T.A. BLAIR, INC. v. FIDELITY CONSTRUCTION COMPANY, INC.
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RENDERED: MARCH 16, 2007; 2:00 P.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2005-CA-001189-MR
AND
NO. 2005-CA-001251-MR
T.A. BLAIR, INC.
v.
APPELLANT/CROSS-APPELLEE
APPEAL AND CROSS-APPEAL FROM WARREN CIRCUIT COURT
HONORABLE STEVE ALAN WILSON, JUDGE
ACTION NO. 01-CI-01065
FIDELITY CONSTRUCTION COMPANY, INC.
APPELLEE/CROSS-APPELLANT
OPINION AFFIRMING IN PART
AND VACATING AND REMANDING IN PART
** ** ** ** ** ** ** **
BEFORE: WINE JUDGE; BUCKINGHAM AND EMBERTON SENIOR JUDGES.1
BUCKINGHAM, SENIOR JUDGE: T.A. Blair, Inc., appeals and Fidelity Construction
Company, Inc., cross-appeals from an order of the Warren Circuit Court in which the
court, pursuant to a prior remand from this court, ordered Blair to pay $90,135.53 in lost
expectation damages as a result of Blair’s breach of repair contracts between the parties.
1
Senior Judges David C. Buckingham and Thomas D. Emberton sitting as Special Judges by
assignment of the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
Kentucky Revised Statutes (KRS) 21.580.
Blair contends that the circuit court failed to follow this court’s directions upon remand
and erroneously awarded expectation damages. In its cross-appeal, Fidelity contends that
the court erred by failing to award additional expectation damages for the lost overhead
component built into the contract prices. For the reasons stated below, we affirm the
circuit court in Blair’s appeal, but vacate and remand in Fidelity’s cross-appeal.
FACTUAL AND PROCEDURAL BACKGROUND
This is the second time this case has been before this court. In the prior
appeal and cross-appeal, Case Nos. 2003-CA-000935-MR and 2003-CA-001035-MR,
this court remanded the case for a determination of whether Fidelity met the requisites for
entitlement to expectation damages. See Fidelity Construction Company, Inc. v. T.A.
Blair, Inc., WL 1699770 (Ky.App. 2004)(Fidelity I).
The parties agree that the relevant facts are accurately recounted in this
court’s opinion in Fidelity I. Those facts may be summarized as follows.
Fidelity and Blair are both Kentucky corporations headquartered in Warren
County, Kentucky. Tim Howell is the president of Fidelity, and Tom Blair is the sole
shareholder in Blair. Fidelity is primarily engaged in the business of general contracting,
while Blair owns several commercial properties in and around Bowling Green that it
leases to various businesses.
On April 16, 1998, a severe hail storm struck the Bowling Green area and
damaged several properties owned by Blair. In order to maximize recovery from Blair's
property insurer, Westfield, Tom Blair contracted with Scott deLuise, a public adjustor,
2
to assist Blair in its negotiations with Westfield. At some point, deLuise asked Howell to
prepare storm damage repair estimates on behalf of Fidelity.
In mid-July 1998, Fidelity submitted written repair proposals for four of
Blair's properties. These included the Greenwood Plaza property, the Big B Cleaners
property, the Bluegrass Copy Products property, and the South Central Bell property. All
four proposals contained detailed repair estimates and included figures taking into
account a 10% profit margin and a 10% charge for overhead expenses. In addition, all
four proposals contained “acceptance” language and a clause subjecting the proposals to
“additional terms and conditions” in a separately executed construction agreement. Both
Howell and Tom Blair signed the proposals on behalf of their respective companies.
On July 17, 1998, Howell and Blair signed a document entitled
“Agreement.” Among other things, Article 2 of this document specifically incorporated
the four written proposals that had previously been signed by both Howell and Blair.
According to the terms of the 1998 agreement, Fidelity would repair the damage done to
the four properties for a total price of $738,387.37.
