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BH Ceramic Tile & Marble LLC v. Royal K. Supply & Warehouse, Inc.

A-4511-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

CONTRACTORS; CONTRACTS; UCC—A construction contract between a contractor and its subcontractor is generally for the provision of services, not goods, and is therefore not governed by the Uniform Commercial Code or its damage provisions.

A contractor engaged a subcontractor to perform tile and flooring work on a number of jobs. When the contractor failed to pay the subcontractor for three of the jobs, the subcontractor filed an action seeking contract damages. The parties did not dispute that the subcontractor performed two of the jobs in an acceptable manner. The contractor, however, withheld payment because of a dispute over the work the subcontractor performed on the third job.

The third job involved a family who hired the contractor to install flooring in a kitchen that the family was remodeling. There was little disagreement that the floor in that kitchen was installed incorrectly. When the family saw the installed floor, they were extremely displeased and demanded that the contractor install a perfect kitchen floor.

Concerned with the cost of reinstalling the kitchen floor, the prolonged disruption the repairs would cause to the family, and the potential for a lawsuit by the family, the contractor agreed to pay the family in exchange for their agreement to engage another contractor to perform the repairs and to release the contractor from its contract. After settling with the family, the contractor sought to recover its losses by backcharging the subcontractor. As a result of the contractors’ calculation of the backcharge, the subcontractor received no payment for the two prior undisputed jobs. Consequently, the subcontractor filed an action seeking payment for the work it had performed on all three jobs.

During the trial, neither party disputed that the subcontractor was entitled to be paid in full for the work it had performed on the prior two jobs. The only issues addressed by the lower court were whether the subcontractor breached its contract with the contractor for the work for the family and the amount of damages which could then be offset in favor of the contractor against the balance due to the subcontractor on the other two jobs. The lower court concluded that the subcontractor breached its contract with the contractor. After offsetting the amount due to the contractor in damages against the sums otherwise owed to the subcontractor, the lower court determined that the subcontractor was entitled to payment from the contractor.

On appeal, the contractor argued that the lower court erred in its findings and conclusions related to damages. First, the lower court rejected the contractor’s argument that the Uniform Commercial Code (UCC) applied to the flooring subcontract. The Appellate Division affirmed the lower court decision because the contract between the contractor and the subcontractor was for performance of services rather than a sale of goods, thus, it fell outside the scope of the UCC by definition.

Next, by applying standard breach of contract principles, the lower court determined the total amount of damages sustained by the contractor. In estimating the contractor’s damages, the lower court considered the issue of whether the contractor should be entitled to recover from the subcontractor the amount of money the contractor paid to the family as part of its settlement. Reasoning that because the amount paid to the family to settle the claim did not arise naturally from the breach of contract and was not reasonably within the contemplation of the parties at the time they entered into their contract, the amount paid to the family as part of the settlement could not be included in the award of damages.

Challenging these findings, the contractor argued that the cost of settling with a dissatisfied customer arose naturally or fairly from the breach of contract. Alternatively, the contractor argued that the parties to the contract were aware of the possibility that the family could demand replacement or repair of the floor if the work were done improperly. The Appellate Division explained that to the extent that the contractor’s arguments challenged the factual findings of the lower court, the scope of review of the Appellate Division was limited. The lower court’s legal findings, however, would not receive special deference from the Appellate Division. Finding no abuse of discretion in the lower court’s conclusions, the Appellate Division deferred to the factual findings of the lower court. Furthermore, the Court found that the lower court’s findings were supported by substantial credible evidence in the record. Accordingly, the Appellate Division affirmed lower court’s judgment.

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