ESI COMPANIES, INC. VS. RAY BELL CONSTRUCTION COMPANY, INC.
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RENDERED: NOVEMBER 25, 2009; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-001756-MR
ESI COMPANIES, INC.
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE THOMAS D. WINGATE, JUDGE
ACTION NO. 08-CI-00442
RAY BELL CONSTRUCTION
COMPANY, INC.
APPELLEE
OPINION
AFFIRMING IN PART, REVERSING IN PART
AND REMANDING
** ** ** ** **
BEFORE: COMBS, CHIEF JUDGE; MOORE, JUDGE; LAMBERT,1 SENIOR
JUDGE.
MOORE, JUDGE: This is an action for breach of contract. The controlling issue is
whether and to what extent an interpretation of contract provisions in dispute made
in a prior action between the parties is binding on them in the present suit.
1
Senior Judge Joseph Lambert sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statute (KRS)
21.580.
FACTS AND PROCEDURAL HISTORY
The facts and procedural history of this case were substantially stated
in its previous disposition before the Tennessee Court of Appeals in ESI
Companies, Inc. v. Ray Bell Const. Co., Inc., 2008 WL 544563 (Tenn.Ct.App.
2008) (unpublished):
Ray Bell Construction Company, Inc. . . . has its
principal offices in Brentwood, Tennessee. On October
8, 2001, [Bell] entered into a “Design/Build Contract”
with the Commonwealth of Kentucky, Department of
Facilities Management . . . to design and construct a
project known as the Elliott County Medium-Security
Correctional facility, located in Sandy Hook, Kentucky,
for a total price of $76,762,000. The bulk of the terms
and conditions of the Design/Build Contract were set out
in a “Request for Proposal.” The Request for Proposal
contained the following provision that is central to the
issues before us:
W.
DISPUTE RESOLUTION
A question or act arising under the [Prime]
Contract which is not disposed of by
agreement may be brought to the Secretary
of the Finance and Administration Cabinet
pursuant to Kentucky Revised Statutes
45A.225 through KRS 45A.280. Actions on
the Contract shall be brought in Franklin
Circuit Court, Frankfort, Kentucky within
one year from the date of completion
specified in the Contract, notwithstanding
the requirement to present Contract claims
to the Secretary of the Finance
Administration cabinet for administrative
review.
Pending final determination of any dispute
hereunder, the Design/Builder shall proceed
diligently with the performance of the
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Contract and in accordance with the
Secretary of the Finance and Administration
Cabinet’s direction.
(Emphasis added.) The Request for Proposal also
provided:
M. PERSONNEL,
SUBCONTRACTORS AND SUPPLIERS
1.
Subcontractor Defined: A
“Subcontractor” means an entity which has a
direct contract with Design/Builder to
perform a portion of the Work or the Design
Services. . . .
3.
Terms of Subcontracts: All
subcontracts and purchase orders with
Subcontractors shall afford Design/Builder
rights against the Subcontractor which
correspond to those rights afforded to Owner
against Design/Builder herein, including
those rights of Contract suspension,
termination, and Stop Work Orders as set
forth herein. . . .
On or around August 5, 2002, the General
Contractor entered into a subcontract agreement . . . with
ESI Companies, Inc. . . . which has its principal offices in
Memphis, Tennessee. Pursuant to the Subcontract, the
Subcontractor would furnish and install certain detention
and security equipment, metal, hardware, glass, glazing,
and doors for the project for the sum of $9,193,449.00.
The Subcontract provided, in relevant part:
This agreement entered into this 23rd
day of January, 2002 by and between Ray
Bell Construction Company, Inc.,
hereinafter called Contractor, and ESI
Companies, Inc., hereinafter called
Subcontractor.
