Archive for the ‘Business disputes’ Category

Decision: Carrothers Construction Company v. City of South Hutchinson

May 26, 2009

May 22nd. The Kansas Supreme Court has issued its opinion in the case of Carrothers Construction Company v. City of South Hutchinson (No. 98,023), a contract dispute concerning liquidated damages. In a unanimous opinion, written by Justice Daniel Biles, the Court held that the construction company was required to lose $140,000 of its fees for delays in the completion of a new sewage plant. In doing so, the Court settled a previously undecided question of Kansas law, ruling that liquidated damages should be reviewed based upon the circumstances at the time of the contract and not taking into account a retrospective assessment of the actual damages incurred to a party.

The background to the case was that the City of South Hutchinson hired Carrothers Construction Company to build a new sewage treatment plant, which incorporated a computer control system. MKEC Engineering Consultants were appointed as Project Engineer and one of their responsibilities was to certify stages of completion, which in turn would trigger liquidated damages at $850 per day of delay if those stages were not met. Both the city and the construction company agreed to the terms of the contract. The treatment plant should have been completed in July of 2003. It wasn’t. In November of that year the City was able to start operating it manually (without the computer system). The project was finally completed in January 2004. Based on this, MKEC advised the City to withhold $140,000, per the contract. Carrothers then sued the City for breach of contract. Carrothers lost in the District Court and the Court of Appeals, which brought the case to the Kansas Supreme Court.

The terms of the contract defined two stages of completion – substantial (when the plant would be operational) and final (when there was nothing left to do). As certified by MKEC, these two stages were met one day apart, the former when the computer control system was finally operational and the second when the manuals to the same were delivered. Carrothers argued that the former was actually met when the City began operating the plant in November 2003. The Court rejected this argument, noting that the contract explicitly included the control system as part of the work and that the Carrothers had agreed to delegate decisions as to completeness to the project engineer.

Carrothers also argued that the liquidated damages should be reviewed for reasonableness in court both prospectively (from the viewpoint of the parties at the time the contract was signed) and retrospectively (after the fact, based on whether the dollar amounts approximated to the actual damages incurred). Carrothers argued that the 10th Circuit Court of Appeals had construed Kansas Law this way in another case, but the Court rejected this and held that the 10th Circuit had in fact found that the issue was not decided. This question was therefore an open question of law and so the Kansas Supreme Court held that in Kansas the analysis in Court of liquidated damages is only based on a prospective assessment. Doing so, the Court stated, was beneficial since it encouraged the use of liquidated damages (instead of tort litigation) and left parties free to agree contracts with one another to handle these issues.

The Court also rejected two arguments from Carrothers, that the $850 per diem damage amount was unreasonably high and that the City waived its right to the liquidated damages by occupying the facility; again holding that it was not the Court’s function to rewrite the contract after the fact.

Decision: Hodges v. Johnson

February 4, 2009

January 30th. The Kansas Supreme Court has issued its decision in Hodges v. Johnson (No. 97,062), a dispute over the implied warranty of merchantability (which applies to all commercial transactions in Kansas) on a used car. In an opinion written by Justice Davis, a unanimous court overturned the Court of Appeals and ruled that the implied warranty can apply to air conditioning systems in a car. Notes: Robert Davis, the author of the opinion is now the Chief Justice of the Court following the retirement of previous Chief Justice Kay McFarland. At the time this case was argued, McFarland was still on the Court. Justice Nuss was recused from this case. His place was taken by Senior Judge Edward Larson.

In January 2005 Dr and Mrs Hodges bought a 1995 Mercedes with 135,000 miles on it from Jim Johnson’s luxury used car dealership in Saline County. Johnson told the Hodges that he had been driving the vehicle and that it was a “perfect car”. About a month later, on first using the air conditioner the Hodges discovered the air conditioner did not work properly. On two occasions their mechanic added freon to the system, but it failed again in May and he reported that several components needed replacing at a cost of $3-4000. Around the same time it was discovered that Johnson had had a mechanic add a product called Super Seal to the AC when he was using the car himself. This mechanic stated that he would not have recommended doing this since Super Seal caused problems with AC systems. The Hodges requested that Johnson pay the costs of the repairs, he refused.

The Hodges then brought a Small Claims Court action which they won, winning around $3500 in damages. Johnson appealed this case to the District Court. When this step is taken the case is retried by the District Court. The Hodges won again, however the District Court refused to award them attorney fees on the grounds that Johnson had not deliberately misrepresented the car. Both Johnson and the Hodges appealed to the Court of Appeals. The Court of Appeals overturned both rulings of the District Court, noting that the District Court was bound by the wording of the statute to award costs to the Hodges if they won, but found that as a matter of law the implied warranty of merchantability did not extend to an air conditioning system since the primary use of the car was unaffected.

The Kansas Supreme Court has reversed this ruling of the Court of Appeals finding it not to be based on established precedent or the plain language of the statute in question (K.S.A. 84-2-314). The warranty attaches to all sales as a matter of law and covers the ordinary uses of the goods sold, not just their primary ones. Exactly which aspects of a particular transaction are covered by the warranty is a question of fact, to be determined on a case by case basis by the District Court. Existing case law should govern this fact-based determination: the Court reiterates a 1980s decision which notes that differences apply between a nearly-new used car and a junker ready for scrap and the way the car was sold along with its price play a role in this.

The Court upheld the Court of Appeals’ decision on Attorney fees, and therefore ordered the District Court to hold a hearing on the appropriate award to make to the Hodges on this matter. It also upheld the statutory arrangement for attorney fees in cases appealed from the Small Claims Court (where only the victor in that Court can be awarded costs if they prevail again in District Court) against an Equal Protection challenge by Johnson. The Court ruled that this passes the Rational Basis test since anyone choosing to lodge an appeal from the Small Claims Court does so knowing that they will be incurring legal costs, while those choosing that venue generally do so without representation and in the knowledge that damages are capped at $4000.

Finally, the opinion awarded the Hodges attorney fees for their successful appeal to the Kansas Supreme Court, amounting to a further $4000 Johnson must pay.