Lee Masonry, Inc. v. City of Franklin, Tennessee Stansell Electric Company, Inc. v. City of Franklin, Tennessee ( 2010 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
October 13, 2009 Session
LEE MASONRY, INC. v. CITY OF FRANKLIN, TENNESSEE
STANSELL ELECTRIC COMPANY, INC. V. CITY OF FRANKLIN,
TENNESSEE
Appeal from the Chancery Court for Williamson County
No. 30483/31022 Timothy L. Easter, Judge
_________________________________
No. M2008-02844-COA-R3-CV - Filed April 28, 2010
Two trade contractors alleged that the City breached its contract with them by failing to take
reasonable measures to guard against delays and disruptions by other contractors in the City’s
coordination, management, and scheduling of the contractors and by failing to pay the
retainages they were due. The contractors sought damages for the delays. The City raised
three defenses: (1) the “no damages for delays” provision of the contracts; (2) untimely
notice of claims by the contractors; and (3) the contractors’ acknowledgment and acceptance
of time extensions without a reservation for increased compensation in the change orders
they executed. The trial court concluded that all three of the City’s defenses failed and
awarded damages to the contractors. We affirm the trial court’s decisions.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
A NDY D. B ENNETT, J., delivered the opinion of the Court, in which F RANK G. C LEMENT, J R.
and R ICHARD H. D INKINS, JJ., joined.
William N. Bates, Gregory L. Cashion, and Craig N. Mangum, Nashville, Tennessee, for the
appellant, City of Franklin, Tennessee.
Todd E. Panther, Nashville, Tennessee, for the appellee, Lee Masonry, Inc.
Stafford F. McNamee, Jr., Brentwood, Tennessee, for the appellee, Stansell Electric
Company, Inc.
OPINION
F ACTUAL AND P ROCEDURAL B ACKGROUND
This is a contract dispute between two trade contractors, Lee Masonry, Inc. (“LMI”)
and Stansell Electrical Company, Inc. (“SEC”), and the City of Franklin, Tennessee (“City”).
The plaintiffs allege that the City breached its contract with them by failing to coordinate,
manage, and schedule the various trade contractors on the Franklin Municipal Services
Complex project by neglecting to take reasonable measures that would guard against delays
and disruptions by other contractors and by failing to pay the retainages the plaintiffs were
due.
LMI filed suit against the City on March 23, 2004; SEC filed suit on October 8, 2004.
The City answered each suit denying the allegations and alleging that each plaintiff failed to
satisfy contractual conditions precedent to obtaining any relief for delay and disruption. On
November 1, 2004, the court entered an order to consolidate the two cases.1 A six-day trial
took place in March 2008. In a detailed memorandum opinion dated August 8, 2008, the
court made findings of fact, which are not in dispute.
Before construction on the project began, the City paid for a geotechnical exploration
into the subsurface conditions of the construction site and received a report on February 11,
2002. The report addressed numerous problems with the soil, including wet soil and soil that
was unsuitable for buildings. A portion of the site was designated wetland. The site work
was delayed until approximately February 1, 2003, for a permit to be issued by the EPA to
allow the project to go forward. The former City Manager and the Job Superintendent for
Rock City, the City’s construction manager for the project, acknowledged that the location
was a bad site. The trial court found that “[t]he soils were very porous, stayed wet, and there
was bad soil virtually all over. The grading contractor ran into springs all over the site and
french drains had to be constructed to get rid of the water.”
Rock City prepared a pre-bid schedule that established dates when certain jobs would
be completed on certain buildings and served as a guide for the trade contractors while they
bid on the project. According to the pre-bid schedule, masonry work was to begin March 18,
1
The City initially filed a third-party complaint against Rock City Construction Co., Inc., its
construction manager on the project. The City alleged that because Rock City was its agent, any contractual
duties that were owed to LMI or SEC that were breached by the City were a result of Rock City’s
performance or non-performance of its duties to the City. The City voluntarily dismissed Rock City in
September 2005. The City and Rock City collaborated at trial with the City’s acknowledgment that Rock
City was its agent and the City was vicariously liable for everything Rock City did on the project.
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2003, and be completed by June 16, 2003, while electrical work was to run from April 1,
2003, to August 22, 2003. The trial court found that “LMI and SEC based their entire
forecast including bid pricing, manpower scheduling and substantial completion for this job
on a Pre-bid Schedule.”
The trial court discussed the collaborative nature of construction projects. On a
construction site, certain jobs must be completed before others may begin. This inevitably
results in certain contractors waiting for others to finish before they can begin. A major draw
to contractors working on this particular project was the fact that six different structures were
being built at the same time, allowing the contractors to work around each other and
minimize downtime. As the trial court found, “[t]his was conveyed to the trade contractors,
and LMI and SEC relied on this incentive while developing their bids.”
On March 12, 2003, LMI entered into a contract with the City agreeing to perform all
masonry work on the project for $271,300. On April 9, 2003, SEC entered into a contract
with the City agreeing to perform all electrical work on the project for $650,000. The
language of the two contracts is identical in all relevant and material aspects. Pursuant to
Article 8 of the agreements, there were a number of other documents incorporated by
reference, including but not limited to the Standard General Conditions of the Construction
Contract (“General Conditions”) and the Specifications. All of the contract documents were
prepared by the City and presented to LMI and SEC on a take-it-or-leave-it-basis.
The trial court determined that paragraphs 2.9 and 6.6 of the General Conditions and
section 01310 of the Specifications require LMI and SEC to abide by a construction schedule
prepared by the City. According to the trial court, the documents contemplate that the City
would develop a fully integrated construction schedule before work on the project began.
