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), andJames 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 ConstructionCompany, #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. TheGuarantee 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 is 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.