Vic Davis Construction, Inc. v. Lauren Engineers & Constructors, Inc.

03/20/2019
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
February 20, 2018 Session
VIC DAVIS CONSTRUCTION, INC. v. LAUREN ENGINEERS &
CONSTRUCTORS, INC.
Appeal from the Chancery Court for Hawkins County
No. 2014-CH-99 Douglas T. Jenkins, Chancellor
___________________________________
No. E2017-00844-COA-R3-CV
___________________________________
A subcontractor brought suit against the general contractor for breach of contract and
violations of the Prompt Pay Act. The subcontractor sought both damages, including
punitive damages, and reformation of the subcontract based on fraud or mutual mistake.
The general contractor counterclaimed for breach of contract. Upon the parties’
agreement, the trial court reformed the subcontract based on mutual mistake. The trial
court also granted the general contractor summary judgment on the subcontractor’s
claims for fraud and punitive damages. Then, following a bench trial, the court awarded
a judgment to the subcontractor on its breach of contract claim and dismissed the general
contractor’s counterclaim. The court declined to award the subcontractor a statutory
penalty or attorney’s fees under the Prompt Pay Act. We affirm the trial court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
W. NEAL MCBRAYER, J., delivered the opinion of the court, in which JOHN W.
MCCLARTY and THOMAS R. FRIERSON II, JJ., joined.
Mark S. Dessauer, Kingsport, Tennessee, (on appeal) for the appellant, Vic Davis
Construction, Inc.
Robert P. Noell and William F. Clayton, Knoxville, Tennessee, for the appellee, Lauren
Engineers & Constructors, Inc.
OPINION
I.
A.
BAE Systems Ordnance Systems, Inc. contracted with Lauren Engineers &
Constructors, Inc. to build a new acetic acid refining facility at the Holston Army
Ammunition Plant in Kingsport, Tennessee. Lauren, in turn, subcontracted with Vic
Davis Construction, Inc. to supply, fabricate, and install underground piping, paving, and
grading for the project.
1. Scope of Work
During the bidding process, the parties understood that the design work for
underground piping was incomplete. Jerry Hobbs, Lauren’s vice president, explained
that, for at least a year, there was a constant flow of revised drawings and scope changes
from BAE. After Vic Davis Construction submitted an initial bid, Lauren requested
revised pricing based on January 2012 design drawings. Vic Davis Construction
submitted a revised bid on February 13, 2012, and a final bid on April 20, 2012. Vic
Davis Construction based its final bid on the underground piping shown in the January
design drawings.
In early July, Brian Rogers, the contracts manager for Lauren, sent Vic Davis
Construction a proposed subcontract. In the subcontract, Lauren agreed to pay Vic Davis
Construction a lump sum of $2,105,582 to perform the work shown in drawings and
specifications, which were attached as Exhibit C to the subcontract. Although Vic Davis
Construction’s project manager, Todd Johnson, reviewed the proposed subcontract, he
did not review the attachments. He wrongly assumed that the subcontract included only
the drawings and specifications that Vic Davis Construction had priced in the bidding
process. In fact, the proposed subcontract included drawings from March and April 2012
that Vic Davis Construction had never seen or priced (the “March drawings”).
Unbeknownst to Mr. Rogers, the March drawings significantly increased the quantity of
the underground piping. On July 13, 2012, Vic Davis Construction executed the
subcontract with the March drawings included as Exhibit C.
In the contract between Lauren and BAE, Lauren also based its budget for
underground piping on the January 2012 drawings, the same drawings on which Vic
Davis Construction had based its final bid. In October, using the price per linear feet of
pipe from Vic Davis Construction’s revised February bid, a Lauren cost analyst estimated
that the revisions in the March drawings would cost an additional $577,061 to complete.
Assuming that Vic Davis Construction’s final bid included pricing for the March
2
drawings, the analyst suggested using price data from the final bid for a more accurate
cost estimate.
Fred Gibson, Lauren’s project budget manager, initially questioned whether Vic
Davis Construction’s final bid included the March drawings. In an e-mail to Lauren’s
onsite manager and others, Mr. Gibson wrote, “If [Vic Davis Construction] believe[s]
they have captured the [March drawings in the subcontract price] then all the better,” but
he then followed up with the statement, “Keep in mind these drawings were issued in the
March/April timeframe.” After further review, Mr. Gibson concluded that the March
drawings were included in the subcontract pricing, but other subsequent revisions were
not. So he recommended asking Vic Davis Construction to price the subsequent
revisions to obtain a more complete estimate.
Rather than asking Vic Davis Construction, Lauren instead chose to submit a
change request to BAE based on its own estimate of the cost of the additional work.
Ralph Elkins, Lauren’s construction manager, directed Jeff Campbell, a project manager,
to draft the change order without any discussion with Vic Davis Construction. On
January 18, 2013, Lauren submitted a change order request to BAE for $399,909.82.
BAE approved the change order the following May and paid Lauren in June. Vic Davis
Construction was unaware of this change order.
Meanwhile, Adam Hendrickson, Vic Davis Construction’s onsite project manager,
noticed that the underground pipe quantities in Lauren’s work schedule exceeded those
upon which Vic Davis Construction based its bid. As it turned out, the extra pipe
reflected in Lauren’s work schedule was directly attributable to the March drawings.
