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Sherman & Zalenko, L.L.C. v. Spystef, L.L.C.

A-6305-06T3 (N.J. Super. App. Div. 2008) (Unpublished)

CONTRACTORS; AGREEMENTS; DAMAGES — When calculating damages to be paid when a property owner breaches a cost-plus contract with a builder, a court must look closely at the exact agreement between the parties as to which items will be covered by additional allowance for overhead and profit.

A construction contractor filed suit against three landowners for breach of contract and fraud arising out of three separate transactions. The construction contractor had met with the landowners to discuss construction of a housing development consisting of seven duplex homes. The contractor prepared a proposal that reflected the parties’ agreement in which the owners would pay a set price per unit. Subsequently, the owners agreed to pay the contractor an additional twenty percent for overhead and profit to clear the site before construction, and also an amount to complete sewer work plus a profit amount. Additionally, the contractor, without reimbursement from the owners, added basements in four units and installed air conditioning units. Because the owners stopped paying, the contractor could not complete the seventh house. Ultimately, the contractor filed a construction lien. In a separate matter, the parties discussed an opportunity by which the contractor would purchase a separate property and the owners would contribute toward that purchase. The parties never reached any agreement as to their respective financial responsibilities for this new property. After investment into the new property and its sale, the contractor alleged that he suffered a net loss on the property and sought contribution from the owners for this loss.

The lower court awarded damages to the contractor with regard to the construction of the seven homes, less deductions for the partially completed seventh home, the monies already paid, and other amounts due the owners. The Court added twenty percent to the damage figure to represent overhead and profit before deductions. The Court further held that the owners were not responsible for the loss on the investment property because no agreement to share the loss between the parties existed.

On appeal, the Appellate Division affirmed the lower court’s ruling, except as to the manner in which the lower court applied the twenty percent allowance for overhead and profit because there was no evidence of an agreement to add that allowance with respect to those particular items. It found that the costs for the sewer lines, water hookups, basements, and air conditioning units should not have been covered by the overhead and profit allocations. Lastly, regarding the issue of the owner’s payments to the contractor, the Court found that the lower court erred in accepting the contractor’s testimony that he received a lower amount than what was shown by other evidence because the lower court gave no reasoning to support its acceptance of the lower figure.

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