March Newsletter (Issue 03-2017)

Missouri Supreme Court Upholds City St. Louis Minimum Wage Ordinance

Facts: On August 28, 2015, the City of St. Louis (City) enacted Ordinance 70078 (Ordinance), which became effective upon passage.  The Ordinance provided for a series of graduated increases to the minimum wage for employees working within the physical boundaries of St. Louis, beginning on October 15, 2015.  The increase in minimum wage would start at $8.25 per hour and end on January 1, 2018, at $11 per hour.  Beginning January 1, 2021, the minimum wage rate under the Ordinance would be increased annually on a percentage basis to reflect the rate of inflation.  The Ordinance stated:

“If the state or federal minimum wage rate is at any time greater than the minimum wage rate established by this ordinance, then the greater shall become the minimum wage rate for purposes of this ordinance.”

Plaintiff ’s filed a declaratory judgment action against the City requesting that the Ordinance be declared invalid and that the City be enjoined from it’s enforcement.  The petition alleged that City Ordinance was preempted by Section 290.502 (alone or in conjunction with section 71.010), by Section 67.1571, and that the Ordinance exceeded the charter authority granted to the City.

Opinion: Section 67.1571 Did Not Preempt the St. Louis Ordinance; One Subject Rule: Plaintiff’s argued that the Ordinance was expressly preempted by Section 67.1571, which provides that a municipality “shall not establish, mandate or otherwise require a minimum wage that exceeds the state minimum wage.”  The Court rejected this argument because Section 67.1571, was unconstitutional due to a violation of the “single subject” rule in the Missouri Constitution.  The minimum wage prohibition, Section 67.1571, was added to HB 1636, a bill that pertained to community improvement districts, thereby violating the provision in the Missouri Constitution that prohibits a bill a from containing more than one subject. “The test for whether a bill violates the single subject rule is whether the bills provisions fairly relate to, have a natural connection with, or are a means to accomplish the subject of the bill as expressed in its title.”  The title to HB 1636 originally related to community improvement districts was not in any way related to minimum wages nor was it germane to the original purpose of HB 1636.  The minimum wage provision was attached, as an amendment to HB 1636, only after the original bill failed to get out of committee.  The Court called this a classic example of log rolling; therefore, the provisions pertaining to minimum wages in HB 1636 were invalid.

Collateral Estoppel: The Plaintiff’s sought to use collateral estoppel against the City because of the City’s involvement in a prior case relating to Setion 67.1571.  The collateral estoppel argument failed because elements to prove its applicability were missing since the prior adjudication did not result in a judgment on the merits nor did the City have a full opportunity to challenge the action; therefore, the City could raise the defect in the enactment of HB 1636 as a defense.

Statute of Limitations: The Plaintiffs asserted that the five-year statute of limitations in Section 516.500 barred the City from challenging a procedural defect in the enactment of a law.  This argument failed because even though a claim may be barred by the applicable statute of limitations with respect to “actions” the City was using this argument as a “defense” to the constitutionality of Section 67.1571.  The five-year statute of limitations in Section 516.500 applies to bringing actions and does not bar raising the defect in the enactment of the statute as a defense.

Conflict and Field Preemption: Plaintiff’s argued that Section 67.1571, permitted the payment of an employee at or above the statutory minimum wage.  Plaintiffs claimed that the Ordinance prohibited what the state permits because it prohibited an employer from paying a wage above the state statutory minimum but below the minimum required by the Ordinance, thereby, directly conflicting with Section 70.010.  Plaintiff’s argument under Section 70.010, that there was total preemption of local ordinances, when the state has passed a law pertaining to a particular subject was totally inconsistent with cases applying Section 71.010.  In this case, there was no preemption because the City was simply supplementing the state law by setting additional local limits on the minimum amount a local employer can pay an employee.  This interpretation is consistent with long-standing case law.