Mr. Hendrickson discussed the additional pipe with Dean Thomason, Lauren’s onsite
manager. Together they decided that the extra work could be addressed through a change
order, which was required for any work outside the scope of the subcontract.
The parties’ subcontract anticipated the potential for changes to the scope of work.
But changes had to be memorialized in writing and approved by Lauren. Under the
subcontract, Vic Davis Construction agreed not to “perform any work outside the Scope
of Work without receipt of an executed change order or other form of written
communication from [Lauren].” Vic Davis Construction further agreed that any work
outside the scope of work would be uncompensated “unless written approval [wa]s
obtained . . . prior to performance of the Work.”
Despite recognizing the need for a change order and the language of the
subcontract, Mr. Hendrickson, at Mr. Thomason’s urging, agreed to delay in requesting a
change order. Vic Davis Construction already had a number of unrelated change order
3
requests pending,1 and Mr. Thomason thought it best to get the pending requests resolved
first.
By March 2013, Vic Davis Construction had nearly completed the underground
piping that it believed to be in its scope of work. Because Mr. Thomason was no longer
with Lauren, Mr. Hendrickson notified Mr. Gibson by email that he would soon be
submitting a change order request for the additional underground piping on the schedule.
Apparently, Mr. Hendrickson’s email came as a surprise. Mr. Gibson responded,
“THIS Sounds like we are missing a huge piece in the forecast!!” Internally, he also
behaved as if the March drawings were an intended part of the subcontract. In an April
email to Mr. Campbell, Mr. Gibson wrote: “[t]he bulk of the [additional quantities] that
[Vic Davis Construction] believes are not included would be [included] if the [March]
drawings were his contract basis” and added that “[o]nly minor changes have occurred
since those March drawings.” For his part, Mr. Campbell suggested that Lauren “remind
[Vic Davis Construction] that their [sic] contract is based on the March drawings but
anticipate a change request for the extra footages.”
As a structural estimator working for Lauren presciently observed a few days later,
“the key [wa]s whether Vic Davis’ revised quote on 4-20-12 included the [March
drawings.]” The revised quote did not. But the subcontract executed by Vic Davis
Construction based on that quote did.
2. The Payment Dispute
On July 16, Mr. Hobbs sent Vic Davis Construction a punch list “for the
remaining work in your Subcontract scope.” The punch list included items reflected in
the March drawings. Vic Davis, president of Vic Davis Construction, objected to work
beyond what the company had priced in its final bid. In his view, the March drawings
had been attached to the subcontract by mistake. But Mr. Hobbs did not relent, relying
on the parties’ agreement.
In late July, Mr. Hobbs rejected Vic Davis Construction’s June pay application
based on inaccurate progress reports. The perceived inaccuracies arose from the
disagreement over the scope of the work. For the first time, Mr. Hobbs also objected to
the way Vic Davis Construction had billed sales tax on the project. The subcontract
required that sales tax be invoiced separately with supporting documentation and paid
through a change order. Mr. Hobbs requested that Vic Davis Construction supply the
missing documentation “to avoid delays to future Subcontract payments.”
1
At the beginning of the project, Vic Davis had performed several months of work outside of the
subcontract at Lauren’s request to address problems with the work site.
4
Two outstanding change order requests provided another source of friction for the
parties. In one instance, Lauren’s on-site manager requested over $154,000 in additional
work related to a sewer connection, which Vic Davis Construction completed by early
December 2012. Afterwards, a new on-site manager questioned the necessity for the
work. And Vic Davis Construction spent months answering inquiries from Lauren about
the work. Although Vic Davis Construction had submitted a change order request for the
work on November 7, 2012, Lauren delayed sending the request to BAE for approval
until July 26, 2013.
On August 1, 2013, both sides met to discuss the punch list and their other
differences. On the sewer connection change order, Lauren explained that it was waiting
on a response to the request from BAE. On the sales tax issue, Vic Davis Construction
agreed to provide materials invoices for the purchase involved. Both sides also reviewed
the punch list. For those items on the punch list attributable to the March drawings, they
recognized that they had a potential “scope gap” issue. Lauren requested that Vic Davis
Construction submit pricing for those items it deemed to be extra work.
Following the meeting, Mr. Davis believed that all controversies had been
resolved. Mr. Hendrickson directed his crew to carry out the subcontract work that it
could. By August 2, Vic Davis Construction had finished the work, which was mostly
clean-up. The company still needed clearance to install the industrial storm drain. And
the remaining grading and paving could only be performed at the end of the project.
As agreed at the meeting, Mr. Hendrickson also submitted change order requests
and pricing for the work on the punch list that was not encompassed by Vic Davis
Construction’s April 2012 final bid. But Lauren stood on the parties’ agreement. By
letter dated August 6, 2013, Mr. Hobbs stated Lauren’s position that the subcontract
governed the scope of work and that “[f]urther negotiation of the Subcontract scope [wa]s
inappropriate at this stage of the Project.” Lauren requested that Vic Davis Construction
only “submit requests for a change in the Subcontract where the Subcontract Documents
for the Work ha[d] been changed since execution of the Agreement.” And “Lauren
expect[ed] Vic Davis [Construction] to timely supply all materials and install all Work
required by the Subcontract and drawings listed in the Subcontract.”