At trial, Blair testified that he entered into this agreement solely for the
purpose of enabling his company to present Westfield with repair estimates during their
settlement negotiations. He further testified that any work to be performed by Fidelity
was conditioned upon him giving Fidelity the “green light” to begin repairs. However,
Howell testified that at all times he expected to eventually perform the work specified in
the 1998 agreement. Regardless of the parties' differing beliefs, it is undisputed that Blair
never gave Fidelity permission to commence the repair work under the 1998 agreement.
3
On July 21, 1998, Fidelity submitted another written repair proposal for
Blair's FiServ property. Blair signed this proposal on December 10, 1998, and the repair
work for this property was completed in early summer 1999 for the agreed price of
$38,908.00. Unlike the previous four signed proposals, the FiServ proposal was not
made subject to the “additional terms and conditions” in the separately executed
construction agreement.
On April 5, 2000, Fidelity submitted yet another written repair proposal for
Blair's National City Bank property, which Blair signed on April 10, 2000. In addition to
containing the similar “acceptance” language that was present in the first four written
proposals, the National City Bank proposal contained a handwritten note stating that the
proposal was “subject to previously executed AIA agreement.” Both Howell and Blair
signed their initials next to this handwritten language. The price of this proposal totaled
$352,504.15.
Throughout August, September, and October 2000, Howell sent Blair
several inquiries via letters and facsimiles regarding the planned repair work at the
National City Bank property. These correspondences generally inquired as to when
Fidelity would be given permission to begin the repair work. In addition, one of these
inquiries explained that Blair could choose between two methods for repairing the roof at
National City Bank. At trial, Blair testified that during this time period, he informed
Fidelity that he was not ready to proceed with the work at that time.
In December 2000 Blair finally settled all its insurance claims with
Westfield. In May 2001 Howell once again sent Blair a letter asking when Fidelity could
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commence repair work on the National City Bank property. On June 18, 2001, after this
latest inquiry purportedly went unanswered, attorneys for Fidelity sent Blair a letter
stating that Fidelity had suffered damages as a result of Blair's alleged breach of the April
10, 2000, agreement (2000 agreement). This notice informed Blair that a legal action
would be filed by Fidelity unless Blair was willing to discuss a settlement of Fidelity's
alleged damages.
On August 20, 2001, Fidelity filed a civil complaint in the Warren Circuit
Court alleging that Blair had breached the 2000 agreement. Specifically, Fidelity alleged
that Blair had “wrongfully refused, without legal or factual justification or excuse, to
permit Fidelity to perform repairs” as specified in the 2000 agreement.
Approximately one year later, after a good deal of discovery had taken
place, Fidelity filed an amended complaint alleging that Blair had also breached the 1998
agreement. Therein, Fidelity alleged that Blair had “wrongfully refused” to permit
Fidelity to perform the repairs specified in the 1998 agreement.
On February 4-5, 2003, after still more discovery had taken place, a bench
trial was held in the Warren Circuit Court. After the trial was concluded, and after both
parties were given time to submit written memoranda in support of their respective
positions, the court entered findings of fact, conclusions of law, and judgment on March
12, 2003. The court found that Fidelity and T.A. Blair had entered into two binding
contracts, and, that by “preventing Fidelity's performance”, Blair had breached both the
1998 and 2000 agreements. On the issue of damages, the trial court awarded Fidelity
reliance damages, but it declined to award expectation damages; i.e., the court declined to
5
award Fidelity damages for its lost profits under the agreements. The court gave Fidelity
30 days in which to submit proof regarding its reliance damages.
Fidelity subsequently filed a motion to alter, amend, or vacate the
judgment. Specifically, it asked the court to add a finding that Fidelity did perform some
repair work for Blair between the signings of the 1998 and 2000 agreements. In addition,
Fidelity once again asked the court to award expectation damages.
On April 14, 2003, the court entered an order granting Fidelity's motion in
part and denying it in part. The court entered a finding that Fidelity did perform repair
work on Blair's FiServ property between 1998 and 2000. However, the court denied
Fidelity's request that it be awarded expectation damages.
On April 23, 2003, by an agreed order of the parties, the court noted that
Fidelity had declined to take proof on the issue of reliance damages, and it entered an
order declaring the March 12, 2003, judgment to be final and appealable. Fidelity's
appeal and Blair's cross-appeal followed.