The General Conditions state that time is of the essence of the agreement. The trial court
found that LMI and SEC “reasonably relied upon the City’s fulfillment of this obligation.”
At the time of the agreements, the only schedule that existed was the pre-bid schedule.
The first contractor scheduled to begin work was Civil Construction Company
(“Civil”). Civil started on time in February 2003 but immediately encountered problems with
the soil. One problem was that the soil was too porous, a problem that the geotechnical
report had uncovered. Another problem that delayed the project occurred when Civil
mistakenly used the wrong technique in blasting an area designated for the solid waste
transfer station, resulting in “overshot” rock. Civil was forced to dig up shattered, overshot
rock and fill the area with usable soil before building on the site could commence. Civil was
given extra time by the City to correct the mistake, and Rock City changed the schedule.
Instead of starting on the solid waste transfer station, Rock City moved all work to the
training center. By this point, the project was already well behind the pre-bid schedule. On
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April 13, 2003, Rock City initiated a new schedule under which the contractors started and
finished at a later date, but the anticipated duration of the project was essentially the same.
After receiving its notice to proceed, SEC began work on May 18, 2003. By this time,
the April 13, 2003 schedule had been replaced by an April 20, 2003 schedule, which changed
the sequence of work that would be done on the project. When SEC began work, the April
20 schedule was already sixty days behind. The schedule still gave SEC 144 days to
complete its work, the same amount allotted in the pre-bid schedule. Although required by
article 12.1 of the SEC contract and paragraph 6.6 of the General Conditions, neither of the
two revised schedules were issued through change orders.
Once Civil completed grading at the training center, the concrete contractor, Romach,
began to lay the footings. The project was further delayed when Romach workers struck
“prosphates” that were predicted in the geotechnical report and had to dig deeper to find firm
soil. LMI finally began laying the foundation on the training center on June 2, 2003.
However, because the site lacked power and water, LMI had difficulty completing its job.
The site received power on July 15, 2003, and did not receive water until October 21, 2003.
On July 15, 2003, Rock City issued another construction schedule without a change order.
At that point, the project was ninety days behind.
Romach continued to struggle to complete its work on time. Romach had problems
getting the correct blueprints, receiving materials on time, finding enough workers, and
encountering rock at the site. The City gave Romach more time to do the excavation while
LMI and SEC were forced to wait. The City issued another schedule on November 17, 2003,
without a change order.
At trial, the City presented testimony that the weather and site conditions were the
cause for most of the delays. The issue of whether it was a particularly rainy spring was
sharply disputed. The trial court reached the following conclusion: “It is evident that much
more of the delay and disruptions were due to the site conditions and not the weather. The
City was aware of the problems with this site before the Project began; it was attempting to
place six buildings . . . on a site covered with bad soils.” The City granted both Civil and
Romach time extensions to accomplish their work and increased their compensation for
problems they encountered with the site conditions.
The City issued Change Order 1 to SEC on December 15, 2003, authorizing the
payment of another $7,433.17 for five additional tasks already completed by SEC. It stated
“no change” to SEC’s contract time for these items but also stated that substantial completion
was essentially being moved from December 15, 2003 to January 17, 2004. The City issued
Change Order 2 to SEC on January 17, 2004, authorizing the payment of $16,738.28 for four
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additional jobs. Simultaneously, the City’s Board of Mayor and Aldermen (“BOMA”),
which must approve all requests for change orders, stated that no more change orders would
be accepted until the completion of the job. Change Order 2 stated “no change” to SEC’s
contract time but also listed the same substantial completion dates as contained in Change
Order 1.2 In its opinion, the court discussed the effect of the change orders on SEC’s right
to pursue extra costs:
Mr. Stansell testified that SEC did not need extra time and that by signing the
Change Orders he was not waiving any rights SEC had to pursue its extra
costs. He had not asked for an extension; there was no fault on SEC’s part.
He acknowledged that he really did not understand it and he did not think
waiving any rights was an issue. The Court agrees.
The court determined that the delays and disruptions kept LMI and SEC on the project
longer than anticipated and increased both contractors’ costs. The City had not paid either
contractor their retainage or extra costs. On or about April 15, 2004, SEC filed a Request
for Equitable Adjustment with Rock City for $183,606.16, which represented SEC’s cost
purely for delay. David Stansell of SEC met with John Lee, a representative of Rock City,
to discuss the claim. Mr. Lee asked for more information but also said that there would be
some money left at the end of the project to compensate SEC. Mr. Stansell replied that it
would need to be a six-figure number.
SEC was on the project over seven months longer than it anticipated. The trial court
summarized the reasons why this was the case:
The site was not prepared and ready for SEC to perform its work. The
buildings were not constructed per the schedules and SEC had to wait on its
predecessor contractors . . . . SEC had to work during the winter months. SEC
was required to do things it ordinarily would not do; it was required to jump
around and work piece meal. . . . The mobilization, de-mobilization and re-
mobilization affected the workers’ efficiency. There was no continuity and no
flow of the work.
2
On September 14, 2004, long after the project was completed, the City issued Change Order 3 to
SEC, which resulted in a decrease of $3,139.40.
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The court also outlined the reasons that LMI was delayed:
Among the factors that prevented LMI from progressing with its work were
the City’s failure to have a meaningful schedule in place before work began;
the City’s failure to force other contractors, primarily Civil and Romach, to
adhere to the Schedule; the City’s failure to take known subsurface conditions
into account when planning the Project; the City’s failure to hold contractors
accountable . . . . None of these delays and disruptions were caused or
contributed to by LMI, and all of the foregoing delays were within the City’s
control to avoid or overcome.
