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Hope's Architectural Products, Inc. v. Lundy's Construction, Inc.
781 F. Supp. 711 (D. Kan 1991)
Lungstrum, Judge
This case presents a familiar situation in the field of construction
contracts. Two parties, who disagreed over the meaning of their contract, held their
positions to the brink, with litigation and loss the predictable result of the dispute.
What is rarely predictable, however, (and what leads to a compromise resolution of many
construction disputes when cool heads hold sway) is which party will ultimately prevail.
The stakes become winner-take-all.
Plaintiff Hope's Architectural Products (Hope's) is a New York
corporation that manufactures and installs custom window fixtures. Defendant Lundy's
Construction (Lundy's) is a Kansas corporation that contracted to buy windows from Hope's
for a school remodeling project. Defendant Bank IV Olathe (Bank IV) is a national banking
organization with its principal place of business in Kansas. Bank IV acted as surety for a
statutory bond obtained by Lundy's for the remodeling project.
Hope's contends that Lundy's breached the contract to buy windows,
entitling Hope's to damages in the amount of the contract price of $55,000. Hope's also
contends that Bank IV wrongfully refused to pay Hope's on the bond when Lundy's breached
the contract. Hope's has sued for breach of contract, and in the alternative, for recovery
under the theory of quantum meruit. A trial to the Court was held December 4 and 5, 1991.
Two issues emerged as pivotal to the resolution of this case: (1) when was delivery of the
windows due, and (2) if delivery was late, could Hope's lawfully suspend performance and
demand certain assurances, (including ultimately, a demand for prepayment in full) that
Lundy's would not back charge for the late delivery under the authority of K.S.A. § 84-2-609? Because the Court finds that a determination of
these issues leads to the conclusion that Hope's was the party in breach of this contract,
the plaintiff's request for relief is denied.
I. FACTS
The following findings of fact are entered pursuant to Fed. R. Civ. P.
52. On June 13, 1988, defendant Lundy's entered into a contract with the Shawnee Mission
School District as general contractor for the construction of an addition to the Rushton
Elementary School. Lundy's provided a public works bond in connection with the Rushton
project as required by K.S.A. § 60-1111 (1983). The purpose of the bond was to insure
that Lundy's paid any outstanding indebtedness it incurred in the construction of the
project. The statutory bond was secured through defendant Bank IV.
Plaintiff Hope's is a manufacturer of custom-built windows. The initial
contact between Hope's and Lundy's occurred through Mr. Richard Odor, a regional agent for
Hope's in Kansas City. On June 29, 1988, Hope's contracted with Lundy's to manufacture
ninety-three windows for the Rushton project. The contract price, including the cost of
labor and materials for the windows, was $55,000.
Although the contract included a term pertaining to the time for
delivering the windows, there is some controversy over the meaning of this provision. Even
under the most favorable interpretation to Hope's, however, delivery was due twelve to
fourteen weeks after Hope's received approved shop drawings from Lundy's on July 18. Thus,
delivery was due no later than October 24, 1988.
During the late summer and fall of 1988, several discussions took place
between Hope's and Lundy's concerning when the windows would be delivered to the job site.
Production of the windows was delayed by events that: according to the testimony of Mr.
Odor, were not the fault of Lundy's. On September 27, 1988, Mark Hannah, vice
president of Lundy's, wrote to Hope's requesting that installation of the windows begin by
October 19, and be completed by October 26. On October 14 Hannah again wrote to Hope's, threatening to withhold "liquidated damages"
from the contract price if Hope's did not comply with these deadlines. Although there was
no provision in the contract for liquidated damages, Hope's did not make any response
to the October 14 letter.
The windows were shipped from Hopes' New York plant to Kansas City on
October 28. Delivery to the Rushton site was anticipated on November 4. On November 1,
Hannah called Hopes' office in New York to inquire about the windows. He spoke to Kathy
Anderson, Hopes' customer service manager. The substance of this conversation is disputed.