On July 30, 2004, this court rendered an unpublished opinion in this case.
The opinion upheld the circuit court’s determination that Blair had breached the 1998 and
2000 agreements. However, the opinion concluded that the circuit court had failed to
properly consider Fidelity’s request for expectation damages. This court remanded the
case for a determination by the circuit court of whether Fidelity satisfied the
“foreseeabilty” and “reasonable certainty” requirements for entitlement to expectation
damages.
6
Following remand, in an order entered on February 23, 2005, the circuit
court determined that Fidelity had met the requisites for entitlement to expectation
damages. The court awarded expectation damages of $90,135.53, which represented the
sum of the line-items designated as “profit” in the agreements. The court, however,
rejected Fidelity’s request for an additional $96,737.25 in expectation damages for lineitems designated as “overhead.” These appeals followed.
T.A. BLAIR APPEAL – CASE NO. 2005-CA-001189-MR
Blair first contends that the circuit court failed to follow this court’s
instructions upon remand in Fidelity I. The general idea of this argument is that upon
remand the circuit court was to consider “all” facts and circumstances surrounding the
execution of the contracts in determining whether the foreseeability and reasonable
certainty requirements had been met and that the court failed to do so. We disagree.
The mandate of the this court’s opinion in Fidelity I was that, upon remand,
the circuit court should make findings regarding whether the foreseeability and
reasonable certainty prerequisites for expectation damages had been met in this case and,
if so, to make an award for such damages. The court complied with this mandate. The
court’s understanding of this mandate is well-illustrated by the following discussion at
the outset of the court’s February 23, 2005, order:
The Court of Appeals remanded this case so that this Court
could determine two things. First, this Court must determine
whether Fidelity is entitled to recover expectation damages.
Second, if Fidelity is entitled to expectation damages, this
Court must then decide how much Fidelity is entitled to
recover.
7
The Court of Appeals held that Blair improperly prevented
Fidelity from performing under the contracts it entered into
with Blair. To recover expectation damages in the form of
lost profits, the non-breaching party must prove two things.
First, the non-breaching party’s lost profits must have been
reasonably foreseeable at the time the parties entered into the
contract. Kentucky Consumers Oil Co. v. General Bonding
Warehousing Corp., Ky., 184 S.W.2d 972, 974 (1945).
Second, the amount of the non-breaching party’s lost profits
must be proven to a degree of reasonable certainty. Illinois
Valley Asphalt, Inc. v. Harry Berry, Inc., Ky., 578 S.W.2d
244, 245-246 (1979). Mere uncertainty as to the amount does
not preclude one’s right of recovery or prevent a jury decision
awarding damages. Johnson v. Cormney, Ky.App., 596
S.W.2d 23, 27 (1979), overruled on other grounds by
Marshall v. City of Paducah, Ky.App., 618 S.W.2d 433
(1981). Under this analysis, Fidelity has sufficiently shown it
is entitled to recover expectation damages. The total amount
due Fidelity from Blair is $90,135.53.
The foregoing demonstrates that the court properly understood and
implemented this court’s mandate upon remand. In support of its argument, Blair cites to
various statements made by the court in the course of the hearings upon remand;
however, in light of the plain language of its February 23, 2005, order as cited above, and
upon review of the order as a whole, we are unpersuaded that the statements cited by
Blair establish a misunderstanding by the court of its duties upon remand.
Blair also argues that the court erred in awarding damages because Fidelity
failed to prove its damages were foreseeable based on the circumstances in which the
contracts were executed and, moreover, failed to prove any damages with reasonable
certainty.
We begin our discussion of this argument by noting that the issue of
expectation damages was tried by the circuit court sitting without a jury. The issue is
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before this court upon the circuit court's findings of fact and conclusions of law and upon
the record made before it. Accordingly, appellate review of the circuit court's findings of
fact is governed by the rule that such findings shall not be set aside unless clearly
erroneous. Ky. R. Civ. P. 52.01; Largent v. Largent, 643 S.W.2d 261, 263 (Ky. 1982).