The following day, Mr. Davis responded with a letter of his own. He pointed out
that the bid form provided by Lauren and used by Vic Davis Construction “identifie[d]
the drawings that were to be used to bid each section of the project” and that the form
“also list[ed] the linear footage and installation time for every section of underground
piping.” He noted that there were drawings listed in the subcontract that were not on the
bid form and that the piping quantities shown in the subcontract exceeded those in the bid
form. Because the subcontract price was set by the bid, Mr. Davis submitted that “the
scope of our work should also be based on the drawings connected to the bid form.” In
conclusion, Vic Davis Construction would only “complete that work that [wa]s related to
5
the bid form and its governing drawings.” The company considered “[a]ll other drawings
. . . not part of the competitive bid process and . . . not part of our scope of work for the
project.”
On August 13, Lauren requested that Vic Davis Construction return to complete
the storm drain installation, which both sides agreed was within the scope of work. Vic
Davis Construction responded by inquiring about payment of its June pay application,
which had previously been rejected, and the two change order requests that remained
outstanding. The pay application and change order requests represented $337,001.21 in
unpaid work by Vic Davis Construction.
Mr. Hobbs asked Vic Davis Construction to resubmit the June pay application
“with the changes requested.” And Lauren’s construction manager, Mr. Elkins,
erroneously informed Mr. Davis that BAE had not yet approved the sewer connection
change order.2
On August 19, frustrated that Vic Davis Construction “ha[d] not received any
resolution to the issues,” Mr. Davis wrote to Lauren that his company “ha[d] no intention
of returning to the jobsite until all the[] matters are resolved!” To keep the project
moving, he invited Lauren “to hire the storm drain work that [wa]s in the critical path and
deduct [the cost of the work] from [the parties’] contract.” At the same time, he
continued to press Lauren for payment for work that had “been installed for months.” In
early September, Mr. Davis sent a similar missive, advising Mr. Hobbs that Vic Davis
Construction was “happy to return and complete our ‘contracted’ scope of work” when
all outstanding invoices were paid.
On September 9, Lauren responded. Its letter advised that the sewer connection
change order had been approved by BAE and that Lauren was in the process of amending
the subcontract. But Lauren found Vic Davis Construction’s documentation of its sales
tax claim wanting and indicated that Lauren would be recouping some of the amounts
already paid.
Lauren also persisted in the position that the scope of Vic Davis Construction’s
work included the March drawings. The letter stated that “[n]o further payment will be
issued to Vic Davis Construction until the scope of the subcontract is complete.”3
2
BAE approved the sewer connection change order a few days before Mr. Elkins’s
communication, but Lauren had not yet been paid. Approval for the sewer relocation change order was
still pending. In October 2013, Jeff Campbell resubmitted the sewer relocation change order, and BAE
approved it shortly thereafter.
3
Lauren also conditioned payment on the resolution of an issue between Vic Davis Construction
and the United States Department of Labor. The Department disputed the classification of certain Vic
Davis Construction workers as pipe layers rather than pipefitters for purposes of the Davis-Bacon Act.
6
Finally, because Vic Davis Construction had “abandon[ed] their [sic] contractual
commitment to complete the work as detailed in the Scope of Work and Drawings as
included in the Subcontract Agreement,” Lauren gave notice of its intention to complete
the subcontract work and to seek recovery of the costs of completion from Vic Davis
Construction.
B.
On May 15, 2014, in the Chancery Court for Hawkins County, Tennessee, Vic
Davis Construction sued Lauren. The complaint, among other things, contained claims
for breach of contract, breach of the implied duty of good faith and fair dealing, and
violations of the Prompt Pay Act of 1991. See Tenn. Code Ann. §§ 66-34-301, -602
(2015). Vic Davis Construction sought compensatory and punitive damages and
reformation of the subcontract based on mutual mistake or fraud. Lauren filed an answer
and a counterclaim for breach of contract.
Both sides moved for summary judgment on the reformation claim. The parties
ultimately agreed that the March drawings were included in Exhibit C to the subcontract
by mutual mistake. So the court reformed the subcontract to remove the March drawings
from the scope of the work and dismissed Vic Davis Construction’s claim of fraud in the
formation of the subcontract.
After that, Vic Davis Construction amended its complaint. Although
incorporating many of the allegations from the original complaint, the amended
complaint included new claims. Vic Davis Construction added a claim for a statutory
penalty under the Prompt Pay Act based on Lauren’s alleged failure to deposit retainage
in an interest-bearing escrow account. See id. § 66-34-104(c) (2015). It also added a
claim for punitive damages for Lauren’s alleged “intentional, fraudulent, reckless and/or
malicious conduct.”
Lauren moved for partial summary judgment on the claims added by the amended
complaint, which the trial court granted in part. The court dismissed Vic Davis
Construction’s claims for fraud and punitive damages. But the court declined to grant
summary judgment on the claim for the statutory penalty arising from the alleged
retainage.
After a bench trial, the court ruled that Lauren committed the first material breach
of the subcontract. The court granted Vic Davis Construction a judgment on its breach of
See 40 U.S.C. §§ 3141-3148 (Supp. 2017). Ultimately, the Department determined that the company
owed $10,000 in back wages. After Vic Davis Construction paid the back wages, the matter was closed.
