Southern, School Bldgs., Inc. v. Loew Elec., Inc.

• Decision Date: 09 July 1980
• Docket Number: No. 3-879A241,3-879A241
• Citation: 407 N.E.2d 240
• Parties: SOUTHERN, SCHOOL BUILDINGS, INC., Appellant (Defendant Below), v. LOEW ELECTRIC, INC., Appellee (Plaintiff Below).
• Court: Indiana Appellate Court

Page 240

407 N.E.2d 240

SOUTHERN, SCHOOL BUILDINGS, INC., Appellant (Defendant Below), v. LOEW ELECTRIC, INC., Appellee (Plaintiff Below).

No. 3-879A241.

Court of Appeals of Indiana, Third District.

July 9, 1980.

Martin H. Kinney, Merrillville, for appellant.

Clifford E. Simon, Jr., Shoaff, Keegan, Baird & Simon, Fort Wayne, David C. Jensen, Eichhorn, Eichhorn & Link, Hammond, for appellee.

STATON, Judge.

In 1972 Loew Electric, Inc., an electrical contractor, entered into a written agreement with Southern, School Buildings, Inc., a builder and owner of educational facilities. Under the terms of the contract, Loew Electric agreed to complete all electrical work in the construction of Jay County High School in consideration for the sum of $946,910.00.

Pursuant to the agreement, the electrical work was required to conform to specifications, incorporated into the contract. Included in the contract was a proviso whereby a third party an architectural firm named K.M. Associates, Inc. was vested with responsibility to inspect Loew's work and evaluate its conformity with contract specifications. According to the contract, Loew was entitled to interim payments as its work at the construction site progressed; Southern, on the other hand, was entitled to retain ten (10) per cent of the contract price as "final payment" to insure Loew's ultimate compliance with its contractual obligations.

As Loew's work at the construction site proceeded, it received payments from Southern proportionate to the work completed and approved. Ultimately, those payments totaled approximately $850,000.00.

In February of 1976, an architect for K.M. Associates inspected Loew's final work product and certified that it was completed in accordance with contract specifications. Loew Electric then requested that Southern pay the outstanding balance on the contract account, which included the ten per cent retainage and various "extra" costs incurred by Loew not originally included in the contract.

Notwithstanding the certification, Southern refused to pay the balance. This refusal was motivated by Southern's belief that Loew's work did not in fact conform to contract specifications; in turn, Southern claimed its contractual obligation to make final payment was dependent not only on the architect's certification, but also, on its own determination that Loew's work conformed to contract specifications. Southern also claimed that it was not responsible for "extra" costs incurred by Loew because no authorization for these extra costs had been given by Southern as required under contract.

After Southern refused to pay the outstanding balance, Loew Electric instituted this action to recover the monies it considered due. Prior to trial Loew sought leave to amend its complaint to add a count for punitive damages against Southern, which was denied by the court. The cause was tried to a jury, which found for Loew Electric and awarded it damages in the amount of $112,890.53, plus $23,171.21 in accrued prejudgment interest. The jury also awarded Southern $5,088.00 on its counterclaim, which sought attorney fees and costs incurred by Southern as a result of the suit.

Both parties then filed Motions to Correct Errors. The trial court denied Southern's motion, but granted Loew Electric a new trial solely on the issue of punitive damages.

On appeal, Southern has raised the following issues for our review:

(1) Whether the trial court erred in giving Loew's tendered instructions numbered 1, 3, and 4?

(2) Whether the trial court erred in refusing Southern's tendered instructions numbered 7, 10, 12, and 18?

(3) Whether the jury's verdicts were inconsistent?

(4) Whether the court erred in granting Loew Electric a new trial on the issue of punitive damages?

We affirm in part and reverse in part. We conclude that the trial court committed reversible error when it gave Loew's tendered instruction 1; Southern is granted a new trial on the issue of Loew's claim to the ten per cent retainage and interest thereon. ¹ In all other respects, the trial court is affirmed.

I.

Instructions Given

A. Loew's Tendered Instruction 1

Loew Electric's tendered instruction 1, which was given by the trial court, reads:

"It is a rule of law in Indiana that where a contract provides that work shall be done to the satisfaction, approval, or acceptance of an architect or engineer, he is thereby constituted a sole arbitrator by the parties, who are bound by his decision in the absence of fraud or such gross mistake as to imply bad faith or a failure to exercise honest judgment. His decision is not conclusive to the extent that it cannot be reviewed by a court. It is only prima facie correct and the burden is upon the other party to show fraud or mistake. Accordingly, if you find that the architects, K/M Associates, Inc., did accept the work performed by Loew Electric Inc., and approved payment therefor, Plaintiff is entitled to recover the amounts approved by the architects as of the payment dates set forth in the contract between the parties, unless Defendant proves, by a preponderance of the evidence, fraud on the part of the architects or such gross mistake on the part of the architects as to imply bad faith."

