Archive for the ‘Contracts’ 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.

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Decision: Nelson v. Nelson

April 23, 2009

April 17th. The Kansas Supreme Court has issued its opinion in Albert H. Nelson III and Markeyta Nelson Dewey v. Doris H. Nelson (No. 97,664), a case brought by a pair of adult children against their stepmother for their late father’s failure to abide by the terms of his divorce settlement in drawing his will. In a unanimous opinion, written by Justice Luckert, the Court found that the claim which was brought was for a breach of contract by the late Albert H. Nelson Jr and that it was not filed in time to avoid being barred by the Kansas nonclaim statute. In the course of the ruling the Court also overrules one line of its precedents and determines that constructive trusts do not require fraud be shown in order to be created.

In 1975 Albert Nelson Jr and his wife divorced. Under the terms of the divorce settlement he was to leave his entire estate to his two children. In 1978 Nelson remarried and structured his affairs in such a way that almost all his property was held in two trusts or in his new wife’s name (Doris). One trust was to ultimately benefit his children, but on their deaths to bequeath the assets to Oklahoma State and Wichita State Universities. The other was to benefit OSU and WSU after the death of Doris. Mr Nelson died in 2003 and this case was brought by his children to assert that a constructive trust existed which meant that the trusts he had funded should return the assets to the children under the terms of the 1975 divorce settlement.

The District Court and the Court of Appeals rejected this argument, finding that the case which had been brought did not show constructive fraud to have taken place, and that therefore under established precedent of the Kansas Supreme Court a constructive trust could not have been created. The Kansas Supreme Court agreed in part, finding that the Albert (III) and Markeyta had not shown that their action was one for constructive fraud, rather they were bringing an action for breach of contract, which ultimately was against Albert (Jr)’s estate, not his trusts.

However, the Court went on to investigate whether the rule in Kansas that a constructive trust could only be created where constructive fraud was shown was valid. After reviewing the case law it concluded that it was not, finding that there were two lines of cases, a recent one which asserted this principle and an older one which took a broader view. The older cases were from a time when contracts to include someone in a will were common and therefore there were more cases regarding them. The modern cases were based around constructive fraud claims, however there was not reason to limit the law this way and therefore that part of precedent was overturned.

As a result of this, the Court considered whether the claim could therefore be brought that a constructive trust existed. It found that it could not because it had not been brought in a timely manner under the Kansas nonclaim statute which sets time limits on actions such as these to allow probate to conclude with finality. While an exception exists to this statute for tort claims, the Court ruled that that exception did not apply in this case since this was essentially a contracts case (breach of the 1975 divorce settlement). Therefore the claim was time barred and the lower courts’ decisions were upheld.

Decision: Double M Construction v. Kansas Corporation Commission

February 11, 2009

February 6th. The Kansas Supreme Court has issued its decision in Double M Construction v. Kansas Corporation Commission (No. 100,312). In a unanimous opinion, written by Justice Rosen, the Court upheld the Commission’s imposition of a $25,000 fine upon Double M for failing to follow the law that governs excavations near underground gas lines. Note: this case was argued while Chief Justice McFarland was still a member of the court. She was recused from the case and her place taken by Judge Melissa Standridge of the Court of Appeals.

A company called Double J Pipeline subcontracted some Labette County excavation work to Double M Construction, an Oklahoma-based firm. Under the contract between the two companies  Double M was not to be responsible for any damage to underground utilities. Double J called the Kansas One Call system to notify of intent to excavate and arrange for underground lines to be marked, as required under the Kansas Underground Utility Damage Prevention Act (KUUDPA). Due to an error, the wrong area was marked by Kansas One Call. Double J called again and Kansas One Call arranged to mark the correct area. Before Kansas One Call had done so Double J directed Double M to begin digging the unchecked area. Double M struck a gas line and a worker was killed. The Kansas Corporation Commission assessed a $25,000 penalty upon Double M for failing to follow the KUUDPA, on the grounds that it states that the excavator must notify Kansas One Call of its intent to excavate.