WITNESSETH, that, WHEREAS
Contractor has heretofore entered into a
Design/Build Contract with Commonwealth
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of Kentucky Facilities Management
Division of Contract Administration of 702
Capitol Avenue, Frankfort, KY 40601,
hereinafter called the Owner, to furnish all
labor and materials and perform all work
required for Design & Construction of
Elliott County, KY Medium Security
Correctional Facility, in strict accordance
with the general contractor, specifications,
schedules and drawings and amendments or
addenda prepared by Arch, II of Lexington,
KY, and DLR Group, Inc., of Overland
Park, KS Architect and/or Engineer which
are made a part of said Design/Build
Contract, and which are now made a part of
this Subcontract insofar as they apply, and
the parties heretofore desire to contract with
reference to a part of said work.
...
ATTACHMENTS “A”, “B” AND “C” ARE
PARTS OF THIS DOCUMENT AND ESI
AMENDMENT #1, PAGES 1 OF 1
...
Article VII – (a) Contractor shall have
the same rights and privileges as against the
Subcontractor herein as the Owner in the
Design/Build Contract has against
Contractor. Subcontractor shall have the
same rights, remedies and privileges against
the Contractor herein as the Contractor in
the Design/Build Contract has against
Owner.[2]
(b) Subcontractor acknowledges that he has
read the Design/Build Contract and all plans
2
The opinion of the Tennessee Court of Appeals states that this provision
“is an example of a “flow-down” or “conduit” clause. Flow-Down clauses are commonly used
in subcontracts and are closely related to the concept of incorporation by reference. If the clause
functions as intended, the same rights and obligations of the subcontractor should flow from the
subcontract up through the general contractor to the owner, and conversely down the same
contractual chain. The use of flow-down clauses represents efforts to ensure consistency of
obligations throughout the various tiers of the contracting process.” ESI, 2008 WL 544563 at *5
(internal citations omitted).
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and specifications together with all
amendments and addenda thereto and is
familiar therewith and agrees to comply with
and perform all provisions thereof
applicable to Subcontractor. The intent of
the Contract documents is to include all
items necessary for the proper execution and
completion of the work. The Contract
documents are complementary and what is
required by any one shall be as binding as if
required by all. Work not covered in the
Contract documents will not be required,
unless it is consistent therewith and is
reasonably inferrible therefrom as being
necessary to produce the intended results.
...
Article XII – It is understood and
agreed that the laws of the State of
Tennessee will govern interpretation of this
contract. The provisions of this document
shall be controlling should there be a
conflict between its terms and the terms of
any attached or referred to materials.
...
ATTACHMENT ‘B’
...
5) IT SHOULD BE UNDERSTOOD
BY SIGNATURE OF THIS AGREEMENT
THAT THE REQUEST FOR PROPOSAL
PREPARED BY THE OWNER PROVIDES
INFORMATION AS TO PROJECT
OVERVIEW, STATUTORY LAW,
MASTER PLAN AND PROGRAM
REQUIREMENTS, AS WELL AS,
TECHNICAL REQUIREMENTS AND
PERFORMANCE FOR MATERIALS,
INSTALLATION PRACTICES AND
SYSTEMS OPERATION AND
PERFORMANCE.
...
ATTACHMENT ‘C’
...
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1) AS STATED HEREIN, ALL
TERMS AND CONDITIONS OF THE
CONTRACT BETWEEN THE
COMMONWEALTH OF KENTUCKY
AND RAY BELL CONSTRUCTION
COMPANY, INC. ARE FULLY
INCORPORATED HEREIN BY
REFERENCE. WITHOUT LIMITING
THE FOREGOING STATEMENT, THE
CONTRACTOR WOULD SPECIFICALLY
REFERENCE THE FOLLOWING TERMS
FOR THE BENEFIT OF THE
SUBCONTRACTOR.
A. THE TERMS OF
SUBCONTRACT: ALL SUBCONTRACTS
AND PURCHASE ORDERS WITH
SUBCONTRACTORS SHALL AFFORD
DESIGN/BUILDER RIGHTS AGAINST
THE SUBCONTRACTOR WHICH
CORRESPOND TO THOSE RIGHTS
AFFORDED TO OWNER AGAINST
DESIGN/BUILDER HEREIN,
INCLUDING THOSE RIGHTS OF
CONTRACT SUSPENSION,
TERMINATION, AND STOP WORK
ORDERS AS SET FORTH HEREIN. . . .
