Friday, 08 August 2014 10:11
By Gina Helou
Background to the contract
The primary contract between the owner and general contractor called for renovations to a public housing complex. The general contractor then subcontracted with the subcontractor to provide specific materials and labor for 365 days in exchange for almost $3 million dollars. As provided in the contract, the subcontractor submitted monthly invoices to the general contractor for progress payments. However, the general contractor never paid the full amount provided in the invoices, and the payments were always made late. After several unsuccessful payment disputes, the subcontractor finally informed the owner of the payment deficiencies along with several other complaints about the general contractor.
Nine months after the scheduled completion date, the subcontractor stopped working on the project and brought suit for breach of contract. While the action was pending, the owner terminated the general contractor and retained a new general contractor to complete the project. This new primary contract stated the new general contractor would be responsible for paying any past due amounts owed to the subcontractors out of the agreed contract price. The subcontractor agreed to provide labor and material under the new contract, and at completion of the project, the subcontractor was paid in full for its past unpaid work under the old contract and its new work performed.
Based on the receipt of these payments, the subcontractor focused its breach of contract claims against the old general contractor on the alleged damages suffered because of the delays caused by that general contractor. However, at trial, the subcontractor did not submit any invoices or other documentation to support a claim for damages caused by delays. Instead, the subcontractor offered expert witness and employee testimony to show these damages. Although the trial court found the general contractor had breached the subcontract, it ruled the subcontractor was not entitled to recover damages because the subcontractor was fully compensated for work performed under the new contract and there was inadequate proof to support the claim for delay damages. The subcontractor appealed the decision to the Court of Appeals of Tennessee, which ultimately agreed with the trial court’s findings.
Analysis on appeal
The Court of Appeals stated the subcontractor had not met all the requirements for a breach of contract claim because it could not prove that it suffered damages resulting from the general contractor’s breach of the original subcontract. There was a valid contract between the parties, and it was breached by the general contractor, but the subcontractor was compensated for that breach by the new general contractor. Without documented proof of any damages caused by delays, the court found the subcontractor only had proof consisting “of estimates, guessing and speculation even though more reliable sources existed to quantify actual loss.” By making this finding, the court ruled that the expert’s testimony alone was “not a reliable source for calculating damages.”
Expert testimony and expert reports are often used as proof in trials. However, expert testimony alone may not be sufficient without back-up documentation to establish damages in a breach of contract case. The court made several references to the lack of invoices, checks, or financial statements that could have been used to show any additional overhead expenses the subcontractor suffered because of the construction delays. Contractors should take these statements as a hint that simple bookkeeping of accounts could be the difference between a win and a loss in the courtroom.