Hope's claims that Hannah threatened a back charge of $11,000 (20% of the contract price)
for late delivery of the windows. Hannah testified, however, that although the possibility
of a back charge was discussed, no specific dollar amount was mentioned. Hannah
specifically denies that he threatened to withhold $11,000 from the contract.
After her conversation with Hannah, Anderson immediately informed Chris
Arvantinos, vice president of Hope's, of the threatened back charge. Arvantinos called
Hannah to discuss the back charge, but he does not recall hearing Hannah mention the
$11,000 figure. Arvantinos requested that Hannah provide assurances that Lundy's would not
back charge Hope's, but Hannah was unwilling to provide such assurances.
In a letter written on November 2, Arvantinos informed Hannah that
Hope's was suspending delivery of the windows until Lundy's provided assurances that there
would be no back charge. Hannah received this letter on the morning of November 3, shortly
before Mr. Odor visited Hannah at Lundy's. Odor, who had spoken with Arvantinos about the
back charge, issued a new demand that Lundy's had to meet before Hope's would deliver the
windows. He gave Hannah an invoice for the full amount of the contract price, demanding
prepayment before the windows would be delivered.
Odor set out three ways that Lundy's could meet this demand: (1)
payment of the contract price in full by cashier's check; (2) placement of the full
contract price in an escrow account until the windows were installed; or (3) delivery of
the full contract amount to the architect to hold until the windows were installed. All
three options required Lundy's to come up with $55,000 before the windows would be
delivered. Hannah believed that the demand presented by Odor superseded the letter from
Arvantinos he received earlier that morning.
Hannah informed Odor that there was no way for Lundy's to get an
advance from the school district at that time to comply with Hopes' request. The meeting
ended, Lundy's did not prepay, and Hope's did not deliver the windows. On November 7,
1988, Lundy's terminated the contract with Hope's. Thereafter,
Lundy's obtained an alternate supplier of the windows.
On February 15, 1989, Hope's notified defendant Bank IV of Lundy's
failure to pay the contract price and demanded payment from Bank IV on the public works
bond. Bank IV refused to pay Hopes' claim. This action was filed by Hope's on March 20,
1989. . . .
II. DISCUSSION
At the outset, the Court concludes that the Uniform Commercial Code
(UCC) governs this transaction. Article 2 of the UCC applies to transactions in goods.
K.S.A. § 84-2-102 (1983). The contract at issue in this case involved a mixed
goods/services transaction. Whether the UCC applies to hybrid transactions such as this
depends upon "'whether their predominant factor, their thrust, their purpose,
reasonably stated, is the rendition of service, with goods incidentally involved . . . or
is a transaction of sale, with labor incidentally involved.'" The transaction
at issue in this case primarily involved a sale of windows, with installation and
manufacturing services provided as an incidental component. Therefore, the UCC applies.
A. Plaintiff's Contract Claim Against Defendant Lundy's
This case turns on the resolution of two central and interrelated
issues: (1) when was delivery due under the contract, and (2) could Hope's lawfully demand
the assurances it demanded from Lundy's under K.S.A. § 84-2-609. If the demands for
assurances were proper, then Hope's would have been justified in suspending its
performance and withholding delivery and Lundy's failure to provide assurances and
subsequent termination of the contract amounted to a total breach. If, however, the
demands for assurances were not proper under 84-2-609 then Hope's breached the contract by
wrongfully withholding delivery of the windows and Lundy's was entitled to cancel the
contract. The delivery date issue is addressed first because the matter of whether or not
Hope's was already in breach for late delivery goes directly to the propriety of its
demand for assurances.
1. Delivery Date
Even under Hopes' interpretation of the delivery term, delivery of the
windows was not timely. At trial, Chris Arvantinos, Hopes' vice president, testified
that Hope's committed to deliver the windows twelve to fourteen weeks after July 18, 1988,
the day Hope's received approved shop drawings. This would make delivery due between
October 10 and October 24. In fact, the windows did not arrive in Kansas City until
November 4, fifteen and one-half weeks after July 18. Hope's claims that this delay was
"immaterial" and did not excuse Lundy's from its duties under the contract.