According to [ESI], it performed all work required
of it under the Subcontract. A dispute subsequently arose
between [Bell] and [ESI], and on January 12, 2006, [ESI]
filed a “Notice of Lien/Claim” with the Finance and
Administration Cabinet of the Commonwealth of
Kentucky against the funds due to [Bell] under its
Design/Build Contract with the Commonwealth. [Bell]
procured a bond from Fidelity & Deposit Company of
Maryland to release the lien claim.
On May 10, 2006, [ESI] filed a complaint in
Shelby County Chancery Court against [Bell]. [ESI]
alleged that while working on the Project, it received
several directives from [Bell] to perform additional work,
which caused [ESI] to incur unanticipated, additional
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costs and expenses, as well as delay damages, for which
[ESI] has not been paid.
In response, [Bell] filed a motion to dismiss the
complaint for lack of venue. First, Bell contended that
the exclusive venue for the dispute was in Franklin
County Circuit Court in Frankfort, Kentucky, pursuant to
the forum selection clause in the Design/Build Contract
that was incorporated by reference in the Subcontract.
[Bell] also claimed that it could enforce the forum
selection clause against [ESI] because the
[Commonwealth of Kentucky] had the right or privilege
of enforcing it against [Bell], relying on the “flow down”
provision of the Subcontract.
...
Following a hearing, the chancellor entered an
order simply stating that [Bell’s] motion to dismiss for
lack of venue was denied. [Bell] filed a motion
requesting permission to seek an interlocutory appeal
pursuant to Rule 9 of the Tennessee Rules of Appellate
Procedure, but the trial court denied the motion. [Bell]
then filed an application for extraordinary appeal to [the
Tennessee Court of Appeals] under Rule 10 of the
Tennessee Rules of Appellate Procedure, which [was]
granted.
Id. at *1-4.
On February 29, 2008, the Tennessee Court of Appeals reversed and
remanded the judgment of the chancery court. Of relevance, the opinion of that
Court specifically addressed the issues: 1) “Whether the Subcontract incorporates
by reference the forum selection clause contained in the Design/Build Contract,
which requires all disputes to be brought in the Circuit Court of Franklin County,
Kentucky,” and 2) “Whether the forum selection clause is enforceable.”
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Regarding whether the forum selection clause in the “DISPUTE
RESOLUTION” section applied to the subcontract via incorporation by reference,
the Tennessee Court of Appeals held:
[Bell] argues . . . that [ESI’s] claim does arise from
the Contract because all terms of the Contract were
incorporated by reference and made a part of the
Subcontract. We agree with [Bell’s] contention, as the
Subcontract clearly provided that “ALL TERMS AND
CONDITIONS OF THE CONTRACT BETWEEN THE
COMMONWEALTH OF KENTUCKY AND RAY
BELL CONSTRUCTION COMPANY, INC. ARE
FULLY INCORPORATED HEREIN BY
REFERENCE.” Because the terms of the Contract were
expressly incorporated into the Subcontract, the language
of the Contract became a part of the Subcontract, and
both writings must be construed together. See Staubach
Retail Services-Southeast, LLC v. H.G. Hill Realty Co.,
160 S.W.3d 521, 525 (Tenn. 2005); T.R. Mills
Contractors, Inc. v. WRH Enterprises, LLC, 93 S.W.3d
861, 870 (Tenn. Ct. App. 2002).
[Bell] also argues that the forum selection clause
requires [ESI] to file its lawsuit in Kentucky because of
the following provision of the Subcontract:
Article VII – (a) Contractor shall have
the same rights and privileges as against the
Subcontractor herein as the Owner in the
Design/Build Contract has against
Contractor. Subcontractor shall have the
same rights, remedies and privileges against
the Contractor herein as the Contractor in
the Design/Build Contract has against
Owner.
