Legal Issues

Supreme Court of Texas, May 23, 1984

Factual Background and Issues Presented
The instant case arises from a contract dispute involving the construction of a restaurant.  The restaurant was to be constructed for 116,000, delays ensued, and Steak House (Owner) terminated Vances (Contractor) contract.  Owner thereafter withheld 20,000 of the original contract price, denied Contractor further access to the construction site, and employed others to make repairs and finish construction.  For purposes of the issues presented on appeal, though there were other parties at the trial level, it is enough to note that Contractor did not completely perform the contract, that he did substantially perform the contract, and that he perfected his appeal to the Supreme Court of Texas whereas the Owner did not perfect its appeal.  Contractor argued that he was entitled to damages because he substantially performed the contract and that the Atkinson rule placing the burden of proof on the contractor should be overturned so as to make the owner responsible for proving the costs of repairs for defects that might be used to offset or otherwise eliminate a potential damage award.

Two main issues were presented in this case.  The first issue presented was whether a contractor who brings a suit on a substantial performance theory, in which the owner also argues that there remain defects capable of being remedied, bears the burden of prove for establishing substantial performance, the contract price for the construction, and the costs for fixing remediable defects.  The Supreme Court of Texas held, affirming the Atkinson rule despite Contractors challenges, that Contractor did bear the burden of proof.  The second issue presented was whether the evidence presented at trial was sufficient to create material issues of fact such that the trial courts grant of a directed verdict against Vance.  The Supreme Court held that the directed verdict was improper because there were issues of fact that should have been submitted to the jury.

Rules
The Supreme Court of Texas stated that contractors can recover damages when there is substantial performance.  These damages are calculated by subtracting the costs of fixing remediable defects from the contract price.  At the same time, however, an owner is also entitled to damages and these damages are measured as either the costs associated with the completion of the construction contract or the costs attributable to fixing remediable defects.  This damage measure is adjusted when only part of the contract price has been paid by creating a credit against the unpaid portion of the contract.  The main argument centered not on the proper measure of damages rather, the fundamental question was whether the Supreme Court of Texas would reaffirm the Atkinson rule which placed the burden of proof with respect to the aforementioned elements of the substantial performance cause of action and damages on the contractor.  The Atkinson rule stands for the proposition that, as substantial performance is an equitable doctrine, the burden of proof must be placed on the contractor because it would be inequitable to allow a contractor a full recovery when the contract has not been fully performed.

With respect to the directed verdict, the Supreme Court of Texas stated that issues of fact must be given to the jury, that damage measures in substantial performance cases are extraordinarily fact-specific, and that a directed verdict may only be granted when there are no material facts capable of being disputed.

Analysis
The Supreme Court of Texas began its analysis by discussing why the Atkinson rule was consistent with sound public policy.  As an equitable doctrine, substantial performance was created in order to allow contractors to recover damages for construction that has been substantially performed.  The public policy benefit is that damages should be equitable attributed to actual costs and work done.  Vance, citing both other jurisdictions and legal experts, asked for the Atkinson rule to be overruled and to place the burden of proof for the costs associated with fixing the remediable defects on the owner.  The Supreme Court of Texas refused because they felt that such a ruling might lead to strange results in which a substantially performing contractor could thereby recover the full contract price if an owner failed to meet the requisite burden of proof.  Additionally, because the substantial performance doctrine had evolved to benefit a contractor in an equitable fashion rather than to punish an owner, the court reaffirmed Atkinson and placed the burden of proof on the contractor.  With respect to the directed verdict, the court reviewed and discussed various evidence regarding repairs from the trial transcript and held that there were issues of fact that should have been submitted to the jury.

Conclusion
In conclusion, the Supreme Court of Texas reaffirmed the Atkinson rule and placed the burden of proof on contractors when contractors seek damages pursuant to a substantial performance cause of action.  The court acknowledged that other jurisdictions have approached the issue differently, but felt that this approach was most consistent with equitable principles.