#30007-r-PJD
2023 S.D. 48
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
TOM SMITH DBA TOM SMITH
MASONRY, Plaintiff and Appellant,
v.
WIPI GROUP, USA, INC., Defendant and Appellee,
and
LINCOLN COUNTY, SOUTH DAKOTA, Defendant.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SECOND JUDICIAL CIRCUIT
LINCOLN COUNTY, SOUTH DAKOTA
****
THE HONORABLE DOUGLAS E. HOFFMAN
Judge
****
JEFFREY L. BRATKIEWICZ of
Bangs, McCullen, Butler, Foye
& Simmons, LLP
Sioux Falls, South Dakota Attorneys for plaintiff and
appellant.
RONALD A. PARSONS, JR. of
Johnson, Janklow & Abdallah, LLP
Sioux Falls, South Dakota Attorneys for defendant and
appellee.
****
CONSIDERED ON BRIEFS
JANUARY 9, 2023
OPINION FILED 09/20/23
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DEVANEY, Justice
[¶1.] Tom Smith Masonry (Smith Masonry) instituted a mechanic’s lien
foreclosure action against WIPI Group USA, Inc. (WIPI), seeking to recover the
unpaid balance due under the parties’ construction contract and an award of
attorney fees. WIPI answered, asserting that Smith Masonry failed to properly
complete the work called for in the contract. WIPI also asserted claims for breach of
contract, breach of express warranty, and breach of implied warranty of reasonable
workmanship. After a six-day bench trial, the circuit court determined that Smith
Masonry had a valid mechanic’s lien for the unpaid contract balance; however, the
court further determined that WIPI was entitled to an offset because Smith
Masonry’s work did not meet a reasonable standard for construction of this nature.
The court relied on principles of equity to deny both parties relief and ordered that
each party be responsible for their own attorney fees and costs. Smith Masonry
appeals, asserting the circuit court erred in multiple respects in denying its
requested relief and abused its discretion in denying an award of attorney fees. We
reverse in part and remand in part.
Factual and Procedural Background
[¶2.] Tom Smith owns and operates Smith Masonry, and at the time of the
contract at issue, his sons, Brent and Brady, worked for his company. On February
14, 2014, Smith Masonry entered into a contract with WIPI to construct a fence
along the front of WIPI’s property in an industrial park. The construction of the
fence was part of a larger project wherein WIPI was converting an industrial
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building into a commercial office space. WIPI acted as the general contractor for
the project, and counsel for WIPI drafted the contract with Smith Masonry.
[¶3.] WIPI agreed to pay Smith Masonry a total of $60,387, with 40% paid
as a down payment, 57% due “upon satisfactory completion of the work as
determined by both parties and as outlined in [the contract],” and 3%, retained by
WIPI for one year, to be paid to Smith Masonry after satisfactory completion of the
general guarantee contained in the contract. The contract stated that WIPI would
pay Smith Masonry $28,620 for the construction and installation of twelve stone
veneer columns for the fence and two additional stone veneer columns for a sign,
$24,827 for subcontractor American Fence’s portion of the work for fence panels and
a gate, and $6,940 for a sign base. The contract incorporated a drawing by Tom
depicting a rough layout of the columns and fence panels on the property. The
drawing indicated that the columns would be 20 inches by 20 inches in width, with
two-by-two-foot caps, and that square footings would be 46 to 48 inches deep. The
contract also incorporated a surveyed site plan showing the proposed location of the
columns and fence. Pursuant to the contract, if there were any change orders, they
were to “be made by written agreement of all the parties.”
[¶4.] After WIPI paid the down payment, but before any work on the project
began, the parties executed an addendum to the original contract. Under the
addendum, Smith Masonry agreed to construct a fence around the entire lot. This
change required an additional 40 masonry columns at a sum of $95,400 and
additional fence panels at a sum of $23,515. The contract indicated that the
columns would be 29 inches by 24 inches in width, 6 feet tall, and spaced 24 feet
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apart. Similar to the original contract, Smith Masonry was to construct the
columns, American Fence was to install the panels, and any changes to the scope of
the work were to “be made by written agreement of all the parties.” WIPI agreed to
pay an additional $118,915 under the same payment terms as the original contract.
A surveyed site plan depicting the proposed location of the columns and fence was
attached to the addendum.
[¶5.] When construction began, Smith Masonry subcontracted with Krueger
Excavation to perform the dirt work and pour the concrete footings. Smith Masonry
had Krueger Excavation pour circular (not square), 24-inch footings at a depth of 46
to 48 inches. Tom claimed that he used circular rather than square footings
because the auger drilled circular holes and the use of circular footings made it
easier for Smith Masonry to keep the fence within the property boundary lines.
[¶6.] While Krueger Excavation was responsible for digging the holes for the
column footings and for pouring the concrete, Smith Masonry determined the
location of the holes. Tom and his son Brady both testified that the presence of
underground utilities played a role in where the holes ended up being dug and in
the number of columns Smith Masonry ultimately constructed. As a result, while
the contract called for 52 columns, Smith Masonry constructed 59 to avoid utility
lines and “for the spacing to work out[.]” The change in the number of columns
constructed and other changes raised the total cost of the project to $201,387. Tom
claimed that WIPI approved these changes and that change orders were drafted as
a result. However, WIPI never signed the change orders.
