All Star Const. Co., Inc. v. Koehn

#24405, #24413-aff in pt, rev in pt & rem-BARNETT, Circuit Judge

2007 SD 111

IN THE SUPREME COURT

OF THE

STATE OF SOUTH DAKOTA

* * * *

ALL STAR CONSTRUCTION COMPANY, INC.,
a South Dakota Corporation, Plaintiff and Appellant,

v.

MARK KOEHN and ALICIA GARCIA, Defendants and Appellees.

* * * *

APPEAL FROM THE CIRCUIT COURT
OF THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON, COUNTY SOUTH DAKOTA

* * * *

HONORABLE A.P. FULLER
Judge

* * * *
BARTON R. BANKS of
Banks, Johnson, Colbath,
Sumner & Kappelman, PLLC Attorneys for plaintiff
Rapid City, South Dakota and appellant.

MICHAEL C. LOOS of
Clayborne, Loos & Strommen, LLP Attorneys for defendants
Rapid City, South Dakota and appellees.

* * * *
CONSIDERED ON BRIEFS
ON AUGUST 28, 2007

OPINION FILED 10/31/07
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BARNETT, Circuit Judge.

[¶1.] All Star Construction Company, Inc., (All Star) appeals from a judgment

ordering it to "specifically perform under the terms of the contract and complete the

punch list items set forth in Exhibit 118 as revised from time to time on the record,

as well as the reconstruction and repair of the shower[.]" The judgment also ordered

Mark Koehn and Alicia Garcia (Homeowners) to "specifically perform under the

terms of the contract and pay to [All Star] the sum of $56,516.81 as the reasonable

value of the work completed and not yet paid."

[¶2.] We affirm in part, reverse in part, and remand.

FACTS AND PROCEDURAL HISTORY

[¶3.] Homeowners are practicing attorneys in Rapid City, South Dakota.

They decided to remodel their home and build an addition to it. They contacted All

Star and, on November 1, 2002, signed a form contract provided by All Star. The

contract contemplated that some items listed in the contract were allowances or

estimates. While figures were listed in the contract for these items, the contract also

stated that "estimates are provided for budgeting purposes only. More accurate

pricing can be provided when design and construction details have been furnished."

Additionally, the contract stated that "[a]llowance figures are included as actual costs

to the contractor. Final job expenses will be adjusted accordingly." (emphasis

supplied). Notably, the contract did not define actual costs.

[¶4.] In the contract All Star warranted that all work would be completed in a

workmanlike manner according to standard practices. The contract provided that

"any alteration or deviation from above specifications including extra costs will be

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executed only upon written orders, and will become an extra charge over and above

the estimate." (emphasis supplied).

[¶5.] The base contract price was $122,500 plus excise taxes. Approximately

$51,000 of this total was denominated as allowances, which could be revised when

changes were ordered by Homeowners, or as costs increased over the stated

allowances. All Star later claimed a fifteen percent markup for overhead as an actual

cost, and later reduced the markup claim to eight percent. Neither figure appears in

either the contract or the change orders. Furthermore, All Star admitted that

neither markup had ever been discussed with Homeowners during construction.

[¶6.] Throughout the course of the project Homeowners requested changes in

the plan and details. On four occasions All Star presented Homeowners with a

written change order, which they signed. The change orders described generally

what caused the extra bill, but did not specify whether an eight percent markup had

been added in. The change orders simply listed labor and materials. A fifth change

order was presented after the work was completed, and was not signed by

Homeowners. At trial Homeowners conceded that the amount listed on the fifth

change order was due and owing, with the exception of a possible unstated eight

percent markup. To further complicate matters, other changes were requested or

approved by Homeowners, and performed by All Star, yet neither side presented or

demanded a written change order at the time.

[¶7.] All Star admitted at trial that it was required to secure a signed change

order in every instance, and that it did not do so in all cases. However, All Star

contended, and the trial court agreed, that in such instances Homeowners were

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present and living in the home and not only requested the changes, but acquiesced

despite the lack of a written change order.

[¶8.] In mid-2003 Homeowners were significantly behind in payments owed

under the contract due to problems securing adequate financing. About this time,

Homeowners hosted a family reunion and asked that All Star leave the jobsite. Due

to the arrearages, All Star did not return to the home after the reunion, nor were

they asked by Homeowners to come back. Homeowners did obtain some additional

financing and were able to pay $90,000; however, this left almost $60,000 still owing.