But Lauren did not receive official confirmation from the Department until September 13.
7
contract claim in the amount of $352,105.19 plus prejudgment interest. The court
declined to award Vic Davis Construction attorney’s fees or a statutory penalty under the
Prompt Pay Act. And the court dismissed Lauren’s counterclaim for breach of contract.
II.
Both Vic Davis Construction and Lauren raise issues on appeal. Of the five issues
raised by Vic Davis Construction, two of the five relate to the court’s grant of partial
summary judgment to Lauren.
A.
Summary judgment may be granted only “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” Tenn. R. Civ. P. 56.04. The party moving for summary
judgment has “the burden of persuading the court that no genuine and material factual
issues exist and that it is, therefore, entitled to judgment as a matter of law.” Byrd v.
Hall, 847 S.W.2d 208, 211 (Tenn. 1993). If the moving party satisfies its burden, “the
nonmoving party must then demonstrate, by affidavits or discovery materials, that there is
a genuine, material fact dispute to warrant a trial.” Id.
In this case, the party moving for summary judgment did not bear the burden of
proof at trial. Thus, “the moving party may satisfy its burden of production either (1) by
affirmatively negating an essential element of the nonmoving party’s claim or (2) by
demonstrating that the nonmoving party’s evidence at the summary judgment stage is
insufficient to establish the nonmoving party’s claim or defense.” Rye v. Women’s Care
Ctr. of Memphis, MPLLC, 477 S.W.3d 235, 264 (Tenn. 2015). Satisfying this burden
requires more than a “conclusory assertion that summary judgment is appropriate,” rather
the movant must set forth specific material facts as to which the movant contends there is
no dispute. Id.
If a motion for summary judgment is properly supported, the nonmoving party
must then come forward with something more than the allegations or denials of its
pleadings. Id. at 265. The nonmoving party must “by affidavits or one of the other
means provided in Tennessee Rule 56, ‘set forth specific facts’ at the summary judgment
stage ‘showing that there is a genuine issue for trial.’” Id. (quoting Tenn. R. Civ. P.
56.06).
A trial court’s decision on a motion for summary judgment enjoys no presumption
of correctness on appeal. Martin v. Norfolk S. Ry. Co., 271 S.W.3d 76, 84 (Tenn. 2008);
Blair v. W. Town Mall, 130 S.W.3d 761, 763 (Tenn. 2004). We review the summary
judgment decision as a question of law. Martin, 271 S.W.3d at 84; Blair, 130 S.W.3d at
8
763. Accordingly, we must review the record de novo and make a fresh determination of
whether the requirements of Rule 56 of the Tennessee Rules of Civil Procedure have
been met. Eadie v. Complete Co., 142 S.W.3d 288, 291 (Tenn. 2004); Blair, 130 S.W.3d
at 763.
1. Fraud
The trial court dismissed Vic Davis Construction’s fraud claims because the proof
at the summary judgment stage was insufficient to establish two essential elements of the
claims, reliance and damages.4 Fraud claims are inherently fact-intensive and often
inappropriate for summary judgment. See Fowler v. Happy Goodman Family, 575
S.W.2d 496, 499 (Tenn. 1978). Even so, a plaintiff faced with a summary judgment
motion must “produce some competent and material evidence legally sufficient to
support his claim or defense.” Id. A fraud claim is subject to dismissal “if the plaintiff,
after being given a reasonable opportunity, has failed to establish an essential element of
its case on which it will bear the burden of proof at trial.” Wells Fargo & Co. v. Paul
Davidson Constr. Co., No. 02A01-9110-CV-00225, 1992 WL 108703, at *4 (Tenn. Ct.
App. May 22, 1992).
Vic Davis Construction’s claim for fraud is found in Count Four of its amended
complaint. Lauren allegedly made affirmative, false representations and failed to
disclose that which it had a duty to disclose. According to the amended complaint,
Lauren falsely represented that the March drawings were included in the subcontract, and
Lauren failed to disclose its pursuit of a change order from BAE for the March drawings.
Thus, we must consider whether Vic Davis Construction’s evidence was sufficient to
establish the essential elements of fraud or fraudulent concealment.5 Reasonable reliance
4
We are not persuaded by Vic Davis Construction’s argument that the trial court failed to “state
the legal grounds upon which the court denie[d] or grant[ed] the motion.” See Tenn. R. Civ. P. 56.04.
The summary judgment order incorporated and attached the court’s oral ruling. From the bench, the court
announced that it was granting Lauren summary judgment on the fraud claims because Vic Davis
Construction was unable to establish reliance or damages. See In re Estate of Storey, No. W2010-00819-
COA-R3-CV, 2011 WL 2174901, at *14 (Tenn. Ct. App. May 31, 2011) (interpreting court’s written
order in light of its oral ruling which was incorporated by reference). The ruling also appears to be the
product of the court’s own independent judgment. See Smith v. UHS of Lakeside, Inc., 439 S.W.3d 303,
316-17 (Tenn. 2014).
5
Vic Davis Construction contends that Count Four includes four claims: fraud, intentional
misrepresentation, fraudulent concealment, and constructive fraud. But intentional misrepresentation is
not a stand-alone claim; it is an element of fraud. PNC Multifamily Capital Institutional Fund XXVI Ltd.