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[¶7.] In addition to constructing 59 rather than 52 columns, Smith Masonry
constructed larger columns than what the contract called for. While this increased
the cost of the columns, Smith Masonry did not charge WIPI for the increased cost.
According to Tom, larger columns were constructed “[f]or the general appearance of
the structure and to receive the fence and make sure it was finished and balanced
and proportionate.” Tom also claimed that WIPI approved the larger columns. In
regard to the spacing between the columns, Tom testified that Smith Masonry did
not space the columns 24 feet apart or place the columns in accord with the site
plan attached to the contract because the terrain made it impossible to do so. He
further testified that WIPI was aware of the inconsistent spacing and voiced no
objection.
[¶8.] In August 2014, WIPI advanced Smith Masonry $50,000. WIPI
claimed that Smith Masonry requested the advance because it needed to pay
subcontractors and to purchase materials. Around this same timeframe, Smith
Masonry requested final payment under the contract, and thereafter, Tom and
Brady conducted a walk around the property with Albino Aboug (the owner of WIPI)
to look at the columns. Tom testified that Albino expressed approval of the
columns, did not indicate there were too many, and did not express any concerns
about the spacing or aesthetics. As to these matters, Brady testified similarly to
Tom.
[¶9.] Brady also testified that by this time, American Fence had nearly
completed its work installing the panels. While American Fence had dug holes for
the posts that would become the gooseneck stand with a keypad for the front gate to
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slide back and forth, American Fence could not install the gate operator because
electricity had not been provided. According to Brady, WIPI believed Smith
Masonry was required to run electricity to the keypad so the gate operator could
function. Brady explained that after he informed WIPI that neither Smith
Masonry’s contract nor American Fence’s contained the requirement to run
electricity to the gate operator, the parties tried to address the issue. While
discussions were ongoing about the gate, the parties were also having conversations
about final payment to Smith Masonry and about American Fence’s request for
payment for its completed work. It is undisputed that WIPI did not make further
payment to Smith Masonry. It is also undisputed that American Fence stopped
work on the project in September 2014.
[¶10.] When American Fence stopped work, all of the fence panels had been
installed; however, some of the brackets needed adjusting to bring the fence panels
into alignment. Also, although the gate had been installed and the holes were
drilled for the gate operator, American Fence did not install the gate operator or
finish securing the gates because electricity was never provided.
[¶11.] Between September and December 2014, Smith Masonry and WIPI
had multiple conversations concerning final payment on the project, including
payment to American Fence. However, WIPI refused to remit further payments,
and American Fence filed a mechanic’s lien on WIPI’s property. Although Smith
Masonry was required under the contract to indemnify and defend against this
subcontractor lien, WIPI made a direct payment to American Fence for $38,000 to
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satisfy the lien. According to American Fence, it was not made whole by WIPI’s
payment but accepted it and released the lien based on an agreement with Tom.
[¶12.] Although WIPI paid American Fence to satisfy American Fence’s
mechanic’s lien, it continued to refuse to remit final payment to Smith Masonry.
On December 15, 2014, Smith Masonry filed a mechanic’s lien for $41,672 on WIPI’s
property, representing what Smith Masonry believed it was owed under the
contract. Thereafter, the parties communicated about concerns WIPI had related to
the fence project and Smith Masonry’s attempts to obtain final payment. At some
point in 2016, while communications were ongoing between Smith Masonry and
WIPI, American Fence went to WIPI’s property to attempt to address, at no
additional cost to WIPI, alignment issues that had occurred with the fence panels.
However, WIPI did not allow American Fence to do the work. WIPI also refused to
remit any additional payment to Smith Masonry.
[¶13.] In January 2017, Smith Masonry instituted this action to foreclose on
its mechanic’s lien. In its complaint, it claimed that it “timely and properly and
substantially completed its work in accordance with its agreement with” WIPI. It
further claimed that WIPI had made total payments in the amount of $159,714.90,
leaving a total unpaid balance of $41,672.20 as of September 23, 2014. Smith
Masonry requested that the circuit court find its lien valid and foreclose on the lien
to satisfy the amount owed. Smith Masonry also requested an award of attorney
fees.
[¶14.] In its answer, WIPI denied that Smith Masonry “properly completed
the work called for in the contract” and the addendum. It also asserted multiple
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counterclaims, including breach of contract, breach of express warranty, and breach
of implied warranty of reasonable workmanship. WIPI alleged that Smith
Masonry’s “faulty workmanship has resulted in stone columns that have heaved
and/or moved[,]” referring specifically to a failure to provide footings at a sufficient
depth. WIPI further alleged that the movement of the columns caused the steel
posts and crossbeams that connect the stone columns to move. WIPI asserted that
because of Smith Masonry’s faulty workmanship, the fence must be totally removed
and replaced at a cost in excess of the parties’ original contract price. WIPI sought
damages at an amount not less than $300,000.