[ESI] does not offer any argument as to how this
section affects its rights. However, we find that this
provision is dispositive of the issue before us and
requires [ESI] to file its action in Kentucky. It is
undisputed that the [Commonwealth of Kentucky] had
the “right” against [Bell] to have any actions against it
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filed in Franklin County Circuit Court in Frankfort,
Kentucky. Black’s Law Dictionary, 8th Ed. 2004, defines
a “right,” as used in this context, as “[a] legally
enforceable claim that another will do or will not do a
given act.” If [Bell] did not file its action in Kentucky,
the Owner could assert the forum selection clause in
order to have its right enforced. See, e.g., Woodruff v.
Anastasia Intern., Inc., No. E2007-00874-COA-R3-CV,
2007 WL 4439677, at *4 (Tenn. Ct. App. Dec. 19, 2007)
(speaking of a party’s “right” to assert a forum selection
clause defense). Pursuant to the flow-down clause, [Bell]
has the same right to enforce the forum selection clause
against [ESI]. Similarly, [Bell’s] corresponding remedy
against [the Commonwealth] was to file an action in
Kentucky, and pursuant to the flow-down provision,
[ESI] has that same remedy. A “remedy” is defined by
Black’s Law Dictionary, 8th ed. 2004, as “the means of
enforcing a right or preventing or redressing a wrong;
legal or equitable relief.” In sum, we find that the flowdown provision of the Subcontract required [ESI] to file
any actions against [Bell] in Franklin County Circuit
Court in Frankfort, Kentucky, just as [Bell] would have
proceeded with claims against the [Commonwealth].
ESI, 2008 WL 544563 at *4-5.
As such, the Tennessee Court of Appeals held that the forum selection
clause in the Design/Build Contract was effectively incorporated into the
Subcontract, and that the “flow-down” clause provided ESI and Bell the same
rights against each other as Bell had against the Commonwealth. That Court
further held that the forum selection clause gave Bell an enforceable right to venue
in the Franklin Circuit Court in Frankfort, Kentucky. Because the Tennessee Court
of Appeals found that Bell had exercised that right, ESI’s complaint was dismissed
as a consequence.
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On March 12, 2008, after the Tennessee Court had dismissed ESI’s
case, ESI filed a complaint against Bell, substantially similar to the complaint it
filed in Tennessee, in the Franklin Circuit Court. However, Bell again moved to
dismiss ESI’s claims, this time on the basis of the clause contained in the
Design/Build Contract’s “Dispute Resolution” provision, which limited the period
of time for asserting actions under the contracts to one year from the specified date
of completion. Bell argued that, in light of the holding of the Tennessee Court of
Appeals, ESI was collaterally estopped from contesting that the one-year limitation
applied to the Subcontract in the same manner as the forum selection clause. The
completion date specified in ESI’s Subcontract was December 18, 2003; Bell’s
completion date for its Design/Build Contract, specified in a change order issued
by the Commonwealth, was September 27, 2004. Thus, Bell argued that under
either completion date, ESI’s filing of its action on May 10, 2006, was untimely
under the one-year limitation.
ESI contended that the one-year contractual limitations period did not
apply because 1) the concept of a one-year limitation originated from Kentucky’s
Model Procurement Code, KRS 45A.225 through KRS 45A.280, and the Model
Procurement Code only applies to disputes between the general contractor and the
Commonwealth, and not to subcontractors; 2) the terms of ESI’s Subcontract state
that it incorporates the terms of the Design/Build Contract only “where
applicable,” and no language stated that the terms of the Design/Build Contract
would be incorporated into the Subcontract for the specific purpose of determining
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a period of time limiting claims arising under its Subcontract; 3) applying a oneyear limitation period against ESI would work an undue forfeiture upon ESI’s
rights; 4) collateral estoppel could not apply because a dismissal on the basis of
venue is not a dismissal “on the merits,” as that doctrine requires; 5) its claims
were timely because Kentucky law provides a fifteen-year statute of limitations for
contract actions, and 6) ESI last performed substantive work on the project on
March 30, 2007, which was accepted by Ray Bell and pursuant to extra work
directives issued by Ray Bell.