The court further concluded that “the magnitude of the delays and disruptions that the City
allowed to occur could not have been anticipated by LMI or SEC.” LMI and SEC
continually contacted and notified the City and Rock City that the delays were impeding their
progress and preventing them from completing work in accordance with the schedule. The
trial court surmised that “[t]he City was well aware of the delays and disruptions that were
occurring on the Project.”
In an October 13, 2003 letter, LMI requested a time extension and fair and equitable
compensation for all associated costs. Rock City directed LMI to wait to submit its detailed
claim until LMI knew the amount of its claim. LMI provided the City a preliminary claim
with supporting documentation dated December 23, 2003. LMI was notified via e-mail on
January 28, 2004, that its claim was denied. LMI filed suit on March 23, 2004.
LMI sought damages for claims of loss of productivity (using the “measured mile”
approach), extended filed overhead expenses, extended home office expenses (Eichleay
damages), and the undisputed portion of its contract balance (retainage). SEC sought
damages for claims of loss of productivity (using the “modified total cost” approach),
extended general conditions costs, extended home office expenses (Eichleay damages), and
the undisputed portion of its contract balance (retainage). Additionally, both plaintiffs
claimed they were forced to incur additional fees and charges for engineers, consultants,
attorneys, and other professionals in the collection of the amount due. According to
paragraph 17.5 of the General Conditions, these additional expenses were recoverable.
The City raised three defenses: (1) the “no damages for delays” provisions of Article
12.4 of the General Conditions, (2) untimely notice of claims by LMI and SEC, and (3) the
acknowledgment and acceptance of time extensions by LMI and SEC in the change orders
they executed. The City admitted that LMI and SEC were entitled to their claims for
retainage, with accrued interest.
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In its August 8, 2008 memorandum opinion, the trial court concluded that all three of
the City’s defenses failed. The City filed this appeal.
S TANDARD OF R EVIEW
The relevant facts are not in dispute on appeal. We are presented with only questions
of law, which are reviewed de novo, with no presumption of correctness. Johnson v.
Johnson, 37 S.W.3d 892, 894 (Tenn. 2001).
This case turns on the interpretation of a contract between two trade contractors with
the City of Franklin. The interpretation of a contract is a question of law, and therefore our
review is de novo with no presumption of correctness. Tenn. R. App. P. 13(d); Allstate Ins.
Co. v. Watson, 195 S.W.3d 609, 611 (Tenn. 2006). In interpreting a contract, we seek to
ascertain the intent of the parties from the language of the contract; in so doing, we must
apply to those words their usual, natural, and ordinary meaning. Staubach Retail Servs.-SE,
LLC v. H.G. Hill Realty Co., 160 S.W.3d 521, 526 (Tenn. 2005). If the terms of a contract
are ambiguous, a court must determine the intent of the parties as expressed in the four
corners of the contract. Rogers v. First Tenn. Bank Nat’l Ass’n, 738 S.W.2d 635, 637 (Tenn.
Ct. App. 1987). The parol evidence rule generally prohibits the use of extrinsic evidence to
alter or contradict the plain meaning of an unambiguous written contract. Richland Country
Club, Inc. v. CRC Equities, Inc., 832 S.W.2d 554, 558 (Tenn. Ct. App. 1991); Stamp v.
Honest Abe Log Homes, Inc., 804 S.W.2d 455, 457 (Tenn. Ct. App. 1990). To aid the court’s
discernment of the parties’ intention, however, the parol evidence rule does not prohibit the
court from considering the circumstances surrounding the formation of the contract, the
business to which the contract relates, and the construction placed upon the contract by the
parties in carrying it out. Simonton v. Huff, 60 S.W.3d 820, 825 (Tenn. Ct. App. 2000);
Frank Rudy Heirs Assocs. v. Sholodge, Inc., 967 S.W.2d 810, 814 (Tenn. Ct. App. 1997);
Richland Country Club, 832 S.W.2d at 558; Coble Sys., Inc. v. Gifford, 627 S.W.2d 359, 362
(Tenn. Ct. App. 1981). Moreover, any “[a]mbiguous language in a contract is construed
against the drafter.” Jackson v. Miller, 776 S.W.2d 115, 117 (Tenn. Ct. App. 1989).
A NALYSIS
On appeal, the City challenges four of the trial court’s rulings: (1) that the City cannot
rely on the “no damages for delay” clause, (2) that LMI’s and SEC’s claims for contract price
increases were timely, (3) that the change orders did not have the effect of extending LMI’s
and SEC’s time to complete their obligations without extra compensation, and (4) the award
of damages.
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“No Damages for Delay” Clause
The City relies on the “no damages for delay” provision of the contract as a defense
to the plaintiffs’ action for damages. Paragraph 12.4 of the General Conditions states the
following:
Where CONTRACTOR is prevented from completing any part of the Work
within the Contract Times (or Milestones) due to delay beyond the control of
both OWNER and CONTRACTOR, an extension of the Contract Times (or
Milestones) in an amount equal to the time lost due to such delay shall be
CONTRACTOR’s sole and exclusive remedy for such delay. In no event shall
OWNER be liable to CONTRACTOR, any Subcontractor, any Supplier, any
other person or organization, or to any surety for or employee or agent of any
of them, for damages arising out of or resulting from (I) delays caused by or
within the control of CONTRACTOR, or (ii) delays beyond the control of both
parties including but not limited to fires, floods, epidemics, abnormal weather
conditions, acts of God or acts or neglect by utility owners or other contractors
performing other work as contemplated by Article 7.