The Plaintiffs also argued that the state occupied the field when it regulated minimum wages, thereby preempting the Ordinance.  Plaintiff’s argued for an expanded interpretation of Section 70.010 by asserting that the Ordinance, directly conflicted with Missouri’s minimum wage law because once the state enacted a law on minimum wages it occupied the entire field.  The Court considered this new and unusual argument as an amalgam of conflict and field preemption.  The Court rejected this analysis and discussed separately conflict preemption and field preemption, concluding that they did not prohibit the enactment of the Ordinance.

Field preemption occurs when the state has occupied the entire field so as to preempt all local laws regulating minimum wages.  The legislative history of minimum wage prohibitions by the state demonstrates conclusively that the City ordinance, which was enacted prior to the adoption of HB 722, was protected because it specifically provided that an ordinance that was in effect when HB 722 became law; therefore, it was grandfathered and could continue in effect.  Cooperative Home Care, Inc., v. City Of St. Louis, (SC95401, on 2/28/17)

Comment Howard: The opinion authored by Judge Stith, is by far the best analysis of local government/state preemption law.  Even though, you may never have a minimum wage case you will have cases dealing with state/local conflicts. This opinion is now the best source for analyzing state/local conflicts.  There was a concurring opinion by Judge Fischer that simplified the analysis to one of statutory construction but if the court followed Judge Fischer’s analysis we would not have Judge Stith’s opinion.

Missouri Recognizes New Clause Of Action To Sue Government Based On Implied Warranty That Design Plans Are Reasonably Accurate While Recognizing New Method To Calculate Damages

Important. The Eastern District held in a case of first impression that liability could be based on the “Spearin Doctrine” and damages could be computed using the “modified total cost method.”  Neither doctrine was recognized in Missouri prior to this decision.  This decision dramatically impacts local government construction practices.

Facts:  The Jackson School District (District) entered into a contract with WNB as architect to build an addition to the Jackson High School (“the Project”).  Subsequently, WNB entered into a subcontract with Henthorn to produce electrical plans and specifications for the Project.  During the bidding phase, the District furnished the plans and specifications (“the Plans”) for the Project to Penzel, who in turn gave a copy of the Plans to Total Electric.  Neither Penzel nor Total Electric noticed any errors in the Plans during the bidding process.

Based on the Plans, Total Electric submitted a bid of $1,040,444 to Penzel to furnish and install electrical work for the Project.  The District entered into a contract (“the Contract”) with Penzel to be the general contractor for the Project.  In turn, Penzel entered into a subcontract (“the Subcontract”) with Total Electric to provide electrical work on the Project based on the submitted bid.  The notice to proceed required substantial completion of the Project within 550 days.  Total Electric substantially completed its work some sixteen month after the contract delivery date claiming that the delay was the direct result of the defects and inadequacies in the Plans.

Penzel brought a breach of contract action on behalf of Total Electric against the District, based on a breach of implied warranty for furnishing “deficient and inadequate plans and specifications” to Penzel.  Penzel claimed that, under the Spearin Doctrine, the District impliedly warranted that the Plans it furnished were adequate for completing the Project, and the District breached the Contract by providing inadequate and defective plans and specifications, which caused damages to Total Electric.  Penzel alleged in its petition that there was a massive failure of the Plans in a number of material ways.  In addition, the District compounded Total Electric’s damages because of WNB’s slow response time in dealing with problems on the Project.  Sometimes Total Electric would have to wait several weeks, or months, for a response.

Initially, Total Electric created daily logs for the Project to track the deficiencies in the Plans and their associated damages.  However, Total Electric stopped maintaining these logs as problems persisted.  Total Electric claimed it was unable to specifically track the amount of damages and extra hours attributable to each delay or distribution because the “sheer volume and variety of interfering and disruptive events” made it highly impractical.  Total Electric further stated that accurately tracking and categorizing the defects and corresponding damages would have required the company to “devote multiple professionals to tracking costs,” which would further increase its costs.  To prove damages for Total Electric’s labor loss of productivity, Penzel sought to use the “total cost method” or “modified total cost method.”

