Substantial Performance Doctrine: Contractor Defeats Finicky Homeowners in Construction Case (the ‘You Missed A Spot’ Post)

Two diva-esque homeowners (I don’t judge; I just report) who demanded impossible perfection from a contractor got slapped with a $100,000-plus bench trial verdict in Wolfe Construction v. Knight, 2014 IL App (5th) 130115-U. Affirming the damage award, the appeals court gave content to the substantial performance doctrine, expanded on the requirement of contractual definiteness and applied the governing standards for recovering contractual interest and attorneys’ fees,

The plaintiff contractor was hired to perform renovation work on the defendants’ home after a fire damaged the home.  The written contract required the homeowners to pay for any extras and to also foot the bill for any services not covered by their homeowners’ insurance.  Over a span of about a year, the contractor completed nearly all of the restoration work (about 95% of it) and performed some $30,000 of additional work including interior painting, building a new porch and custom-ordering and installing kitchen cabinets – all at the defendants’ specific request.  But according to the homeowners, the contractor’s work was lacking and the homeowners refused to pay and kicked the contractor off the job.  The contractor sued for breach of contract and after a bench trial, won a $100,000-plus judgment against the homeowners, including amounts for unpaid services, extras, contractual interest and attorneys’ fees.  The homeowners appealed.

Held: Money judgment for the contractor affirmed.

Rules/Reasoning:

The Court upheld the judgment for the contractor; noting that the defendants demanded “perfection and the impossible.”  The law doesn’t require surgical precision in construction contract performance.  Instead, the contractor is held only to the duty of substantial performance in a workmanlike manner.  For substantial performance, a contractor must show there was an honest and faithful performance of the contract in its material and substantial aspects.  The contractor must also demonstrate there was no willful departure from, or omission of the contract’s essential elements.  A nebulous standard, the substantial performance test depends on the unique facts of each case.  (¶33).

During trial, both sides presented expert testimony in support of their position and the Court found that the contractor completed about 95% of the job before the defendants fired it (the contractor).  (¶¶ 25-26).  And since the defects asserted by the homeowners involved items which pre-dated the contractor’s involvement, the Court found those deficiencies weren’t the contractor’s fault.  The Court also found the homeowner’s blatantly biased expert’s testimony to be incredible and even “laughable.”  For these reasons, the Court sided with the contractor on all issues. (¶34).

The Court also affirmed the trial court’s award of interest and attorneys’ fees under the contract; but against only one of the homeowners.  Interest and attorneys’ fees generally are not recoverable unless specified in a written contract.  ¶¶36-37.  If a contract does provide for interest and attorneys’ fees, only the party that signs the contract will have to pay them.  (¶ 37).  Here, the parties’ construction contract clearly delineated that the homeowners would be responsible for the contractor’s attorneys’ fees and would have to pay monthly interest at 1.5% on tardy amounts if the contractor sued. The Court held that since the contractual interest and fee-shifting language was clear, it was enforceable – but only against the defendant that signed the contract.  The homeowner that didn’t sign the contract wasn’t responsible for the over $26,000 in interest and nearly $40,000 in attorneys’ fees awarded to the plaintiff contractor.  (¶ 38).

Aftermath:

Definitely a pro-contractor and anti-persnickety homeowner case.  I suppose perfectionism, as character trait and life ethos, has its merits.  But the law doesn’t require it; at least not in the construction setting.   This case illustrates in lurid detail the perils of a property owner having unrealistic and too-exacting expectations of his contractor.  Blemish-free work is not required under the law.  As this case amply shows, if a contractor substantially performs or is prevented from remedying or completing performance by a recalcitrant homeowner, the contractor will win.  Wolfe Construction also seems to set a fairly lenient benchmark for a contractor to establish substantial performance.  This case should and will likely give property owners pause before they declare a default and fail to pay a contractor.

 

 

 

Tortious Interference With Prospective Economic Advantage – An Illinois Case Note

In Davidson v. Schneider, 2014 WL 656780 (N.D.Ill. 2014), the Court describes the quantum of proof required for a plaintiff to survive summary judgment on both the damages element of a breach of contract claim and the “reasonable expectancy” prong of a tortious interference claim.

The plaintiff and defendant were competitors in the baseball vision testing business.  They were also parties to prior patent infringement litigation that culminated in a written settlement agreement that contained broad non-disparagement language.

 When the plaintiff found out that one of defendant’s employee’s was bad-mouthing the plaintiff to a college softball coach and prospective client, he sued in Federal court.  After discovery finished, the Court entered summary judgment for defendants on plaintiff’s breach of contract and tortious interference claims.

An Illinois breach of contract plaintiff must show (a) existence of a contract, (b) performance by the plaintiff, (c) breach by the defendant and (d) compensable damages resulting from the breach.  Davidson, *3, Asset Exch. II, LLC v. First Choice Bank, 2011 Ill.App. (1st) 103718. 

