General Contractors Lose Three Recent Cases
by James R. Keller
This article appeared St. Louis Construction News
& Review, p. 20, May-June 2000.
The year 2000 has been tough on general contractors
in Missouri's courtrooms.
In two recent appeals general contractors lost
their claims against the owners of buildings for tenant finish. The cases are William
Graves d/b/a Graves Construction v. Jerry Berkowitz, WD 57374, decided
April 11 in the Missouri Court of Appeals for the Western District (Kansas
City), and James Kujawa d/b/a Restaurant Builders v. Billboard Café
at Lucas Park, ED 75984, decided January 25 in the Missouri Court of
Appeals for the Eastern District (St. Louis).
In a third case a federal court jury in St. Louis
awarded a subcontractor $116,797 against a general contractor for alleged bid
shopping. This case is Guarantee Electrical Company v. Capitol Construction
Company, #4: 98CV01424LOD, United States District Court in St. Louis,
decided April 7.
These three cases may impact significantly the construction
industry. The tenant finish cases raise the barrier to a contractor's chances
of recovering money from an owner for construction work requested by a tenant.
The Guarantee Electrical case sends a warning to those who engage in bid
shopping. They may have to pay the lost profits to the subcontractor they
decide not to use.
While separate and unrelated, the tenant finish
cases share similar facts and the same result-a victory for the owners. In both
cases tenants hired general contractors to improve the tenants' leased space in
buildings owned by others. In Graves the tenants planned to open a
restaurant at 10th and Broadway in Kansas City. In Kujawa the
tenants planned to open Billboard Café and to improve a second floor office
space at the Lucas Plaza Building, 614 North 11th Street in St.
Louis.
In both cases the general contractors apparently
did the work. The problem was getting paid. Both restaurants opened but within
a few months closed. Without a viable tenant to generate money to pay the generals,
they looked to the owners whose building space had been improved for payment.
The contractors did not have a direct contract with
the owners for the construction work. So they decided to sue the owners under a
theory of quasi contract or unjust enrichment.
A quasi contract-as the name implies-is not a
complete and binding contract. Recovery is still possible, however, if the
owner has been "unjustly enriched" by the construction and thus he
should pay for it.
To recover in Missouri the general contractors had
to prove three things. First, the owner had to benefit from the work. Second,
the owner had to "appreciate" the benefit. Third, it would be
"inequitable" for the owner to benefit from the work without paying
for it. Of these three elements, proving inequity is the most important and
difficult.
The Graves court studied recent cases in
this area and decided there is a general trend to when recovery is possible. To
show the requisite inequity there must be some fault or undue advantage on the
owner's part. An agency relationship between the owner and the tenant also may
be enough. There has to be more than mere "passive acquiescence" by
the owner in the construction work.
Applying this standard, the Graves court
decided the general contractor could not make a viable legal claim in quasi
contract to entitle him to a trial. It was not enough that the owner agreed to
and knew about the construction. Owners with knowledge but no active
participation are merely "passive beneficiaries".
Additional facts also worked against the
contractor. The owner did not guarantee payment. The general contractor never
demanded that the owner pay, even when the tenant was in default. The
contractor continued to work without seeking assurances from the owner as to
payment. The general contractor completed the work "hoping" that the
tenant would pay after the restaurant opened.
Given all this, the Court concluded it was not
unjust for the owners to keep the benefit of the improvement-which cost
$250,000-without paying anything for it.
In Kujawa the owner provided $75,000 in
"tenant finish allowance" under the lease for Billboard Café (a
restaurant) and another $30,000 for the second-floor office space. The owner
agreed that the tenant could use Kujawa as the contractor even though the owner
usually used Paric Corporation for improvements.
The owner paid, pursuant to this lease arrangement,
its tenant allowance. The tenant did not pay the contractor remaining money
owed for the work. The general contractor then sued for $162,922 nearly
everyone involved in the project, including the owner for quasi contract or
unjust enrichment.
In a separate case the owner sued the tenant for
rent and possession, seeking $222,000 in accelerated unpaid rent. They settled
this claim by having the owner take title to the restaurant equipment. Kujawa,
the general contractor, obtained a default judgment against the tenants for
$213,000 plus. (A default judgment typically occurs when the defendant fails to
answer the lawsuit or appear in court to defend.)
The Court applied the three elements needed to
prove a case of quasi contract. Once again, the facts worked against the
contractor.
There was no evidence that Kujawa expected payment
from the owner beyond the tenant finish allowance. The leases allowed the
owners to review, approve and observe the construction. They did not, however,
actively supervise the work, alter the plans or participate in construction.
The owner's passive activity was not enough to merit recovery or even a trial.
In the Guarantee Electrical case, the jury
deliberated about 2 hours before awarding subcontractor Guarantee Electrical
all its claimed lost profits. The project involved rehabbing the Doubletree on
Natural Bridge Road.
During the initial bid process, general contractor Capitol
Construction used the subcontractor bid of Guarantee Electrical. All of the
general contractors' bids were way beyond the owner's budget. The generals
could submit new, lower bids. To do this, Capitol then asked Guarantee to lower
its initial bid.
Guarantee claimed it could not go lower without
some guarantee that it would get the contract. Capitol then assured Guarantee,
according to Guarantee's proof, that if Capitol gets the contract, Guarantee
gets the contract, too.
Through "value engineering" Guarantee
reduced its bid by almost $500,000. Guarantee claimed it put a lot of work into
this bid and that its efforts benefited Capitol, since it got the contract.
Capitol then had Crest Electrical Company, with whom Capitol had an ongoing
relationship, bid on the job as the electrical subcontractor. Crest submitted a
bid suggested by Capital that was slightly lower than Guarantee's final bid.
Capitol decided to use Crest Electrical, not Guarantee Electrical.
Guarantee claimed that the general contractor,
after being awarded the contract from the owner, engaged in "bid
shopping" by playing the subcontractors against each other in an effort to
get the lowest bid possible.
Guarantee asserted that it had an oral contract
with Capitol to be the electrical subcontractor. By going with someone else,
Capitol allegedly ignored this deal.
Capitol contended that without a written contract
there was no binding contract, especially since the "deal" involved
an estimator. Capitol argued that Guarantee's estimator did not have the
authority to bind the parties to an oral contract of such importance. The jury
decided otherwise.
Guarantee sued for breach of contract and for
fraud. The jury awarded Guarantee on its breach of contract count the profits
it would have made as the subcontractor. The jury also awarded Guarantee $1 on
its claim of fraud. Typically, a jury award of $1 for fraud means the jury felt
there was wrongdoing but no one lost any money. It sends a message to the
conscience rather than the pocketbook.
Capitol has filed various post-trial motions
seeking an overturning of the jury's verdict and a new trial. It claims a
number of trial errors, including that the jury was not properly instructed as
to the law. If denied, Capitol's counsel vows to pursue an appeal, and argues
that if allowed to stand, the jury's verdict would be
"revolutionary".
The case in unusual because subcontractors
generally do not sue their general contractors, no matter how large the loss.
Bid shopping, while practiced by some contractors to reduce costs, is
discouraged by many others who depend upon an unwritten bond of
"trust" with their subcontractors to prepare successful bids.
Jim Keller is a partner at HERZOG, CREBS &
MCGHEE, LLP, St. Louis, Missouri, where he concentrates on construction law,
real estate and business litigation. He also is a panelist with the American
Arbitration Association.