P’ship v. Bluff City Cmty. Dev. Corp., 387 S.W.3d 525, 547 (Tenn. Ct. App. 2012). And constructive
fraud differs from actual fraud only in the element of intent. Kincaid v. SouthTrust Bank, 221 S.W.3d 32,
39 (Tenn. Ct. App. 2006). The motive of the actor is irrelevant for constructive fraud. Id. But reliance
and damages remain essential elements for a constructive fraud claim. Parks v. Alexander, 608 S.W.2d
881. (Tenn. Ct. App. 1980) (noting that constructive frauds involve conduct “which reasonably can be
expected to influence the conduct of others”).
9
and damages are essential for both claims. See Chrisman v. Hill Home Dev., Inc., 978
S.W.2d 535, 538-39 (Tenn. 1998) (explaining the essential elements of a fraudulent
concealment claim); PNC Multifamily Capital Institutional Fund XXVI Ltd. P’ship v.
Bluff City Cmty. Dev. Corp., 387 S.W.3d 525, 548 (Tenn. Ct. App. 2012) (listing the
essential elements of fraudulent misrepresentation).
Before Lauren filed its motion for partial summary judgment, the parties stipulated
to several facts. The parties agreed that the March drawings were included in the
subcontract by mutual mistake. Vic Davis Construction acknowledged that it was
unaware of Lauren’s pursuit of a change order for the March drawings until after it
demobilized from the project. The parties stipulated that Lauren, not Vic Davis
Construction, performed the work described in the March drawings and that Vic Davis
Construction never intended to perform that work. Vic Davis Construction also agreed
that its claim for actual damages was limited to payment for work it actually performed
on the project and that it was not seeking an award of lost profits related to the work
encompassed by the March drawings.
In addition to the parties’ stipulations, Lauren supported its motion for partial
summary judgment with the deposition testimony of Mr. Davis. Mr. Davis testified that
his decision to demobilize was not based on the dispute over the scope of work. Rather,
he decided to demobilize because Vic Davis Construction was not being paid for
completed work.
The gist of the fraud claim was that Lauren attempted to mislead Vic Davis
Construction into performing extra work, represented by the March drawings, without
compensation. The problem with that theory was that Vic Davis Construction was never
misled. It refused to do work outside the scope of its bid, despite the language of the
subcontract. So even if Lauren intentionally misrepresented the scope of the work, Vic
Davis Construction did not rely on the misrepresentation.
Vic Davis Construction’s fraudulent concealment claim fails for much of the same
reason. Vic Davis Construction complains that Lauren failed to disclose that it had
obtained a change order from BAE to do the work represented by the March drawings.
But Vic Davis Construction could not prove that it would have acted differently had it
known about the change order. Vic Davis Construction stipulated that it never intended
to do the extra work.
To prevail on a claim for fraud or fraudulent concealment, the plaintiff also must
have suffered damages from the deception. PNC Multifamily Capital Institutional Fund
XXVI Ltd. P’ship, 387 S.W.3d at 548. Vic Davis Construction was not seeking to recover
lost profits; its fraud damages were limited to payment for completed work. Vic Davis
Construction did not perform any of the work in the March drawings. Because Vic Davis
10
Construction could not establish any damages arising from Lauren’s alleged deception,
the fraud and fraudulent concealment claims failed as a matter of law.
Here, Lauren affirmatively demonstrated that Vic Davis Construction’s evidence
at the summary judgment stage was insufficient to establish reliance or damages, so the
trial court did not err in dismissing the fraud claims on summary judgment. See Rye, 477
S.W.3d at 264. Vic Davis Construction was obligated to come forward with specific
facts showing that there was a genuine issue for trial. See id. at 265. But it failed to do
so.
2. Punitive Damages
On appeal, Vic Davis Construction also contends that the trial court erred in
dismissing its punitive damages claim when it dismissed the fraud claims. Punitive
damages may be awarded for breach of contract but only in the most egregious cases.
Rogers v. Louisville Land Co., 367 S.W.3d 196, 211 n.14 (Tenn. 2012). The egregious
cases are those with clear and convincing evidence that the defendant acted intentionally,
fraudulently, maliciously, or recklessly in breaching the contract. Id.; see also
RESTATEMENT (SECOND) OF CONTRACTS § 355 (AM. LAW INST. 1981) (“Punitive
damages are not recoverable for a breach of contract unless the conduct constituting the
breach is also a tort for which punitive damages are recoverable.”).
Vic Davis Construction argued that Lauren’s conduct was egregious in several
respects. Primarily it points to Lauren’s insistence on enforcing the subcontract as
written despite knowing a mistake had been made. Vic Davis Construction also claims
that Lauren acted egregiously by failing to disclose its own pursuit of a change order for
the work in the March drawings and by refusing to approve a change order to allow Vic
Davis Construction to be compensated for performing the work in the March drawings.
We agree with the trial court’s conclusion that punitive damages were not
warranted. During the course of this litigation, both parties agreed that the March
drawings were included in the subcontract by mutual mistake. In other words, both
parties were mistaken about the contents or effect of the subcontract. See Sikora v.
