Subcontractor Must Pay Punitive Damages to Contractor for Settling Claim with Owner

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 34, November-December 2005.

What started in 1999 as a subcontractor's mechanic's lien and a breach of contract claim against its contractor turned six years later into a contractor judgment, affirmed on appeal, against the subcontractor for $26,100 for tortuous interference and $500,000 in punitive damages. The case is Environmental Energy Partners, Inc. v. Siemens Building Technologies, Inc., Nos. 26521 and 26702 (Mo. App. S.D. 2005), decided October 25.

All of this occurred because, on the eve of the trial over breach of contract and unpaid work, the subcontractor, Siemens Building Technologies, confidentially settled its claim with the owner. Unbeknownst to the contractor, the owner agreed to pay the subcontractor $148,475, money that a jury and the appellate court later decided should have been paid to the contractor, pursuant to the "pay when paid" clause in the subcontractor contract.

The courts decided that the subcontractor's settlement with the owner was not legally permissible, and the payment exposed the subcontractor to a claim from its contractor for tortuous interference with the payment of money that should have flowed from the owner to the contractor.

Despite this significant loss, the result could have been much worse for Siemens. The trial court threw out the jury's additional verdicts in favor of general contractor Environmental Energy Partners (EEP) and against Siemens of $3,000,000 in punitive damages for malicious prosecution and another $201,175 in punitive damages for abuse of process because in each case the jury awarded no actual damages. The appellate court affirmed the trial court's decision.

Under Missouri law, punitive damages cannot be sustained without an award of actual damages. The trial court remarked that if the law would have allowed an award, it would have sustained the punitive damage awards.

The project involved several subcontractors that performed various aspects of work on the buildings at St. John's Medical Center, including lighting upgrades to 10,500 light fixtures, a new boiler with digital controls, new drives for the HVAC system, removing an incinerator and installing digital controls throughout the hospital.

EEP had entered into a contract with St. John's to do all of this work for $1,484,750. Siemens agreed to perform the HVAC subcontract portion of the work for $593,500.

Siemens tried to collect for unpaid work by filing a mechanic's lien lawsuit against St. John's and EEP and a breach of contract claim against EEP. The facts did not favor Siemens, however.

Siemens was the only subcontractor not to finish the project on time; in fact, Siemens was 617 days late in completing its work. Further, Siemens stopped providing updates to EEP while the job was still ongoing, did not return telephone calls about its progress and chose not to communicate with EEP from the latter portion of the project until the trial began.

Siemens lawsuit drew multiple claims by the parties. Among them, Siemens claimed that EEP and St. John's owed $201,178.75 for unpaid work. EEP sought liquidated damages against Siemens of $154,250, representing $250 per day for 617 days beyond the scheduled completion date.

On the first day of trial, EEP learned that Siemens and St. John's had settled their disputes with St. John's paying Siemens $148,475. This was the exact amount that St. John's had been withholding from EEP as the last payment under the contract between St. John's and EEP. Siemens also agreed to hold St. John's harmless and defend it against any claim that EEP may file as a result of the settlement and payment.

Based on this settlement and payment to Siemens, EEP filed a tortuous interference count against Siemens, arguing that it improperly interfered with the payment of that money from St. John's to EEP by having the money diverted instead to Siemens. Siemens defended that it was legally justified in receiving this payment because EEP owed the money for this work.

The jury and the court found Siemens' actions to be tortuous interference. The defense of legal justification for Siemens' actions could not exist because the contract between EEP and Siemens clearly provided that Siemens was to be paid only after EEP received the corresponding scheduled payment from St. John's, something that never happened in this case. This is a typical provision in many construction contracts involving owners, contractors and subcontractors.

Both the jury and the court found Siemens' actions in diverting the payment to itself to meet the legal standard for punitive damages, that of being "outrageous" due to Siemens' "evil motive or reckless indifference to the rights of others."

The appellate court noted that Siemens falsely represented in its mechanic's lien that its work was complete when it was not complete. The appellate court decided, after reviewing the entire record, that punitive damages were justified because Siemens' "actions were egregious, unwarranted, overbearing, reprehensible, and without justification."

The appellate court also affirmed EEP's judgment against St. John's for $101,546 for the unpaid final installment under the contract. The court enforced Missouri's Prompt Payment Act and sent the case back to the trial court to determine what portion of EEP's attorney fees related to its breach of contract count against St. John's.

In addition, the jury did award for Siemens and against EEP $46,928 on Siemens' breach of contract claim. This was the difference between the amount originally owed of $201,178 and the liquidated damages of $154,250.

In the end, however, it was EEP's tortuous interference claim against Siemens and the $500,000 punitive damage judgment that had the greatest impact on the overall balance of who really recovered what.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on complex business litigation, construction law and ADR. He also is a mediator and an arbitrator with the American Arbitration Association.