Damage to reputation or goodwill resulting in a diminished ability to make money as a result of a breach can be recovered in a breach of contract suit.  However, where a party shows a breach but no damages, the contract claim is “pointless” and must failDavidson, *5.

Here, the plaintiff established a contract (the settlement agreement) and defendant’s breach (by disparaging plaintiff’s products and services).  However, the plaintiff was unable to pinpoint any measurable money damages resulting from the defendants’ denigrating the plaintiff’s vision training services.

 Plaintiff cited no lost clients or business opportunities traceable to the defendants disparaging comments.  Without any damages evidence, the plaintiff’s breach of contract claim failed as a matter of law.  Davidson, *4.

The Court also granted summary judgment on plaintiff’s tortious interference with prospective economic advantage claim.  Plaintiff’s tortious interference count was based on derogatory comments defendants’ employee made to another baseball coach and prospective customer of plaintiff. 

The elements of tortious interference with prospective economic advantage are: (1) a reasonable expectation of entering a valid business relationship, (2) defendant’s knowledge of the expectation, (3) purposeful interference by the defendant that prevents plaintiff’s expectation from ripening into a business relationship, and (4) damages to the plaintiff resulting from the interference.  *5

The mere  hope for or possibility of a future business relationship is insufficient to show a reasonable expectancy. 

Here, plaintiff’s evidence showed only a nebulous hope of a future business pairing with the baseball coach to whom defendants trashed plaintiff’s product.  He didn’t show any specific business arrangement that was in the works.  As a result, plaintiff failed to raise a triable fact question on whether he had a reasonable expectation of a future business relationship with the baseball coach.

Take-aways: A breach of contract plaintiff’s failure to prove damages with tangible evidence of financial loss at the summary judgment state will doom his case. 

To survive summary judgment on a tortious interference with prospective economic advantage claim, the plaintiff must offer tangible evidence that he had a specific, proposed business arrangement with an identified third party – instead of a wish or hope for one – to meet the tort’s reasonable expectancy test.

 

Contractual Impossibility? Global Economic Crash Doesn’t Excuse Performance Of Real Estate Deal – Illinois Court

In YPI 180 N. LaSalle, LLC v. 180 N. LaSalle II, LLC, 403 Ill.App.3d 1 (1st Dist. 2010), the court examined whether the 2008 global credit crisis was significant and unforeseen enough to merit application of the impossibility of  performance doctrine in connection with a real estate contract for the sale of a Chicago office building.

Facts

The parties entered into a contract to purchase the office building for a cool $124M.  The plaintiff – the buyer’s assignee – deposited $6M in earnest money.  When the world credit markets froze, plaintiff wasn’t able to get financing and couldn’t consummate the purchase.

The seller then terminated the contract and retained the buyer’s $6M earnest money.  Plaintiff sued to rescind the contract and for return of its $6M earnest money deposit claiming that the world financial crisis made it impossible for it to go forward with the building’s purchase.  The Court dismissed plaintiff’s complaint on defendant’s motion.  The First District affirmed.

Rules/reasoning

The basis for the plaintiff’s rescission claim was contractual impossibility: that the world credit crisis made it impossible for the plaintiff to obtain the necessary financing to buy the building. 

In Illinois, the impossibility of performance doctrine applies where the purposes for which a contract was made have become impossible for one side to perform.  Impossibility excuses contractual performance where performance is “objectively impossible” due to the contract subject’s destruction or by operation of law

But where a contingency that causes the impossibility could have been anticipated and guarded against, impossibility won’t excuse performance. The party asserting impossibility must show that events or circumstances making performance impossible were not reasonably foreseeable at the time of contracting and the defense won’t apply where the event creating impossibility lies within the promisor’s power to remove the obstacle to performance.  *6-7.

Here, the First District sided with the defendant and held that even if the credit crunch did make it impossible for the plaintiff to buy the building, its inability to get financing could have been anticipated and provided for in the contract.

The Court noted that an inability to secure financing is pretty much always a risk in any contract setting and that if the court allowed failed financing to excuse performance, it would completely undercut contract law.  *7.

The Court also pointed to the plaintiff’s financial largesse in rejecting the impossibility argument; the plaintiff’s $1.6 billion in assets showed that it had the power to remove any obstacles to performance selling off some of its assets and paying the $124M purchase price for the building. *8

Take-aways:

Not even a cataclysmic, world-wide financial disaster qualified for the impossibility defense.  There’s actually more to it than that but YPI definitely shows that the impossibility of performance defense (or offense) can be a tough sell and is sparingly applied in Illinois contract litigation.

The case also cautions parties to take pains to allocate risks and provide for obstacles to performance during the contract formation phase.  YPI also seems to suggest that if a party claiming impossibility has the financial resources to remove the obstacle preventing performance, an impossibility of performance argument may fail.