Hope's is unable to cite any controlling authority to support this argument, however.
Moreover, this argument misses the point. Even if an "immaterial" delay did not
excuse future performance by Lundy's, no performance was due from Lundy's until the
windows were delivered to the job site, which never occurred.
Hope's also argues, almost in passing, that the delay was caused by
problems that were outside of its control, thus excusing Hope's from responsibility for
the late delivery. Under a clause in the contract, Hope's disclaimed responsibility
"for delayed shipments and deliveries occasioned by strikes, fires, accidents, delays
of common carriers or other causes beyond our control . . . ." (Plaintiff's exhibit
11, para. 3). During the course of production, Hope's experienced problems with its
"bonderizing" and prime paint system, which resulted in a delay in production of
approximately two weeks. (Defendants' exhibit 403). Hope's produced no evidence at trial,
however, to show that this was a matter which was beyond its control. Moreover, it is
interesting to note that Hope's did not contemporaneously seek from Lundy's any extension
of the delivery date under this provision or notify Lundy's that it might result in a
delay beyond October 24. It appears that reference to this clause is more of an
afterthought born of litigation than a bona fide excuse for modifying the delivery date.
Hope's also contends that a three to four day delay resulted when
Lundy's asked for a change in the design of the windows to include "weep holes"
after production had already begun. However, Hopes' representative, Odor, testified that
nothing Lundy's did delayed Hopes' manufacturing. Moreover, even accounting for this
delay, Hope's was a week late delivering the windows.
2. Section 2-609 Demand for Assurances
The framework for judging demands for assurances under 84-2-609 was set
forth in LNS Investment Co., Inc.v. Phillips 66 Co., 731 F. Supp. 1484, 1487 (D. Kan.
1990):
To suspend its performance pursuant to [84-2-609], defendant must (1) have had reasonable grounds for insecurity regarding plaintiff's performance under the contract, (2) have demanded in writing adequate assurance of plaintiff's future performance and (3) have not received from plaintiff such assurance.
White and Summers note that what constitutes a "reasonable
ground" for insecurity and an "adequate assurance" are fact questions. J.
White & R. Summers, Uniform Commercial Code § 6-2, at 236 (3d ed. 1988).
Reasonableness and adequacy are determined according to commercial standards when, as is
the case here, the parties are merchants. K.S.A. § 84-2-609(2) (1983).
Although nothing in the record indicates that Hope's expressly claimed
any rights under 84-2-609 during the course of this transaction, Hope's asserted at trial
that the October 14 letter from Lundy's demanding delivery by October 16 and threatening
liquidated damages gave Hope's reasonable grounds for insecurity. Delivery was not due
until October 24 under Hopes' version of the parties' agreement, and Lundy's had no right
to demand performance early, let alone broach the withholding of liquidated damages. This
letter might have justified a demand for assurances under 84-2-609. However, Hope's made
no such demand after receiving the letter. Instead of invoking its rights under 84-2-609,
Hope's chose not to respond at all to Lundy's threat of liquidated damages. This event
merely came and went without any legal consequence.
Hope's in effect invoked its rights under 84-2-609 in response to
Lundys' threat of a back charge during the November 1 phone conversations. Two separate
demands for assurances were made in response to this threat. Initially, Chris Arvantinos
demanded assurances that Lundy's would not back charge Hope's for the delayed shipment in
a telephone conversation with Mark Hannah later in the day on November 1. Arvantinos
memorialized this demand in a letter composed on that day and mailed on the second of
November. In their telephone conversation, Hannah refused to provide assurances that
Lundy's would not back charge Hope's.
Hope's made a second demand for assurances on November 3, when Richard
Odor presented Hopes' invoice to Hannah demanding payment in full. Thus, Hope's demanded
assurances that it would not be back charged on November 1, and when that demand was
refused, Hope's made a second demand on November 3. The Court finds that Hope's was not
entitled to invoke 84-2-609 on either occasion.