In further support of its last contention, ESI provided a sworn affidavit
from its President, Warner Speakman, stating that:
As a consequence of the extra work directives, the delays
and impacts to ESI’s prosecution of its work on the
Project, ESI did not complete its substantive work on the
Project until March 30, 2007. During this time frame, in
which I was personally on-site to review the situation and
associated work involved, ESI’s work activities included
providing additional work, labor, services, materials in
connection with the electronic perimeter security fence
on the Project and ensuring that it complied with the
proper design requirements for the integrated security
system and completed the fully functional detention
facility.
In fact, as reflected in the attached weekly time sheet
record for Harold Dale Felts, one of ESI’s technicians,
ESI performed work on the Project specifically regarding
the aforementioned extra or changed work issue from
March 24-30, 2007. A true and correct copy of the time
sheet for Mr. Felts’ work on the Project during the period
of March 24-30, 2007 is attached hereto as Exhibit A-2.
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ESI also included timesheets for the period of March 24 through March 30, 2007,
noting that Felts had spent time at “Job 2058” in “ELLIOT CO.”
In an opinion and order dated August 14, 2008, the Franklin Circuit
Court dismissed ESI’s claims against Bell as untimely. Specifically, the court held
that collateral estoppel barred ESI from contending that the one-year claims
limitation contained in the Design/Build Contract was not also incorporated into its
Subcontract, and that it required ESI to assert its claims against Bell no later than
September 26, 2005. Regarding ESI’s contention that its last substantive work on
the project was not performed until March 30, 2007, the trial court held that “the
terms of the contract make it clear that that is not the appropriate date from which
the contractual time limit is to run.”
On appeal, ESI restates the same six contentions it made before the
trial court in opposition to the application of the one-year claims limitation
contained in the Design/Build Contract. Taken as a whole, these contentions may
be summarized as contesting 1) whether the one-year claims limitation actually
was incorporated into its Subcontract; and 2) whether the one-year claims
limitation, if incorporated, may be enforced against ESI. We hold that ESI is
collaterally estopped from contesting the incorporation of the one-year claims
limitation into its Subcontract. However, we also hold that there remains a genuine
issue of material fact as to whether the conduct of the parties caused this term to be
waived.
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STANDARD OF LAW
Although Bell moved to dismiss for failure to state a claim pursuant to
Kentucky Rule of Civil Procedure (CR) 12.02(f), it attached to its motion the
supporting affidavit of its project manager, Randy Young, as a means to
substantiate ESI’s original contract completion date and prove that ESI’s claims
were outside the one-year limitation clause. This affidavit was an item outside of
the pleadings. As ESI made no objection to its introduction, we treat Bell’s motion
to dismiss as a motion for summary judgment. See Cabinet for Human Resources
v. Women’s Health Services, Inc., 878 S.W.2d 806, 807 (Ky. App. 1994); see also,
Pearce v. Courier-Journal, 683 S.W.2d 633, 635 (Ky. App. 1985).
As Bell’s motion to dismiss is converted into a motion for summary
judgment, the issue is not whether the complaint states a claim but whether the
record discloses a genuine issue of fact. See CR 56.03. As such, when considering
a motion for summary judgment, the court is to view the record in the light most
favorable to the party opposing the motion, and all doubts are to be resolved in that
party's favor. Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480
(Ky.1991). The trial court must examine the evidence, not to decide any issue of
fact, but to discover if a real issue of material fact exists. Id. The moving party
bears the initial burden of showing that no issue of material fact exists, and then
the burden shifts to the party opposing summary judgment to present at least some
affirmative evidence showing that there is a genuine issue of material fact for trial.
See Lewis v. B & R Corporation, 56 S.W.3d 432, 436 (Ky. App. 2001).
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ANALYSIS
We begin by first addressing whether the Tennessee Court of
Appeals’ previous holding now precludes ESI from contesting that the “flowdown” clause of the Design/Build Contract incorporated the “one-year limitation
of actions” clause into the Subcontract. We hold that ESI is so precluded.
