Health Related Services, Inc. v. Golden Plains Convalescent Center, Inc., No. WD

• Decision Date: 26 March 1991
• Docket Number: No. WD
• Citation: 806 S.W.2d 102
• Parties: HEALTH RELATED SERVICES, INC., Respondent, v. GOLDEN PLAINS CONVALESCENT CENTER, INC., Appellant. 42543.
• Court: Missouri Court of Appeals

Page 102

806 S.W.2d 102

HEALTH RELATED SERVICES, INC., Respondent, v. GOLDEN PLAINS CONVALESCENT CENTER, INC., Appellant.

No. WD 42543.

Missouri Court of Appeals Western District.

March 26, 1991.

Benjamin F. Mann and Douglas J. Schmidt, Kansas City, for appellant.

Duane J. Fox and Paul G. Schepers, Kansas City, for respondent.

Before LOWENSTEIN, P.J., and SHANGLER and MANFORD, JJ.

SHANGLER, Judge.

Health Related Service, Inc. [HRS] sued Golden Plains Convalescent Center, Inc. [Golden Plains] for the breach of a management contract by refusing to allow HRS to make the agreed performance. Golden Plains alleged that HRS breached the contract by failing to make the agreed performance and counterclaimed for damages. The jury found in favor of the claim of HRS and against the counterclaim of Golden Plains, and assessed damages of $170.647.12. Golden Plains appeals the judgment entered upon the verdict in favor of HRS.

HRS contracted to manage Golden Plains, a skilled nursing home in Kansas, for a term of ten years. There was included an option to either party to renew the contract for two successive ten year terms. HRS was to receive the greater of 5% of the gross revenues of the nursing home or $750 per month. In exchange, HRS agreed to operate and manage the facility. Those services included the supervision of the nursing home, the recruitment and training of personnel, establishment of fiscal policies and rates for patient care, purchase of supplies, the supervision of dietary and food preparation, advice as to insurance coverages, and other such incidents of operation.

The contract took effect in January of 1977. HRS was acquired by Research Health Services, Inc. in October of 1981. Following that acquisition Golden Plains began to experience dissatisfactions with the HRS management of the facility. They included the failure to pay vendor invoices on time, to supply payroll checks and to adequately staff the operation, among other neglects. Golden Plains informed HRS of these lapses in the obligation to perform, and on December 17, 1982, formally terminated the contract.

HRS followed with this suit and alleged that the termination constituted a breach of the contract. The petition sought as damages the lost profits from the remainder of the ten year term as well as the two ten-year option terms. The Golden Plains counterclaim alleged that the numerous failures by HRS to make performance effectively terminated the contract and sought damages for that default.

Golden Plains sold most of its assets in October of 1984 and left the nursing home business. At that time also the number of homes HRS managed was in decline. In November of 1984 HRS decided no longer to manage nursing homes. In January of 1987 the last of the HRS nursing home management contracts was terminated. There was evidence that thereafter HRS continued as a shell corporation without business activity. There was evidence also that at the time the contract was terminated and thereafter, HRS had access to the full resources of its parent, Research Health Services--a system of some 32 corporations--so that had not Golden Plains terminated that management contract, HRS would have been fully capable of performing the required services.

We note at the outset of the discussion of the legal issues the agreement of the parties that the substantive law of Kansas governs their dispute.

I. Submissibility of the HRS Claim

Golden Plains asserts first that the trial court erroneously denied its motion for judgment notwithstanding the verdict because HRS failed to prove a submissible breach of contract. In order to prove a case under the theory Golden Plains propounds, HRS "had to show that it properly performed all of its duties under the contract rendering the performance by Golden Plains necessary." [emphasis added] It is the sense of the argument that, in the absence of evidence that there was "satisfactory performance" of all the obligations owed by HRS, "Golden Plains had just cause to terminate the contract."

This argument undertakes to correlate two deemed principles of contract law. One is, that the strict and literal performance of the terms of the contract is the condition precedent to recovery on the contract. The other is, that the failure to make exact performance constitutes a material breach and entitles the other party to repudiate the contract and treat the obligation for further performance as rescinded. One invokes a rule in general discard, and the other an application of a rule incompatible with the law as now evolved. The common law rule that required exact performance of the contract has given way to the modern view that allows recovery for substantial performance done in good faith. That is the principle that obtains in general, and the principle that governs contract disputes under Kansas law. 17A C.J.S. Contracts § 508 (1963); 17A Am.Jur.2d Contracts § 631 (1991); Holder v. Kansas Steel Built, 224 Kan. 406, 582 P.2d 244, 250 (1978).