Vanderploeg, 212 S.W.3d 277, 287 (Tenn. Ct. App. 2006) (“A mistake in expression
occurs where one or both parties to a written contract erroneously believe that the
contract embodies the agreement that both parties intended it to express.”);
RESTATEMENT (SECOND) OF CONTRACTS § 155 (AM. LAW INST. 1981) (“Where a writing
that evidences or embodies an agreement in whole or in part fails to express the
agreement because of a mistake of both parties as to the contents or effect of the writing,
the court may at the request of a party reform the writing to express the agreement,
except to the extent that rights of third parties such as good faith purchasers for value will
be unfairly affected.”). So any actions taken by Lauren in furtherance of its mistaken
belief lacked the requisite culpability to be characterized as “intentional, fraudulent,
11
malicious, or reckless.” See Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 901 (Tenn.
1992) (defining intentional, fraudulent, malicious, and reckless conduct).
Vic Davis Construction presented no evidence that Lauren was aware of the
mistake prior to demobilizing from the project. Both externally and internally, Lauren
proceeded as though the parties’ subcontract, which included the March drawings,
governed the scope of work. And it does not necessarily follow that a change order
would be required for the subcontract just because Lauren required a change order for its
contract with the owner due to the March drawings. After all, the subcontract, which Vic
Davis Construction signed, already included the March drawings. In sum, the evidence
presented failed to rise to the level of establishing egregious conduct on the part of
Lauren.
B.
Lauren contends that the evidence preponderates against the court’s finding that it
committed the first material breach under the subcontract. In non-jury cases, our
standard of review is de novo upon the record of the proceedings below, but the trial
court’s findings of fact are presumed to be correct unless the evidence in the record
preponderates against them. Tenn. R. App. P. 13(d). Evidence preponderates against a
finding of fact if the evidence “support[s] another finding of fact with greater convincing
effect.” Rawlings v. John Hancock Mut. Life Ins. Co., 78 S.W.3d 291, 296 (Tenn. Ct.
App. 2001). We review a trial court’s conclusions of law de novo, with no presumption
of correctness. Armbrister v. Armbrister, 414 S.W.3d 685, 692 (Tenn. 2013); Rigsby v.
Edmonds, 395 S.W.3d 728, 734 (Tenn. Ct. App. 2012).
Here, neither party fully performed under the subcontract. So the court had to
determine which party was responsible for the first uncured material breach. See
McClain v. Kimbrough Constr. Co., 806 S.W.2d 194, 199 (Tenn. Ct. App. 1990). 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. John P. Saad & Sons, Inc. v.
Nashville Thermal Transfer Corp., 715 S.W.2d 41, 47 (Tenn. 1986). Failure to pay a
progress payment on a construction contract is a material breach that entitles the
subcontractor to stop work and sue for breach. Rhea v. Marko Constr. Co., 652 S.W.2d
332, 333 (Tenn. 1983). But Lauren submits that it did not owe Vic Davis Construction
any compensation when it demobilized from the project.
On August 19, 2013, Mr. Davis notified Mr. Hobbs that Vic Davis Construction
would not return to work until the payment dispute was resolved. We assume that Vic
Davis Construction demobilized shortly after the letter. According to Vic Davis
Construction, Lauren owed it $337,000 for completed work as of that date.
12
The subcontract included a number of conditions to payment of the subcontractor.
Among those conditions was a “pay-if-paid” clause.6 Specifically, the subcontract
provided as follows:
After review and approval of Subcontractor’s invoice by Contractor,
Subcontractor shall be entitled to receive payment of the approved portion
of its requisition within three (3) business days following Contractor’s
(bank cleared) receipt of payment for the Subcontractor’s work from the
Owner. It is expressly acknowledged that receipt of payment by the
Contractor from the Owner on account of the work performed by the
Subcontractor shall be a condition precedent to any obligation by the
Contractor to make any payment to the Subcontractor. . . . Further, any
amount disputed by Contractor, or by Owner which is attributable to
Subcontractor’s work, will be withheld until the dispute is resolved, and the
disputed balance will be paid immediately upon resolution of the dispute.
Contractor and Subcontractor agree to discuss in good faith and attempt
settlement of any disputed amount as rapidly as possible.
On August 19, BAE had not yet paid Lauren for the two outstanding change order
requests. Because receipt of payment from BAE was a condition precedent to any
obligation by Lauren to pay, we agree that Vic Davis Construction was not entitled to
payment for the change order work when it demobilized.
But the June pay application was also unpaid when Vic Davis Construction
demobilized. Lauren contends that the failure to pay the June pay application was not a
breach because any amount Lauren owed for the June pay application was more than
offset by the amounts Vic Davis Construction owed Lauren for sales tax and change
order number ten. Article 22 of the subcontract provided that “Contractor shall have the
right . . . to deduct from any amounts due Subcontractor an equitable amount in
discharge” of any claims Contractor may have against Subcontractor.
Change order number ten reduced Vic Davis Construction’s compensation by
$22,835, the amount Lauren mistakenly paid Vic Davis Construction for work performed
by another subcontractor. The parties did not dispute the amount should be deducted, but
after the deduction, Lauren still owed Vic Davis Construction $90,000 for the June pay
application.
The trial court rejected Lauren’s argument that it had a claim against Vic Davis
Construction for undocumented sales tax. As the court recognized, while the State of
6
These clauses can serve to transfer the credit risk associated with the solvency of the owner
from the general contractor to the subcontractor. Thos. J. Dyer Co. v. Bishop Int’l Eng’g Co., 303 F.2d
655, 661 (6th Cir. 1962).