“A factual finding is not clearly erroneous if it is supported by substantial
evidence.” Sherfey v. Sherfey, 74 S.W.3d 777, 782 (Ky.App. 2002). “Substantial
evidence” is evidence of substance and relevant consequence sufficient to induce
conviction in the minds of reasonable people.” Id. The circuit court's application of law
is, of course, reviewed de novo. Monin v. Monin, 156 S.W.3d 309, 315 (Ky. App. 2004).
The court addressed Fidelity’s entitlement to expectation damages in its
February 23, 2005, order as follows:
Fidelity has proven that at the time it submitted the proposals
and signed the contracts with Blair that it intended to earn a
profit on the work that would be performed. First, the nature
of the relationship between the parties was commercial.
These proposals by Fidelity to Blair were proposals for work
to be done. The record does not reflect that Fidelity
undertook to do these repairs for free. Therefore, a profit
motive would have been reasonable. Second, a profit
calculation was part of the proposals. On four of the five
contracts, after a subtotal was derived, a ten per cent (10%)
profit margin was added to the price. Therefore, at the time
of contracting, it was foreseeable that profits were expected,
as they were included in the final price of each proposal.
Sagamore Coal Co. v. Clark, Ky., 109 S.W.2d 349, 352
(1908).
Second, Fidelity has proven its lost profits to a degree of
reasonable certainty. Although a clause in each of the
contracts states that Blair has the ability to increase or
decrease the amount of work Fidelity would complete on each
of the proposals, such clause does not negate the fact that a
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stated profit was contemplated at contract formation.
Although contracts attempt to freeze in time the terms of a
contract, sometimes forces beyond the contracting parties’
control interfere and may cause the cost of performance to
exceed what was originally anticipated. It is even
conceivable that cost of performance may sometimes be less
than projected. Because of this, there is an inherent fluidity to
the performance of contracts that nevertheless requires the
contracting parties to abide by the terms to which they
mutually agreed, absent changes so extreme and unexpected
as to make rescission of the contract the proper equitable
remedy. However, that is not the situation with which this
Court is faced.
There was always the potential for the final profit earned by
Fidelity to be something more or less than what was
contracted for in the bid because of the clause that allowed
Blair to unilaterally alter portions of the proposals. This
change, though, is hypothetical and speculative. Fidelity was
able to show, to the penny, what it expected its profit to be
had performance been completed in accordance with the
proposals it submitted, and Kentucky case law does not seem
to require a more detailed calculation.[2]
Therefore, as a starting point, the contract amount of
$186,878.78 represents the profit and overhead sought by
Fidelity as expectation damages. However, overhead is not
the same as profit. In fact, the two items are polar opposites.
Overhead includes business expenses, such as rent or
insurance, that cannot be charged to a particular part of the
work or product. They constitute monetary outlays Fidelity
would have had to incur as another cost of performing the
work it planned to do for Blair.[3] Profit, on the other hand, is
Here, the order contained a footnote which stated as follows: “’Profits which would have been
realized if a contract had been performed may be recovered as damages for its breach, provided
they are susceptible of being ascertained with reasonable certainty and are not remote,
conjectural and speculative.’ Eastern Ky. Lumber & Development Co. v. Waddell, Ky. 239
S.W.2d 68, 71 (1951). The profit quote from the proposal is about as certain as the profit
expectation can be. That estimate is not conjectural or speculative despite the fact that the
ultimate profit may vary.”
2
Here, the order contained a footnote which stated as follows: “It is unfortunate that Fidelity, in
its proposals to Blair, computed the 10% profit before adding 10% for overhead. Had Fidelity
3
10
the amount of revenue that remains after all costs (of which
overhead is one) have been paid. Profit is income. Overhead
is an expense. Therefore, because Fidelity was able to avoid
having to pay overhead because it never performed work for
Blair, and because it has not shown that it has incurred costs
for overhead in anticipation of performing for Blair, overhead
cannot be awarded as part of an expectation damages
recovery. Only money that Fidelity expected to pocket at the
end of the day is recoverable as lost profits.