In determining the effect of the prior judgment on whether the terms
of the Design/Build Contract were incorporated into the Subcontract, the issue of
collateral estoppel is dispositive; it bars the relitigation of certain facts necessarily
determined in the former action. See Moore v. Commonwealth, 954 S.W.2d 317,
319 (Ky. 1997); see also King v. Brooks, 562 S.W.2d 422, 424 (Tenn. 1978)
(“Under the doctrine of collateral estoppel, when an issue has been actually and
necessarily determined in a former action between the parties, that determination is
conclusive upon them in subsequent litigation.”) The essential elements of
collateral estoppel are: 1) identity of issues; 2) a final decision or judgment on the
merits; 3) a necessary issue with the estopped party given a full and fair
opportunity to litigate; and 4) a prior losing litigant. See Moore, supra.
Here, the meaning and implication of the “flow-down” clause and the
Subcontract’s “incorporation by reference” of the Design/Build Contract were at
issue in the prior suit between these parties, and the Subcontract, by its own terms,
is subject to interpretation under the laws of Tennessee. The Tennessee Court of
Appeals interpreted these provisions and whether, through them, the term
designating venue in the Design/Build Contract was also incorporated into the
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Subcontract and binding upon ESI. In order to do so, the Court first determined
that all of the terms of the Design/Build Contract were expressly incorporated into
the Subcontract, that the language of the Design/Build Contract became a part of
the Subcontract, and that both writings must be construed together. Second, that
Court determined that the Subcontract’s flow-down clause mandated that ESI had
the same rights, remedies and privileges against Bell as Bell in the Design/Build
Contract had against Kentucky, and vice-versa. See ESI Companies, Inc. v. Ray
Bell Const. Co., Inc., 2008 WL 544563 at *4 (Tenn. Ct. App. 2008) (unpublished).
As a result of the incorporation of the Design/Build Contract into the Subcontract,
the term designating venue in the Design/Build Contract was applied to the
Subcontract. In turn, Bell was entitled to venue in the Franklin Circuit Court. The
Tennessee Court of Appeals determined that right was enforceable. And because
the Tennessee Court of Appeals found that Bell had exercised that right, ESI’s
complaint was dismissed as a consequence.
In sum, the Tennessee Court of Appeals has already applied
Tennessee law and decided that all of the terms of the Design/Build Contract have
been incorporated into the Subcontract. The Court determined that the flow-down
clause gave ESI and Bell the same rights against each other as Bell had against the
Commonwealth and that the selection of forum was a “right” covered under the
flow-down clause.
With regard to the limitation upon the period of time in which a claim
may be brought under contract, we likewise restate the reasoning of the Tennessee
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Court of Appeals. Analogous to the selection of forum, the limitation upon the
period in which a claim may be brought under contract is also a “right” within the
definition provided by the Court. The Commonwealth had the “right” against Bell,
under the dispute resolution provision, to have any actions against it filed in
Franklin Circuit Court within one year of the date of completion specified in the
Design/Build Contract. If Bell did not file its action within one year of the date of
completion, the Commonwealth could assert the dispute resolution clause in order
to have its right enforced. Pursuant to the flow-down clause, Bell has the same
right to enforce the dispute resolution clause against ESI. Similarly, Bell’s
corresponding remedy against the Commonwealth was to file an action in
Kentucky within one year of the date of completion, and pursuant to the flowdown provision, the Subcontractor has that same remedy. In sum, the flow-down
provision of the Subcontract required ESI to file any actions against Bell within
one year of the specified date of completion, just as Bell would have proceeded
with claims against the Commonwealth.