13
Tennessee may have a claim against Vic Davis Construction for unpaid sales tax, Lauren
did not. Lauren agreed to pay sales tax on permanent materials. Lauren’s only “claim”
against Vic Davis Construction was for documentation. At trial, Mr. Hobbs
acknowledged that Vic Davis Construction remained responsible for paying the sales tax
to the State of Tennessee. Lauren had no intention of paying any sales tax to the State of
Tennessee; rather it intended to keep any funds recouped from Vic Davis Construction
for unpaid taxes as profit.
Lauren’s failure to pay the June pay application was a material breach that gave
Vic Davis Construction the right to cease performance and sue for damages. See
McClain, 806 S.W.2d at 199. So the trial court did not err in awarding Vic Davis
Construction a judgment against Lauren for breach of contract or in dismissing Lauren’s
counterclaim for breach of contract.
C.
The remaining issues raised by the parties relate to the Prompt Pay Act. Vic Davis
Construction argues that the evidence preponderates against the trial court’s finding that
Lauren did not retain a percentage of the subcontract price. As a result, Vic Davis
Construction asserts that the court erred in not considering statutory penalties under the
Act. Both parties argue that they are entitled to attorney’s fees under the Act based on
the other parties’ bad faith.
1. Retainage Claim
Under the Prompt Pay Act, “[w]henever, in any [construction] contract . . . , a
certain . . . percentage of the contract price is retained, that retained amount shall be
deposited in a separate, interest-bearing, escrow account with a third party which must be
established upon the withholding of any retainage.” Tenn. Code Ann. § 66-34-104(a).
Compliance is mandatory and cannot be waived by contract. See id. § 66-34-104(j). If a
contractor fails to deposit retainage as required, the contractor must pay the subcontractor
“an additional three hundred dollar ($300) penalty per day for each and every day that
such retained funds are not deposited . . . .” Id. § 66-34-104(c).
The trial court ruled that Vic Davis Construction was not entitled to recover the
statutory penalty because the subcontract did not provide for retainage. The subcontract
plainly provided that “[i]nvoices are not subject to retention.” No other subcontract
provisions indicate that Lauren was authorized to withhold a percentage of the contract
value as retainage. And Lauren paid Vic Davis Construction’s first twelve pay
applications in full; nothing was retained.
Nevertheless, Vic Davis Construction contends that Lauren withheld a percentage
of payment, which was reflected in the subcontract as a line item designated as “Turn-
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over, As-Builts, Final Clean Up, Demobilize.” Vic Davis Construction points out that
the amount of this line item, $108,835, equals five percent of the total contract price
before credits, and according to the company, “[t]he $108,835.00 was not representative
of the cost of ‘Turn-over, As-Builts, Final Clean Up, Demobilize’ for [Vic Davis
Construction]’s scope of work on the Project . . . .”7 In reality, the company claims that
such work would cost less than $20,000. Vic Davis Construction’s project manager,
Mr. Johnson, testified that Lauren referred to these amounts as “holdback” in pre-contract
negotiations and that the amount proposed was initially ten percent of the total contract
price. Mr. Johnson explained that the amount was reduced only after he told his
counterpart at Lauren that, under Tennessee law, retainage could not exceed five percent
of the amount of the contract. See id. § 66-34-103(a) (2015).
Here, the trial court properly concluded that the escrow provision of the Prompt
Pay Act did not apply. The parties expressly agreed that invoices were not subject to
retention. Although Mr. Johnson testified that the amount attributed to “Turn-over, As-
Builts, Final Clean Up, Demobilize” was excessive, he acknowledged that he “did not
pay any attention to th[e] verbiage” in the final version of the subcontract, leaving the
amount shown for those services, as well as the other line items, unchallenged. It is not
our role to “make a new contract for parties who have spoken for themselves.” Realty
Shop, Inc. v. RR Westminster Holding, Inc., 7 S.W.3d 581, 597 (Tenn. Ct. App. 1999).
We also do not rewrite contracts to include protections that are not there.
The parties’ pre-contract discussions regarding establishing a holdback do not alter
the outcome. The subcontract contained an integration clause.8 Thus, “the parol
evidence rule prohibit[ed] the use of evidence of pre-contract negotiations in order to
vary, contradict, or supplement the contractual terms of [the] fully integrated agreement.”
Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tenn., Inc., ___
S.W.3d ___, No. M2015-02524-SC-R11-CV, 2019 WL 256716, at *18 (Tenn. Jan. 18,
2019).
7
In the construction context, retainage serves “to assure that a contractor or subcontractor will
satisfy its obligations and complete a project.” A-C Constr., Inc. v. Bakke Corp., 956 P.2d 219, 226 (Or.
Ct. App. 1998); PSE Consulting, Inc. v. Frank Mercede and Sons, Inc., 838 A.2d 135, 141 n.3 (Conn.
2004) (“[T]he term ‘retainage’ ordinarily refers to the percentage of the contract price that a project owner
may withhold from a contractor pending completion and acceptance of the contractor’s performance
under the terms of a construction contract.”). By assigning some value to “Turn-over, As-Builts, Final
Clean Up, Demobilize,” Vic Davis Construction seems to acknowledge that the entire amount of this line
item does not constitute retainage.