[¶15.] A six-day bench trial was held on February 6–8, May 13–14, and May
16, 2019. Tom, Brady, and Brent each testified about the construction of the
columns. Tom acknowledged that the columns were not constructed in conformity
with the contract specifications, namely that there were more columns, the columns
were larger, and the columns were not spaced 24 feet apart. However, he testified
that each change was approved by WIPI and opined that the columns were
nevertheless constructed to masonry standards. When questioned about issues that
had been identified in WIPI’s pretrial expert witness disclosures (in particular,
Smith Masonry’s use of circular foundations that were smaller in diameter than the
constructed columns and whether this could cause the columns to shift), Tom and
Brady each opined that the circular foundations aligned with masonry standards
and provided a sufficient foundation for the constructed columns. Tom was also
questioned about Smith Masonry’s decision to not center some of the columns on the
foundations, which then resulted in these columns having a lip or ledge
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overhanging the footing. He testified that the placement decision was intentional
and was done for aesthetic reasons (i.e., to adjust spacing between columns) and
that the offset of the columns on the footings was not a problem because they would
still be adequately supported by the footings.
[¶16.] Tom, however, agreed that one of the columns was leaning, that there
were multiple fence panels out of alignment, and that there were connection issues
between the panels and columns. In Tom’s view, the one column that was
noticeably tipping was not something Smith Masonry could have controlled because
it was the result of the column being in the drainage way of the building’s gutter
system. He explained that “[w]ater is masonry’s worst enemy” because of “[t]he
frost cycles, the wet soils, all conditions related to the water.” He further claimed
that other than the one column, the rest “were nice and apportioned or in good level
or plumbness” and that they “were in line and true.”
[¶17.] In regard to the fence portion of the project, Matt Vogel explained that
American Fence had agreed to install 376 feet of five-foot tall, eight-foot wide black
ornamental steel fence panels between the masonry columns with intervening
support posts. The intervening support posts were installed with 36- to 42-inch
deep footings, and the spacing between two masonry columns dictated whether
American Fence installed one or two intervening support posts. According to Vogel,
attaching this type of fence to masonry columns is difficult. He testified that some
of the brackets he used for attaching the fence panels to the columns did not attach
right and that some panels were not aligned. He also testified that the front gate
American Fence installed had fallen to the ground.
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[¶18.] According to Vogel, the issues with the fencing were not Smith
Masonry’s fault, and he explained that American Fence would ordinarily make final
adjustments after completing the installation to remedy any issues. However, on
this project, American Fence did not conduct a walkthrough to address what he
regarded as “punch list” items because they stopped work on the project due to
nonpayment, and when they later attempted to return to the project to remedy
these issues, WIPI would not allow them to do so.
[¶19.] Smith Masonry also called Corey Visscher from Michaels Fence &
Supply as a witness. In March 2015, Visscher had been asked by counsel for WIPI
to examine WIPI’s fence to determine what could be done to repair it. He testified
that when he examined the fence, he could see alignment and attachment issues.
He further testified that he did not see anything wrong with the connections to the
masonry columns, but he noticed issues with the connections between the fence
panels and the fence posts. His proposal to remedy the “up and down look of the
fence” was to change the type of brackets used to one that could be adjusted
vertically when necessary, for a total cost of $1,555.96 plus tax.
[¶20.] For its case-in-chief, WIPI called Paul Reynolds as a witness to testify
about his knowledge of constructing foundations to account for the freeze/thaw cycle
based on his thirty years in the construction industry. WIPI had hired Reynolds’s
company to construct the office spaces, conference rooms, and a second floor in the
building on the site and to be in charge of constructing the façade on the outside of
the building.
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[¶21.] Reynolds testified that he was still working at the site when Smith
Masonry and American Fence were working on the fence project. He claimed that
he had noticed horizontal and vertical movement in the fence panels, bolts coming
off where the panels were connected to the columns, and some columns leaning.
Reynolds expressed his opinion that the foundations for the columns were not
constructed properly because the foundation did not encompass the entire column,
leaving edges or ridges along the foundation. The shape and size of the footing was
also problematic, according to Reynolds, because it was circular in shape and
smaller than the base of the column; therefore, if the dirt “freezes to a point, it is
going to start to push up.” He opined that this is “what happened in this situation.”
[¶22.] When asked, “What would be involved in trying to repair this,”
Reynolds replied that “[t]he simplest way but, unfortunately, the most expensive
way, would be to wipe them out and rebuild them.” He agreed that regardless of
whether repair or replacement is done, “either method is going to involve lots and
lots of labor” and each column would need to be repaired or replaced. However,
during cross-examination, he conceded that he could not say whether he saw any of
the foundations being installed and he only looked at a few columns where the fence
panels had fallen down. He also acknowledged that he did not look at the fence
posts and could not rule out that the posts could have caused the stress on the fence
panels.
[¶23.] WIPI also called surveyor Eric Meyer. WIPI had retained Meyer in
February 2017 to conduct a survey of the horizontal and vertical position of the
columns, the fence posts between the columns, and the points where the fences
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attached to the columns. Meyer testified that when he looked down the fence line,
“it didn’t look like it was all the same elevation” and “you could see it, they weren’t
lining up.” Regarding his survey, Meyer testified that he determined the elevation
and horizontal position of every post and column and whether the columns were
evenly spaced apart. He then conducted the same survey a year later in March
2018, so he could determine whether movement had occurred since 2017. Referring
to an exhibit he created, Meyer testified that all the columns within his survey,
except for one or two, registered measurable movement.
