Hard Hat Case Notes

• Author: By Christopher M. Burke and Lauren P. McLaughlin
• Pages: 38-41

THE CONSTRUCTION LAWYER38 Volume 41, Issue 3

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The Construction Lawyer

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HARD HAT CASE NOTES

Unexecuted Contract Held

to Be Express and Binding

Between Owner and

Contractor

In 2012, the owner of a hotel in

Spearsh, South Dakota, sought

to renovate his property and con-

vert the hotel from one brand

to another brand. The owner,

Khan Comfort, LLC (Khan),

approached J. Clancy, Inc.

(Clancy), a construction company

with whom Khan had previously

worked on other projects, about

the potential renovation work.

In March 2012, the parties cre-

ated a document that listed the

specic works that Clancy would

undertake as part of the hotel

renovation; the document included a price of $191,258.11

for the works, but that price excluded the labor/installation

costs. Khan signed the document, but Clancy did not. Addi-

tionally, Khan did not make the required 50 percent deposit

contemplated by the document, nor did Clancy actually

commence any of the work items contained in the document.

In May 2012, however, Khan made a payment of

$20,000 to Clancy in connection with a phase of the work

that Clancy had begun performing. At the same time that

Clancy was performing this work, Clancy prepared what it

referred to as a “standard proposal” for the entirety of the

work to be performed, listing both the labor and materi-

als and associated costs for the overall project scope. This

new document included the scopes of work from the previ-

ous March document, added new scopes, and included an

adjusted price of $308,922.28 for the complete project (and

this time included the labor/installation costs).

On September 5, 2012, Clancy sent the standard proposal

document to Khan, which Khan signed. Clancy did not sign

the document. Khan also immediately made a 50 percent

down payment as required by the Clancy standard proposal,

and Clancy began work on September 6, 2012. Over the

next several months, Clancy submitted several invoices to

Khan, and the parties also agreed on a number of change

orders in connection with the scope of work to be performed.

Aside from the initial down payment from Khan to Clancy

on September 5, 2012, Khan did not make any further pay-

ments to Clancy until December 12, 2012, when Khan paid

an additional $70,000 to Clancy.

Clancy left the construction site in February 2013. Prior

to leaving the site, Clancy and Khan walked through the site

to determine if additional work still needed to be completed,

and Khan did not voice dissatisfaction with the work. Khan,

however, refused to make any additional payments to Clancy,

stating later that portions of the work remained incom-

plete. Clancy led two mechanics’ liens against Khan for

unpaid labor and materials costs. Clancy also led a com-

plaint against Khan in South Dakota Circuit Court alleging,

among other things, breach of contract and unjust enrich-

ment. Khan itself asserted several counterclaims, including

breach of contract and overpayment.

The trial court held that neither the March 2012 nor the

September 2012 documents met the criteria for an express

contract; instead, the trial court held that the parties had an

implied-in-fact contract. The trial court went on to review

each of the invoices submitted by Clancy under this implied-

in-fact contract theory and ruled that the amount paid by

Khan to Clancy actually exceeded the value of the work in

place. Accordingly, the trial court awarded Khan recovery

on some of its overpayment claim.

The South Dakota Supreme Court took the case up on

appeal. The rst issue the court addressed was the nature

of the contract between Khan and Clancy. The court dis-

agreed with the trial court and held that the parties had an

express contract, not an implied-in-fact contract. In reach-

ing its conclusion, the court reviewed the essential elements

of any contract: (i) the capability of the parties to enter a

contract, (ii) the parties’ consent, (iii) a lawful object or pur-

pose, and (iv) consideration. The court cited South Dakota

Codied Law, which provided that “an express contract is

one, the terms of which are stated in words. An implied con-

tract is one, the existence and term of which are manifested

by conduct.” The court further explained that the words in

an express contract could be oral or written.

In the case of Khan/Clancy, the court held that the par-

ties did, in fact, have an express contract pursuant to the

September 2012 “standard proposal” that was signed by

Khan and against which the original 50 percent down pay-

ment was made. The court noted that Khan struggled to

fully articulate its position at the trial court level as to pre

-

cisely why the signed proposal did not serve as a contract

against which the parties’ rights would be measured. More-

over, the court held that “Khan’s signature on the September

document and his payment by wire constitutes an absolute

and unqualied acceptance of the terms of the document.”

The court also noted that Clancy continued to invoice Khan

consistent with the September document and that Khan

(albeit belatedly) issued additional payments to Clancy.

With the issue of an express contract resolved, the court

remanded the parties’ dispute back to the trial court to deter-

mine which party, if any, could be found in breach of the

express contract. The court noted that the September doc-

ument/express contract required that Khan make periodic

Christoph er M. Burke

Lauren P. McLaughlin

By Christopher M. Burke and Lauren P. McLaughlin