When Hope's made its first demand for assurances on November 1, it was
already in breach of the parties' agreement. Delivery of the windows was due by October
24, but the windows did not arrive in Kansas City until November 4. A party already in
breach is not entitled to invoke section 2-609 by demanding assurances. United States v.
Great Plains Gasification Associates, 819 F.2d 831, 835 (8th Cir. 1987); cf. Sumner v.
Fel-Air, Inc., 680 P.2d 1109 (Alaska 1984) (2-609 does not apply after a breach has
already occurred). To hold otherwise would allow a party to avoid liability for breaching
its contract by invoking 2-609 to extract from the nonbreaching party an assurance that no
damages will be sought for the breach. A nonbreaching party in need of prompt performance
could be coerced into giving up its right to damages for the breach by giving in to the
demands in order to receive the needed performance. This Court refuses to endorse such a
result.
The assurances which Hope's demanded, moreover, were excessive.
"What constitutes 'adequate assurance' is to be determined by factual conditions; the
seller must exercise good faith and observe commercial standards; his satisfaction must be
based upon reason and must not be arbitrary or capricious." Richmond Leasing Co. v.
Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985). "If the assurances he
demands are more than 'adequate' and the other party refuses to accede to the excessive
demands, the court may find that the demanding party was in breach or a repudiator."
J. White & R. Summers, supra, § 6-2, at 236.
Lundy's argues that Hopes' demand for assurances in the November 2
letter from Arvantinos was overly broad and unreasonable. The letter informed Lundy's that
Hope's would not deliver the windows to the job site until it received assurances that it
would not "be backcharged or otherwise held responsible for liquidated damages, delay
charges or any extra costs on account of time of delivery of the windows."
(Plaintiff's exhibit 23) (emphasis added). When this demand was made, the windows had not
yet arrived in Kansas City. Therefore, the parties did not know at this time whether the
proper quantity of windows had been shipped, whether the windows were the correct size, or
whether they otherwise met Lundy's specifications. If there were any nonconformities in
the shipment, there could have been another delay in the time of delivery while Hope's
corrected the problem. Yet, Hope's demanded a blanket assurance that it would not be held
responsible for any extra costs incurred because of "time of delivery of the
windows." This demand was overly broad on its face and unreasonable under 84-2-609.
The assurances Hope's demanded on November 3 were also excessive. In
his meeting with Mark Hannah, Richard Odor insisted that Lundy's prepay the contract
price, deliver a cashier's check to the architect, or place the full contract price in an
escrow account before the windows would be delivered. Yet, Lundy's never gave any
indication that it was unable or unwilling to pay the amount it owed to Hope's when the
windows were delivered and the bond stood as security for Lundy's obligation. Such a
demand was unreasonable and amounted to a breach by Hope's. See Pittsburgh-Des Moines
Steel v. Brookhaven Manor Water Co., 532 F.2d 572, 578-82 (7th Cir. 1976) (demanding under
2-609 a personal guarantee of payment from a shareholder, or that other party escrow the
entire amount of the contract price before it was due, absent any showing of an inability
to pay, was unreasonable); Scott v. Crown, 765 P.2d 1043 (Colo. Ct. App. 1988) (demanding
payment in full before it was due was unreasonable demand under 2-609 and amounted to
anticipatory breach). The payment terms under the contract were "Progress payments by
the 10th of each month covering 90% of the total value of materials delivered and
installation performed during the previous month with final payment upon completion of our
[Hopes'] work." (Plaintiff's exhibit 11). By demanding prepayment, Hope's essentially
attempted to rewrite this term of the contract. Pittsburgh-Des Moines Steel, 532 F.2d 572
at 578-82 (2-609 may not be used to force a contract modification); Scott, 765 P.2d 1043
(same).