On appeal to the District Court (where the Commission’s verdict was affirmed) and the Kansas Supreme Court, Double M claims that it was not liable for the failure to notify Kansas One Call, and the events that followed because that was Double J’s responsibility under its contract. It also argued that even if the statute applied to it, that this interfered with its right to contract which is protected under the Due Process clause of the Fourteenth Amendment. Double M also argued that the law was inequitable since as an Oklahoma company it was unaware of it, and argued that at common law liability rests with the main contractor and not the subcontractor(s).

The Court rejected all these arguments. It notes that its ruling is driven by the plain language of the KUUDPA which (apart from an exception for private home owners on their own property) requires that any excavator notify Kansas One Call. Since Double M was an excavator under the meaning of the act, it and no one else, was required to make the phone call. Since it did not do that it is liable. Double M’s argument about common law liability is rejected since the legislature can override common law by statute, and therefore that is inapplicable. Double M’s argument about the law being inequitable is rejected since all persons are presumed to know the law: ignorance is not a defense. Finally, Double M’s Constitutional argument (which seems to have been based on Lochner-era concepts) is rejected: the legislature has the right to pass laws which govern what contracts may legally be signed. If that were not enough, it notes that the contract was entered into after the passage of the act. Freedom of Contract does not extend to being able to enter into a contract that rewrites the law.

Justice Rosen has fun with all this with the following quip:

“Double M would have this court find that a corporation that specializes in excavation, enters into a contract to excavate, and then carries out an excavation is not really an excavator under the statute. It proposes that a creature that looks like a duck, walks like a duck, and quacks like a duck is not a duck if it contracts with a goose to assume the duties and liabilities of a duck.”

Having rejected all of Double M’s argumencts, the Court affirms the Corporation Commission’s ruling, noting that because Double M did not follow the plain, unambiguous wording of the law and do the Kansas One Call notifications itself an accident resulting in property damage and death occurred: precisely what the law was enacted to prevent.

Decision: Miller v. Westport Insurance Company

February 3, 2009

January 30th. The Kansas Supreme Court has issued its opinion in Miller v. Westport Insurance Company (No. 95,786) a contract dispute case. In a unanimous opinion, written by Justice Beier, the Court overturned a decision of the Court of Appeals and District Court granting summary judgement to Westport against three of its customers who sued over its refusal to pay on their litigation insurance policy. Instead the Court ordered that the District Court enter a summary judgement in favor of the three customers and grant them their claim of around $70,000 in insurance settlement and legal costs. Note: Justice Rosen was recused from this case. His place was taken by Court of Appeals Judge, Steve Leben.

Richard Miller, Ed Zeller, and Jeremy Kohn are insurance agents who had referred several clients to a credit rating repair company which was engaged in a fraud, whose owner absconded with the money given to it. When the fraud was revealed the three were sued by two of their clients. They entered a claim on their litigation insurance (which covered them for losses due to negligence) from Westport. Westport denied the claim on multiple occasions on the grounds that the claim did not arise out of the three men’s actions as licensed insurance agents, however part of the policy paperwork stated that it covered financial planning activities. Ultimately Miller, Zeller and Kohn settled their client’s suits and remimbursed them, along with another 10 who were affected.

In finding for Miller, Zeller and Kohn, the Court notes that the insurance policy includes language which states that Westport has a duty “to investigate, defend, conduct settlement negotiations and enter into settlements for any ‘claim’ or ‘suit’ for which coverage is provided by the terms of the policy.” The Court notes that this duty to defend is very broad: it would for instance cover defending the policy holder against meritless lawsuits. The Court also held that the policy did cover the activities that led to the losses and that none of the policy exclusions applied. Therefore since Westport had not honored its duty to pay for a legal defense of the cases that were brought against the three insurance agents it was liable to pay out for the cost of the settlement they had reached independently.

Holders of litigation insurance should watch out for changes to policy wordings in the next few months.