[¶24.] To supplement Meyer’s testimony about the fact of movement, WIPI
called Karl Liester, a geotechnical engineer, to testify about the cause of the
movement of the columns, fence posts, and panels. Liester testified that he visited
the site in November 2017, and based on his visual observation, he could see that
some columns and fence panels were out of alignment. As part of his testimony,
multiple photographs were admitted into evidence depicting what Liester had
observed during his November 2017 inspection; during part of an excavation
conducted on one column in March 2018; and from another site visit in May 2019.
Through these pictures, Liester described the vertical and lateral movement
occurring with the fence panels and the vertical movement of the steel fence posts.
[¶25.] In regard to the columns, Liester testified, consistent with Tom’s
opinion, that one column on the north end of the gate is noticeably leaning, but he
also testified that the entire row of columns on the east end was starting to lean
out. In Liester’s view, the possible causes for this movement “would be expansive
soils, soft soils, frost heave, some type of structural damage[.]” He further
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explained that if the foundations for the columns were not constructed correctly, the
freeze/thaw cycle could move the structures. According to Liester, constructing the
columns with larger footings and placing the columns squarely on top of the
footings, as depicted in Tom’s drawing that was made part of the contract, could
have minimized the problems he identified. He also testified that it is “very likely”
the fence as currently constructed will continue to experience movement if not
repaired and claimed that while adjusting the fence panels would probably provide
a temporary fix, this would not fix the movement in the columns.
[¶26.] However, on cross-examination, Liester agreed that multiple other
factors could cause movement in the columns, including wind, gravity, tectonic
activity, vandalism, settlement, the high water table at this location, frost, surface
water drainage, grading, etc. He conceded that movement could still have occurred
had Smith Masonry constructed larger and deeper footings. He also agreed that he
could not say whether any of the columns other than the one he excavated had “an
overhang” and agreed that not every single column would have to be removed. He
further agreed that other forms of remediation such as adjustments to the fence
panels should probably be tried before removing columns. He did not express an
opinion on cost of any repairs.
[¶27.] As its last witness, WIPI called Keith Stroh as an expert related to
construction standards and WIPI’s damages. However, a dispute arose concerning
the permissible scope of his testimony. Smith Masonry asserted that WIPI
disclosed Stroh only as an expert as to cost of repair or replacement, not on the
cause of the alleged damage, and objected to Stroh testifying beyond these disclosed
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matters. While WIPI disagreed with this characterization of Stroh’s expert
disclosure, the parties agreed to a continuance for WIPI to update its expert
disclosure. In a supplemental report, Stroh opined that the columns failed to meet
masonry standards and that WIPI sustained $650,000 in damages. But this report
never became part of the trial record because the trial never resumed. In
September 2021, WIPI and Smith Masonry agreed to have the circuit court decide
the case on the existing trial record.
[¶28.] On October 27, 2021, the circuit court issued a memorandum decision
detailing its findings and conclusions, and after receiving Smith Masonry’s
objections, the court issued supplemental findings and conclusions on December 29,
2021. The court found that Smith Masonry proved “a legally enforceable agreement
and obligation to pay for all the work completed.” It further found that Smith
Masonry “has a valid Mechanic’s Lien for the work completed.” However, in the
court’s view, “the issues in this case turn on the quality of the work, rather than
deviations from the original plans[.]”
[¶29.] In that regard, the court found “that at least some of the masonry
columns failed to meet a reasonable standard of care for the application and specific
geological conditions at the site.” In particular, the court determined that the
construction of the footings and the placement of the columns on the footings
allowed “surface ground heave due to frost to leverage the columns and cause them
to tilt out of plomb [sic]” and that column shifting “caused some of the metal fencing
panels to twist and fail.” The court rejected Smith Masonry’s contention that
climate and seasonal weather fluctuations inherently cause movement of structures
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and that the construction of the columns met industry and construction standards,
finding instead that “the evidence shows that [Smith Masonry’s] construction
practices resulted in shifting [of] the columns that was unreasonable and outside
the tolerances allowed for quality construction of this nature.”
[¶30.] The circuit court did not enter specific conclusions determining
whether WIPI proved its counterclaims. However, the court agreed with Smith
Masonry’s assertion that the counterclaims “are meritless because, among other
reasons, adequate notice and opportunity to remediate the alleged defects was
never provided” and WIPI did not allow Smith Masonry “to come in and mitigate
the harm caused by the slightly off-kilter columns.” The court further determined
that WIPI’s interference “with reasonable efforts by American Fence and [Smith
Masonry] to secure and attach the fencing panels in a way that would have
significantly mitigated [WIPI’s] damages” amounted to a “breach of [WIPI’s] implied
duty to allow reasonable access to its property for work to be performed to correct
any warranty issues.”
[¶31.] In its conclusions of law, the court determined that WIPI was entitled
“to a sum of damages or, in the alternative, an offset against the balance due” under
the contract because of Smith Masonry’s non-conforming work. The court then
determined that an offset was warranted. With regard to the amount of offset, the
court noted that “there was no evidence presented of any diminution of value to the
property, either before or after the thwarted remediation work[,]” and the court
rejected WIPI’s claim that the entire fence structure “must be razed and rebuilt[.]”