The respective profits sought on each of the five proposals are
as follows:
1025 Lovers Lane
$6,064.00
Bluegrass Products
$ 9,829.00
Southern Lanes
$40,829.00
Big B Cleaners
$ 4,173.90
National City Bank
$29,125.35
Total Profit
$90,135.53
==========
This figure is the maximum profit Fidelity is entitled to
recover as expectation damages. However, Blair argues that
there are at least three downward adjustments that should be
made to this figure should the Court decide to award any
damages at all. These proposed adjustments will be
addressed individually.
First, Blair argues that the profit from the Greenwood Plaza
proposal (including Big B Cleaners) should be subtracted
because the property had been sold and Blair was therefore
not required to make any repairs under the purchase contract.
This argument is without merit in computing Fidelity’s
expectation damages. Although it makes a huge difference to
Blair that it is not obligated to make repairs to a building it no
longer owns, this fact is of little consequence to Fidelity who
expected to perform work on the building for which it
prepared repair proposals. If the building had been sold at the
time Blair entered into these contracts with Fidelity, then
Blair should have been forthcoming with the information that
charged Blair 10% for overhead first (with the other costs of production), and then 10% for
profit, the amount Fidelity would have recovered under this Court’s award of lost profits would
have been much higher.”
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the estimates it sought from Fidelity were only for insurance
purposes – not for potential work to be completed by Fidelity.
There is no evidence in the record that Fidelity knew, at the
time it entered into its contracts with Blair, that it would not
be allowed to complete the work for which it drafted
proposals. Therefore, the profit for these particular projects
should remain unchanged.
Second, Blair argues that recovery by Fidelity for the air
conditioning units Blair had replaced before Fidelity
submitted its National City Bank proposal would be
inappropriate. Although this is a more convincing argument
for a reduction in profits, it is also without merit. Blair argues
that Fidelity should not be allowed to profit for work Fidelity
did not perform (and would have never performed) because
the air conditioners were functional at the time the proposals
were submitted. The logic that Fidelity should not be paid for
an item that Blair would have removed from the proposals is
very appealing. Ideally, Blair would have utilized its
contractual right to decrease the amount of work done when it
came to the newly replaced air conditioners.
However, to grant this particular credit to Blair requires mind
reading by this Court as to what Blair “obviously” would
have done. The Court cannot engage in entertaining
hypothetical situations that have the effect of altering the
clear terms of the contract. It is conceivable that Blair would
have told Fidelity not to perform work on the air conditioners,
as they were not damaged. However, if the air conditioners
were functional at the time Fidelity submitted its proposal to
Blair, it begs the question of why Blair allowed Fidelity to
quote a price to repair air conditioners that were not broken in
the first place. This Court cannot impute to Fidelity
knowledge that it knew the air conditioners were in working
order because nothing in the record would substantiate such
an imputation. Fidelity contracted to perform the work listed
on the proposals and that is the work for which it would have
profited. Therefore, this Court denies Blair’s request for a
credit as to the air conditioners at Greenwood Plaza and the
National City Bank Building.
Finally, Blair argues that Fidelity’s profit, as far as the
National City Bank Building proposal is concerned, should be
12
limited to only those costs relating to the roof and caulking.
The basis for this assertion is a letter written by Howell to
Blair that states, “the roof and caulking was all [Howell] was
interested in.” Although this statement expresses Fidelity’s
exasperation in its dealing with Blair, this statement does not
create a counteroffer anticipating an acceptance. The original
contract executed between Fidelity and Blair always remained
in play, and the contracted-for profits on the National City
Bank project should not be disturbed, regardless of Fidelity’s
apprehension and impatience of work not yet begun. Fidelity
expected to do all of the work on the National City Bank
proposal, and that amount is what he is entitled to under an
expectation damages recovery.
As noted in this court’s opinion in Fidelity I, in Kentucky it is well-settled
that in an action for breach of contract, the measure of damages “is that sum which will
put the injured party into the same position he would have been in had the contract been
performed.” Perkins Motors, Inc. v. Autotruck Federal Credit Union, 607 S.W.2d 429,
430 (Ky.App. 1980). Further, where the breaching party has prevented the plaintiff from
performing any part of the contract, the measure of damages is the net profit which would
have been made; that is, the difference between the contract price and the reasonable cost
of performance. See, e.g., Koplin v. Faulkner, 293 S.W.2d 467, 469 (Ky. 1956). In
setting expectation damages upon remand, the court’s task was to comply with the
foregoing.
