud because Dryvit had constructive notice that the Association was an intended end-user of the products which were the subject of Dryvit’s alleged misrepresentations and omissions.
The Appellate Division’s ruling affirms the concept that condominium and homeowner associations have standing to sue third parties on behalf of its members for damages due to defective common elements. Contractors, subcontractors and suppliers should be cognizant of the fact that their exposure for damages is not limited to the developer with whom they direct contract or make representations, but that the association later formed and to whom the developer hands control of the development may also seek damages for claims that arose prior to the association’s formal existence.
Click here to view full opinion as PDF (provided with
the permission of LexisNexis).
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Vermont Court Reverses Award Of Consequential Damages To Owner In Construction Defect Case
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EBWS, LLC v. Britly Corporation
2007 VT 37; 2007 Vt. LEXIS 69 (Vt. May 25, 2007)
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| The Vermont Supreme Court held that the cost of an owner’s anticipated voluntary payments of employee wages and for product purchases during the temporary shutdown of a creamery pending repair of construction defects were not recoverable consequential damages because they could not reasonably have been within the contemplation of the defendant when it contracted to build the creamery.
EBWS filed suit against Britly for damages resulting from defective design and construction of a creamery in Strafford, Vermont. EBWS’ Complaint included causes of action for: (1) negligent design and execution, (2) negligent supervision, (3) consumer fraud, (4) breach of express warranties, (5) breach of contract, (6) breach of fiduciary duty, and (7) unjust enrichment. All claims except for breach of contract and warranty were, however, dismissed before trial.
At trial, the jury found Britly had breached the contract and its express warranty, and awarded EBWS: (1) $ 38,020 in direct damages for anticipated costs to repair the defects, and (2) $ 35,711 in consequential damages, consisting of wages which the owner anticipated paying its employees and payments it anticipated making to a neighboring dairy for milk during the period of shut down. At trial, the owner’s CEO had testified that the wage and product payments were not compelled by contract, but were voluntary. On appeal, Britly contended that because there was no contractual or legal obligation for EBWS to purchase milk or pay its employees, those damages were not foreseeable. EBWS countered that it is common knowledge that cows continue to produce milk, even if the processing plant is not working, and thus it is foreseeable that this loss would occur.
The Court concluded that it was not reasonable to expect Britly to foresee that its failure to perform under the contract would result in these types of damages. EBWS maintained no employment agreements with its employees obligating it to pay wages during periods of closure for repairs, dips in market demand, or for any other reason. Any losses EBWS might have suffered in the future because it chose to pay its employees during a plant closure for repairs would have been a voluntary expense and not in Britly's contemplation at the time it entered the construction contract. Applying the traditional standard for recovery of consequential damages in contract actions, i.e., whether the damages were within the reasonable contemplation of the defendant at the time of contracting, the court held the damages were not recoverable. It stated, "[P]arties are not presumed to know the condition of each other's affairs nor to take into account contracts with a third party that is not communicated.” The Court found that it was not reasonable to expect Britly to foresee losses incurred as a result of agreements that were informal in nature and carried no legal obligation on EBWS to perform.
Additionally, the Court held that because the actual costs of the wages and milk were uncertain as, the milk and wages were future expenses, this was an additional reason for denying recovery. The Court noted that at the time of the construction contract, EBWS had not yet begun to operate as a creamery and had no history of buying milk or paying employees. Thus, both the cost of the milk and the number and amount of wages of future employees that EBWS might have paid in the event of a plant closure for repairs were uncertain.
The court also rejected the owner’s appeal of the dismissal of its negligence claims against Britly, holding that the damages sought were solely economic in character and thus barred by the economic loss rule. The court rejected the owner’s argument that its claims fell within the professional services exception to the economic loss rule, holding that the contract was for construction services rather than professional services, such as architectural services.
Click here to view full opinion as PDF (provided with
the permission of LexisNexis).
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Minnesota Court Rules Architect-Client Relationship Is Not Per Se Fiduciary
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Carlson v. SALA Architects, Inc.
2007 Minn. App. LEXIS 74
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| The of Minnesota Court of Appeals reversed entry of summary judgment in favor of a purchaser of architectural services, holding, among other things, that the relationship between an architect and its client is not per se a fiduciary relationship. Rather, the Court held that whether a fiduciary relationship exists was a question of fact which was unable to be resolved on summary judgment.
The Carlsons hired SALA Architects, Inc. to design a single family home in the cottage style. A particular architect at SALA, Mulfinger, had expertise in the cottage style. However, most of the work on the Carlson’s project was performed by an architect, Wagner, who had worked as an architect elsewhere, but was not licensed in Minnesota. Frustrated with progress on the project and having spent almost $292,000 in fees with design incomplete, the Carlsons terminated SALA’s contract services and sued for breach of contract and professional negligence.
The Carlson contended that SALA falsely held Wagner out to be a licensed architect in Minnesota, and further complained that Mulfinger, the architect to whom they were drawn, performed only minor work on the project. SALA moved for summary judgment, but the district court held there were genuine issues of material fact which precluded entry of summary judgment in favor of SALA.