The court also found that “the actual cost of remediation wasn’t established with
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exactitude at trial,” but it nevertheless concluded that WIPI was entitled to an
offset of the entire lien amount.
[¶32.] Further, the court determined that given the “absence of any precise
calculation afforded by the incomplete evidence on both sides of the respective
claims, principals [sic] of equity apply to allow for the wholesale offset of any money
damages awarded to either party.” The court then valued the parties’ claims as
equal due to wrongdoing by both parties. In that regard, the court stated that the
value WIPI received for Smith Masonry’s work “is equivalent to what was paid, and
the balance due under the mechanic’s lien would be unjust enrichment to [Smith
Masonry]. Conversely, the cost to remediate the flaws in [Smith Masonry’s]
work/diminution in the value of the property as a whole due to [Smith Masonry’s]
poor workmanship are equivalent to the unpaid balance forfeited by [Smith
Masonry].” Finally, the circuit court denied Smith Masonry’s request for an award
of attorney fees, concluding that “each of the parties shall assume its own costs and
disbursements herein, including attorney fees.”
[¶33.] Smith Masonry appeals, asserting the following restated issues:
1. Whether the circuit court erred in denying Smith
Masonry a judgment of foreclosure on the mechanic’s lien
for the full amount of the recorded lien.
2. Whether the circuit court erred in denying Smith
Masonry’s request for an award of attorney fees.
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Standard of Review
[¶34.] We review the circuit court’s findings of fact for clear error. Mathis
Implement Co. v. Heath, 2003 S.D. 72, ¶ 9, 665 N.W.2d 90, 92. However, a court’s
conclusions of law are reviewed de novo. Action Mechanical, Inc. v. Deadwood
Historic Preservation Comm’n, 2002 S.D. 121, ¶ 12, 652 N.W.2d 742, 748
Analysis and Decision
1. Whether the circuit court erred in denying Smith
Masonry a judgment of foreclosure on the
mechanic’s lien for the full amount of the recorded
lien.
a. Whether Smith Masonry fully performed under the
contract
[¶35.] Smith Masonry claims that the evidence presented at trial established
that it completed the masonry portion of the fence project and thus fully performed
under the contract. It deems “immaterial” that American Fence’s portion of “the
fencing aspect of the project had not been finished” because American Fence, not
Smith Masonry, was responsible for that portion of the project. 1 Finally, Smith
Masonry asserts that because it fully performed, it is entitled to full payment under
the contract.
1. Smith Masonry further asserts that “[a]s a matter of law, WIPI’s settlement
with American Fence released [Smith Masonry] from any further legal
obligations or responsibilities concerning the fencing aspect of the project.” It
directs this Court to Estate of Williams v. Vandeberg, for the proposition that
“a release of an agent is a release of the principal even when the release
contains an express reservation . . . .” 2000 S.D. 155, ¶ 15, 620 N.W.2d 187,
191. But there is no evidence in the record that WIPI and American Fence
executed a release. The record establishes only that WIPI paid American
Fence $38,000 to facilitate completion of the project and to have American
Fence’s lien released.
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[¶36.] A review of the record reveals that American Fence was Smith
Masonry’s subcontractor. In fact, Smith Masonry’s complaint refers to them as
such. American Fence did not have a contract with WIPI. Rather, American Fence
was identified in Smith Masonry’s contract with WIPI. Also, as Tom testified,
Smith Masonry was responsible for paying American Fence for its work under the
contract. Because it is undisputed that American Fence did not fully complete its
portion of the work on the project, the fencing project as a whole was not complete
and Smith Masonry cannot prevail on its claim that it fully performed and was, in
that regard, entitled to full payment under the contract.
b. Whether Smith Masonry substantially performed
under the contract
[¶37.] Alternatively, Smith Masonry claims that, at the very least, it
substantially performed under the contract and would thus be entitled to recover
the unpaid contract balance. It notes that the circuit court did not specifically find
that the doctrine of substantial performance applied; however, in its view, the
circuit court’s rulings suggest it did because the court reduced the amount of the
lien by what it regarded to be deficient construction practices.
[¶38.] As this Court explained in Ahlers Building Supply, Inc. v. Larsen, the
party seeking to recover the contract price has the burden of proving substantial
performance of the contract. 535 N.W.2d 431, 435 (S.D. 1995). Further, “[t]he
question of substantial performance is a question of fact[.]” Id.
[¶39.] Here, the circuit court did not specifically determine whether Smith
Masonry substantially performed under the contract. The court found that some of
the work on the project was defective, “thus entitling [WIPI] to a sum of damages
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or, in the alternative, an offset against the balance due as a result of the non-
conforming work.” However, the court also found “that the facts at trial established
a legally enforceable agreement and obligation to pay for all the work completed”
and that Smith Masonry proved it has a valid mechanic’s lien for the work
completed.