The trial court found that LMI’s and SEC’s alleged waiver of the right to recover
damages for delay was conditional upon the City fulfilling the following contractual
obligations: a) paragraphs 2.9 and 6.6 of the General Conditions and section 01310 of the
Specifications to have an integrated schedule developed before work began; b) paragraph
12.1 of the General Conditions to change the schedule only by change order; and c)
paragraphs 12.3 and 12.4 of the General Conditions to timely grant LMI and SEC a time
extension in an amount equal to the time lost by such delay. Because the City failed to
comply with these three contractual provisions, the trial court held that the City could not rely
upon the “no damages for delay” clause as a bar to LMI’s and SEC’s claims.
The City contends that (1) it did not breach the contracts by failing to fulfill these
obligations, and (2) if it did, the trial court erred in concluding that the contractors’ right to
recover damages was contingent upon the City’s fulfillment of these obligations. We think
a discussion of these issues is unnecessary in light of the plain language of paragraph 12.4.
A plain reading of paragraph 12.4 reveals that any waiver of damages by LMI and
SEC is conditional upon a number of factors, including that (1) the delay must be beyond the
control of the City, (2) the City must grant the contractors an extension of time for the delay,
and (3) the extension must be in an amount equal to the time lost due to such delay.
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Given the trial court’s factual determination of the events that caused the delays, we
conclude that the delays were within the control of the City. The trial court specifically
found that the delays and disruptions on the project were not the result of adverse weather
conditions as the City insisted. Rather, “[t]he delays and disruptions were caused more by
the City’s selection of a poor, unsuitable project site, with bad soil conditions than bad
weather.” Additionally, the trial court found that the City directed the contractors to begin
work without having an overall schedule in place and did not require contractors that
encountered difficult site conditions to adhere to the schedule. The specifications outlined
what the City could do when a contractor did not comply with the schedule, and instead of
exercising its authority to mitigate or eliminate delays, the City took no proactive measures.
Thus, because the delays were not beyond the control of the City, the City cannot rely on
paragraph 12.4's “no damages for delays” clause to bar LMI’s and SEC’s claims.
Rather, paragraph 12.3 of the General Conditions governs delays beyond the control
of the contractor, as opposed to both the contractor and owner. This provision stipulates that
for such delays, contract times are to be “extended in an amount equal to the time lost due
to such delay.” The trial court found that the City did not comply with this obligation.
Specifically, “the City neither granted LMI and SEC the time extension to which they were
entitled, nor did it maintain LMI’s and SEC’s construction activities in the same sequence
and durations as they were originally scheduled.” Testimony for both contractors at trial
indicated that LMI and SEC were forced to perform work in a different, more costly
sequence than planned. Thus, the City breached paragraph 12.3 of the General Conditions,
which does not limit damages exclusively to time extensions.
The City insists that the risks of delay caused by other contractors and the site
selection were risks that were placed on LMI and SEC according to their contracts. It relies
on paragraph 4.2.3 of the General Conditions, which states the following:
If CONTRACTOR believes that any subsurface or physical condition at or
contiguous to the site that is uncovered or revealed either:
....
4.2.3.2. is of such a nature as to require a change in the Contract
Documents, or
4.2.3.3. differs materially from that shown or indicated in the
Contract Documents, or
4.2.3.4. is of an unusual nature, and differs materially from
conditions ordinarily encountered and generally recognized as
inherent in work of the character provided for in the Contract
Documents; then
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CONTRACTOR shall, promptly after becoming aware thereof and before
further disturbing conditions affected thereby or performing any Work in
connection therewith . . . , notify OWNER and ENGINEER in writing about
such condition. CONTRACTOR shall not further disturb such conditions or
perform any Work in connection therewith . . . until receipt of written order to
do so.
Additionally, the City points to paragraph 4.2 of the Supplementary Conditions of the
General Conditions:
[N]either OWNER nor ENGINEER makes any warranties or representations
about any subsurface conditions that may be encountered within the scope of
the Work. The CONTRACTOR shall satisfy himself of subsurface conditions
that may be encountered by performing on-site inspections, core drillings, or
other methods. The risk of encountering and correcting such subsurface
conditions shall be borne solely by the CONTRACTOR . . . .
Thus, the City contends that the risk that site conditions would cause disruptions or delays
was borne by the contractors.
The above cited provisions of the contract upon which the City relies focus on the
subsurface conditions of the site. Subsurface conditions were of the utmost importance for
the first contractors on the job, Civil and Romach, in completion of their grading and footing
responsibilities. However, soil conditions had no direct effect on masonry and electrical
work. To the extent that LMI and SEC were delayed and encountered additional expenses
in completing their tasks, it was a result of the earlier contractors’ difficulties with the site
conditions, not their own.
The City’s argument also fails to consider the fact that the City was well informed of
the delays and disruptions that were occurring on the project and their cause. Written
notification to the City of “disturbing conditions” was unnecessary. The City was aware of
the problems with the site based on the geotechnical report it paid for before it contracted
with LMI and SEC and before Rock City prepared the pre-bid schedule. Additionally, the
City knew of the difficulties that the first contractors on the job encountered. Civil and
Romach each caused delays and disruptions due to difficult site conditions. Both contractors
were given time extensions and were paid for their extra time on the job, indicating the City’s
recognition that the site posed more problems than the contractors could have anticipated.
Furthermore, LMI and SEC individually notified the City of the various delays and
disruptions that were impeding their ability to progress with the project and attended
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regularly scheduled job site meetings with Rock City. Despite notification of these
difficulties, the trial court found that “[t]he City did not take available measures to prevent
and/or overcome the delays and disruptions.” Around January 2004, after the City issued
Change Order 2 to SEC, the City BOMA announced that no more change orders would be
accepted until completion of the project. The City was clearly not interested in receiving
further notifications of “disturbing conditions.”
The evidence does not preponderate against the trial court’s conclusion that the delays
were within the control of the City. As a result, the City cannot rely on the “no damages for
delay” provision of the contract.