For two years there was no final construction or payment. Homeowners submitted a

"punch list," a list of finishing work that was not completed. All Star admitted that

some of the finishing work was in fact not completed, but argued that its

nonperformance was excused by Homeowners' nonpayment. Additionally, the parties

agreed that an expensive waterfall shower leaked, though they could not agree on the

cause. Eventually All Star sued for payment under the contract. Homeowners

sought an offset for unfinished or non-workmanlike efforts.

[¶9.] The case was heard at a court trial. After all evidence had been

submitted, the trial court ruled from the bench. The trial court asked Homeowners if

they wanted to amend their answer to seek specific performance. Homeowners so

moved. The motion was granted over All Star's objection. The trial court ordered All

Star to go back in the home, fix the leaking shower, and complete the work listed on

the punch list. The trial court further ordered the Homeowners to "specifically

perform" their part of the contract, by paying All Star $56,581.86. All Star sought

prejudgment interest under SDCL 21-1-13.1. However, the trial court denied this

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claim on the ground that it had not awarded damages, but had instead awarded

specific performance of $56,581.86.

[¶10.] The trial court denied All Star's claim for an eight percent markup on

any changes which were approved by Homeowners but not evidenced by a written

change order. The written change orders do not specify whether they contain an

eight percent markup. It is unclear whether the court intended that Homeowners be

responsible for such a charge on the written change orders. Homeowners contend

that they stipulated to all charges in the five change orders, except for any unstated

eight percent markup.

[¶11.] All Star raises four issues on appeal:

Whether the trial court erred in ordering All Star to
specifically perform under the contract.

Whether the trial court erred in failing to award
prejudgment interest to All Star.

Whether All Star is entitled to an eight percent markup on
labor and materials charged under change order number
five.

Whether All Star is entitled to eight percent overhead or
markup on the allowance overruns under the contract.

[¶12.] Homeowners filed a notice of review and raise one issue:

Whether Homeowners waived the requirement that all
changes be in writing.

STANDARD OF REVIEW

[¶13.] We review the trial court's findings of fact under the clearly erroneous

standard. City of Deadwood v. Summit, Inc., 2000 SD 29, ¶ 9, 607 NW2d 22, 25.

"Conclusions of law are reviewed under a de novo standard, giving no deference to

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the circuit court's conclusions of law." Id. The equitable remedy of specific

performance is addressed to the sound discretion of the court, to be granted or denied

according to the facts and circumstances in each instance. Stugelmayer v. Ulmer,

260 NW2d 236, 238 (SD 1977). We review the decision of the trial court regarding an

equitable remedy under the abuse of discretion standard. Ziegler Furniture and

Funeral Home, Inc, v. Cicmanec, 2006 SD 6, ¶ 14, 709 NW2d 350, 354.

ANALYSIS AND DECISION

ISSUE ONE

[¶14.] Whether the trial court erred in ordering All Star to specifically
perform under the contract.

[¶15.] All Star contends that the trial court erred by ordering it to specifically

perform the work itemized on the punch list. We agree.

[¶16.] Specific performance was not pleaded or tried. Neither party requested

specific performance in the pleadings. Specific performance was never litigated or

mentioned by either party during the evidentiary phase of trial.

[¶17.] The first mention of specific performance in this case came not from a

party, but from the trial court as it issued its bench ruling. The court stated, "I was

hoping that the defendant would make a motion based upon the evidence in this case

to amend its pleadings to allege specific performance. Does the defense?" Counsel

for defense took the trial court's suggestion:

If it will help the Court with its decision, we'd so move. My
sense was if the Court is looking for an explanation on
items that specifically Mr. Declerq testified to, that under
the law, his testimony serves equally as establishing what
the owner offset would be, but if it's specific performance,
one way or the other, we're asking that the shower be done
within the context of the suit.

