Contractor Recovers $2,071,371 from Kansas City' Construction Authority

by James R. Keller

The Western District Court of Appeals in Kansas City recently upheld a judgment in favor of general contractor Gill Construction, Inc. and against 18th & Vine Authority, a Missouri not-for-profit corporation, for a combined $2,071,371.70. The case is Gill Construction, Inc. v. 18th & Vine Authority, Nos. WD 62073 and WD 62076, decided December 21, 2004.

In doing so, however, the appellate court also decided that the City of Kansas City was not a proper party to the lawsuit and upheld the trial court's dismissal of the City, leaving as the only defendant the City's development Authority. The decision reinforces the importance to a general contractor of actually entering into a written contract with a municipality under Missouri law to recover against that city.

Kansas City had created the Authority to revitalize the 18th and Vine District in downtown Kansas City. The project involved renovation of the American Jazz Museum and the Gem Theater, after the district had significantly deteriorated and many businesses in the area had closed or moved.

While both Gill and the Authority appealed portions of the judgment, the appellate court ultimately left in place exactly what a jury and trial court had awarded to Gill: $449,000 for extra work beyond the three written contracts with the Authority, $1,065,000 for loss of business opportunities and bonding capacity, $360,000 in interest under Missouri's Prompt Payment Act, and $197,371.70 for Gill's attorney fees.

Kansas City and the Authority had entered into an agreement for construction and management of the project. The Authority and Gill then entered into the three separate contracts for the project.

Gill sued the Authority and Kansas City for breach of contract, alleging in part that extra work it performed increased the project cost by 68 percent. Gill claimed this extra work materially altered the contract and constituted a cardinal change from the original agreements.

In suing the City, Gill could not overcome Missouri statute § 432.070, which provides that no Missouri city can enter into a contract unless it is in writing. The appellate court noted that all contractors who deal with cities are legally charged with notice of this law, regardless of whether they actually know it.

Gill lodged several arguments that the City was liable, given the close connection between the Authority and the City. For example, the contracts between Gill and the Authority required City approval and funding. The Authority was the City's expressly designated agent for the contracts and all change orders. In other words, the actions of the Authority, as the City's agent, were the actions of the City.

The court disagreed. It found that Missouri law was mandatory on the requirement for a written contract, a lesson that all contractors doing business with municipalities should heed, if they want to hold that city liable for contract obligations.

The Authority also argued that Gill should not be compensated for alleged extra work because it did not comply with the contract's requirement for 21-day advance notice. While there was no technical compliance with the contract, the court concluded that a jury could decide this issue, given many examples that through procedure and practice the notice provision had been waived.

First, there was a hectic schedule. Second, the Authority requested that Gill supply additional labor. Also, when asked to process change order requests, the Authority responded there was not enough time. The jury concluded this evidence and more like it was enough to support the claim for extra work. The appellate court agreed.

Significantly, the appellate court held that it was impossible for Gill to know the full impact of all delays and extra costs until the project and extra work were completed. This offers encouragement to contractors in future disputes who engage in a similar practice, and are too busy building to have the time to stop and obtain all the proper paperwork and who cannot document their extra costs until the project is completed.

The court further upheld Gill's claim for loss of productivity and consequential damages, rejecting the Authority's argument that Gill should have reserved its rights when receiving payments to claim additional costs.

Gill testified that bonding companies denied Gill bonding because its financial documents showed an account receivable unpaid for a long period of time. Gill also lost three contracts due to lack of bonding and this generated in substantial part its lost-profits' claim. The Authority was aware of Gill's bonding requirements to obtain new contacts.

Due to the Authority not preserving certain arguments for appeal, the appellate court also left in place the trial court's award of interest and attorney fees based on Missouri's Prompt Pay Act. This part of the decision alone boosted the overall recovery to Gill by $557,371.70, or nearly 27 percent of the total award.

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 an arbitrator and mediator with the American Arbitration Association.