A cause of action for the contract price is proven by evidence that the plaintiff has in good faith made substantial performance of benefit to the other party, a benefit retained--subject nevertheless to the right of the other party for recoupment of damages for the imperfect performance. Id.; 17A C.J.S. Contracts § 508 (1963). The doctrine of substantial performance expresses the presumption that the exchange contractors expect from each other is that of a reasonable performance. Restatement (Second) of Contracts § 241 comment b (1981). Thus, the doctrine operates when the defects in performance are sufficiently slight that damages will complete the contract. 17A Am.Jur.2d Contracts § 632 (1991). A material defect or failure in performance, however, is not a reasonably expected performance, and so operates to prevent the duty of the other party to perform from becoming due. McKnight v. Midwest Eye Inst., 799 S.W.2d 909, 915 (Mo.App.1990); Restatement (Second) of Contracts § 237 comment a (1979). The effect of the Golden Plains argument is that the failure of HRS to perform the contract was material, and so precluded HRS from a theory of substantial performance, and excused Golden Plains from any further obligation to perform. The specific lapses of performance are not described, other than as allegations in the Golden Plains counterclaim. The brief merely alludes to 27 pages in the transcript cross-examination of HRS vice-president Fischer as proof that "Golden Plains was dissatisfied with HRS' services and had repeatedly voiced its dissatisfaction." It is apparent from that testimony, from the exchange of correspondence, and the testimony of Golden Plains employees, that in 1981 Golden Plains acquired a new administrator and HRS was acquired by Research Health Services. It was a period of readjustment of the systems of operation between them and also of complaints.

The dissatisfactions--some of them petty, others of more consequence--ranged from the shortage of linens to late payment of invoices, late payrolls and the failure to obtain medicare reimbursements due, among others. There was evidence that HRS was responsive to these complaints and disposed to correct them. There was other evidence that some were never fully resolved to Golden Plains' satisfaction. It is this residue of dissatisfaction, Golden Plains seems to insist, that proves not only that HRS failed to perform under the contract, but also a fundamental breach that both denies HRS any right to recover and justifies Golden Plains to terminate the contract.

It is not every dissatisfaction with a contract performance, nor even every breach--but only a material breach--that excuses performance by the other party. See McKnight v. Midwest Eye Inst., 799 S.W.2d at 915 and Village of Cairo v. Bodine Contracting Co., 685 S.W.2d 253, 260[9-11] (Mo.App.1985). The circumstances significant to that determination are given in Restatement (Second) of Contracts § 241 (1981). They are explained and applied in McKnight v. Midwest Eye Inst., 799 S.W.2d at 915[9-11]. It is sufficient to say that, under those principles, neither the evidence nor the arguments Golden Plains brings to bear, shows any HRS neglect that constitutes a material failure to perform under the contract. Those considerations that determine whether performance is substantial are those that determine whether a failure is material. Restatement (Second) of Contracts § 237 comment d (1979). It follows that HRS proved a submissible case of breach of contract.

II. Submissibility of Damages

Golden Plains argues also that, the cause was not submissible in any event, because the claim for lost profits, the only damages sought by HRS, was not proven. The argument cites Kansas authority to the effect that loss of profits as an element of damages for contract breach are recoverable when "proved with reasonable certainty, and when they may reasonably be considered to have been within the contemplation of the parties." Vickers v. Wichita State Univ., 213 Kan. 614, 518 P.2d 512, 515 (1974). Vickers, the leading exponent in Kansas on loss of profits, also holds, "The fact that damages cannot be calculated with absolute exactness will not render them so uncertain as to preclude assessment." Id. at 516.

Golden Plains contends that the HRS evidence of damage calculations, based not only on the four years that remained on the contract, but also on the two successive ten-year options, was wholly speculative. The HRS testimony that they would have exercised the options to renew, moreover, was contradictory, Golden Plains asserts, and not trustworthy. In any event, the argument goes, that evidence "cannot overcome" the fact that HRS voluntarily chose to leave the business of nursing home management in 1984, before the first option to renew ever accrued. It was "sheer speculation," Golden Plains argues, to conclude that HRS would have renewed the contract with Golden Plains when HRS had...