Untimely Notice of Claims by LMI and SEC
The trial court determined that the City’s untimely notice of claims defense failed for
two reasons: (1) LMI and SEC gave timely notice of their claims pursuant to the Agreement,
and (2) the City waived strict adherence to the notice provisions in the Agreement. The City
challenges the trial court’s conclusions on both grounds.
The trial court relied on paragraph 12.1 of the General Conditions in determining that
LMI and SEC gave timely notice of their claims. Paragraph 12.1 requires LMI and SEC to
give notice no later than thirty days “after the occurrence of the event giving rise to the
claim.” Thus, the trial court concluded that LMI and SEC had thirty days after the
occurrence ended, not started, within which to state the general nature of their claims. On
this basis, the court concluded that because of the cumulative nature of the delays and
disruptions that were occurring over the course of the project, “the occurrence was on-going
and did not end until LMI’s and SEC’s work ended.”
The City correctly points out that paragraph 12.1 governs the change of contract times
and not the change of contract price, which is instead governed by paragraph 11.2.
Paragraph 11.2 requires LMI and SEC to give notice of their claims no later than thirty days
“after the start of the occurrence or event giving rise to the claim” (emphasis added). The
City argues that there was no notice from either LMI or SEC during the period when delays
on the project were “most apparent”—April, May, June, and July of 2003.
As discussed above, the City had ample notice of the events giving rise to LMI’s and
SEC’s claims and had even more information about the claims than the “general nature”
required. Additionally, LMI and SEC were not required to provide notice of a claim until
the events were sufficient to generate a claim. As the trial court noted, “It was only when
these delays and disruptions [of June, July, and August 2003] were not addressed and
additional delays and disruptions occurred that LMI and SEC were able to make a claim.”
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Paragraph 11.2 substantiates this conclusion in requiring a written statement from the
claimant that the amount claimed “covers all known amounts to which the claimant is entitled
as a result of said occurrence or event.” It was impossible to know the extent of the damage
on a project that started behind schedule and only became increasingly behind schedule. The
trial court correctly concluded that it was not possible for LMI and SEC to assert, thirty days
after the start of the occurrence, that the amount claimed was all the money they believed
they were due.
Further, even if LMI and SEC did not fully comply with all of the notice provisions,
such non-compliance would not be a material deviation from the contract requirements. We
agree with the trial court’s assessment that, based on meeting minutes, daily reports, revised
schedules, and default letters to Romach, the City had actual knowledge of the delays and
disruptions on the project and how they were impacting LMI and SEC. As the trial court
noted, “[a]ny further written notice would not have served any practical purpose.”
Additionally, we agree with the trial court’s conclusion that the City materially
breached the contract first. “A party who has materially breached a contract is not entitled
to damages stemming from the other party’s later material breach of the same contract. Thus,
in cases where both parties have not fully performed, it is necessary for the courts to
determine which party is chargeable with the first uncured material breach.” McClain v.
Kimbrough Constr. Co., Inc., 806 S.W.2d 194, 199 (Tenn. Ct. App. 1990) (citations omitted).
The trial court found that “the City materially breached the contract first, both before and
when the BOMA got involved, and any obligation of LMI and SEC to give notice was a later
material breach.”
We agree with the trial court that the City’s failure to issue new schedules properly
constituted a material breach.3 The City failed to issue a fully integrated schedule before
3
The relevant factors for determination of what constitutes a material breach include the following:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably
expected;
(b) the extent to which the injured party can be adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure,
taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing.
(continued...)
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construction began as required by paragraphs 2.9 and 6.6 of the General Conditions and
issued four revised schedules without change orders as required by paragraph 12.1. These
breaches preceded any failure of LMI or SEC to give notice and were of sufficient magnitude
to justify LMI’s and SEC’s failure to continue and complete its performance of the contract.
Thus, any failure by LMI and SEC to fully perform their contractual obligations should not
prevent them from seeking damages from the City.
The City also challenges the trial court’s finding that it waived strict adherence to the
written notice provisions of the contract through its conduct and course of dealings with LMI
and SEC. The court found that “the delays and disruptions were occurring in June, July, and
August of 2003, after LMI and SEC brought them to the City’s attention.” The court
concluded that both LMI and SEC relied upon the City’s promises that the delays and
disruptions would be overcome and that the City would bring the schedule under control.
This court has previously noted that written change order provisions in construction
contracts may be waived by the parties:
The waiver of a written change order requirement by an owner is not
always required to be in writing but may be the result of the parties’ conduct
on the job. Thus, it is not uncommon for courts to find that an owner has
waived a written notice requirement in cases where extra work has been
ordered verbally by the owner or the extra work has been performed with the
owner’s knowledge and without its objection.
The course of dealing between the parties can also amount to a waiver
where the conduct of the parties makes it clear that they did not intend to rely
strictly upon a contract’s written notice requirement and that adherence to such
a requirement would serve no useful purpose.
Vakili v. Hawkersmith, No. M2000-01402-COA-R3-CV, 2001 WL 1173285, at *6 (Tenn.
Ct. App. Oct. 5, 2001) (citations omitted).
Particularly instructive on this issue is Moore Constr. Co., Inc. v. Clarksville
Department of Electricity, 707 S.W.2d 1 (Tenn. Ct. App. 1985). In Moore, the Court of
Appeals reversed the trial court’s ruling that a contractor could not recover because it failed
to prepare or submit a written change order in a manner required by the contract. Instead,
the court concluded that the owner waived its right to rely on the written change order
3
(...continued)
McClain, 806 S.W.2d at 198 (quoting RESTATEM ENT (SECOND ) OF CONTRACTS § 241).