ESI argues that a dismissal on the basis of venue does not constitute a
“judgment on the merits” as required by the doctrine of collateral estoppel. Under
the specific circumstances of this case, we disagree. The issues resolved by the
Tennessee Court of Appeals did not consist only of whether the Shelby County
Chancery Court was the particular locality where ESI’s suit should have been
heard, i.e., whether venue was proper. Another issue was whether the meaning of
the Design/Build Contract and Subcontract, construed together, demonstrated that
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Bell had the contractual right to venue elsewhere and, in light of Bell’s exercising
that right, whether ESI had met a condition precedent to filing suit. In simply
classifying that Court’s dismissal as “not on the merits,” ESI is essentially
disputing the Tennessee Court’s interpretation of the forum selection clause, the
flow-down clause, and the contracts as a whole.
The parties fully litigated whether Bell’s right to forum in the Franklin
Circuit Court had been incorporated into the Subcontract by invoking terms of the
contracts that required proofs and interpretations. Determining that all of the terms
of the Design/Build Contract were necessarily incorporated into the Subcontract
was the essence of the Tennessee Court of Appeals’ resolution of whether Bell had
the right to venue elsewhere as it was a prerequisite to incorporating the
Design/Build Contract’s forum selection clause into the Subcontract and ultimately
dismissing ESI’s claims.
The general rule of collateral estoppel is “[w]hen an issue of fact or
law is actually litigated and determined by a valid and final judgment, and the
determination is essential to the judgment, the determination is conclusive in a
subsequent action between the parties, whether on the same or a different claim.”
Restatement (Second) of Judgments § 27. That Court’s resolution of these issues
is conclusive upon the contracts in the present action. Its application may not be
altered without altering that Court’s interpretation of the contracts. Regardless of
whether the parties or this Court agree with that result, that Court’s interpretation
of these contracts has become final; any objections should have been raised before
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the Tennessee Supreme Court in the prior case. They were not, and the decision is
now binding.
Nevertheless, while we agree that the terms of the Design/Build
Contract were incorporated into the terms of the Subcontract, we disagree that such
incorporation necessarily required the dismissal of ESI’s claims against Bell on the
basis of the contractual limitations period. Here, the trial court erred in dismissing
ESI’s claims without also considering the effect of ESI’s continued work on the
project, through March 30, 2007, upon the term’s enforceability.
In Tennessee, a contractual limitations period, like any other term in a
contract, may be waived by the conduct of the parties. As stated by the Tennessee
Court of Appeals,
[i]t is true that parties to a contract are generally free to
impose whatever conditions they wish on their
contractual undertakings and that if such conditions are
not literally met or exactly fulfilled, no liability can arise
on the promise qualified by the conditions. However, it
is also “well established that a party to a contract may
waive a condition precedent to his or her own
performance of a contractual duty, even in the absence of
a provision in the contract expressly authorizing a
waiver.” This is so even where . . . the contract contains
a clause stating that the entire agreement will be null and
void if the condition is not met. If, in spite the failure of
the condition precedent, the party in whose favor it was
drafted performs or receives performance under the
contract, the condition precedent is waived. The contract
will be enforced despite the nonoccurrence of the
condition, and the party that waived the condition is
estopped from asserting the failure of the condition as a
defense in a suit to enforce the agreement.
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Tennessee Div. of United Daughters of the Confederacy v. Vanderbilt University,
174 S.W.3d 98, 115 (Tenn. Ct. App. 2005) (internal citations omitted).
In the case at bar, the affidavit of Speakman, as well as Felt’s
timesheets, taken in the light most favorable to ESI, are some evidence
demonstrating that ESI continued to work at the project at the request of Bell and
that Bell received its performance pursuant to the contract until March 30, 2007.
We find that this evidence creates a genuine issue of material fact regarding
whether Bell did in fact accept ESI’s performance subsequent to the specified date
of completion, and whether, through its conduct in accepting ESI’s performance
subsequent to the specified date of completion, Bell waived its right to assert that
the one-year period started to run earlier than March 30, 2007.
