Erie Ins. Co. As Assignee v. the Winter Constr. Co.

• Decision Date: 12 August 2011
• Docket Number: No. 4841.,4841.
• Citation: 713 S.E.2d 318,393 S.C. 455
• Court: South Carolina Court of Appeals
• Parties: ERIE INSURANCE CO. as Assignee and Subrogee of Fountain Electric, Inc., Respondent,v.The WINTER CONSTRUCTION COMPANY, Appellant.

393 S.C. 455

713 S.E.2d 318

ERIE INSURANCE CO. as Assignee and Subrogee of Fountain Electric, Inc., Respondent,

v.The WINTER CONSTRUCTION COMPANY, Appellant.

No. 4841.

Court of Appeals of South Carolina.

Heard Dec. 7, 2010.Decided June 15, 2011.Rehearing Denied Aug. 12, 2011.

Richard J. Morgan, of Columbia and C. Walker Ingraham, of Atlanta, for Appellant.Mason A. Summers, Francis M. Mack and Emily R. Gifford, all of Columbia, for Respondent.WILLIAMS, J.

The Winter Construction Company (“Winter”) appeals the trial court's order granting summary judgment to ERIE Insurance Company (“Erie”) and finding the administrative burden provision in a subcontract is an unenforceable penalty. We reverse.

FACTS

On March 14, 2005, Winter entered into a construction contract with Building Equity Sooner for Tomorrow Corporation (“BEST”) for construction of Greenville Senior High School (the “Project”). The Project was divided into two phases. Phase 1 was comprised of a 100,000 square foot school and a 70,000 square foot addition. Phase 1 construction was intended to be completed by December 31, 2006, to accommodate students after the winter break. Phase 2, a 33,000 square foot gymnasium, was to be completed in June 2007.

On or about June 27, 2005, Winter entered into a subcontract with Fountain Electric Company, Inc. (“Fountain Electric”) for all of the electrical work on the Project, with an original principal amount of $4,574,500 (the “Subcontract”).¹ Winter required Fountain Electric to provide payments and performance bonds for its work from a surety acceptable to Winter. With Winter's approval, Erie provided payment and performance bonds for the full Subcontract amount.

Approximately fourteen months later, Fountain Electric defaulted on its Subcontract with Winter by failing to complete its work on the Project or pay all of its suppliers. The default occurred two months prior to the Phase 1 completion deadline. After the default, Winter sought bids from three potential replacements for Fountain Electric. Two days after the default, Winter retained the services of Metro Power, Inc. d/b/a Carolina Power (“Carolina Power”) to complete the remaining electrical work. Carolina Power completed its work and the overall project was completed on time. Erie paid $2,799,654.80 to satisfy Fountain Electric's obligations under its Subcontract with Winter.

Fountain Electric's Subcontract included a damages provision that was triggered if Fountain Electric defaulted as set forth in Article 18.2 of the Subcontract. The provision set forth a formula to compensate Winter for its administrative burden of overseeing the completion of Fountain Electric's Subcontract (the “administrative burden”) in the event Fountain Electric defaulted. The administrative burden provision states, in pertinent part:

If SUBCONTRACTOR fails to cure an event of default within seventy-two (72) hours after receipt of written notice of default by WINTER to SUBCONTRACTOR, WINTER may, without prejudice to any of [its] other rights or remedies, terminate the employment of SUBCONTRACTOR and [ ... ] WINTER shall be entitled to charge all reasonable costs incurred in this regard (including attorney['s] fees) plus an allowance for administrative burden equal to fifteen percent (15%) to the account of SUBCONTRACTOR.

Fountain Electric's President, Terry Fountain, Jr., agreed to every provision in the Subcontract, as evidenced by his initials on every page of the Subcontract, including directly below the administrative burden.

After Fountain Electric defaulted, a total of $3,110,150.17 worth of electrical work was ultimately completed on the Project that Winter was forced to oversee and administratively manage. After its default, Fountain Electric, as required by the terms of its bond agreement with Erie, assigned all of its rights under the Subcontract to Erie, including the right of payment for all contract balances owed to Fountain Electric. Erie, as subrogee of Fountain Electric, then made a demand upon Winter for payment of all remaining contract balances that Winter owed to Fountain Electric. On November 5, 2007, Winter made payment of $236,727.98 to Erie, representing “undisputed” amounts that it owed to Erie, as subrogee of Fountain Electric. Winter withheld an additional $466,522, claiming it was entitled to withhold these remaining funds based upon the provision in the Subcontract that is at issue. After a recalculation and retainage released from the owner of the Project, Winter made a second payment to Erie, as subrogee of Fountain Electric. To date, Winter continues to withhold $350,000 from Erie based on the provision in the contract.

