July 19, 2012
STEVEN L. SUGARMAN AND LISA M. SUGARMAN, H/W, PLAINTIFFS-RESPONDENTS,
GABRIEL BUILDING GROUP, INC., DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Cape May County, Docket No. L-809-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Telephonically argued May 2, 2012
Before Judges Baxter, Nugent and Carchman.
Defendant Gabriel Building Group, Inc., appeals from a final judgment, following a bench trial, finding that defendant breached its contract with plaintiffs Steven L. and Lisa M. Sugarman (collectively "plaintiffs," with any reference to Sugarman referring to Steven, except as noted) and fixing damages at $200,000 plus prejudgment interest of $53,886.90 together with taxed costs. Defendant challenges the findings as to both liability and damages as well as the dismissal of its counterclaim and denial of its motion to amend. We affirm the judgment as to liability and the calculation of damages, but reverse and remand for a determination of whether the contract contained an enforceable limitation on plaintiffs' available remedies. We also affirm the order dismissing the counterclaim and denying the motion to amend.
I. These are the facts adduced at trial.
In September 2004, plaintiffs approached Ed McLaughlin, a representative of defendant, and offered to purchase for $1.5 million an unimproved lot (the property) owned by defendant in Ocean City. Sam Gabriel, president of defendant, rejected plaintiffs' offer and instead offered to sell the land in conjunction with also building plaintiffs a "[l]uxury Mediterranean-style home" (the house) using architectural plans being prepared for defendant by the architectural firm Olivieri, Shousky and Kiss (Olivieri). Defendant had contracted with Olivieri in March 2003 to design a home for the property, and those plans (the Olivieri plans) were nearly complete while plaintiffs' and defendant's negotiations were underway. Although defendant was an experienced home building company that had built approximately ninety homes in Ocean City since 1997, this was the first time defendant had contracted with Olivieri.
Throughout September and October 2004, plaintiffs, Gabriel, and defendant's attorney Robert Penza negotiated the terms of the contract. Multiple drafts of the contract were exchanged by the parties.
On October 11, 2004, Sugarman, a Pennsylvania real estate attorney, emailed Gabriel and Penza a draft of a contract with a blank space where the Olivieri plans could be referenced by date once the plans were completed. The email also noted plaintiffs "understand that [defendant's] office will be forwarding the architectural plans and engineering study regarding the bulkhead to [Sugarman's] office by overnight mail and that the specifications will be finalized and provided later this week." That same day, and at Gabriel's request, Matthew Hamilton, the architect at Olivieri, sent copies of the Olivieri plans directly to plaintiffs and to McLaughlin; plaintiffs received the plans the following day.
Within a few days after receiving the Olivieri plans, plaintiffs included the date of those plans as part of the contract, signed the contract, and sent it to Gabriel and Penza for approval. In the October 15, 2004 email transmitting those plans, plaintiffs requested that defendant "forward the specifications for the [h]house, together with the engineering report for the bulkhead, at [its] earliest possible convenience," and also "let [plaintiffs] know the [a]rchitect's thoughts on the additional half story and/or the rooftop deck with interior access."
Three days later, Gabriel signed the contract on behalf of defendant. In response, plaintiffs made their initial deposit of $1000 as required under the terms of the contract, and plaintiffs again requested that defendant "forward the specifications, surveys, engineering reports and related studies comprising the 'Construction Documents' . . . for [their] review as soon as possible."
In the contract, defendant agreed to sell the property to plaintiffs and to construct a new residential unit on the property, "in accordance with the plans and specifications approved by Buyer," for the purchase price of $2,494,900. The contract further provided as follows:
[Paragraph 3.2]. Permits and Approvals. Attached hereto as Exhibit "A" and made an integral part hereof are copies of certain architectural plans prepared by Olivieri, Shousky and Kiss P.A. (the "Architect"), dated December 23, 2003 and October 7, 2004, and certain site and foundation plans prepared by the Architect, dated December 23, 2003 (collectively, the "Plans"), in connection with a Mediterranean style, single family home (the "House") Seller proposes to construct on the property. Seller has obtained foundation and piling permits from the City of Ocean City (the "City") and is in the process of applying for and/or obtaining building permits and such other approvals from the City and any other applicable governmental or regulatory authorities as may be required in order to construct the House and all other improvements as shown on the Plans. [Paragraph 3.3]. Construction Documents. Within ten (10) business days of the execution of this Contract by all parties, Seller shall provide Buyer with copies of all plans and specifications, building permits, governmental approvals, surveys, and engineering reports and studies related to or prepared in conjunction with Seller's development of the property and construction of the House thereon (the "Construction Documents"). Within ten (10) business days of Buyer's receipt of the Construction Documents, Buyer shall elect, upon written notice to Seller, to either (a) accept the Construction Documents and proceed with the purchase of the property as provided herein, or (b) terminate this Contract in which event all deposit monies shall be returned to Buyer upon the Buyer's return to the Seller of all of the original Construction Documents and the obligations hereunder shall terminate and be of no force and effect. [Paragraph 3.4]. Commencement of Construction. Seller shall commence construction of the foundation of the House in accordance with the approved foundation plans as soon as practicable following the parties' execution of this Contract and shall diligently and expeditiously apply for and pursue the requisite building permits and approvals for the House upon notification of Buyer's acceptance of the Construction Documents. Seller shall promptly notify Buyer if and when Seller does, or does not, obtain the requisite building permits and approvals. In the event Seller is unable to obtain the requisite building permits and approvals to construct the House and other improvements upon the property in accordance with the plans and specifications accepted by Buyer, then Buyer, within ten (10) business days of Buyer's receipt of Seller's notice, shall elect, upon written notice to Seller, to (a) accept such plans and specifications for the House as will be permitted and approved by the governmental authorities, or (b) terminate this Contract in which event all deposit monies shall be returned to Buyer upon the Buyer's return to the Seller of all the original Construction Documents and the obligations hereunder shall terminate and be of no force and effect.