Southern contends that the instruction was improper because it misled the jury regarding the contractual rights and obligations between itself and Loew Electric. Specifically, Southern argues that, contrary to the express language of the instruction, Loew was not "entitled" to final payment simply because the architect certified its work as completed in accordance with contract specifications. Rather, Southern asserts, its own determination that Loew's work conformed to contract specifications was also a condition precedent to Loew's right to final payment. In response, Loew argues that the instruction was an accurate statement of law and properly described the contractual rights and obligations of the parties. We agree with Southern.

It is true that the statement of law incorporated into the instruction accurately reflects Indiana case precedent. It has often been stated that when a contract provides that work is to be "done to the satisfaction, approval, or acceptance of an architect or engineer, he is thereby constituted a sole arbiter by the parties. . . ." McCoy v. Able et al. (1892), 131 Ind. 417, 30 N.E. 528, 31 N.E. 453, quoted in Lake Mich. Water Co. v. U.S. Fidelity, etc. Co. (1919), 70 Ind.App. 537, 123 N.E. 703, 705, and James I. Barnes Const. Co. v. Washington Township (1962), 134 Ind.App. 461, 184 N.E.2d 763, 764.

Our courts apparently have not heretofore confronted a contract wherein an architect's or engineer's certificate was not made conclusive upon the parties. ² That the effect of an architect's or engineer's certificate is wholly dependent upon its contractual context is axiomatic. The parties to a contract have the right to define their mutual rights and obligations as they see fit. Prudential Insurance Co. v. Lancaster (1966), 139 Ind.App. 292, 219 N.E.2d 607, 609. Were our courts to regard an architect's or engineer's certificate as per se conclusive upon the parties, irrespective of the contractual role accorded the certificate by the parties, we would invade the sanctity of the contractual relationship. As explained in Jaeger, Williston on Contracts § 789 p. 803 (3rd Ed. 1961):

"The mere fact that an architect's or engineer's certificate is made a condition precedent to the liability of the owner does not establish necessarily the fact that the builder has fulfilled his main obligation to build according to the plans and specifications and in a workmanlike manner. The owner may have protected himself doubly: first, by a condition requiring an architect's certificate before payment is due; and second, by the builder's promise or by some other additional condition. In such a case, even though the condition requiring a certificate is fulfilled, a builder will still remain liable for the fulfilment of the second condition or for breach of his promise." (Footnotes omitted.).

Cf., Mercantile Trust Co. v. Hensley (1907), 205 U.S. 298, 27 S.Ct. 535, 51 L.Ed. 811 (absent provision to the effect that architect's certificate is conclusive, it is not binding on the parties). Gerisch v. Herold (1913), 82 N.J.L. 605, 83 A. 892 (proof of owner's satisfaction as well as architect's certificate required under contract); Smith v. Goff (1958), Okl., 325 P.2d 1061 (construction of home in "good and workmanlike manner", as well as to satisfaction of architect, required by contract). Other jurisdictions have consistently held that inasmuch as a "sole arbiter" proviso is in derogation of common law, the intent to so appoint an architect or engineer must be unequivocally expressed. Mercantile Trust Co. v. Hensley, supra ("To make such certificate conclusive requires plain language in the contract. It is not to be implied."); Zimmerman v. Marymoor (1927), 290 Pa. 299, 138 A. 824, 825 ("As the effect of the architect's certificate is to deprive a party of trial by jury, it must be construed strictly.")

Here, the parties unequivocally indicated in their written contract that K.M. Associates' certificate of approval was not to be conclusive upon Southern insofar as its duty to make final payment was concerned. Paragraph two (2) of Southern and Loew's agreement reads:

"2. CONTRACT PRICE : The 'OWNER' shall pay to the 'CONTRACTOR' for the performance of this contract, the contract price of NINE HUNDRED FORTY-SIX THOUSAND, NINE HUNDRED TEN and 00/100 ($946,910.00) Dollars. Payments are to be made to the 'CONTRACTOR' in accordance with and subject to the provisions embodied in the documents made a part of this contract and according to the conditions hereinafter set out in this contract, provided partial waivers of liens from 'CONTRACTOR' and all suppliers and subcontractors of 'CONTRACTOR' are delivered to 'OWNER' for each payment requested. Ten (10%) Per Cent of...