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[¶18.] The court then stated, "If you move for specific performance, then

I know what my decision is going to be." Counsel for the defense replied,

"We've so moved, Your honor." Counsel for All Star immediately objected,

argued the illegality of such an order, and moved to amend All Star's

pleadings:

From the plaintiff's perspective, with all due respect, I
don't believe that the Court can legally order specific
performance unless it can also find a breach of contract. In
our submissions to the Court, we acknowledge that there
were some items remaining to be completed on this job.
However, until such time as the contractor has received
payment due, that performance is illegally [sic] excused.
And to the extent that maybe submissions or my complaint
don't [sic] adequately set forth that, we would likewise
move to amend to include that.

[¶19.] This brief exchange between counsel and the court does not meet the

requirements of SDCL 15-6-15(b) which provides, in part, "[w]hen issues not raised

by the pleadings are tried by express or implied consent of the parties, they shall be

treated in all respects as if they had been raised in the pleadings." In American

Property Services, Inc. v. Barringer, 256 NW2d 887, 891 (SD 1977), we outlined the

test which must be met before a party may be awarded relief not requested in the

pleadings:

The test for allowing an adjudication of an issue under
FRCP 15(b) and SDCL 15-6-15(b) tried by implied consent
is whether the opposing party will be prejudiced by the
implied amendment, i.e., did he have a fair opportunity to
litigate the issue, and could he have offered any additional
evidence if the case had been tried on the different issue.
Moore's Federal Practice ¶ 15.13(2) at 993; Lomartira v.
American Automobile Insurance Co., 1967, 2 Cir 371 F2d
550; Deitz v. Bowman, 1975 DCSD, 403 FSupp 1111.
Where there has not been a fair opportunity for a party to
be heard on the issue and/or additional evidence could have

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been offered, any implied amendment would be prejudicial
and no trial by implied consent exists.

[¶20.] In this case, All Star was prejudiced by the trial court's ruling that All

Star could not be awarded prejudgment interest because the court awarded specific

performance of $56,581.86 rather than awarding that amount as damages. All Star

did not have a fair opportunity to litigate whether specific performance was an

appropriate remedy; the issue was initially raised by the trial court when it delivered

its ruling from the bench. Had All Star known that specific performance was a

possible remedy it may well have presented evidence regarding whether or not the

remaining work was of the type that any contractor could perform, a question

common to specific performance cases. Because the trial court raised this issue at

the end of trial, we can only speculate on how the evidence might have come in

differently. There was no evidence from either side at trial on the issue.

[¶21.] Although our previous cases suggest that leave to amend pleadings

should be granted to conform the case to the evidence adduced at trial, this rule is

not without limits. In Oesterling v. Oesterling, 354 NW2d 735 (SD 1984), the trial

court proposed an affirmative defense at the end of evidence, and relied on that

defense in ruling for the defendant. Plaintiff was not given any legitimate

opportunity to contest the defense. We reversed, holding that affirmative defenses

must be pleaded as such, and finding that the plaintiff in that case had no notice that

she would be called upon to respond to the court's suggested defense. The present

case is similar.

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[¶22.] Thus, the issue of specific performance was not tried by implied consent.

SDCL 15-6-16(b); Barringer, supra. The trial court abused its discretion in ordering

specific performance.

ISSUE TWO

[¶23.] Whether the trial court erred in failing to award All Star
prejudgment interest.

[¶24.] Prejudgment interest on contract damages is governed by SDCL 21-1-

13.1:

Any person who is entitled to recover damages, whether in
the principal action or by counterclaim, cross claim, or
third-party claim, is entitled to recover interest thereon
from the day that the loss or damage occurred, except
during such time as the debtor is prevented by law, or by
act of the creditor, from paying the debt.

This Court has recently held that an award of interest under this statute is

mandatory. Bunkers v. Jacobson, 2002 SD 135, ¶ 44, 653 NW2d 732, 744 ; City of

Aberdeen v. Rich, 2003 SD 27, ¶ 19, 658 NW2d 775, 781. Prejudgment interest is

allowed from the date of the loss regardless of whether the damages were known

with certainty. City of Aberdeen v. Rich, 2003 SD 27 at ¶ 19, 658 NW2d at 781.

[¶25.] In this case, the trial court concluded that damages were not easily

ascertainable and ordered Homeowners to specifically perform their obligations

under the contract and pay All Star $56,516.81. The trial court further ordered that

"no prejudgment interest is awarded since no damages are assessed." Simply

couching an award of damages in terms of specific performance cannot operate to

defeat SDCL 21-1-13.1 and this Court's holdings in Bunkers and City of Aberdeen. If

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this were the case, every judgment awarding contract damages could be relabeled an

order for specific performance, and prejudgment interest would never be mandatory.