The contract noted an estimated closing date of June 15, 2005, but also set an outside closing date of July 15, 2005, and provided that "time shall be of the essence in this regard," meaning "the party failing to perform within this time shall be in default under the [c]ontract." The contract further provided that plaintiffs were to make an initial deposit of $1000 upon signing of the contract, an additional deposit of $24,000 due ten business days after plaintiffs' receipt of the Construction Documents, and a final payment of the remainder at closing.
Paragraph 25 of the contract, titled "CANCELLATION OR DEFAULT OF CONTRACT," stated as follows:
If the Buyer does not make settlement in accordance with the terms of this Contract, all deposit monies may be retained by the Seller as compensation for the damages and expenses which the Seller has incurred in which event this Contract shall be canceled without further liability to either party, except as the Seller may be liable to REALTOR(S) for commission or other payment. In the event that the Seller does not perform in accordance with this Contract or the Seller is unable to deliver marketable title, and the Buyer is unwilling to accept such title as the Seller can make, then the Buyer has the choice of securing the return of all deposit monies, together with reasonable costs incurred for examination of title, survey and mortgage application fees or bringing any action in court for specific performance to which the Buyer may be entitled. In the event that Seller defaults by failing to substantially complete construction and obtain a municipal certificate of occupancy by the Outside Closing Date, then the Buyer has the choice of pursuing any and all remedies described above or extending the Outside Closing Date for a reasonable period of time to permit Seller to cure the default.
In the event settlement is not held in accordance with this Contract, or any dispute arises in which the parties cannot agree as to the disposition of deposit monies, it is agreed the Title Company shall act as Escrow Agent and shall retain the monies in escrow until the parties otherwise agree or a determination is made by the courts. Additionally, when a dispute arises as to the disposition of deposit monies under this Contract, the third party holding such deposit monies may unilaterally deposit the disputed funds in the Superior Court of New Jersey pursuant to the court rules and the laws of the State of New Jersey.
Finally, the contract contained numerous other provisions not directly relevant to the issues in dispute, such as provisions regarding marketable title, risk of loss, and warranties.
Unbeknownst to defendant, the Olivieri plans included a variety of specifications and allowances not contemplated by defendant as being part of the home. At trial, Gabriel claimed that when he signed the contract, he had not seen the Olivieri plans and did not know the level of detail that they contained. However, Gabriel also admitted that defendant's contract with Olivieri required Olivieri to "prepare complete construction documents . . . [including] plumbing faucet and fixture specifications and general specifications[,]" and that the Olivieri plans were "exactly what [defendant] had contracted with Olivieri to prepare for the construction of the high-end luxury Mediterranean house."
On October 23, 2004, plaintiffs received from defendant a document entitled "New Custom Home Specifications," which contained specifications that contradicted those contained in the Olivieri plans. At trial, Gabriel admitted that his specifications contained lower-cost allowances than the Olivieri plans did for the same items. As a result, plaintiffs emailed Gabriel and Penza, saying:
We have received the additional specifications from Ed McLaughlin, and unfortunately there must be a mistake. As you know, the architectural plans provided to us, dated Dec. 23, 2003 and Oct. 7, 2004, and upon which we based our decision to proceed with this transaction, set forth a number of detailed specifications for the house. We expected to receive specifications from you relating to those items, such as landscaping, pool and spa, not previously described in the plans.
Instead, the specifications forwarded to us by Ed cover the same items already detailed in the plans, and surprisingly, are directly contrary to the specifications in the plans and inconsistent with the "high end" product intended under our Agreement.
Hence, our conclusion that a mistake has been made.
Plaintiffs requested that Gabriel contact them about this issue at his earliest convenience. On November 1, 2004, Gabriel advised plaintiffs that he would investigate this issue and get back to plaintiffs about it. Plaintiffs requested that Gabriel forward to plaintiffs the additional Construction Documents.
Within the week, Gabriel responded to plaintiffs. Gabriel disagreed that he must honor the specifications contained in the Olivieri plans. He continued:
In the interest of saving time, I did direct the architect to directly provide you with plans. However, my architect did not obtain from me the allowance specifications he listed in his plans, some of which are in conflict with the specifications I provided to you. The architect's allowance specifications are his estimates, not my approved allowances. Therefore, you were correct in your first e-mail, that there must be a mistake. There is a mistake, which is some of the allowances contained in the architect's plans. The allowances I will honor as part of the Contract are the allowances contained in my New Custom Home Specifications.
I also want to be candid with you. I view building a custom home for individuals as a joint project between me and the customer.
It is usually a personally rewarding project for both of us, because I can tailor the home to the details and tastes of the customer, so that in the end they will have the home they want. In fact, they usually have a home which is even better than they anticipated, because along the way we may make construction suggestions from our experience, which the customer may not have thought of on their own. Time of completion of the home is frequently a consideration.
In your case, a timely completion is something that you have stressed in your Contract. Your current demands and position on this specification issue causes concern for me that I will have a difficult time with you on this project, which in the end will leave either one or both of us dissatisfied. Therefore, I would prefer to instruct the realtor to release your deposit monies to you, and release you from the Contract, so that neither of us will be dissatisfied with this project. [(Emphasis added).]
Plaintiffs responded to Gabriel by letter, stating, in part:
Your proposal that we simply "walk away" from our [c]ontract is categorically rejected. However, in an effort to provide you with an opportunity to cure your breach of the Contract, we offer the following: Build the house in accordance with the [p]lans and [s]pecifications and the terms of our [c]ontract, or alternatively, sell us the [l]ot for the [l]ot [p]urchase [p]rice as originally contemplated.
Please advise on your intensions, in writing, by no later than the close of business on Friday, November 12, 2004. If you refuse to perform under the [c]ontract or the alternative transaction suggested above, then we shall be compelled to initiate appropriate legal proceedings to protect our interests, including the filing of a [l]is [p]endens.