[¶40.] “It must be remembered that substantial performance is not full
performance and that the party who relies on the doctrine has breached his
contract.” Ahlers Bldg. Supply, 535 N.W.2d at 435 (citation omitted). When a
contractor has breached a construction agreement and seeks to recover for the work
performed, the remedy available to the contractor depends on whether the
contractor has substantially performed the contract. “If performance was
substantial, the contractor is entitled to recover the contract price less deductions
for defects in performance. If performance was not substantial, the contractor is
entitled, at most, to the value of the benefit that he conferred upon the owner under
a theory of quantum meruit or unjust enrichment, and not the contract price minus
defects.” Id. (internal citations omitted) (quoting Van Den Hoek v. Bradwisch, 273
N.W.2d 152, 154 (S.D. 1978)).
[¶41.] Based upon the circuit court’s determination that Smith Masonry was
entitled to enforce the terms of the agreement, less any defects, we can only
conclude that the circuit court found Smith Masonry had substantially performed.
“[B]y the nature of the damages it awarded, the court obviously found [the
contractor] substantially performed its contract.” Id. A review of the circuit court’s
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decision supports that the doctrine of substantial performance applies under the
circumstances presented.
c. Whether the circuit court erred in wholly offsetting
the amount of Smith Masonry’s mechanic’s lien
i. Contract Warranties
[¶42.] Smith Masonry claims that the circuit court ignored “the express
contract terms and conditions” when it reduced the amount of, or eliminated, Smith
Masonry’s recoverable mechanic’s lien. In particular, Smith Masonry claims that
WIPI is not entitled to compensation for defects related to the columns under the
general guarantee provisions in its contract with Smith Masonry.
[¶43.] Looking at the relevant contract provisions here, WIPI agreed to pay
Smith Masonry 57% “of the contract sum upon satisfactory completion of the work”
under the contract and was to retain 3% of the contract sum for one year with the
amount being paid after satisfactory completion of the general guarantee provision
of the contract. The general guarantee provides:
The Contractor shall remedy any defect due to faulty material or
workmanship and pay for any damage to other work resulting
therefrom which shall appear within the period of one year from
final payment.
(Emphasis added.)
[¶44.] Smith Masonry acknowledges that in withholding final payment when
such was requested in 2014, WIPI expressed concerns related to the faulty
workmanship in the installation of the fence panels. However, Smith Masonry
claims that WIPI did not express a concern about faulty construction of the columns
until after Smith Masonry filed its lawsuit in 2017 to foreclose its mechanic’s lien.
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In Smith Masonry’s view, WIPI’s only concerns prior to that point related to the
number of columns and spacing between them not conforming to the contract
terms—claims that were rejected by the circuit court in its finding that WIPI had
“tacitly approved” these deviations. Thus, Smith Masonry claims that the general
guarantee expired even though final payment has not been remitted. It further
asserts that even if it “had a theoretical warranty obligation to WIPI,” its obligation
under the warranty “disappeared the moment WIPI refused to pay [Smith Masonry]
the contract balance” because such nonpayment was a material breach of the
contract relieving Smith Masonry of any duty to perform warranty work.
[¶45.] While a review of the record supports that WIPI did not initially
express an issue with the construction of the columns, Smith Masonry’s contractual
guarantee related to the fence project as a whole, not just its masonry work on the
project. Moreover, as early as January 2015, WIPI identified issues with the
misalignment and bowing of the fence, and as the circuit court identified from the
evidence at trial, the misalignment and twisting of some fence panels was caused by
the shifting of columns to which they were attached.
[¶46.] Importantly, nothing in the guarantee requires WIPI to immediately
identify the cause of the defect. Thus, the fact that it did not claim until later that
the issues with the fence were caused by faulty construction of the columns does not
relieve Smith Masonry of its obligations to remedy the defects. Because there is
evidence establishing a lack of “satisfactory completion of the work,” the general
guarantee had not expired.
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[¶47.] Nevertheless, Smith Masonry asserts that any defects related to the
fence panels were excluded by American Fence’s express warranty. American
Fence’s warranty provides that it “shall not be liable for and this warranty does not
apply to any failure, defect or damage resulting from and/or connected with . . .
[a]ny alteration, adjustment, settling or materials as a result of freeze thaw cycle,
further settling of soil, and varied precipitation that may cause ground swell. This
includes gates, gate posts, and associated alignments. This is a natural process that
cannot be predicted nor prevented and thus cannot be warranted.”
[¶48.] Although the record contains evidence to support that the fence panels
moved because ground freeze caused the fence posts (not just the columns) to rise,
circumstances specifically excluded under American Fence’s warranty, there is
testimony from Vogel that when American Fence stopped work on the project in
2014, there were workmanship issues unrelated to ground freeze with how some of
the fence panels attached to the masonry columns. Vogel referred to his notes
indicating that some panels had issues with the brackets attaching to the columns
and that there were issues with certain bolts and connectors. He testified, “I’m not
proud of this at all. Those are tough to put on these styles of columns.” Thus, as it
relates to at least some of these defects, American Fence’s warranty exclusions do
not apply.
ii. Principles of Equity
[¶49.] Smith Masonry claims the circuit court erred in applying equitable
principles to “allow for the wholesale offset of any money damages awarded to
either party” because an express contract controls and WIPI’s counterclaims and
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requests for an offset arise out of the same express contract. Although an action to
foreclose on “a mechanic’s lien is an action in equity[,]” Action Mechanical, 2002
S.D. 121, ¶ 13, 652 N.W.2d at 748, “an obligation must exist under either an express
or implied contract[,]” id. ¶ 35, 652 N.W.2d at 753. And when, as here, there is no
dispute that an express contract governs the right to recover under the mechanic’s
lien and neither party seeks damages in equity, equitable principles such as unjust
enrichment and unclean hands are inapplicable.