The court’s factual determination that expectation damages were
recoverable because lost profits were both foreseeable and ascertainable to a degree of
reasonable certainty is supported by substantial evidence and, accordingly, is not clearly
erroneous. The court based its decision upon the agreement as contained within the four
corners of the contracts executed by the parties. The contracts themselves are sufficient
13
evidence to support the court’s finding that Fidelity is entitled to expectation damages in
this case.
Further, the court’s determination that expectation damages should include
the $90,135.53 delineated in the contracts as profit margin is not clearly erroneous. The
amount is derived directly from line-items contained in the contracts. As such, the figure
is supported by substantial evidence.
In opposition to the court’s finding that the full $90,135.53 profit-margin
amounts listed in the contract should not be allowed, Blair cites to various evidence in the
record which supports its contention that it would not have had some of the work
specified in the contract performed under provisions of the contract that provided it with
the right to make change orders. However, as noted in the opinion in Fidelity I, the right
retained by Blair was “the right to make reasonable additions to or subtractions from the
contemplated repair work.”
The circuit court’s findings that there should be no deductions for the sale
of Greenwood Plaza subsequent to the execution of the contracts, the National City Bank
air conditioners based upon their purported lack of a need of repair, and the National City
Bank roofing based upon a letter that Blair had sent to Howell falls within the circuit
court’s province as fact-finder. The fact is that the contracts called for that work to be
done, and Fidelity expected to earn profits under the contracts for doing that work.
Moreover, Blair’s approach to making adjustments is one-sided and speculative. Had the
contracts actually been performed, there may have been countervailing change-orders to
14
increase certain aspects of the repairs, with corresponding upward adjustments in the
contract price.
In short, the method used by the circuit court in determining the profit
component of expectation damages – the sum of the profits stated within the contracts was not clearly erroneous. We are accordingly bound by the finding.
FIDELITY CONSTRUCTION COMPANY APPEAL –
CASE NO. 2005-CA-001251-MR
In its cross-appeal Fidelity contends that the court erred by denying its
request for an additional $96,727.25 in expectation damages associated with overhead
charges contained in the cost estimates.4 Fidelity argues that if it is to be placed in the
same position it would have been in had the contracts been performed – as is required
under Kentucky law – then it must also be awarded the overhead component of the cost
estimates. We agree.
We begin by recapitulating the circuit court’s discussion of the issue in its
February 23, 2005, order:
Therefore, as a starting point, the contract amount of
$186,878.78 represents the profit and overhead sought by
Fidelity as expectation damages. However, overhead is not
the same as profit. In fact, the two items are polar opposites.
Overhead includes business expenses, such as rent or
insurance, that cannot be charged to a particular part of the
work or product. They constitute monetary outlays Fidelity
would have had to incur as another cost of performing the
work it planned to do for Blair.[5] Profit, on the other hand, is
Blair’s argument that Fidelity failed to preserve this issue for appellate review is without merit.
Here, the order contained a footnote which stated as follows: “It is unfortunate that Fidelity, in
its proposals to Blair, computed the 10% profit before adding 10% for overhead. Had Fidelity
charged Blair 10% for overhead first (with the other costs of production), and then 10% for
4
5
15
the amount of revenue that remains after all costs (of which
overhead is one) have been paid. Profit is income. Overhead
is an expense. Therefore, because Fidelity was able to avoid
having to pay overhead because it never performed work for
Blair, and because it has not shown that it has incurred costs
for overhead in anticipation of performing for Blair, overhead
cannot be awarded as part of an expectation damages
recovery. Only money that Fidelity expected to pocket at the
end of the day is recoverable as lost profits.
In short, the circuit court denied overhead on the basis that the amounts
represented costs associated with “performing the work [Fidelity] planned to do for
Blair” and “because Fidelity was able to avoid having to pay overhead because it never
performed work for Blair.”