Gabriel never responded personally to this letter. On November 16, 2004, Penza notified plaintiffs for the first time that Ocean City "is now strictly interpreting their building codes, including projects under construction for which building permits have been previously issued," specifically with regard to two-and-one-half-story structures.
Thus, under the current climate, it was not surprising to receive the enclosed [z]oning [p]ermit [d]isapproval dated November 12, 2004 from Ocean City advising that the submitted applications for building permits for the above property were denied for the reasons given. The building permits were first denied on October 29, 2004 for the five reasons listed on the enclosed fax from the zoning office. These reasons were manageable requirements. However, the November 12, 2004 denial disallowing a third story will require a complete re-design of the house. [Gabriel] is in contact with the architect, for the purpose of obtaining re-designed plans to conform to township require- ments. . . . [Gabriel] will urge the architect to complete the re-designed plans as promptly as possible. You will be updated, once [Gabriel] receives more information from the architect. [(Emphasis added).]
On November 30, 2004, plaintiffs acknowledged Penza's letter and agreed to "extend the applicable time periods set forth in the [c]ontract so that [defendant] may furnish [plaintiffs] with new and/or revised plans as soon as practicable, and upon receipt thereof, [plaintiffs] shall have ten (10) days to accept the [p]lans and move forward with the transaction or terminate the [c]ontract as provided under paragraph 3.4 of the [c]ontract."
From this time forward, all correspondence between plaintiffs and defendant occurred through Penza, defendant's attorney. Also, almost all contact between plaintiffs and defendant was initiated by plaintiffs.
One month later, plaintiffs sent Gabriel and Penza an email noting that "it's been over three weeks since we last spoke . . . and unfortunately, we have not received any information regarding the new architectural plans or the status thereof." Penza replied that same day, advising that the architect was in contact with Ocean City regarding the zoning requirements and "has indicated that he will work on drafting [the] preliminary sketch plan promptly for submission to Ocean City by the first week in January 2005." Penza promised to update plaintiffs as more information became available.
Plaintiffs sent Penza a confirming email on January 26, 2005, stating that "we understand that your client's architect has submitted a [s]ketch [p]lan . . . to the City . . . . [and that you] will be forwarding a copy of the [p]lan to us by overnight mail (upon your receipt of same)[.]" Six days later, plaintiffs again contacted Penza and noted that they "ha[d] not received a copy of the [p]lan[.]" Penza replied that same day, saying "I do have a copy of the plan we discussed" and promising to send it to plaintiffs that day. Penza also promised to forward to plaintiffs new pricing and closing date information.
Penza did as promised and sent the sketch plans, also referred to as the half-story proposal, to plaintiffs that day. Penza noted in his cover letter that, in the event Ocean City approves those plans, Gabriel would instruct the architect to prepare "detailed building plans," and that the specifications and allowances would remain the same as those in the New Custom Home Specifications. Gabriel also agreed to reduce the price of the home by $20,000 and move the closing date to ten months from the date of approval of the final building permits by Ocean City.
Plaintiffs acknowledged receipt of the half-story proposal but noted disappointment that it "does not depict the first floor layout nor the rear or right side elevations. Moreover, the [p]lan does not reference a number of important components, including the revised calculations for building square footage, impervious coverage, etc." Plaintiffs asked if the architect had any more detailed plans depicting these items. In response, Penza claimed that the architect had no additional plans for review because the architect was "waiting for some preliminary guidance from Ocean City," and promised to update plaintiffs once Ocean City had responded to the plans. Plaintiffs further requested Penza to confirm at a minimum whether the first floor plan would change "in any respect." Penza replied by promising to update plaintiffs after receiving word from Ocean City about the revised plans.
Plaintiffs followed up with Penza on February 11, 2005, asking for any updates. Penza replied that same day, denying having received any response from Ocean City. On March 1, 2005, plaintiffs again contacted Penza, and complained about the lack of communication between the parties:
It is our understanding that the city responded to the [h]alf-[s]tory [p]roposal some time ago. Unfortunately, we have not received any information from you or your principal, and instead, have been kept in the dark regarding the status of the revised plans and the City's position with respect thereto. This course of conduct is completely unacceptable. We must insist that you immediately forward copies of any and all responses and documentation received from the City with respect to the [h]alf[s]tory [p]roposal, together with the revised plans prepared by the architect; otherwise, we shall be compelled to seek appropriate relief from our courts.
On March 3, 2005, Penza responded:
I have been out of my office since 2/24/05, returning today. I am just reading your e-mail now, for the first time. I do not appreciate the tone and demands of your e-mail. You have been continually updated on this matter.
I was advised by my client that Ocean City did not approve the revised sketch plan, but rather they requested more detailed information on the sketch plan. My client proceeded to have the requested detail added to the plan by the architect, and the revised plan was submitted to Ocean City on 2/25/05. I have a copy of the revised plan which my client sent to my office while I was away on business, which includes some detail for the first floor as well.
My client is still awaiting a response from Ocean City for the revised plan submitted just last week. I plan on sending this revised plan to you. However, I would appreciate some apology for what I consider the discourtesy to me, you displayed in this last e-mail. Thank you.
Plaintiffs responded the next day, disagreeing that they had been "continually updated," and "respectfully suggest[ing] [Penza] reconsider who owes who an apology." That same day, Penza sent plaintiffs copies of the revised plans submitted to Ocean City on February 25, 2005, and again promised "further update[s]" once a response from Ocean City was received.
Almost a month later, on March 29 and 30, 2005, plaintiffs attempted to contact Penza, saying they had heard "absolutely nothing" from Penza or defendant and requesting that Penza call plaintiff "at [his] earliest possible opportunity[.]" That same day, Penza replied, stating that "it is my understanding that Ocean City had only one issue with the revised plan involving the dormer." Penza also asserted that "[t]he architect is in the process of preparing final construction drawings for formal submission to Ocean City for building permits . . . , and it is believed that [O]cean City will approve the revised plans." Penza promised to forward the revised construction plans once he had received them.