The District, Henthorn, and WNB filed motions for summary judgment, which were granted by the trial court and appealed to the Eastern District.

Opinion: Spearin Doctrine: The Spearin Doctrine, long recognized by the federal courts, “stands for the proposition that when a governmental entity includes detailed specifications in a contract, it impliedly warrants that [1] if the contractor follows those specifications, the resultant product will not be defective or unsafe, and [2] if the resultant product proves defective or unsafe, the contractor will not be liable for the consequences.”  In addition, the Doctrine may also be used to compensate a contractor for losses incurred due to plans and specifications that are inaccurate making it impossible to complete the work without expanding significantly more hours and money then it would have required if the plans and specifications were adequate.

The Spearin Doctrine provides: “Delay due to defective or erroneous Government specifications are per se unreasonable and hence compensable.” The government impliedly warrants that the design plans are “reasonably accurate” although the specifications need not be perfect; In determining whether the District’s plans were defective, you look at the cumulative effect of the alleged errors.

The Eastern District held that a Spearin claim is an acceptable vehicle for bringing a cause of action in Missouri when all of the following circumstances are present: “(1) there is a dispute between a contractor (or subcontractor with a valid liquidating or “pass-through” agreement) and a governmental entity; (2) arising from a construction contract; (3) where the governmental entity furnishes inadequate or deficient plans and specifications for work to be performed by the contractor under the parties’ agreement; and (4) these deficiencies cause additional costs for the contractor.”

Measure of Damages: Penzel argued that there was sufficient evidence to establish damages with “reasonable certainty” based upon use of the Total Cost Method or the Modified Total Cost Method.  After examining both methods for calculating damages the Eastern District, concluded that the better method for calculating damages in Missouri is the Modified Total Cost Method because it is more clearly aligned with Missouri’s’ contract law policy, since it places the non-breaching party in the same position that it would have been in the absence of the breach while only penalizing the breaching party to the extent it is responsible for the non-breaching party’s damages.  Penzel Construction Company, Inc., v. Jackson R-2 School District, (ED103878, 02/14/17)

Comment Howard: The 42-page opinion establishes very important new public contract law principles that merit your close attention.  Local government lawyers should examine existing construction contracts forms to determine if they need to be modified in light of this case.  You should also consider reviewing construction work that is already under contract to see if there are potential problems that might be minimized by extra attention to construction contract administration.

I would add a word of caution, that if you are using the standard AIA contract you would do well to determine whether or not the contract shifts to the local government entity the risk of design defects.  There is a 2014 article in Construction Law and Public Contracts Section appearing in Volume 59 October 2010 of the Virginia Lawyer that strongly suggest there is a potential problem leaving the government stuck for poor design of plans.  Consider the following quote from the article: “On the other hand, under the Spearin doctrine, the owner does warrant to the contractor that the plans and specifications are accurate, correct, and suited for their intended purpose.  The result is that the owner, rather than the architect who prepared the plans, is liable to the contractor for extra costs resulting from errors in the plans and specifications.”

You may also want to look at the latest model construction form recently drafted by IMLA to see how risks are allocated between the parties or look at the response from MODOT.

When Are Funds Appropriated?

 Facts: A recent Eighth Circuit Court of Appeals decision discusses the meaning of the word “appropriation” in the context of a economic development agreement for a TIF, which provided that rebate payments under the agreement were “subject to annual appropriation of the City Council.”

Under the agreement the City of West Branch, Iowa (City) entered into an agreement with a wind power company (Company) that manufactures and installs wind power generation systems.   The Company agreed to expand its business in the City, if the City would consider rebating a portion of the Companies taxes each year for eight years.

In November 2011, the City approved a resolution obligating for appropriation a tax rebate to the Company for fiscal year 2013.  The authorized rebate was subsequently included in the City’s budget, which was adopted in March 2012.  After the Company paid its taxes for fiscal year 2013, the City budget was amended to remove the funds.  The City failed to pay a rebate to the Company for fiscal year 2013 and in 2014 under similar circumstances.  Thereafter, the City canceled the contract.