The district court then sua sponte awarded summary judgment to the Carlsons, holding that it could not be disputed that SALA held Wagner out to be a licensed architect. The district court held SALA’s conduct was professionally negligent. Further, it held that in misrepresenting Wagner’s status, SALA breached a fiduciary duty owed to the Carlsons, and was therefore required to refund all fees paid by the Carlsons.
On appeal, the Court of Appeals of Minnesota reversed the grant of summary judgment. The Court concluded that genuine issues of fact and credibility existed as to whether SALA’s held Wagner out to be a licensed architect. On the issue of fiduciary duty, the Court observed that while Minnesota statutes made it unlawful for a person to practice architecture without a license, it was acceptable for an unlicensed person to engage in architectural work, so long as a licensed architect is in responsible charge of the work. It held there were genuine issues of fact as to whether Mulfinger had taken the requisite charge of the work.
The Court of Appeals also held that the district court incorrectly assumed, without authority, that the relationship between architect and client is per se fiduciary. Rather the whether a fiduciary duty exits is a question of fact. The Court also noted that since this was a case where the termination occurred at the design stage, it would appear to be a simple breach of contract case. A true negligence claim would appear to relate to stages beyond the design stage, such as the building stage. Accordingly the court suggested that, on remand, the parties and court consider whether any viable negligence claim exists for trial.
Click here to view full opinion as PDF (provided with
the permission of LexisNexis).
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Florida Court Holds that Arbitrator, Rather Than Court, Should Determine Validity of Contract
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Charles Boyd Construction Inc. v. Vacation Beach, Inc.
No. 5D06-2168, 2007 Fla. App. LEXIS 9597 (Fla. Dist. Ct. App., June 22, 2007)
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| Following the precedent of the United States Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006), the Fifth District Court of Appeal of Florida reversed its prior decision and held that whether a contract is illegal in its entirety and, thus, an arbitration provision contained therein would be unenforceable, must in the first instance be decided by the arbitrator, and not a court.
The case arose out of the construction of a project where Vacation Beach, Inc. (the “Owner”) hired Boyd Construction (the “Contractor”) to build a condominium project. The contract between the Owner and the Contractor contained a provision requiring claims arising out of or related to the contract to be arbitrated pursuant to the American Arbitration Association after first being submitted to mediation.
During the Project, the Owner discovered that the building permit for the structure had been obtained by an entity known as “Charles Boyd Homes, Inc.,” a corporation that had been dissolved and never reinstated, and not by the Contractor with whom the Owner had contracted. The Owner alleged that the Contractor never had a primary or secondary qualifying agent as required by Florida law and thus was an unlicensed Contractor. Disputes arose between the parties concerning the construction of the Project that culminated in the Contractor filing a lien against the property and a demand for arbitration. The owner, in response, filed an action for declaratory relief seeking a declaration concerning the legality of the construction contract in view of the lack of a qualifying agent for the Contractor.
The trial court granted the Contractor’s motion to dismiss and compelled the parties to arbitrate. Upon appeal, the Court of Appeals of Florida reversed the trial court based largely on the Florida Supreme Court’s decision in Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860 (Fla. 2005). The Court of Appeals held that contracts entered into by an unlicensed contractor were unenforceable by the contractor. Because the Contractor lacked a qualifying agent and a certificate of authority, it was unlicensed and thus the Contractor could not enforce the contract in an arbitration proceeding. Following the Cardegna holding, the Court of Appeals held that “a claim by a party asserting that a contract is illegal is first required to be presented to the trial court for disposition before arbitration of other disputes under the contract could proceed.”
Upon remand, the trial court accordingly entered an order denying the Contractor’s motion to compel arbitration and granted the Owners’ motion to stay the arbitration. Shortly thereafter, the Contractor requested that the court take into consideration the opinion of the Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006), reversing the decision which had been relied upon on the first appeal. In Cardegna, the US Supreme Court held that under the Federal Arbitration Act the issue of a contract’s validity, as a whole, should be decided by the arbitrator, rather than a court in the first instance, in the first instance. The trial court, however, held that it could not change the law of the case as it had been decided by the Court of Appeals, and thus declined to send the matter to arbitration.
On a second appeal, the Court of Appeals held that in view of the reversal of the Florida Supreme Court’s decision in Cardegna by the United States Supreme Court, it was required to reverse the trial court and direct that the trial court order the matter to arbitration.
Click here to view full opinion as PDF (provided with
the permission of LexisNexis).
(Where, however, the allegations of illegality or unenforceability pertain specifically to the arbitration clause itself, as on a theory of fraudulent inducement, rather than to the entire contract, the courts have typically held that the issue of the validity of the arbitration clause is for a courts rather than an arbitrator to decide. See J.A. Walker, Inc. v. Excel Metals, Inc., 2007 Colo. LEXIS 447 (Colo. S.Ct. May 29, 2007).)
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