The next day, plaintiffs offered to "resolve the on-going disputes and obviate the need for any litigation" by purchasing the subject property for $1.55 million. Plaintiffs sent a follow-up letter on April 6, 2005, noting that they had not received a response to their last email. In that letter, plaintiffs also expressed frustration at defendant's "refusal to adhere to the specifications spelled out in the original plans" as well as its "intentional failure to keep any revisions to the plans described in [the] [c]ontract to an absolute minimum[.]" That same day, Penza wrote plaintiffs, advising that plaintiffs' offer to purchase the subject property for $1.55 million was rejected, dismissing plaintiffs' threats of litigation, and asserting that it was defendant's intention to "revise the building plans in a manner which can be approved by Ocean City, which are also as similar as reasonably possible to the original submitted plans."
In the days following, plaintiffs offered to purchase the subject property for $1.6 million and requested on multiple occasions copies of the revised building plans. Defendant rejected the $1.6 million offer but claimed to remain amenable to the sale of the subject property at some unspecified higher price, as did plaintiffs.
Finally, on April 26, 2005, Penza sent plaintiffs a set of revised building plans dated April 21, 2005 (revised plans), which were being submitted to Ocean City for approval. The revised plans provided for one fewer bedroom than the original plans, and incorporated defendant's New Custom Home Specifications. Again, Penza reiterated the $20,000 reduced purchase price, the adjusted closing date, and the applicability of the New Custom Home Specifications. Penza also noted that "this correspondence is intended as [defendant's] notice pursuant to the October 15, 2004 [c]ontract . . . to ascertain whether [plaintiffs] elect to accept the enclosed revised construction plans or terminate the [c]ontract." In response, on May 11, 2005, plaintiffs indicated they would either accept or reject the revised Olivieri plans "within ten (10) business days of receipt of [defendant's] notice that the revised plans will be permitted and approved by the City of Ocean City in accordance with [p]aragraph [3.]4 of the parties' [c]ontract."
At trial, Gabriel admitted that he did not consult with plaintiffs regarding the revisions made to the Olivieri plans between November 2004 and April 2005. In explaining why not, Gabriel said that defendant "had to make [the house] something that we thought we could either sell to the [plaintiffs] or sell to another buyer in case [plaintiffs] decided to . . . cancel out of the contract. So it was a house we had to design for sale." Gabriel also admitted that in January 2005, he instructed Olivieri to make various revisions to the plans --including changing "roofing to dimentional [sic] shingle," "arch sliding doors to straight," and "all circle top windows to square transoms" -- that were not necessary to gain approval from Ocean City. Rather, he did so because he "wanted to get Olivieri's plans to match [defendant's] specifications." Gabriel never notified plaintiffs that he gave these instructions to Olivieri.
In the months following plaintiffs' receipt of the revised plans, while waiting for Ocean City's response, the parties attempted but ultimately failed to negotiate plaintiffs' purchase of the subject property without the construction of the house. Plaintiffs also suggested having Olivieri or another architect revise the plans so that they "compl[ied] with both the City's Ordinance and [defendant's] obligations under the [c]ontract." Plaintiffs offered George Wray Thomas as a possible alternate architect, with whom plaintiffs had consulted regarding this matter. Defendant rejected any possibility of revision based upon "all of the time and expense [defendant] ha[d] incurred to obtain the preliminary unofficial approval," defendant's expectation that Ocean City would approve the revised plans, and defendant's desire not to risk "any further delay of getting construction of this project started." Plaintiffs also suggested a reduction in the purchase price of the contract by "a minimum of $110,000," to "compensate [them] for the unnecessary loss of . . . critical square footage and a bedroom." Defendant also rejected this option. During the course of these negotiations, Penza discovered that plaintiffs had never posted their additional $24,000 deposit into escrow.
On August 4, 2005, Penza notified plaintiff that Ocean City had approved the revised plans and issued a building permit on August 2, 2005. However, Penza also noted that plaintiffs had not made their additional $24,000 deposit. Penza concluded that plaintiffs "ha[d] been in material breach of the October 15, 2004 [c]ontract for a significant period of time," and notified plaintiffs that "[his] client will regard the October 15, 2004 [c]ontract as null and void due to [plaintiffs'] failure to timely tender the required additional deposit of $24,000.00 required by the express terms of the [c]ontract and subsequently [plaintiffs'] failure or unwillingness to accept the revised construction plans which were approved by Ocean City." Penza requested that plaintiffs forward him all original construction documents, after which defendant would "direct the escrow agent to release [plaintiffs'] deposit monies to [them]." In September 2005, plaintiffs filed their complaint and notice of lis pendens against defendant.
At the trial, George Wray Thomas, the architect with whom plaintiffs had consulted, as plaintiffs' witness, opined that the revised plans made more changes than were necessary to comply with Ocean City's half-story requirements, and lost more square footage than necessary as a result. To contrast, Thomas presented a sketch plan his firm prepared, which "deliver[ed] the same square footage, the same features, the same bedroom and bath count" as the original plans. Thomas also opined that defendant's offer of a $20,000 reduction in the purchase price of the house was "a very inappropriate number[,]" and that $115,000 to $120,000 would have been a more appropriate reduction. Thomas attributed approximately $30,000 of that reduction to the changes made regarding the half-story issue, and the balance to the replacement of Olivieri's specifications with defendant's specifications. Finally, Thomas concluded that the architectural changes necessary to accommodate the half-story issue could have been made in three months as opposed to nine.