[¶26.] The trial court erred in denying prejudgment interest.

ISSUE THREE

[¶27.] Whether All Star is entitled to an eight percent markup on
change order five.

[¶28.] The parties dispute whether All Star is entitled to overhead on the extra

labor and materials charged under change order five. All Star asserts that during

trial Homeowners stipulated to the overhead markup in change order five by

stipulating to change order five itself. The trial court struck the eight percent

markup for overhead from change order five.

[¶29.] Change order five, dated October 30, 2003, was not executed by

Homeowners, but was stipulated at trial to be included in amounts due under the

contract, subject to offsets or credits due Homeowners. Homeowners assert that this

stipulation was limited to the claims and charges set forth in writing, as opposed to

All Star's present claim for additional recovery for items not supported by the

original contract and written change orders.

[¶30.] "Oral stipulations of the parties in the presence of the court are

generally held to be binding, especially when acted upon or entered on the court

record, and need not be signed by the parties or their attorneys." Matter of Estate of

Eberle, 505 NW2d 767, 770 (SD 1993). "While no particular form of stipulation is

required when made orally in open court except that it be noted in the minutes, its

terms must be definite and certain in order to render the proper basis for a judicial

decision." Id.

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[¶31.] In this case, the Homeowners did not stipulate to the eight percent

markup in change order five. No such markup percentage appears in the change

order itself. The record reflects that counsel for the Homeowners did stipulate to the

change orders: "[w]e'll stipulate that [the change order] is what it says it was, that

they were presented to my clients; and that they're due and owing under the

contract, subject to offsets." (emphasis added). However, at the time of this

stipulation, neither attorney made any mention of whether an eight percent markup

was included within change order five. Finally, appellees' counsel stated that his

parties' stipulation was "subject to offsets." In other words, it was subject to

anything that might be owing to the Homeowners by way of the contract. This

stipulation was not sufficiently definite to enable the court to give it an exact

meaning. Therefore, it was proper for the trial court to not give the stipulation any

weight with respect to the eight percent overhead markup on change order five.

ISSUE FOUR

[¶32.] Whether All Star is entitled to its overhead on the allowance
overruns under the contract.

[¶33.] The trial court struck the eight percent overhead markup from all of the

allowance overruns. All Star claims it is entitled to an eight percent markup for

company overhead on the allowance overruns under the terms of the contract which

provide that "allowance figures are included as actual costs to the contractor." All

Star asserts that the phrase "actual costs" encompasses overhead.

Contract interpretation is a question of law reviewable de
novo. Because we can review the contract as easily as the
trial court, there is no presumption in favor of the trial
court's determination. When the meaning of contractual
language is plain and unambiguous, construction is not

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necessary. If a contract is found to be ambiguous the rules
of construction apply. Whether the language of a contract
is ambiguous is. . . a question of law.

Ziegler Furniture and Funeral Home, 2006 SD 6 at ¶ 14, 709 NW2d at 354.

[¶34.] In determining ambiguity we have stated:

A contract is not rendered ambiguous simply because the
parties do not agree on its proper construction or their
intent upon executing the contract. Rather, a contract is
ambiguous only when it is capable of more than one
meaning when viewed objectively by a reasonably
intelligent person who has examined the context of the
entire integrated agreement.

Singpiel v. Morris, 1998 SD 86, ¶ 16, 582 NW2d 715, 719.

[¶35.] Applying these principles to the language of the contract in this

case, ambiguity does exist. The relevant provision states "[a]llowance figures

are included as actual costs to the contractor. Final job expenses will be

adjusted accordingly." (emphasis added). On its face, the contract does not

define what is meant by the phrase "actual costs." Thus, the phrase "actual

costs" could be capable of more than one meaning when viewed objectively by a

reasonably intelligent person who has examined the context of the entire

integrated agreement.

[¶36.] The inquiry is whether the parties intended to include an eight

percent markup for overhead as "actual costs" under contract. All Star admits

that the eight percent overhead markup was never discussed at the time of

contract formation. In fact, the markup was not discussed at all between the

parties until All Star submitted its final settlement summary, and that

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summary claimed a fifteen percent markup on the allowance overruns. Only

at trial did All Star reduce its request for overhead markup to eight percent.