The Company sued in federal district court claiming breach of contract.  The parties filed cross motions for summary judgment.  The district court ruled that the City had breached its agreement by cancelling without cause.  The court also decided that the Company was not entitled to damages for rebates that could be due in future fiscal years, because the agreement only obligated the City to consider the appropriation of rebates.  After a bench trial, the district court ruled that the Company was entitled to recover compensatory damages for the tax rebates obligated for appropriation but not paid in fiscal years 2013 and 2014.  The City appealed to the Eighth Circuit.

Opinion: The City argued that under the agreement a rebate is not appropriated until the moment it is paid.  In other words, the City has the power to decide not to pay the rebate up and until the moment the rebate checks are sent.   The Eighth Circuit reasoned that under the agreement the City must annually certify “no later than December 1… the amount obligated for appropriation for rebate.”  If the City obligates a rebate for appropriation the City must pay within 30 days from the date that it obligates the funds.  The court concluded that the plain language of the agreement supported the interpretation adopted by the district court, which limited the City’s ability to decline and pay rebates at any time.  The opinion noted that the timing provision was extremely narrow and essentially procedural.  It did not limit the power of the City to refuse to appropriate the funds but instead provided that once the funds were appropriated they had to be paid in accordance with the agreement.  This provision did not violate the Iowa Constitution with respect to the creation of debt.  Acciona v. City of West Branch, Iowa, (8th Cir., 16–1735, 02/07/17)

Comment Howard: This case is a rare bird dealing with a topic of considerable importance because the language, “subject to an annual appropriation” is included in many contracts for economic development and bond issues.  I think that once the budget is adopted the expenditures shown therein are appropriated and can be spent without further authorization from the legislative body.

No Additional Compensation Allowed For Unknown Subsurface Conditions

 Facts: Taney County (County) entered into a contract with Herion Company (Contractor) for the “Casey Road Improvements” in the amount of “$1,873,989.50 … as full compensation for the performance of work embraced in this contract, subject to adjustment as provided for changes in the quantities by means of approved change orders.”  The bid form for “subgrade stabilization using shot rock” (SSUSR) had a unit price of $65 per cubic yard for 5 cubic yards totaling $325.

During the course of the work the Contractor discovered unsuitable subgrade and began SSUSR work in early April 2008.  By April 22, Contractor used over 4,500 cubic yards of SSUSR, which amounted to $292,510 of SSUSR work.  At that point in time, the County first learned of the additional SSUSR work and materials.  The County then directed its project engineers, Great River Engineering (GRE), to stop the SSUSR work on that phase of the project and schedule further discussion of the issue.  It is undisputed that, prior to performing the SSUSR work, Contractor did not: (1) obtain written permission from GRE authorizing Contractor to proceed with the SSUSR work above the 5 cubic yards included in the bid form; or (2) seek written authorization from the County to perform the additional work or to use additional materials for SSUSR.  On April 30th, the parties resolved the issue and agreed to “Addendum No. 2.” Therein, Contractor agreed to amend its unit price to $52 per cubic yard for all past and future SSUSR work on the project and was paid accordingly.  Ultimately, Contractor was paid $685,000 for 13,500 cubic yards of SSUSR work instead of $325 for 5 cubic yards bid in the original contract.

In December 2009, Contractor filed a lawsuit seeking to set aside Addendum No. 2.  Contractor’s first amended, two-count petition generally alleged, inter alia, that: (1) the County breached the Contract by paying a reduced price for SSUSR ($52 per cubic yard) after agreeing to pay $65 per cubic yard; (2) the SSUSR work did not require a change order prior to completing the work; and (3) the County wrongly informed Contractor that a prior change order was required and that Contractor did not obtain proper authorization before performing the SSUSR work.  The petition alleged that Addendum No. 2 was not binding “because it was signed by Contractor under duress” and requested damages for the difference in price.  The Contractor also sought damages for the delay in work, and requested prejudgment interest.  As an affirmative defense the County alleged, that Contractor breached the Contract by failing to obtain the required written approval prior to undertaking additional SSUSR work.