Hamilton, Olivieri's architect, on behalf of defendant, indicated that he never consulted with plaintiffs and was never told to take into account plaintiffs' concerns when redesigning the house. He also confirmed that defendant instructed him to incorporate the New Custom Home Specifications into the revised plans. While revising the plans to accommodate Ocean City's half-story requirements, Hamilton tried to preserve the original design as much as he could, but "the way we were reading the code it turned out to be losing a bedroom unfortunately." He concluded that keeping that bedroom was "virtually impossible."
Defendant also offered the opinion of Michael Hyland, a licensed architect and engineer, regarding the "convoluted" nature of Ocean City's zoning ordinances, and the history surrounding the half-story issue. With regard to the revised plans, Hyland concluded that "[i]t had its costs, but it was a reasonable solution" to the half-story issue. He opined that the $20,000 reduction in the purchase price was a reasonable adjustment for the impacts associated with the half-story change but offered no opinion regarding the difference in value between Olivieri's specifications and defendant's specifications. He also compared and contrasted the revised plans with Thomas's sketch plan. While he criticized certain details of Thomas's sketch plan as an awkward layout of the house's upper stories, he agreed that Thomas's sketch plan was approvable by Ocean City.
As to damages, plaintiffs offered an appraisal expert James M. Hanson. Based on his review of the Olivieri plans and Thomas's sketch plans, Hanson estimated that, had the house been constructed, the value of the house and the subject property would have been $2.95 million as of September 15, 2005. Hanson broke down this valuation as follows. Based on three area land sales, which Hanson deemed comparable to the subject property, Hanson valued the land itself at $1.75 million. Hanson estimated the value of the proposed house at $217.14 per square foot, or $926,047 total. Hanson made no adjustment for depreciation or obsolescence "[b]ecause the property [was] new or to be newly constructed[.]" Hanson also added an "estimated value for bulkhead and landscaping[.]" Finally, Hanson added an estimated twenty percent increase for "entrepreneurial profit[.]" Hanson admitted that, in calculating his appraisal, he assumed the architectural plans he had reviewed complied with the applicable zoning laws.
On August 9, 2010, the trial judge entered judgment in favor of plaintiffs and against defendant in the amount of $200,000 plus prejudgment interest of $53,886.90 and taxed costs, and dismissed defendant's counterclaim with prejudice.
This appeal followed.
On appeal, defendant argues, among other issues, that the judge erred by: (1) concluding that defendant breached its contract with plaintiffs, (2) awarding damages in the amount of $200,000 plus prejudgment interest, (3) failing to limit the damages based upon Paragraph 25 of the contract, and (4) dismissing defendant's counterclaim.
We first address the finding of a breach of contract. Defendant argues that the trial court erred in its judgment because (1) no contract existed, (2) defendant did not breach the contract, and (3) plaintiffs breached the contract by failing to post the required $24,000 additional deposit.
Our scope of review of determinations made by a trial court sitting in a non-jury case is limited. Seidman v. Clifton Sav. Bank, S.L.A., 205 N.J. 150, 169 (2011). See also Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974).
The general rule is that findings by the trial court are binding on appeal when supported by adequate, substantial, credible evidence. Deference is especially appropriate when the evidence is largely testimonial and involves questions of credibility. Because a trial court hears the case, sees and observes the witnesses, and hears them testify, it has a better perspective than a reviewing court in evaluating the veracity of witnesses. Therefore, an appellate court should not disturb the factual findings and legal conclusions of the trial judge unless it is convinced that they are so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice. [Seidman, supra, 205 N.J. at 169 (quoting Cesare v. Cesare, 154 N.J. 394, 411-12 (1998)).]
The interpretation of a contract is a question of law and subject to de novo review. Kieffer v. Best Buy, 205 N.J. 213, 222-23 (2011). However, even where contracts are concerned, this court still affords deference to the factfinder's resolution of factual disputes. Id. at 223 n.5.
Defendant first contends that no contract existed between the parties because there was no meeting of the minds. Specifically, defendant asserts that the purported contract lacked agreement with regard to "material items," particularly with regard to defendant's obligation to provide plaintiffs with "specifications" for the home.
"A written contract is formed when there is a 'meeting of the minds' between the parties evidenced by a written offer and an unconditional, written acceptance." Morton v. 4 Orchard Land Trust, 180 N.J. 118, 129-30 (2004) (citation omitted). A contract must also be "sufficiently definite," meaning "'that the performance to be rendered by each party can be ascertained with reasonable certainty.'" Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435 (1992) (citation omitted). "Thus, if parties agree on essential terms and manifest an intention to be bound by those terms, they have created an enforceable contract." Ibid.
Here, the trial court found that there was a contract. It explained, the parties knew the real estate that [p]laintiff wanted to buy and the [d]efendant wanted to sell -- a desirable parcel of land with a lagoon water frontage in the Riviera section of Ocean City, N.J. The parties agreed that the [s]eller would build a house on the land and the plans and specifications were made part of the [c]ontract. Both parties agreed the home was to be a "high end" Mediterranean style home as depicted on the plans and detailed in the specifications. The time periods for approval and construction were set forth in the [c]ontract. The [c]ontract answered the important basic questions of who, what, where, when and why. The material terms were set forth. Obviously, there would need to be consultation between the parties during the contract period as issues developed and needed to be resolved.
The parties signed the [c]ontract.
Sufficient credible evidence existed to support this finding by the trial court. Both parties signed this contract for the sale of land and the construction of a home on that land. Among other things, the contract incorporated by reference and "made an integral part" of the contract detailed architectural plans prepared by the architect.
Defendant asserts that there was no meeting of the minds because "Sugarman testified that there were other material items which he felt were not adequately addressed in either the Olivieri Plans or the Gabriel specifications and they would have to be negotiated[,] such as the landscaping and the pool." However:
[I]t is not necessary for a writing to contain every possible contractual provision to cover every contingency in order to qualify as a completed binding agreement.