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provision by its own conduct on the job related to delays in completion. Id. at 13. The court
noted that “a contractor whose performance is delayed through no fault of its own [usually]
has two types of relief available”—an extension of the time available for performance and
a right to be compensated for the increased costs it has incurred as a result of the delay. Id.
“[C]onstruction delays have consequences that are quickly translated into time and money,
and in certain situations a contractor whose performance is delayed unreasonably is entitled
to both an extension of time and damages.” Id.
In Moore, as in the present case, “[t]here is no question that all parties knew that [the
contractor] was being prevented from completing its work because of construction delays
being experienced by [another contractor].” Id. The court concluded that, when the owner
extended the time of completion through a means other than change order, the contractor
“could have presumed legitimately that the [owner] was not going to insist on further written
notice with regard to the delay because it had acknowledged that the delay had occurred and
had granted the company extra time.” Id. In sum, “[i]f the [owner] did not require a change
order to grant extra time, it should not be permitted to require a change order for extra costs
resulting from the same delay.” Id. at 13-14.
The City argues that in the present case, unlike Moore, there was no detrimental
reliance by LMI and SEC because they “were never led to believe that time extensions would
be granted by any means other than Change Order.” However, it was clear from the outset
that adherence to the construction schedule was not possible. The project was behind before
LMI or SEC began construction, and the City issued several revised schedules without
change orders. The trial court noted the effect of the City’s failure to comply with the change
order requirement:
The provisions of the General Conditions interrelate to one another in such a
way that the City’s failure to issue proposed Change Orders with its various
schedules excused LMI and SEC from having to strictly comply with the
notice provisions in the Contract Documents. Had the City submitted a
proposed Change Order with its schedules, it would have given LMI and SEC
the opportunity to calculate the increased cost associated with having to follow
each schedule, and then if the City disagreed, give written notice of a claim.
The City’s failure to submit proposed Change Orders when it issued its various
schedules resulted in the City by-passing the contractual procedures which
would have led to written notice of a claim.
Additionally, shortly after the two change orders that were issued by the City to SEC,
the City announced that no more change orders would be accepted until the completion of
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the project. Not surprisingly, this affected the filing of claims by the contractors; SEC did
not submit any further change orders.
It is clear that the City had knowledge throughout the period that LMI and SEC were
being delayed through no fault of their own, and the City undoubtedly knew that the delays
could prove costly to the contractors. As a result, it was reasonable for both contractors to
conclude that the City had consciously decided that formal adherence to the written notice
requirements with regard to the delays was no longer necessary. We agree with the trial
court’s conclusion that LMI’s and SEC’s claims for price increases were timely.
Acknowledgment and Acceptance of Time Extensions
in LMI’s and SEC’s Change Orders
The City argues that the change orders it executed had the effect of giving LMI and
SEC extra days to complete their obligations without any reservation for being compensated
for the extension. The contractors, on the other hand, insist that they did not waive their right
to damages by failing to indicate a reservation of rights when they signed the change orders.
The City first contests the trial court’s determination that it could not interpret the
City’s change order according to its plain terms because it is “confusing” and the terms are
“not plain.” The City also challenges the court’s finding that it was understandable for LMI
and SEC to not know what effect, if any, the change orders would carry since they were told
that the City would not approve any more change orders until the project was complete.
The City instead asserts that the “clear and unambiguous” language of the change
orders constituted an accord and satisfaction between the parties, an acceptance of something
other than what was originally due in settlement of an existing claim. The City relies on John
Massman Contracting Co. v. United States, 23 Cl. Ct. 24 (1991), as support for its
proposition. “A party claiming an accord and satisfaction must show ‘proper subject matter,
competent parties, meeting of the minds of the parties, and consideration.’” Id. at 29
(quoting Brock & Blevins Co. v. United States, 343 F.2d 951, 955 (Ct. Cl. 1965)).
In the instant action, the trial court found that there never existed a meeting of the
minds of the parties because LMI and SEC did not know what effect, if any, an executed
change order would carry since the project was perpetually behind schedule and the City, via
the BOMA, stated its intention not to follow the change order policy as stipulated in the
contract documents. The conclusion that the change orders did not represent a meeting of
the minds between the parties is substantiated by the discussion that City officials had with
SEC representatives. Rock City’s representative indicated that there would be some money
left at the end of the project to compensate SEC.
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Additionally, Massman is distinguishable from the present case on the basis of the
language used in the change orders. The Massman change orders specified that “[t]his
modification constitutes compensation in full on behalf of the contractor . . . for all costs and
markups directly or indirectly attributable to the changes ordered herein, for all delays related
thereto, and for full performance of the changes within the time stated.” Id. at 29 (emphasis
added). No language expressly limiting LMI’s and SEC’s rights to recover is present in the
change orders now at issue.
Damages
The court determined that the preponderance of the evidence established that the
City’s breach caused both LMI and SEC damages to which they are entitled. The court
awarded both contractors damages for loss of productivity, extended filed overhead expenses,
and professional fees, but it denied the contractors Eichleay4 damages for unabsorbed
overhead.5 Combining damages and professional fees, LMI was awarded a judgment in the
amount of $429,110.22 and SEC was awarded a judgment in the amount of $678,845.11.
The City challenges the trial court’s award of any damages to LMI and SEC and specifically
challenges the methods that LMI and SEC used to calculate loss of productivity damages.
Tennessee law permits the recovery of all damages that are the normal and forseeable
result of a breach of contract. Bush v. Cathey, 598 S.W.2d 777, 783 (Tenn. Ct. App. 1979).
Uncertain, contingent, or speculative damages should not be awarded. Maple Manor Hotel,
Inc. v. Metro. Gov’t of Nashville & Davidson County, 543 S.W.2d 593, 599 (Tenn. Ct. App.
