Contractor Loses $450,000 Recovery Due to Lack of Documentation

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 13, March-April, 2001.

In a contractor's lawsuit against an owner, Missouri's appellate court in Kansas City recently upheld a trial judge's decision to take away a jury verdict of $454,572 under Missouri's Prompt Payment Act. The case is a good example of how important it is for a contractor to properly document its claim if it expects to recover interest for late payments.

The appellate court also reversed a judgment in favor of the contractor for breach of contract for $561,200 and sent this part back for another trial. The case isEnvironmental Protection, Inspection and Consulting, Inc. v. City of Kansas City, Missouri, WD56182 (decided December 26, 2000).

In 1992, Environmental Protection, Inspection, and Consulting, Inc. (EPIC) contracted for $400,000 with the City of Kansas City (KCMo) to build a replacement spillway at the Kansas City Zoo. This was part of a $50,000,000 Zoo renovation.

In 1998, a Kansas City jury awarded EPIC the $454,572, plus another $40,000 for negligent maintenance of property and $561,200 for breach of contract. KCMo, the defendant, was looking at an adverse judgement of $1,055,772.

This is when things started going bad, lawsuit wise, for EPIC.

First, the trial judge set aside the jury's interest award of $454,572. Then on December 26, 2000, Missouri's Court of Appeals in Kansas City threw out the contract damage award of $561,200 based on an error in the instruction to the jury and ordered another trial. The appellate court upheld the trial judge's decision to deny the interest award. EPIC will not get another chance at this claim.

This leaves EPIC, after nine years, with a $40,000 recovery. EPIC and KCMo now face another potentially long trial--the first one went six weeks--to determine if EPIC can recover more on its claim for breach of contract.

EPIC's claims arise from an agreement with KCMo to build a new spillway, diverting water for the first time to the Blue River. A prior spillway channeled water to a lagoon. The specifications called for building the spillway without draining the lagoon. To do this, EPIC built a cofferdam, a temporary structure using sheet pilling and concrete forms, to dam the water and thus permit excavations for the spillway.

Water seeped under the cofferdam. EPIC used pumps to remove the water but eventually the water backed up so far that work on the inlet excavation had to stop.

EPIC determined that the water flowed through a specific layer of porous rock under the cofferdam. KCMo ordered the rock's removal. After the lawsuit was filed, EPIC learned that KCMo and its engineers knew of the rock's existence but did not disclose it in the bid documents or the contract.

Also, a KCMo work crew filled a ditch near the existing spillway with dirt, causing the water from a big rainfall to rise over the cofferdam and flood the new spillway work site. The flood created the need for extensive repairs and cleanup. EPIC lost equipment and materials. (This is where the jury awarded EPIC $40,000 for loss of its business concern due to these problems.)

KCMo urged EPIC to timely complete the project, which required extra work. EPIC submitted change orders to cover what happened, but KCMo only approved about $12,500 of them.

EPIC's bad luck continued. The relationship between EPIC and KCMo broke down. A material supplier sued EPIC. The losses on the project forced EPIC to go out of business in 1994, the same year it filed this lawsuit.

EPIC sued under Missouri's Public Works Prompt Payment Statute, which applies to contracts with the government. It promotes timely payment to contractors, subcontractors and suppliers and allows them to recover 1.5% interest per month for late payments made in bad faith, plus reasonable attorney fees. The statute sets out many reasons an owner can withhold payment and not face this interest charge, such as unsatisfactory work progress, defective work or materials that are not corrected and disputed work.

The statute requires the owner to pay the retainage to the contractor within 30 days after the contract work is substantially complete and the public owner accepts. However, the contractor must submit its invoice and all other appropriate documentation and certificates in complete and acceptable form as required in the contract. Before final payment is due, the contractor also must file with the owner all the documents and certificates required by the contract.

The trial judge decided, and the appellate court agreed, that EPIC did not present any evidence that it submitted to the owner the required invoice or the other appropriate documentation and certificates as required in the contract and the statute. Thus, the trial judge properly took away the jury's damage award on this issue.

EPIC argued that its change order requests, a certificate of completion and a payment request were enough to comply with the statute's requirements. The appellate court decided, however, that these facts may help EPIC on its breach of contract claim for extra work but they were no substitute for what is required to trigger a prompt payment claim under the original contract.

Even the jury's finding that KCMo withheld payment in bad faith could not save this claim. Compliance with the threshold requirements of documentation is mandatory.

James R. Keller is a partner at HERZOG, CREBS & McGHEE, LLP, St. Louis, Missouri, where he concentrates on construction law, real estate and business litigation. He is also a panelist with the American Arbitration Association.

This article originally appeared on page 13 of the ST. LOUIS CONSTRUCTION NEWS & REVIEW/MARCH-APRIL 2001.