Some of these issues may be determined by the operation of law, or the parties may resolve such differences by a subsequent agreement or a contract may be silent in those respects. In any event a contract is no less a contract because some preferable clauses may be omitted either deliberately or by neglect. So long as the basic essentials are sufficiently definite, any gaps left by the parties should not frustrate their intention to be bound. Such is the just and fair result[.] [Bistricer v. Bistricer, 231 N.J. Super. 143, 148 (Ch. Div. 1987) (quoting Berg Agency v. Sleepworld, 136 N.J. Super. 369, 376 (App. Div. 1975)).]
As shown above, the written contract at issue here enumerated all the essential details, and the remaining issues represented "the gaps" that did not preclude its enforceability. The parties' failure to articulate every detail of the complex construction of a multi-million-dollar residence did not make their contract less than "sufficiently definite" or unenforceable.
Defendant also maintains that there was no meeting of the minds because of an issue regarding who was to provide plaintiffs with the "specifications" for the home. Neither the contract nor the parties defines the term "specifications," though both parties appear to agree that (1) the Olivieri plans contained specifications, and (2) after the contract was entered into, defendant provided plaintiffs with its own specifications that contradicted those contained in the Olivieri plans.
Contrary to defendant's assertions, the parties' contract was clear. Paragraph 3.2 of the contract incorporated the Olivieri plans as an "integral part" of the contract, which, unbeknownst to defendant, contained a significant level of detail regarding matters defendant attempted to address by its later specifications. Paragraph 3.3 of the contract further stated that, [w]ithin ten (10) business days of the execution of this Contract by all parties, Seller shall provide Buyer with copies of all plans and specifications, building permits, governmental approvals, surveys, and engineering reports and studies related to or prepared in conjunction with Seller's development of the property and construction of the House thereon (the "Construction Documents"). [(Emphasis added).]
Neither paragraph 3.3, nor the various correspondence between the parties referencing "specifications" to be provided by defendant to plaintiffs, negates the integral nature of the Olivieri plans as made clear in paragraph 3.2, permits defendant to override those plans by submitting specifications inconsistent with those plans, or invests defendant with the sole responsibility of drafting specifications. To conclude otherwise would read paragraph 3.3 out of context with the rest of the contract. See Hardy ex rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 103 (2009) ("A basic principle of contract interpretation is to read the document as a whole in a fair and common sense manner"). See also Nester v. O'Donnell, 301 N.J. Super. 198, 210 (App. Div. 1997) (a "'court should not torture the language of [a contract] to create ambiguity'") (citation omitted).
Sufficient credible evidence exists demonstrating that Gabriel alone created any confusion that may have existed by failing to review the Olivieri plans before signing the contract. As defendant concedes:
In the interest of time and at [plaintiffs'] request, Gabriel asked the Olivieri firm to send a copy of their [architectural] plans to both [plaintiffs] and Gabriel[,] which they did on October 11, 2004. . . .
Unbeknownst to Gabriel, the Olivieri firm, who Gabriel had not used before, included with their plans a variety of elements and allowances that had not been discussed with Sugarman or Gabriel and were not contemplated by Gabriel as being part of the home. . . . Gabriel, who had previously constructed over one hundred homes in Ocean City, had primarily used George Thomas as its architect.
. . . Gabriel signed the Contract [on October 18, 2004] without having seen the Olivieri [p]lans and without realizing the level of detail that they contained. [(Emphasis added).]
Defendant, a self-styled experienced builder of high-end custom homes, entered into a contract to build a multi-million-dollar luxury home, without examining the architectural plans made integral to the contract. The trial court did not err by finding that defendant had a duty to read the contract before signing it and was therefore bound by it. See 49 Elga A. Goodman, Kristina J. Pappa & Brent A. Olson, N.J. Practice Series: Business Law Deskbook § 7:16, p.288 (2011) ("one who assents to a writing is presumed to know its contents and cannot escape being bound by its terms merely by contending that the party did not read or understand them").
Defendant next contends that, assuming a contract did exist between the parties, defendant did not breach that contract. A breach of contract occurs when an obligor (1) "fail[s] to perform [its] obligations under the contract," Murphy v. Implicito, 392 N.J. Super. 245, 265 (App. Div. 2007); (2) manifests "'express and unequivocal repudiation of a contract,'" Spring Creek Holding Co. v. Shinnihon U.S.A. Co., 399 N.J. Super. 158, 179 (App. Div.) (citation omitted), certif. denied, 196 N.J. 85 (2008); or (3) gives the obligee "'reasonable grounds . . . to believe that the obligor will commit a breach,'" ibid. (quoting Restatement (Second) of Contracts § 251 (1981)). The latter two situations involve anticipatory breaches.
In addition, an obligor may also breach a contract by violating the implied covenant of good faith and fair dealing. Every contract contains the implied covenant of good faith and fair dealing. Wood v. N.J. Mfrs. Ins. Co., 206 N.J. 562, 577 (2011). This covenant provides that "'neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract[.]'" Ibid. (quoting Kalogeras v. 239 Broad Ave., L.L.C., 202 N.J. 349, 366 (2010)). Because this covenant is implied, the "express contractual terms generally do not provide a definitive response" as to whether a contract contains the covenant or whether the covenant was breached. Ibid. See also Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 422 (1997) (holding that "a party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate").
The trial court found that defendant first breached the contract when it sent to plaintiffs "a wholly different set of specifications" than those included in the Olivieri plans, which specifications "represented a significant decrease in the quality of many specified items including windows, roofing, railings and stairs." This finding is supported by substantial credible evidence. Gabriel admitted that the New Custom Home Specifications differed from the specifications contained in the Olivieri plans and provided for lower allowances. By attempting to override the details of the Olivieri plans, made "integral" to the contract, with contrary specifications, defendant breached the contract.