In Vitex Mfg. Corp. v. Caribtex Corp., 377 F.2d 795 (3rd Cir. 1967), the
court held:
In general, overhead ‘. . . may be said to include broadly the
continuous expenses of the business, irrespective of the outlay
on a particular contract.’ Grand Trunk W.R.R. Co. v. H. W.
Nelson Co., 116 F.2d 823, 839 (C.A.6, 1941). Such expenses
would include executive and clerical salaries, property taxes,
general administrative expenses, rent, insurance, etc.
Id. at 798. As noted by the circuit court in this case, rent and insurance are also examples
of overhead.
In summary, overhead generally represents fixed expenses that will be
incurred by a business independent of the volume of work it performs and regardless of
whether it performs a particular job. The general idea of allocating overhead to a
profit, the amount Fidelity would have recovered under this Court’s award of lost profits would
have been much higher.”
16
particular job, such as the jobs here, is to recover from each job performed over the
course of a year a pro rata share of dollars sufficient to pay the fixed overhead expenses.
For this reason, we conclude that the circuit court’s finding that “Fidelity
was able to avoid having to pay overhead because it never performed work for Blair” is
erroneous. In fact, even though the Blair work was not performed, Fidelity nevertheless
had to incur its ongoing fixed overhead expenses such as executive and clerical salaries,
property taxes, general administration expenses, rent, insurance, etc.
Fidelity expected to generate dollars out of the overhead component of its
cost estimates on these jobs for the purpose of paying its fixed overhead expenses. When
Blair breached the agreements, Fidelity was deprived of those dollars and, in order to pay
the expenses, was constrained to pay the overhead expenses out of the profit margins
from other projects.
As previously noted, in Kentucky it is well-settled that in an action for
breach of contract, the measure of damages “is that sum which will put the injured party
into the same position he would have been in had the contract been performed.” Perkins,
607 S.W.2d at 430. If Fidelity is denied sums it anticipated recovering from the overhead
component of its cost estimates it, simply put, will not be placed in the same position as if
the contracts had been performed.
Neither party has cited us to any case directly on point. Nor could we find
any Kentucky case directly addressing the issue. However, we agree with the conclusion
of the Third Circuit in Vitex Manufacturing:
17
Although there is authority to the contrary, we feel that the
better view is that normally, in a claim for lost profits,
overhead should be treated as a part of gross profits and
recoverable as damages[.]
377 F.2d at 798. See also Buono Sales, Inc. v. Chrysler Motors Corp., 449 F.2d 715,
719-20 (3rd Cir. 1971) (“where a plaintiff's overhead or fixed expenses are not affected by
defendant's breach of agreement, no deduction should be made for them in calculating
profits which plaintiff would have made had it not been for the breach”); Forney v.
Missouri Bridge and Concrete, Inc., 112 S.W.3d 471, 474 (Mo.App.W.D. 2003) (“in the
absence of proof that the contractor/plaintiff saved overhead expenses as a result of the
owner's breach of contract, overhead expenses are included in the lost profits damages
award”); and Magnet Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976, 986
(N.J.Super.App. 1998) (administrative expenses and plant overhead, to the extent
reasonably allocable to a contract, are deductible from gross revenue to determine lost
profits from breach of contract only if they are costs that have been "saved" because the
non-breaching party has been excused from future performance under the contract).
Accordingly, we vacate and remand for entry of a judgment of an award to
Fidelity for the overhead component of its cost estimates. However, if any of the
overhead costs included in the cost estimates were variable in nature and were not
incurred because Fidelity did not actually perform the Blair contracts, those amounts
should not be included in the award. Magnet Resources, Inc. v. Summit MRI, Inc., supra.
18
For the foregoing reasons, we affirm upon the issues raised by T.A. Blair in
its appeal. Upon Fidelity’s cross-appeal, we vacate and remand for additional
proceedings consistent with this opinion.
ALL CONCUR.
BRIEF FOR APPELLANT/CROSSAPPELLEE:
BRIEF FOR APPELLEE/CROSSAPPELLANT:
Greg N. Stivers
Scott D. Laufenberg
Bowling Green, Kentucky
Ryan C. Reed
Bowling Green, Kentucky
19
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