The Contractor filed motions for partial summary judgment.  The trial court granted Contractor’s first motion for partial summary judgment, which posited that there was a conflict between the JSP 1.13 payment provision and the JSP 2.2 additional work provision.  The trial court decided that the provision specific to the work performed (subsoil conditions) under JSP 2.2, controlled over the more general provision in JSP 1.13, which required written authorization before proceeding with the additional work.

The case was tried to a jury, which awarded Contractor $356,058 damages under Counts I and II, plus $139,498 prejudgment interest, for a total award of $495,556, which the County appealed to the Southern District.

Opinion: Section 1.13 of the general provisions provided in part that any extra or additional compensation above the amount fixed by the Contract or on which the Contractor contemplates bringing a claim for extra compensation required the Contractor to promptly notify the Engineer of the condition and circumstances before incurring any expenses.  Section 1.13, further provided, that no extra compensation shall be awarded, in any event, without prior written approval of the Engineer.

Section 2.2, Subgrade Stabilization provided that in the event the existing subgrade proved to be unsuitable the contractor shall perform stabilization measures by using shot rock.  Section 2.2 further provided that stabilization using shot rock will be compared with the estimated plan qualities in the contract quantities for each item, which shall be adjusted as an overrun or underrun by means of a change order using the contract unit price of the item.  A Change Order was defined in the contract as a “written order from the engineer to the contractor, as authorized by the contract, directing changes in the work as made necessary or desirable by unforeseen conditions or events discovered or occurring during the progress of the work.”  Neither party anticipated the extent of unsuitable subgrade discovered on the job.

The Southern District held that the general provisions of 1.13 controlled, based upon statutory rule of construction that a contract should be construed as a whole, giving effect every provision if it is fair and possible to do so, in order to determine the true intention of the parties.  The opinion also incorporated by reference Section 229.050.5 RSMO into the contract, which pertains to a County’s liability for additional work or material by requiring that cost be agreed upon in writing before the work is performed, which prohibits any payment for additional work that has not been agreed in writing in advance of the work being performed.  The court determined that there was no conflict between Section 2.2 and 1.13 of the contract because there was nothing in Section 2.2 that allowed the contractor to perform additional work without first obtaining a written change order.  Herion Company, v. Taney County, (SD 33512, 02/06/17)

Comment Howard: You may want to compare this case to the following case involving J. H. Berra Construction Company and the City of Washington since they both involve interpretations of construction contracts and start at the same but end up with a different result.

Does A “Working Day” Exclude Days When The Contractor Cannot Work Due   To Inclement Weather?

 Facts: J.H. Berra Construction Company, (Berra) and the City of Washington (City) entered into a contract for the construction of an expansion to an existing landfill (Project).  The contract specified that Berra would complete the Project by November 27, 2013 (Completion Date).  The contract provided a penalty of $950 for “each working day” that Berra was in default after the Completion Date.  The contract did not define the term “working day.”  Berra did not complete the project until June 23, 2014, some 140 working days after the Completion Date.  The City assessed liquidated damages in the amount of $133,000 for the 140 working days for not completing the Project by the Completion Date.

Berra filed a petition for damages claiming that the City breached the terms of the contract by assessing and withholding $133,000 as liquidated damages because the City included in its assessment working days when the weather prevented Berra from working.  An engineer from the City testified that she believed the contract defined a “working day” as all non-holiday days Monday through Friday, irrespective of whether the contractor was able to perform productive work.

For Berra, the foreman for the Project testified that the custom in the construction industry was to define a “working day” as only those days where the weather allowed productive work.  Berra introduced exhibits showing that on designated dates Berra was not able to work due to inclement weather conditions.  The trial court concluded that Berra had materially breached the contract by failing to complete the Project by November 27, 2013, and was liable for liquidated damages in the amount of $133,000.00 for the delayed completion of the Project.  The trial court found that for the purpose of calculating liquidated damages, “working days” were every non-holiday weekday.  Berra appealed to the Eastern District.