Defendant claims it did not breach the contract based on its reading of paragraph 3.4 as "contemplat[ing] and requir[ing] [defendant] to send [plaintiffs] 'specifications' in addition to the Olivieri [p]lans within ten days after the [c]ontract was signed." This argument is likewise unavailing, as it attempts to read paragraph 3.4 out of the context of the rest of the contract.
Moreover, defendant's behavior also violated the implied covenant of good faith and fair dealing, in that by attempting to override those details included in the Olivieri plans and made integral to the contract, defendant's new specifications "'ha[d] the effect of destroying or injuring the right of [plaintiffs] to receive the fruits of the contract[.]'" See Wood, supra, 206 N.J. at 577 (quoting Kalogeras, supra, 202 N.J. at 366).
The trial court also found that defendant violated the implied covenant of good faith and fair dealing by "totally shut[ting] [plaintiffs] out of the process" of revising the plans and specifications to conform with Ocean City's zoning requirements. This decision was also supported by substantial credible evidence. Within days after discovering that the Olivieri plans contained specifications that defendant did not want to honor, defendant tried to convince plaintiffs to exercise their right to terminate the contract. Only then did Penza inform plaintiffs about Ocean City's permit disapprovals, at which time plaintiffs were told that the architectural plans for the house would need to be redesigned "to conform to [Ocean City's] requirements." Penza generally contacted plaintiffs only after plaintiffs initiated that contact. The revised plans, received by plaintiffs five months later, not only had one fewer bedroom than the original plans, but also incorporated defendant's New Custom Home Specifications, specifications that (1) directly differed from details made integral to the contract through the Olivieri plans, (2) did not need to be changed to comply with Ocean City's zoning requirements, and (3) were unacceptable to plaintiffs. In other words, as the trial court aptly summarized, defendant "used the subterfuge of the [half-story] issue to attempt to scuttle the [c]ontract." We conclude that the judge's findings were supported by the record.
Finally, defendant claims that plaintiffs breached the contract by failing to post the additional $24,000 deposit.
Although not briefed by the parties, there is a sufficient legal basis for excusing plaintiff's failure to post a deposit. "'When there is a breach of a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement.'" Simonson v. Z Cranbury Assocs., 149 N.J. 536, 547 (1997) (quoting Nolan v. Lee Ho, 120 N.J. 465, 472 (1990)). The trial court found that plaintiffs were excused from posting the additional $24,000 deposit because of defendant's anticipatory breach, "which started here almost immediately after the signing," and was never cured. This finding was appropriate. That breach first occurred in late-October/early-November 2004, before plaintiffs' obligation to post the second deposit matured, and was never cured. This breach by defendant relieved plaintiffs of their obligation to post the $24,000 deposit.
We reiterate that we conclude that the judge's finding of a breach of contract was adequately supported by the record and we find no basis for deviating from that finding.
The issue of damages, however, is more complex. While we are satisfied that $200,000 is an appropriate measure of plaintiffs' damages if viewed in isolation, we find that a remand is necessary to determine what effect, if any, Paragraph 25 of the contract may have on plaintiffs' entitlement to recovery of that amount.
In his decision, the judge calculated damages based on the difference in value of the vacant lot at the time of the execution of the contract ($1,550,000) and the value of the lot at the time the contract was to be completed approximately nine months later ($1,750,000). Defendant asserts that the trial judge erred in calculating damages in this manner and in using June 2005 as the appropriate valuation date for determining damages.
One who breaches a contract is liable for "all of the natural and probable consequences of the breach of that contract." Pickett v. Lloyd's, 131 N.J. 457, 474 (1993). Most often, courts award compensatory damages in breach of contract actions. Totaro, Diffy, Cannova and Co. v. Lane, Middleton & Co., 191 N.J. 1, 13 (2007). Compensatory damages, also known as benefit-of-the-bargain damages, are designed "'to put the injured party in as good a position as he would have had if performance had been rendered as promised.'" Donovan v. Bachstadt, 91 N.J. 434, 444 (1982) (citation omitted). See also Pickett, supra, 131 N.J. at 474.
In the case of a breach of an executory contract for the sale of goods or realty, "[t]he traditional test [of damages] is the difference between the market price of the property at the time of the breach and the contract price." Donovan, supra, 91 N.J. at 445. However, "[t]he specific elements to be applied in any given case of a seller's breach of an executory agreement to sell realty may vary in order to achieve the broad purposes of reparations[.]" Ibid. Moreover, the Court has also approved of measuring the benefit of the bargain based on "the difference between the contract price and the market value at the stipulated time of delivery." St. Pius X House of Retreats v. Diocese of Camden, 88 N.J. 571, 582 (1982).
The trial court below used June 2005 as the time at which plaintiffs damages were calculated because under the terms of the contract, the house was to be delivered on June 15, 2005, or at the latest on July 15, 2005.*fn1 We find no error in this approach to the calculation of damages. June 2005 is when performance would have been rendered if defendant had not breached the contract, and calculating damages based on that date affords plaintiffs the benefit of their bargain. While defendant did face obstacles that could have caused delay in performance through no fault of defendant -- specifically, Ocean City's permit rejection based on its interpretation of its half-story zoning requirements -- Thomas opined that this obstacle should have resulted in no more than a three-month delay. This delay would have had little impact on the closing date and, as a result, the value of the real estate. Moreover, although defendant first breached the contract in late October or early November 2004, defendant's course of conduct supports the trial court's finding that defendant continued to breach the contract in the months following and into the summer of 2005. Finally, we find that the amount of damages awarded by the judge, based upon the change in value of the unimproved lot, was not "so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." Seidman, supra, 205 N.J. at 169 (citation omitted).
However, the trial court failed to address whether Paragraph 25 of the contract may affect plaintiffs' entitlement to recovery of that $200,000.