Bell argues at length that the contractual one-year limitation period is
incorporated into ESI’s Subcontract. However, Bell offers no argument as to how
the issue of ESI’s continued performance and its acceptance of ESI’s performance,
following the contract’s specified date of completion, could affect its right to
enforce the contractual one-year limitation period, which period is entirely
dependent upon that date of completion. Rather, Bell contends that this fact is
irrelevant in light of the date specified in the contract, and in support cites our
decision in Jasper Contracting Co., Inc. v. Commonwealth, 890 S.W.2d 296 (Ky.
1994). We disagree.
In Jasper, a contractor agreed to perform work for the
Commonwealth’s Finance and Administration Cabinet and to complete that work
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by January 31, 1992. On that date, the work was completed, but not properly. Id.
at 298. Between May 19, 1992, and March 4, 1993, consulting engineers and
Finance’s engineers (but not purchasing officers) sent the contractor a series of
letters. These letters first stated that the contractor’s work was unsatisfactory, later
stated that the contractor had until a certain date to decide whether it intended to
satisfactorily complete its work or pay to have the work done, and finally stated
that Finance would pay the contractor $3,000 for the work it had done, but would
complete, to its satisfaction, the contractor’s work by some other manner. In
closing, it added that the contractor would no longer be involved with the project.
The contractor filed suit on April 6, 1993, and its case was dismissed
based upon the one-year statute of limitations contained in KRS 45A.260. The
contractor argued that the statute of limitations did not begin to run until the
project was completed or terminated, and that its cause of action did not accrue
until March 4, 1993, when Finance clearly stated that the project with the
contractor was over. In affirming the dismissal, the Kentucky Supreme Court held
that the one-year limitation ran from the date of completion specified in the
contract. Further, the Court held that while the agreement could have been
modified, there were no other change orders, and the letters upon which the
contractor relied were signed by either a consulting engineer or one of Finance’s
engineers, not an authorized agent (i.e., a purchasing officer) as required by statute.
The facts of this case are distinguishable from Jasper. Jasper turned
upon the issues of whether a one-year statute of limitations was fair and whether
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someone other than a purchasing officer had the authority to validly modify the
date of completion specified in the contract. In Jasper, the issue of waiver through
the acceptance of further performance did not arise because there was no allegation
that that contractor did any further work after the date specified for the project’s
completion, or that the contractor’s work, completed after that date, had been
accepted under the terms of the contract. Here, the Speakman affidavit and Felt’s
timesheets, taken in the light most favorable to ESI, are some evidence that ESI did
further work after the date specified for the project’s completion, and that that
work was accepted by Bell.
As noted by the Tennessee Court of Appeals on the previous
disposition of this case, “a ‘right,’ [is] ‘a legally enforceable claim that another will
do or will not do a given act.’” ESI, 2008 WL 544563 at *5. Nothing prevents the
Commonwealth from voluntarily waiving an affirmative defense granted to it
through statutory right. Likewise, nothing prevents a general contractor, who has
borrowed from one of the Commonwealth’s statutes to craft a contractual right
against a subcontractor, from voluntarily waiving that right as well.
CONCLUSION
Whether Bell has presented the one-year limitation clause as a
meritorious basis for dismissal of ESI’s claims is an issue that would be better
addressed substantively on the merits. For the reasons herein stated, we AFFIRM
the decision of the Franklin Circuit Court as it relates to the incorporation of the
one-year limitation clause into ESI’s subcontract, REVERSE its decision as it
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relates to the enforceability of the one-year limitation clause, and REMAND for
further consideration of whether Bell waived its right to enforce said clause.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
William G. Geisen
Michael C. Surrey
Ft. Mitchell, Kentucky
Buckner Hinkle, Jr.
Ryan R. Loghry
Lexington, Kentucky
Martin R. Salzman
Bart W. Reed
Atlanta, Georgia
ORAL ARGUMENT FOR
APPELLEE:
ORAL ARGUMENT FOR
APPELLANT:
William G. Geisen
Ft. Mitchell, Kentucky
Buckner Hinkle, Jr.
Lexington, Kentucky
ORAL ARGUMENT FOR
APPELLEE:
Ryan R. Loghry
Lexington, Kentucky
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