8
The subcontract provided, in pertinent part, as follows: “This Subcontract . . . contains the entire
agreement of the parties, and supersedes all negotiations, proposals, . . . , agreements and understandings,
if any, written or oral, heretofore had between the parties relating to the Work.”
15
2. Bad Faith Claim
Vic Davis Construction also challenges the court’s refusal to award attorney’s
fees. The prevailing party in an action under the Prompt Pay Act may recover reasonable
attorney’s fees if the nonprevailing party acted in bad faith. Tenn. Code Ann. § 66-34-
602(b). We review the court’s refusal to award attorney’s fees under an abuse of
discretion standard. Madden Phillips Constr., Inc. v. GGAT Dev. Corp., 315 S.W.3d 800,
827 (Tenn. Ct. App. 2009). An abuse of discretion occurs when a court “causes an
injustice to the party challenging the decision by (1) applying an incorrect legal standard,
(2) reaching an illogical or unreasonable decision, or (3) basing its decision on a clearly
erroneous assessment of the evidence.” Lee Med., Inc. v. Beecher, 312 S.W.3d 515, 524
(Tenn. 2010).
Attorney’s fees should not be awarded on this basis absent a finding of bad faith.
Tenn. Code Ann. § 66-34-602(b) (“Reasonable attorney’s fees may be awarded against
the nonprevailing party; provided, that such nonprevailing party has acted in bad faith.”).
Bad faith is a factual determination, which often hinges on witness credibility. Madden
Phillips Constr., Inc., 315 S.W.3d at 828-29. We will not disturb a trial court’s factual
finding based on witness credibility in the absence of clear and convincing evidence to
the contrary. Wells v. Tenn. Bd. of Regents, 9 S.W.3d 779, 783 (Tenn. 1999).
Vic Davis Construction’s bad faith claim is primarily concerned with whether
Lauren honestly believed it was entitled to insist on performance of the subcontract as
written when it knew a mistake had occurred. Bad faith is not defined in the Prompt Pay
Act. But our courts have reasoned that bad faith involves a knowing or reckless disregard
of contractual rights or duties. Trinity Indus., Inc. v. McKinnon Bridge Co., 77 S.W.3d
159, 181 (Tenn. Ct. App. 2001). By contrast, good faith “imposes an honest intention to
abstain from taking any unconscientious advantage of another, even through the forms
and technicalities of the law.” Id. Thus, an honest belief by one party that it did not owe
the money claimed by the other, even if later proved wrong, would not constitute bad
faith. See id. (“In reviewing this record, we have no doubt that McKinnon’s principals
honestly believed that their company did not owe the money claimed by Trinity.”).
After hearing the witnesses and evaluating the evidence, the trial court determined
that neither party had acted in bad faith. 9 The court found that mistakes were made on
both sides regarding the scope of work in the subcontract. The steady flow of revised
drawings at the beginning of the project and lack of attention to detail on both sides
caused the mistake. Once the subcontract was executed and work began, Lauren
9
Lauren also requested that the trial court award attorney’s fees under this provision. Because
Lauren did not prevail at trial, it was not entitled to an award of attorney’s fees. See Tenn. Code Ann.
§ 66-34-602(b). So we decline to address Lauren’s argument that the evidence preponderates against the
court’s finding that Vic Davis Construction did not act in bad faith.
16
understandably proceeded on the assumption that Vic Davis Construction’s final bid
included the work in the March drawings. And even though that assumption proved to be
mistaken, by its terms, the subcontract, including the attached drawings and
specifications, superseded Vic Davis Construction’s bid. On these facts, the court did not
find that Lauren intended to take unconscientious advantage of Vic Davis Construction or
that Lauren knowingly or recklessly disregarded contractual rights or duties. The
evidence does not preponderate against the trial court’s findings.
We affirm the trial court’s refusal to award attorney’s fees under the Prompt Pay
Act. Based on our affirmance, we decline to award Vic Davis Construction its requested
attorney’s fees on appeal under this same statutory provision. See Beacon4, LLC v. I & L
Investments, LLC, 514 S.W.3d 153, 212 (Tenn. Ct. App. 2016) (holding that the Prompt
Pay Act “also provides for an award of reasonable attorney’s fees on appeal, provided
that the appellant has requested such fees in appellate pleadings”).
III.
We affirm the trial court’s grant of summary judgment to Lauren on Vic Davis
Construction’s fraud and punitive damages claims. At the summary judgment stage, Vic
Davis Construction was unable to establish reliance or damages from deception. Vic
Davis Construction was also unable to establish clear and convincing evidence that
Lauren’s breach of contract was sufficiently culpable for an award of punitive damages.
We also conclude that the evidence does not preponderate against the trial court’s
finding that Lauren committed the first material breach. Lauren’s failure to pay the June
pay application was a material breach that justified Vic Davis Construction’s subsequent
demobilization from the project.
Finally, we affirm the trial court’s decisions under the Prompt Pay Act. The trial
court did not err in refusing to award Vic Davis Construction the statutory penalty for
failure to deposit retainage in an interest-bearing escrow account. The subcontract does
not provide for retainage. And the trial court did not abuse its discretion in refusing to
award attorney’s fees for bad faith.
_________________________________
W. NEAL MCBRAYER, JUDGE
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