Defendant maintains that the trial court erred in awarding damages to plaintiffs because Paragraph 25 of the contract sets forth a liquidated damages provision in the event of a breach by either buyer or seller. As we have noted, that paragraph states:
CANCELLATION OR DEFAULT OF CONTRACT. If the Buyer does not make settlement in accordance with the terms of this Contract, all deposit monies may be retained by the Seller as compensation for the damages and expenses which the Seller has incurred in which event this Contract shall be canceled without further liability to either party, except as the Seller may be liable to REALTOR(S) for commission or other payment.
In the event that the Seller does not perform in accordance with this Contract or the Seller is unable to deliver marketable title, and the Buyer is unwilling to accept such titles as the Seller can make, then the Buyer has the choice of securing the return of all deposit monies, together with reasonable costs incurred for examination of title, survey and mortgage application fees or bringing any action in court for specific performance to which the Buyer may be entitled. In the event that Seller defaults by failing to substantially complete construction and obtain a municipal certificate of occupancy by the Outside Closing Date, then the Buyer has the choice of pursuing any and all remedies described above or extending the Outside Closing Date for a reasonable period of time to permit Seller to cure the default.
In the event settlement is not held in accordance with this Contract, or any dispute arises in which the parties cannot agree as to the disposition of deposit monies, it is agreed the Title Company shall act as Escrow Agent and shall retain the monies in escrow until the parties otherwise agree or a determination is made by the courts. Additionally, when a dispute arises as to the disposition of deposit monies under this Contract, the third party holding such deposit monies may unilaterally deposit the disputed funds in the Superior Court of New Jersey pursuant to the court rules and laws of the State of New Jersey.
As an initial matter, we note that it is unclear whether Paragraph 25 is, in fact, a liquidated damages clause. The paragraph sets forth remedies available to the parties in the event of a breach of contract. However, it also provides plaintiffs with the "choice" of invoking its remedies. See Reiter v. Bailey, 39 P.2d 370 (Wash. 1934) (holding that, where a seller may "elect" to declare a forfeiture of a contract and retain any payments made "in liquidation of all damages sustained," the seller's decision not to declare a forfeiture "made inoperative the provision relating to liquidated damages, and therefore left to [seller] the right either to require specific performance or to sue for damages").
Moreover, even assuming arguendo that Paragraph 25 is a liquidated damages clause, it is far from clear whether that clause is enforceable. Regarding the evaluation of liquidated damages clauses, the Supreme Court has adopted the methodology described in the Restatement (Second) of Contracts § 356, which provides that:
[d]amages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
[MetLife Capital Fin. Corp. v. Wash. Ave. Assocs., 159 N.J. 484, 494 (1999).]
The Court has held that "the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause," and that the "overall single test of validity" is whether the liquidated damages clause is "reasonable under the totality of the circumstances." Id. at 495 (citations and internal quotation marks omitted). In a commercial contract between sophisticated parties, liquidated damages clauses are presumptively reasonable, and the party challenging the clause bears the burden of proving its unreasonableness. Id. at 496.
Normally, invalidation of a liquidated damages clause occurs only when a court determines that the liquidated damages are so high that they constitute a penalty. Here, on the other hand, enforcement of Paragraph 25 as defendant suggests would result not in an extremely high award, but rather no award at all, beyond any money plaintiffs deposited into escrow. A low damage provision has also been the subject of discussion and is addressed in comment "a" to the Restatement (Second) of Contracts § 356, which notes that "[a] term that fixes an unreasonably small amount as damages may be unenforceable as unconscionable." Other states have addressed this issue with differing views. Cf., e.g., Mahoney v. Tingley, 529 P.2d 1068, 1071 (Wash. 1975) ("[e]xcept where extraordinary circumstances are involved such as fraud or serious overreaching by the purchaser, a seller who chooses to utilize the device of liquidated damages in an earnest money agreement, with its attendant features of certainty and reliance upon the limitation, cannot avoid the effect of that agreement"); Roscoe-Gill v. Newman, 937 P.2d 673 (Ariz. Ct. App. 1996) (agreeing with Mahoney); Hawkins v. Foster, 897 S.W.2d 80, 85-86 (Mo. Ct. App. 1995) (upholding the trial court's award of $37,000 in damages in the face of a $1000 liquidated damages provision, agreeing with the plaintiffs that such liquidated damages were "unreasonable as a forecast of probable damages and disproportionate to the amount of damages which would probably result from defendant's breach and that the provision is unconscionable"); Varner v. B.L. Lanier Fruit Co., 370 So.2d 61 (Fla. Dist. Ct. App. 1979) (reversing a judgment limited to liquidated damages, finding that the party "would be entitled to a further recovery if he can prove the unconscionability of the liquidated damages clause").
Our concern here is that there may be legitimate arguments to be advanced as to whether Paragraph 25 is a liquidated damages clause, and if so, whether it is invalid as a matter of law or public policy, either on its face or as applied here. We are constrained in addressing the issue as neither the trial judge nor plaintiffs considered or answered the arguments advanced by defendant as to the viability of the provision. We would not be reluctant to address the issue, but our concern is heightened by the absence of a factual record that could bear on the applicability of this default provision.
In sum, we conclude that the appropriate course of action is to remand for further proceedings on the issue of the validity and applicability of Paragraph 25 as well as to develop whatever factual record is necessary to assist the Law Division in reaching a conclusion. Assuming, upon remand, the trial judge determines that additional damages should be considered beyond the limitations set forth in Paragraph 25, we agree that the award of $200,000 is an appropriate damage award under the circumstances presented here. We caution the parties that by recognizing that the award is appropriate, we make no finding as to the viability of Paragraph 25 or its limitations on damages on remand.
We have also considered the additional issues raised by defendant as to the lack of notice of the methodology of calculating damages as well as the award of pre-judgment interest. We conclude that they are without merit and require no further discussion. R. 2:11-3(e)(1)(E). We reach the same result regarding the dismissal of the counterclaim.
We affirm in part, reverse in part and remand for further proceedings consistent with this opinion. We do not retain jurisdiction.