1975). Courts will allow damages for breach of contract even where it is impossible to prove
the exact amount of damages. Provident Life & Accident Ins. Co. v. Globe Indem. Co., 3
S.W.2d 1057, 1058 (Tenn. 1928). All that is required is proof with a reasonable degree of
certainty. Buice v. Scruggs Equip. Co., 267 S.W.2d 119, 125-26 (Tenn. Ct. App. 1953).
In the context of a construction project, “it is reasonably foreseeable that a contractor
whose ability to complete its work is impaired by the owner and whose performance is
4
Eichleay Corp., ASBCA No. 5183, 60-2 B.C.A. (CCH) ¶ 2688 (1960).
5
Both LMI and SEC claimed damages according to the Eichleay formula, which is “the only means
approved in our case law for calculating recovery for unabsorbed home office overhead.” Melka Marine,
Inc. v. United States, 187 F.3d 1370, 1374-75 (Fed. Cir. 1999). The Eichleay formula is used to “equitably
determine allocation of unabsorbed overhead to allow fair compensation of a contractor for government
delay.” Wickham Contracting Co. v. Fischer, 12 F.3d 1574, 1578 (Fed. Cir. 1994). In the present case, the
trial court concluded that the contractors failed to meet the three-prong test to qualify for Eichleay damages
and that damages of this type are specifically excluded by the parties’ contract. See Nicon, Inc. v. United
States, 331 F.3d 878, 883 (Fed. Cir. 2003). Neither contractor appealed the trial court’s denial of Eichleay
damages.
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thereby substantially delayed will suffer direct damages and that the extent of these damages
will depend upon the unique facts of each case.” Moore, 707 S.W.2d at 15. Such damages
can include increased payroll and labor costs, increased material costs, loss of efficiency of
the use of equipment, extended bonding and insurance coverage, and overhead items. Id.
The City asserts that the trial court erred in awarding any damages due to the actions
of other contractors, poor site conditions, or failure to have an integrated schedule. First, the
City insists that to the extent that other contractors, such as Romach and Civil, caused delays,
LMI’s and SEC’s remedy was to bring an action against those contractors. The City relies
on paragraph 12.4 of the General Conditions for this premise:
In no event shall OWNER be liable to CONTRACTOR . . . for damages
arising out of or resulting from (I) delays caused by or within the control of
CONTRACTOR, or (ii) delays beyond the control of both parties including but
not limited to fires, floods, epidemics, abnormal weather conditions, acts of
God or acts or neglect by utility owners or other contractors performing other
works as contemplated by Article 7.
As discussed above, we agree with the trial court’s conclusion that the delays were within
the control of the City. Thus, the City cannot rely on paragraph 12.4's “no damages for
delay” provision.
Next, the City claims that because the contract placed the risk of poor site conditions
on LMI and SEC, the contractors should not be able to recover damages that resulted from
poor site conditions. This argument also fails for the same reasons it did when the City
attempted to rely on the “no damages for delays” clause. The provisions of the contract the
City relies upon in its argument require the contractors to notify the City of any “disturbing
conditions.” From the beginning of the project until its completion, the City was well
informed of the delays and disruptions that were occurring on the project and their cause.
Written notification as required under the clauses that the City now insists “place[] the risk
of poor site conditions upon LMI and SEC” was unnecessary.
Finally, the City insists that LMI and SEC should not have been awarded damages for
the City’s failure to have an integrated schedule because no such requirement existed in the
contract documents. The City is correct that there was no contractual requirement that the
City issue an integrated schedule before construction began. However, the City did create
a schedule upon which bids were based, and the City failed to adhere to and enforce the
integrated schedule it established. It was not the failure to have a schedule that caused LMI
and SEC damage; it was the failure to follow the schedule that was implemented.
Additionally, as discussed above, the City breached other provisions of the
contract—namely, it failed to issue change orders for its numerous revised schedules.
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Tennessee law permits the recovery of all damages that are the normal and forseeable result
of a breach of contract, as long as they can be proven with a reasonable degree of certainty.
Given the abundance of evidence the contractors presented in support of their damages, the
evidence does not preponderate against the trial court’s findings.
The City also specifically contests LMI’s and SEC’s calculation of loss of productivity
damages. LMI used the “measured mile” approach to reach its amount of loss of productivity
damages, and SEC used the “modified total cost” approach. The court found both
approaches reasonable and determined that both contractors were entitled to these damages
as established by the proof at trial.
The City argues that the modified total cost method used by SEC is “highly disfavored
and used only as a last resort when there is no other feasible method of calculation because
it carries the double-edged risk of bidding inaccuracies reducing the estimated cost and
performance inefficiencies inflating the actual cost.” No Tennessee case law directly stands
for this proposition. The case law that the City cites in support of its position actually states
that while the total cost method, whereby the measure of damages is the difference between
the actual cost of the contract and the contractor’s bid, is viewed with disfavor, “[t]he
modified total cost methodology addresses some of the objections to the total cost method.”
Raytheon Co. v. White, 305 F.3d 1354, 1365 (Fed. Cir. 2002). Additionally, the total cost
method is appropriate when “no other method [is] feasible” and “the supporting evidence [is]
substantial.” Moorhead Constr. Co., Inc. v. City of Grand Forks, 508 F.2d 1008, 1016 (8th
Cir. 1975).