After Winter's failure to make payment, Erie initiated this action by filing a breach of contract claim against Winter. Erie's complaint asserted two causes of action. First, Erie contended the liquidated damages provision included in the Subcontract constituted an unenforceable penalty under South Carolina law. Second, Erie alleged that it is entitled to attorney's fees pursuant to section 27–1–15 of the South Carolina Code (Supp.2010) based on Winter's alleged refusal to pay Erie “all amounts due.” Winter timely filed its answer, denying any liability on Erie's claims.

Erie filed a motion for summary judgment on April 14, 2008, on the ground that the contractual clause at issue was an unenforceable penalty. Winter filed a cross-motion for summary judgment on both causes of action. A hearing on the parties' summary judgment motions was held on October 14, 2008. On May 26, 2009, the trial court issued an order granting plaintiff's motion for summary judgment and denying defendant's motion for summary judgment (“Order”). In granting summary judgment in favor of Erie, the trial court ruled the contractual clause Winter had relied on in withholding payment was an unenforceable penalty. The Order further held that a question of material fact existed regarding Erie's claim to attorney's fees under section 27–1–15. This appeal followed.

STANDARD OF REVIEW

Summary judgment is proper when it is clear that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. See Rule 56(c), SCRCP; Tupper v. Dorchester Cnty., 326 S.C. 318, 325, 487 S.E.2d 187, 191 (1997). When plain, palpable, and indisputable facts exist on which reasonable minds cannot differ, summary judgment should be granted. Ellis v. Davidson, 358 S.C. 509, 518, 595 S.E.2d 817, 822 (Ct.App.2004).

When reviewing the grant of summary judgment, this Court applies the same standard that governs the trial court under Rule 56, SCRCP. Pittman v. Grand Strand Entm't Inc., 363 S.C. 531, 536, 611 S.E.2d 922, 925 (2005) (citing S.C. Elec. Gas Co. v. Town of Awendaw, 359 S.C. 29, 34, 596 S.E.2d 482, 485 (2004) and Osborne v. Adams, 346 S.C. 4, 7, 550 S.E.2d 319, 321 (2001)). On appeal, all ambiguities, conclusions, and inferences arising in and from the evidence must be viewed in a light most favorable to the nonmoving party. Pittman, 363 S.C. at 536, 611 S.E.2d at 925.

LAW/ANALYSIS

Winter contends the trial court erred in holding the administrative burden provision in the Subcontract is an unenforceable penalty provision. We agree.

Basic contract law provides that when a contract is clear and unambiguous, the language alone determines the contract's force and effect. C.A.N. Enters., Inc. v. S.C. Health & Human Servs. Fin. Comm'n, 296 S.C. 373, 377, 373 S.E.2d 584, 586 (1988). It is not the function of the court to rewrite contracts for parties. Lewis v. Premium Inv. Corp., 351 S.C. 167, 171, 568 S.E.2d 361, 363 (2002). South Carolina law allows parties to prospectively set an amount of damages for breach through the inclusion of a liquidated damages provision. Id. at 172, 568 S.E.2d at 363 (finding that parties to a contract may stipulate as to amount of liquidated damages owed in event of nonperformance). Such provisions are widely used in construction contracts and have been generally enforced as an appropriate remedy for breach. See 11 S.C. Jur. Damages § 65 (2010); Restatement (Second) of Contracts § 356 (1981).

The dispositive test on whether a provision in a contract is for liquidated damages or is an unenforceable penalty was set forth by our supreme court in Tate v. LeMaster:

Implicit in the meaning of ‘liquidated damages' is the idea of compensation; in that of ‘penalty,’ the idea of punishment. Thus, where the sum stipulated is reasonably intended by the parties as the predetermined measure of compensation for actual damages that might be sustained by reason of nonperformance, the stipulation is for liquidated damages; and where the stipulation is not based upon actual damages in the contemplation of the parties, but is intended to provide punishment for breach of the contract, the sum stipulated is a penalty.

231 S.C. 429, 441, 99 S.E.2d 39, 45–46 (1957); see also Kirkland Distrib. Co. of Columbia, S.C. v. U.S., 276 F.2d 138, 145 (4th Cir.1960). Moreover, “[w]hether such a stipulation is one for liquidated damages or for a penalty is ... primarily a matter of the intention of the parties.” Tate, 231 S.C. at 441, 99 S.E.2d at 45; see also Benya v. Gamble, 282 S.C. 624, 630, 321 S.E.2d 57, 61 (Ct.App.1984), cert. granted, 284 S.C. 366, 326 S.E.2d 654, and cert. dismissed, 285 S.C. 345, 329 S.E.2d 768 (1985). Accordingly, we look to the language of the Subcontract and the reasonable intention of the parties to determine if the liquidated damages provision was the predetermined measure of compensation.A. Language of the Subcontract

The law in this state regarding the construction and interpretation of contracts is well settled. See Conner v. Alvarez, 285 S.C. 97, 101, 328 S.E.2d 334, 336 (1985). When the language of a contract is clear, explicit, and unambiguous, the language of the contract alone determines the contract's force and effect and the court must construe it according to its plain, ordinary, and...