Construction Contracts and Construction Litigation

W. Dudley McCarter
Behr, McCarter & Potter, P. C.
St. Louis

In disputes involving construction projects, there are usually three primary issues: (1) who breached the contract, (2) who is entitled to damages, and (3) what are the damages. There have been recent developments in each of these three areas, as well as other issues commonly arising in connection with construction contracts.

I. Construction Contracts.

Generally, the obligations of both the contractor and the owner are determined by the contract between them. If the owner prevents the contractor from completing performance, the contractor's failure to complete its work is excused and it is not regarded as having breached the contract. Also, the owner's prevention or hindrance of the contractor's performance excuses delay on the part of the contractor and, in such circumstances, the contractor cannot be held liable for liquidated damages. If, however, if the contract requires the contractor to request time extensions, in writing, the contractor's failure to so request an extension cannot be excused on the grounds that the owner caused the delay.

The mere showing of some slight defect or minor omission in the construction is not sufficient to establish that the contractor breached the contract, without evidence that the terms of the contract were not complied with in a material respect or that the work was done in an unworkmanlike manner by the contractor. In all construction contracts, there is an implied agreement on the part of the contractor that the work will be done in a skillful and workmanlike manner.

When a substantial progress payment is due from the owner and not made, a contractor may be entitled to suspend its performance and await payment. However, the failure of the owner to timely make a progress payment that is small compared to the overall contract price will not entitle the contractor to "walk off" the job. When the contract provides for progress payments to be determined by the architect as the work proceeds, the architect's certification of payment is binding upon the parties. When the owner provides plans and specifications to a contractor, the contractor does not become an insurer that the plans and specifications are sufficient to obtain the result sought-i.e, the contractor does not become a guarantor of the plans.

Many construction contracts and subcontracts now include numerous provisions unique to the construction industry, such as "pay-if-paid", "no damages for delay," indemnification, arbitration and liquidated damages clauses. Thus, both parties should carefully read the contract before signing it, it may contain unanticipated provisions that restrict or limit their rights of recovery or increase their liability beyond that which already exists under law. Many contractors use standard AIA contracts for convenience but attach addenda covering special circumstances.

II. Recovery of Damages by the Contractor for Breach of Contract by Owner.

When an owner breaches a construction contract by preventing the contractor from performing the work or by improperly discharging the contractor, the contractor's measure of damages is the contract price less the amount it would have cost the contractor to perform. In other words, a contractor damaged by the owner's breach of the contract may recover whatever net gain or profit it would have made in performing the contract, so that it will be in the same position as if the contract had been completed.

To recover for breach of contract, the contractor must prove the existence of an agreement, substantial performance of the contract by it and damages measured by the contract. The contractor is required to prove either substantial performance or part performance and prevention of full performance by the owner. To recover for extra work or when there is no written contract, the contractor must prove that it provided materials or services to the owner at the owner's request, that those materials or services had a certain reasonable value, and that the owner failed to pay the reasonable value of those items, despite the contractor's demands.

Where a construction contract requires a written change order to be signed by both the owner and the contractor, the contractor cannot recover for extra work without such written change order, unless the conduct of the owner and the prior practice of the parties establish a waiver of this requirement.

Under Missouri law, interest is allowed on liquidated amounts owed for work performed under the contract, at the rate of 9% per annum, unless another interest rate is specified and agreed to in the contract. Normally, attorney's fees are not recoverable unless provided for in the contract. Thus, a contractor who successfully obtains a judgment against the owner or another contractor for monies owed will likely have to bear the cost of its own attorney's fees. Section 431.180 RSMo. does, however, give a judge the discretion to award attorney’s fees and interest at the rate of 1-1/2% per month, to the prevailing party if payments are not made in accordance with the terms of a construction contract.

III. Owner's Damages for Breach of Contract by Contractor.

When the contractor has defectively or incompletely performed the work, the owner is entitled to recover damages from the contractor based upon the amount reasonably required to remedy the defects, complete the project, and make the structure conform to the plans and specifications. In other words, the owner is entitled to damages in an amount that will reasonably compensate it for defects in the building due to unskillful labor or defective materials and for items omitted by the contractor. The contractor may be liable for defective performance even though the contract work was substantially performed. In such case, the owner is entitled to a credit of such sums as will reasonably compensate it for defects in the construction or for items omitted by the contractor.

The owner may not recover the cost of reconstruction and completion if this would involve unreasonable economic waste, i.e. destruction of usable property. If unreasonable economic waste would occur in bringing the structure into conformity with the contract, the owner's damages will be calculated by the difference in value formula rather than by the cost of correction. The diminished value rule allows recovery of damages based upon the difference between the value of the property with the defective work and what its value would have been if it had been constructed according to the plans and specifications. As a general rule, the owner's measure of damages is the cost of correcting the defects or supplying the omissions rather than the reduced value. If there is a dispute about whether damages should be determined by the diminished value rule or the cost of correction rule, all doubts are resolved against the contractor guilty of the breach and the burden is on the contractor to show that correction of the defects would cause unreasonable economic waste. Damages for breach of a contract for the construction of a residence not built in accordance with the plans and specifications are typically based on the cost to reconstruct it to the plans. Unlike a commercial structure, a residence has aesthetic value and must be constructed as the owner wants it, even though the finished dwelling may be just as good, since what is reasonable to be used in a commercial building may not be appropriate or satisfactory for a residence.

Absent excuse or waiver by the owner, a contractor is liable for damages resulting from the contractor's failure to complete the construction project by the date specified in the contract. Such damages may be set in the contract in a liquidated damages provision. Generally, liquidated damages cannot be recovered after the project has reached substantial completion. However, substantial completion, as specifically defined in the contract, must be timely met by the contractor. To be enforceable, the amount of liquidated damages must be reasonable and not so great as to constitute a penalty.

Many construction contracts contain arbitration provisions and construction disputes are now frequently resolved through arbitration rather than litigation. Under some circumstances, a contractor may be permitted to file a mechanic's lien and still proceed with arbitration while the mechanic's lien is pending against the property. Arbitration is favored by the courts but the parties must comply with the conditions in the contract for arbitration or the right to demand arbitration may be waived. In Missouri, once more than one mechanic's lien has been filed against the same property, all claims and disputes arising out of that construction project must be litigated in the same lawsuit.