[¶50.] As the Court in J. Clancy, Inc. v. Khan Comfort, LLC explained,
“equity will not interfere” in a case when a contract controls the parties’
relationship. 2021 S.D. 9, ¶¶ 43, 44, 955 N.W.2d 382, 397 (noting that “where there
is a valid express contract existing between parties in relation to a transaction fully
fixing the rights of each, there is no room for an implied promise, or [claim] on
quantum meruit” (citation omitted)). In its complaint, Smith Masonry alleged it
had substantially performed the agreement with WIPI and was entitled to recover
the balance owed under the express terms of the agreement. Smith Masonry did
not seek any recovery in equity.
[¶51.] Moreover, there is nothing in the record or the court’s findings to
support that Smith Masonry acted with unclean hands. The only evidence of acting
“improperly or unethically in relation to the relief” requested is that relating to
WIPI’s actions. See Adrian v. McKinnie, 2002 S.D. 10, ¶ 17, 639 N.W.2d 529, 535
(explaining conduct that would constitute unclean hands). As the circuit court
determined, WIPI “made absurd counterclaim demands that could never be justified
under the facts or law.” Therefore, the circuit court erred in applying equitable
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principles when determining whether Smith Masonry can recover the amount
unpaid by WIPI under the contract.
iii. The Decision to Allow an Offset
[¶52.] Smith Masonry contends the circuit court’s finding that the
misalignment issues with the metal fencing were caused by its deficient
construction practices relating to the columns was “improperly based on the
theories and opinions of WIPI’s retained expert Keith Stroh,” who did not testify at
trial. Smith Masonry further argues that because Stroh did not testify, “there is no
basis for the trial court’s findings and conclusions that [Smith Masonry] failed to
properly construct the masonry columns” and no evidence in the record to support
“that the masonry columns moved excessively or were misaligned.”
[¶53.] In response, WIPI directs this Court to the testimony of Reynolds,
Meyer, Liester, Vogel, Tom, and his sons. In particular, it claims that the testimony
and evidence at trial support the circuit court’s determination that the footings were
inadequate for the columns Smith Masonry constructed. It further claims that the
testimony and evidence establish that the inadequate footings caused the columns
to move and lean when the ground began to heave due to frost, which then caused
the fence panels to move, twist, bend, and break off from the brackets.
[¶54.] In its reply brief, Smith Masonry acknowledges that Reynolds and
Liester testified that the columns were deficiently constructed and that they both
relied on exhibits in support. 2 However, Smith Masonry claims that such testimony
2. Smith Masonry claims that because the circuit court “did not mention these
witnesses or exhibits in its decision[,]” this Court cannot assume the court
(continued . . .)
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is insufficient to support reducing the amount of its recoverable mechanic’s lien
because the testimony “was grossly unreliable.” Alternatively, Smith Masonry
asserts that even if the circuit court did not err in finding that its construction of
the fence was defective, the court erred in offsetting the full amount of its
mechanic’s lien because WIPI failed to prove the amount “of recoverable damages
for any alleged defect” and the record does not contain evidence that would support
an offset of $41,672.20 (the full amount of the mechanic’s lien) in alleged repair
costs.
[¶55.] This Court has said that when there is “substantial performance, the
proper measure of damage is the contract price less the cost of the defect.” Mathis,
2003 S.D. 72, ¶ 12, 665 N.W.2d at 93. In its counterclaim and at trial, WIPI
asserted that it would be required to demolish all of the columns and build anew to
remedy Smith Masonry’s deficient performance under the contract. On appeal, it
claims the testimony from Liester and Reynolds supports its contention that labor
and costs for repair would be substantial and involve a redo of the project. It then
contends that “[g]iven the more than $200,000 cost for the original fence and
acknowledgement that many of the materials could not be reused, it took no great
leap to conclude there was an adequate evidentiary basis to find with reasonable
________________________
(. . . continued)
relied on the testimony of these witnesses. But “[d]oubts about whether the
evidence supports the court’s findings of fact are to be resolved in favor of the
successful party’s ‘version of the evidence and of all inferences fairly
deducible therefrom which are favorable to the court’s action.’” Osman v.
Karlen & Assocs., 2008 S.D. 16, ¶ 15, 746 N.W.2d 437, 443 (citations omitted).
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certainty that such costs would exceed or at least equal the $41,672.20 equitable
interest sought to be enforced against the property.”