Under either the total cost or the modified total cost methodology, the contractor must
prove “(1) the impracticability of proving actual losses directly; (2) the reasonableness of its
bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added
costs.” Servidone Constr. Corp. v. United States, 931 F.2d 860, 861 (Fed. Cir. 1991) (citing
WRB Corp. v. United States, 183 Ct. Cl. 409, 426 (1968)). At trial, SEC’s expert, Richard
Englehart, explained that the modified total cost method was the only feasible method of
calculating damages:
Q: Is there a—both the modifying the total cost thing, is that an accepted
method of determining damages where the conditions are such as they were at
this site?
A: Given the conditions and the parameters that—that I reviewed in order to
substantiate this type of claim, yes.
Q: Is there any other way you could have computed the extra costs that Stansell
incurred other than this method?
A: On this project?
Q: On this project.
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A: No. There is no other way to have done it.
Q: And why is that?
A: To a reasonable degree of certainty, there’s no other way to do it. Based
upon that pervasive nature of those conditions that we talked about, the
constant uncertainty and the project record and the documentation. In
order—as far as the scheduling information that was available, the day to
day—daily information about where each contractor—not just Stansell, but
where each contractor was, did not allow for that type of study to be done.
Given the evidence presented at trial, we conclude that SEC met the four-part test and that
the modified total cost method for determining SEC’s damages was appropriate.
The City also challenges LMI’s use of the “measured mile” approach to reach its
amount of loss of productivity damages. The measured mile analysis is “a method of
calculating losses related to productivity by comparing the construction progress during a
‘problem’ period on the job with such progress during a similar unimpacted time period.”
Alstom Power, Inc. v. RMF Indus. Contracting, Inc., Nos. 2:03cv627, 2:03cv1050, 2006 WL
3839235, at *2 (W.D. Pa. Dec. 29, 2006). The City accuses LMI of calculating its
unimpacted time during its most productive days, which it claims is contrary to the daily
reports. The City insists that Bob Lee, the president of LMI, changed the days designated
as unimpacted between his first and second reports in order to maximize LMI’s damages.
Mr. Lee explained the Production Impact Report for block, brick, and grouting
activities to the court at trial:
A: Well, on the right-hand side what we have are what’s called unimpacted.
By unimpacted, days at which we felt like we had enough room for work that
particular day, didn’t have lack of steel rentals or some other items impacting
us so that we couldn’t do it.
...
Q: Again, comparing the left column and the right column, what are you trying
to gain a picture of?
A: Of how we were doing when we didn’t have all of the problems that we
ended up having on this project versus how our labor costs were when we had
problems on the project. And quite honestly, you know, it was hard to find
unimpacted work on this project. It was just unbelievable.
Later, during cross-examination, Mr. Lee testified, “I would state that almost every single day
on that project was impacted.”
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Mr. Lee admitted at trial that LMI made a mistake in assessing days in the first report,
but nothing in the record suggests that LMI or Mr. Lee purposefully manipulated the
unimpacted days. Mr. Lee was questioned on the matter during cross-examination:
Q: Now, when I look at the impacted versus unimpacted, you didn’t just run
these numbers and pick the five best, did you?
A: I did not do that.
Mr. Lee also discussed the complexity of assessing unimpacted and impacted days for its
various tasks:
[Y]ou might have had a good day on block and you were having a bad day on
brick. You might have had a good day on grouting, and the reason you would
have that is because you might be being impacted. As you can see, you’re
working on multiple areas, so it does become a little bit more complicated than
that.
This court gives great weight to a trial court’s factual findings that rest on
determinations of credibility. See, e.g., Walton v. Young, 950 S.W.2d 956, 959 (Tenn. 1997).
Given the difficulty LMI encountered in finding unimpacted days on which to base its
analysis and this court’s deference to the trial court on factual findings, we conclude that
LMI proved its loss of productivity damages within a reasonable degree of certainty.
Finally, LMI claims the trial court erred by denying it prejudgment interest on the fees
and expenses it paid to pursue its claim. In its memorandum opinion, the trial court ruled that
LMI was entitled to recover “prejudgment interest at a rate of 8% from February 17, 2004.”
In its final order of judgment dated November 21, 2009, the court awarded LMI prejudgment
interest of $49,370.59. LMI argues that “there is no practical difference between interest on
the amount of LMI’s damages and interest on the amount of LMI’s expenses” (emphasis
added). Both, LMI claims, are needed to make it whole.
LMI claims that the terms of its contract with the City treat fees and expenses spent
to pursue a claim the same way as damages. Thus, prejudgment interest should be awarded
on damages as well as fees and expenses. LMI relies on paragraph 17.5 of the General
Conditions for its assertion: “Whenever reference is made to ‘claims, costs, losses and
damages,’ it shall include in each case, but not be limited to, all fees and charges of
engineers, architects, attorneys and other professionals and all court or arbitration or other
dispute resolution costs.”
Tenn. Code Ann. § 47-14-123 authorizes the award of prejudgment interest. It defines
prejudgment interest as “interest as an element of, or in the nature of, damages” and
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stipulates that it “may be awarded by courts or juries in accordance with the principles of
equity at any rate not in excess of a maximum effective rate of ten percent (10%) per
annum.” Additionally, “[t]he common-law power to award prejudgment interest has
consistently been viewed as an equitable matter entrusted to the judge’s discretion.
Accordingly, Tenn. Code Ann. § 47-14-123 has been construed to preserve the discretionary
character of these decisions.” Scholz v. S.B. Intern, Inc., 40 S.W.3d 78, 81 (Tenn. Ct. App.
2000).
The contractual provision that LMI cites is not specific as to prejudgment interest.
LMI has offered no support for its conclusion that we should modify or supplement the trial
court’s discretionary award of prejudgment interest on damages.
The decision of the trial court is affirmed. Costs of this appeal are assessed against the
appellant, for which execution may issue if necessary.
_________________________________
ANDY D. BENNETT, JUDGE
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