Although Hope's contends that a threatened back charge of $11,000 for a
one week delay in shipment justified its demand for prepayment, the Court is not persuaded
that Lundy's made any specific demand for $11,000. The testimony on this issue was
controverted, but only Kathy Anderson, Hopes' customer service manager, testified, in a
perfunctory manner, that an $11,000 back charge was threatened. Mark Hannah specifically
denied making such a demand. Neither Chris Arvantinos nor Richard Odor testified to
recalling receiving such a demand. There was also testimony at trial from one witness for
Hope's that the threatened back charge was in the amount of $5,000. The Court is not
persuaded that Lundy's went beyond making unspecified threats of a back charge for
possible damages it would incur because of Hopes' delay.
By threatening to withhold damages from the contract price, Lundy's was
merely exercising its rights under .S.A. § 84-2-717,
which entitles a buyer to deduct from the amount owing on the contract any damages from
the seller's breach. Giving notice of its intention to avail itself of a legal right did
not indicate that Lundy's was unwilling or unable to perform under the contract. Indeed,
the very nature of the right invoked by Lundy's manifests an intention that it would
continue performing and pay the contract price due, less damages caused by Hopes' delay.
Thus, the demand for prepayment was unreasonably excessive when there was no indication
that Lundy's would not pay Hope's when performance was due.
Both Hopes' delay in delivering the windows and Hopes' excessive
demands entitled Lundy's to treat Hope's as in breach and to cancel the contract, which it
did on November 7, 1988. K.S.A. § 84-2-711 (1983) ("Where the seller fails to make
delivery or repudiates . . . the buyer may cancel . . . ."). Thus, Hope's is not
entitled to recover under its claim for breach of contract.
B. Plaintiff's Quantum Meruit Claim
Hope's also claims that it is entitled to compensation from Lundy's
under the theory of quantum meruit. "Quantum meruit," which literally means
"as much as he deserves," is a phrase used often in older cases to describe an
equitable doctrine premised on the theories of unjust enrichment and restitution. Black's
Law Dictionary 1119 (5th ed. 1979). Recovery was allowed under this theory when a benefit
had been received by a party and it would be inequitable to allow the party to retain it.
E. Farnsworth, Contracts § 2.20, at 103 n.4 (2d ed. 1990). Instead of labeling it quantum
meruit, courts today speak in terms of restitution.
To recover in restitution, a breaching plaintiff must have conferred a
benefit on the nonbreaching party. See Walker v. Ireton, 221 Kan. 314, 559 P.2d 340 (1977)
(right to restitution limited to expenditures or services that benefitted other party);
Restatement (Second) of Contracts § 374 (1979). The burden is on the breaching party to
prove the extent of the benefit conferred, and doubts will be resolved against him.
Restatement (Second) of Contracts § 374 comment b (1977).
In this case, Hope's conferred no benefit on Lundy's. The windows
manufactured by Hope's were never used in the Rushton project, and the Court is not
persuaded that the installation advice provided by Christiansen Steel Erection for Hope's
improved the project. Hope's admits that the only labor it claims to have provided at the
Rushton job site was consultation work performed by Christiansen Steel Erection, a company
Hope's subcontracted with to install the windows. Mike and John Christiansen visited the
job site on several occasions to advise Lundy's on how to prepare the window openings for
installation. The advice they provided, however, related to the installation of windows
that were never used on the project. When Lundy's canceled its contract with Hope's, it
obtained an alternate supplier of a different type of windows. These windows did not
require the same careful preparation of the window openings as the Hope's windows. Lundy's
job foreman testified that the Christiansens' advice became moot when the alternate
supplier was obtained. "[A] party's expenditures in preparation for performance that
do not confer a benefit on the other party do not give rise to a restitution
interest." Restatement (Second) of Contracts § 370 comment a (1977). Thus, because
no benefit was conferred upon Lundy's, Hope's has no valid claim to restitution. n5
III. CONCLUSION
After careful consideration of the facts and law, this Court holds that
Hope's breached the contract in question. Therefore, defendant Lundy's was entitled to
cancel its performance and defendant Bank IV was not obligated to pay Hope's under the
statutory bond.
IT IS THEREFORE ORDERED that plaintiff's claims for relief are hereby
denied, and judgment is entered in favor of defendants.