By Lee Brumitt, Dysart Taylor
We’ve all heard it: “they got out on a technicality.” A recent case out of Kansas reminds us that what may look like a technicality is, in fact, a court properly applying the plain language of a statute, as enacted by the legislature. In Drywall Systems, Inc. v. A. Arnold of Kansas City, LLC, Arnold entered into a commercial lease of a building in Olathe. Wanting to separate itself from other tenants in the building, Arnold entered into a contract with Drywall Systems to build a partition wall. Drywall constructed the wall, and Arnold defaulted on payment.
The trial court found that Arnold had indeed breached the contract and entered judgment for Drywall for the contract amount only. The court denied Drywall’s request for prejudgment interest and attorneys’ fees under the Kansas Fairness in Private Construction Act, K.S.A. 16-1801, et. seq. The Act’s goal is to promote prompt payment through the various construction tiers – from owners to subcontractors. The Act sets standards for promptness. In the case of an “owner,” the Act requires payment to a contractor within thirty (30) days of submission of an undisputed amount. If the “owner” fails to pay within that time frame, it is required to pay 18% interest and attorneys’ fees.
Interpreting the Act, the trial court decided that Arnold, as a mere tenant, was technically not an “owner” and thus not subject to the prompt payment rules. Drywall Systems appealed. The appeals court found that the Act specifically defined an “owner” as one “who holds an ownership interest” in the property–a tautology (the saying of the same thing twice in different words) and perhaps a technicality. But, because a tenant does not have an ownership interest in the property, the court reasoned that the legislature did not mean for the Act to apply to Arnold.
I wish I had a nickel (ok, maybe a dollar) for every contractor which has described its business as “TI” or tenant improvement work. If you fall in that category, how do you overcome this potential problem? Make sure there is a written contract with the tenant which provides for payment of 18% interest and attorneys’ fees in the event of default or contract directly with the “owner.”
Let’s say the contractor is headquartered in Goodland, Kansas and its lawyer works overtime on the contract including, among other things, a forum selection clause whereby the parties agree to litigate any dispute arising from the contract in the District Court of Sherman County located in Goodland, a forum perhaps more favorable to the client. Subsequently, a dispute arises 400 miles away in Johnson County where the customer’s construction project is located. Can the contractor with the hometown lawyer cause the customer to litigate in Sherman County? Does the Act have anything to say about this scenario?
In Wheatland Contracting, LLC v. Jaco General Contractor, Inc., Jaco’s subcontract with its plumbing subcontractor, Wheatland, stipulated that any dispute arising under the subcontract would be litigated in the District Court of Sedgwick County. Wheatland performed plumbing work on a Kentucky Fried Chicken restaurant in Johnson County, Kansas and sued Jaco in the District Court there for failure to pay the amount owed under the subcontract. Jaco moved to dismiss or, alternatively, transfer venue to Sedgwick County. The trial court denied Jaco’s motion holding that the Act requires the venue to be in the county where the project is located. K.S.A. 16-1806.
On appeal, the court conducted an in-depth review of the Act and noted how broadly it compels prompt payment of amounts due under “all tiers” of construction contracts. In addition, the court noted that the Act “voids” all contract provisions attempting to waive the rights and duties created by the Act. K.S.A 16-1801(b). The court stated, “parties cannot avoid the application of this law by contract.”
Nevertheless, Jaco argued that the Act could not supersede the parties’ freedom to contract and determine where their disputes would be resolved. The court noted that although federal law does enforce forum selection clauses and some Kansas federal district court have indeed honored forum selection clauses on projects located in Kansas, where the parties are Kansas companies governed by the Kansas law, the exclusive venue is set by the Act. Therefore, the Court of Appeals upheld the trial court’s decision that the dispute must be heard in Johnson County, the location of the project.
Two seemingly disparate determinations under the Act are resolved by the Court of Appeals by simply giving plain meaning to the language in the Act. Contractors and their scriveners will be well-served to know what the Act says when drafting contracts.
Dysart Taylor Shareholder/Director Lee B. Brumitt focuses his practice in construction law and litigation, representing owners, contractors, subcontractors, suppliers and design professionals on public, commercial and residential projects. He can be reached at lbrumitt@dysarttaylor.com or 816-714-3027.