[¶37.] The plain and ordinary meaning of the phrase "actual costs" in a

contract between a contractor and a homeowner does not necessarily include

overhead. This Court has allowed a contractor to recover overhead expenses

against a homeowner when the construction contract unambiguously stated

that the contractor was entitled to a percentage mark-up for profit and

overhead on all items. Bunkers, 653 NW2d at 738. However, in Bunkers the

trial court denied the contractor's claim for excise tax as an actual cost.

[¶38.] Finally, because the language in the All Star contract is

ambiguous, the ambiguity must be resolved in favor of the non-drafting party.

Zochert v. Nat'l Farmers Union Property & Gas Co., 1998 SD 34, ¶ 5, 576

NW2d 531, 532. All Star drafted the contract in this case and thus the

ambiguity will be resolved in favor of Homeowners. In this case, "actual costs"

cannot be read to include overhead.

[¶39.] The trial court did not err in refusing to allow the charge of eight

percent for overhead on all of the allowance overruns.

ISSUE FIVE

[¶40.] Whether Homeowners waived the requirement that all changes
be in writing.

[¶41.] The contract in this case provided, "[a]ny alteration or deviation from

above modifications involving extra costs will be executed only upon written orders,

and will become an extra charge over and above the estimate." Homeowners dispute

whether All Star can recover any amount for the extra work and materials supplied

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at Homeowners' request, or for the allowance overrun costs incurred, where All Star

did not execute a written change order for such changes. The trial court concluded

that Homeowners could not avoid paying for the extra work and materials. The trial

court relied on Reif v. Smith, 319 NW2d 815 (SD 1982).

[¶42.] This Court held in Reif:

Generally, provisions [requiring written change orders]
prevent contractors from recovering for alterations or
extras not subject to a written order. Such provisions,
however, are impliedly waived by the owner where he has
knowledge of the change, fails to object to the change, and
other circumstances exists which negate the provision; i.e.
the builder expects additional payment, the alteration was
an unforeseen necessity or obvious, subsequent oral
agreement, or it was ordered or authorized by the owner.

319 NW2d at 817. Additionally, repeated or entire disregard for contract provisions

acts as a waiver of the written change order provision. Id.

[¶43.] The contract in Reif included the following provision: "Section 15. Work

shall be changed and contract price and completion shall be modified only as set out

in written change order." 319 NW2d at 817. Problems arose in Reif when the

original building plans proved inadequate and required numerous changes during

the construction. The owners repeatedly visited the construction site and were aware

of problems created by the plans and the changes. Yet, none of the changes or

additions were made pursuant to written change orders as specified in Section 15.

When the contractor had nearly finished the interior work, he gave the owners a bill

for the balance due on the contract plus the extra labor and material due to changes.

The owners refused to pay the bill, ordered the contractor off the premises, and

refused to let him complete the work. Because owners had knowledge of the changes,

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failed to object to the changes, and authored the contract including Section15, they

were held liable for the costs of the changes.

[¶44.] The facts of this case are remarkably parallel to those in Reif. Here,

Homeowners provided the plans for this construction project. When those plans

proved defective, changes became necessary. While some changes were reflected in

five separate change orders, Homeowners repeatedly requested extra work, upgraded

various allowance items without requesting a bid proposal or a written change order

in advance, and did not request a written change order after the fact. Just as the

owners in Reif were found to have notice by frequently visiting the construction site,

here Homeowners lived in the home while all the work was being done. Thus, the

trial court correctly concluded that Homeowners waived the contract provision

requiring written change orders when Homeowners requested or had knowledge of

the changes, and failed to object to those changes or to the lack of a written change

order.

[¶45.] The trial court did not err in refusing to allow the charge of eight

percent for overhead on the work performed by All Star under change order five.

CONCLUSION

[¶46.] We affirm in part, reverse in part, and remand for the calculation of

both parties' damages in accordance with this opinion.

[¶47.] GILBERTSON, Chief Justice, and ZINTER and MEIERHENRY,

Justices, concur.

[¶48.] KONENKAMP, Justice, disqualified.

[¶49.] BARNETT, Circuit Judge, for SABERS, Justice, disqualified.

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