 Opinion: The Eastern District applied the cardinal principle of contract construction (previously discussed earlier Taney County opinion), which is “to ascertain the intention of the parties and to give effect to that intent.”  The contract is read as a whole to determine intent and give terms used therein their plain and ordinary meaning.  Only when the contract is ambiguous, on its face, may the court look outside a contract to determine the parties’ intent

The contract provided for a penalty of $950 for each working day that Berra was in default after November 27, 2013.  The contract did not define the term “working day.”  Therefore, the court looked to other provisions of the contract to determine the meaning of “working day.”  One provision of the contract suggested that the term “working day” meant a typical business day, which is ordinarily understood to mean a day when banks, governments, and other similar institutions are open for business.  Another portion of the contract suggested that construction crews do not typically work a Monday through Friday schedule and that if workers are not able to work due to inclement weather such days do not count towards a 40-hour workweek, for purposes of calculating overtime payments.

Based upon provisions in the contract the term “working day” was ambiguous.  Since the City prepared the contract any ambiguity is construed against the City.  Berra provided extrinsic evidence to show that within the construction business the term “work day” includes only those days when the weather allows the contractor to work.  Judgment reversed and remanded to the trial court for further proceedings.  J. H. Berra Construction Company, Inc. v. City of Washington, (ED104529, 02/14/17)    

Short-Term Rental of Residential Property

Short-term rentals of residential property continue to be a topic of great interest to local government.  The American Planning Association has prepared a packet of information collecting documents of interest.  Also you may want to consider looking at enforcement procedures established by the City of Denver.

Denver short term rental info

This Just In From Allen Garner:

The Missouri Supreme Court ruled in the Missouri American rate case in which the MML participated.  The Court held that the issue was moot because Missouri-American had a rate case which was completed during the pendency of the appeal.  The Supreme Court is leaving the population issue to the legislature for clarification. On page 11 the Court states:

Precisely because of the general interest and widespread effect should this Court hold that a political subdivision can fall out of the scope of a population statute, it may well be that the legislature will address and clarify the meaning of Section 1.100.2 before this issue recurs.  This would make it unnecessary for this Court to address the issue and would avoid the parade of horribles that it is alleged would occur were this court to hold that St. Louis County or other political subdivisions were no longer subject to statues that have governed them for years if not decades.

Representatives of Missouri American are pursuing a legislative solution.  The two bills involved are HB 451 which has passed the House and SB 124 which is on the Senate Calendar.  They would appreciate the MML’s continued support of these bills to ensure the population issue is clarified once and for all.  If you read the footnotes on pages 10-11 of the decision, there are even more population-based laws affected than were mentioned in the amicus briefs.  Missouri American Water v. Missouri Public Service Commission, (SC95713, 3/14/17)

More From Lisa on United States Supreme Court Cases

 Lisa Soronen, Executive Director for the State & Local Legal Center continues her prolific writings concerning United States Supreme Court cases.  See links below to her latest comments.

Short Supreme Court Midterm Review for the Local Governments 2017 

Supreme Court Midterm Review for States and Local Governments 2017

Supreme Court Midterm Review for the Local Governments 2017


Prepaid Phones Missouri Lawyers Weekly recently announced that TracFone, a prepaid cell phone company, has settled a class-action lawsuit with 356 Missouri municipalities and St. Louis County in the amount of $10 million.  Congratulations to John Mulligan for his fine work.  City of Maryland Heights, Missouri and City of Winchester, Missouri v. Tracfone Wireless Inc,12SL-CC00648-01.

John also has another case pending with Charter Communications related to Voice over Internet Protocol.

Ferguson AppealThe City of Ferguson recently dropped its appeal of a jury verdict for $3 million involving the use of stun gun on unarmed naked man who was running down the street claiming, “I am Jesus.”  Even though stun guns are permitted by the Fourth Amendment their use can lead to excessive force claims.  In November 2016 I posted on my blog a discussion of this case.