[¶56.] The problem with WIPI’s argument is that the circuit court specifically
rejected WIPI’s claim “that the entire fence structure is unfit for its intended
purpose and must be razed and rebuilt at a tremendous cost, exceeding the overall
contract price[.]” Rather, the court found that “only a few of the columns would
need to be repaired or replaced, and the flexing of the metal fence panels could be
remediated by the use of panel fasteners with play or tolerances.” The court noted
that “other than that, the columns are aesthetically pleasing and consistent with
the contract.” Moreover, the court found that WIPI breached an “implied duty to
allow reasonable access to its property for work to be performed to correct any
warranty issues” when it “interfered with reasonable efforts by American Fence and
[Smith Masonry] to secure and attach the fencing panels in a way that would have
significantly mitigated [WIPI’s] damages.” 3
[¶57.] As previously stated, because it is apparent the circuit court found
Smith Masonry met its burden of proving that it substantially performed, Smith
3. Relevant to this finding by the circuit court, “[t]he law imposes upon a party
injured from another’s breach of contract or tort the active duty of making
reasonable exertion to render the injury as light as possible.” Arrowhead
Ridge I, LLC v. Cold Stone Creamery, Inc., 2011 S.D. 38, ¶ 16, 800 N.W.2d
730, 735 (citation omitted). Therefore, “[i]f, by his negligence or willfulness,
he allows the damages to be unnecessarily enhanced, the increased loss, that
which was avoidable by the performance of his duty, falls upon him.” Id.
“The burden is on the breaching party to prove that ‘damages would have
been lessened by the exercise of reasonable diligence on the part of the non-
breaching party.’” Casper Lodging, LLC v. Akers, 2015 S.D. 80, ¶ 67, 871
N.W.2d 477, 498 (citation omitted). Here, the circuit court appears to have
concluded that Smith Masonry proved that WIPI failed to mitigate its
damages.
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Masonry was entitled to recover the contract price less any defects. See Ahlers
Bldg. Supply, 535 N.W.2d at 435; Barton Masonry, Inc. v. Varilek, 375 N.W.2d 200,
202 (S.D. 1985) (providing that “a party who sues to recover on a construction
contract has the burden of proving substantial performance of that contract”).
However, WIPI did not present any testimony or evidence establishing the cost
necessary to remedy Smith Masonry’s defective performance under the contract. It
is well settled that “damages must not be speculative; that is, the damages must be
reasonably certain.” Excel Underground, Inc. v. Brant Lake Sanitary Dist., 2020
S.D. 19, ¶ 51, 941 N.W.2d 791, 805. As the Court in McKie v. Huntley explained,
Proof of damages requires a reasonable relationship between the
method used to calculate damages and the amount claimed. See
Swenson v. Chevron Chemical Co., 89 S.D. 497, 234 N.W.2d 38,
43 (1975). In applying this rule, we refrain from dictating any
specific formula for calculating damages. Instead, we apply a
“reasonable certainty test concerning the proof needed to
establish a right to recover damages.” Drier v. Perfection, Inc.,
259 N.W.2d 496, 506 (S.D. 1977) (citations and internal
quotations omitted). Reasonable certainty requires proof of a
rational basis for measuring loss, without allowing a [fact
finder] to speculate. Id. at 506 (quoting Kressly v. Theberge, 79
S.D. 386, 112 N.W.2d 232, 233 (1961) (further citations
omitted)).
2000 S.D. 160, ¶ 18, 620 N.W.2d 599, 603–04. Therefore, “[o]nce the existence of
damage has been shown by a preponderance of the evidence, a claimant must
produce only the best evidence available to allow a [fact finder] a reasonable basis
for calculating the loss.” Id. ¶ 20, 620 N.W.2d at 604.
[¶58.] Here, accepting the circuit court’s findings that WIPI was entitled to a
reduction in the amount of Smith Masonry’s mechanic’s lien for Smith Masonry’s
deficient performance under the contract, WIPI was required to produce evidence to
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allow the court a reasonable basis to calculate the cost of repair. It did not do so.
Because WIPI did not present any evidence of cost of repair such that the court
could determine an amount to offset from the remaining amount due under the
contract, and given the court’s determination that WIPI failed to mitigate at least
some of its damages, the court erred in denying Smith Masonry’s request for an
award of the amount due under the contract. Therefore, the court’s denial is
reversed, and the matter is remanded for the court to enter a judgment of
foreclosure in favor of Smith Masonry on its mechanic’s lien.
2. Whether the circuit court erred in denying Smith
Masonry’s request for an award of attorney fees.
[¶59.] Smith Masonry contends that an award of attorney fees was warranted
under the circumstances because it defeated a $650,000 counterclaim, and
assuming this Court finds in its favor on appeal, it was successful on its mechanic’s
lien action. Under SDCL 44-9-42, “[t]he court shall have authority in its discretion
to allow such attorney’s fees and receiver’s fees and other expenses as to it may
seem warranted and necessary according to the circumstances of each case, and
except as otherwise specifically provided in this chapter” on mechanic’s and
materialmen’s liens. “This Court has consistently required a trial court to enter
findings of fact and conclusions of law when ruling on a request for attorney’s fees.”
Hoffman v. Olsen, 2003 S.D. 26, ¶ 10, 658 N.W.2d 790, 793. Here, the circuit court
did not enter any findings of fact on Smith Masonry’s attorney fee request; it simply
ordered that both parties are responsible for their own attorney fees. In light of the
court’s erroneous application of principles of equity and determination that WIPI is
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entitled to a wholesale offset of the amount due on the contract, the court is directed
on remand to reconsider the attorney fee request and to make necessary findings.
[¶60.] Reversed in part and remanded in part.
[¶61.] JENSEN, Chief Justice, and KERN, SALTER, and MYREN, Justices,
concur.
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