No. 94,473
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
NEWMAN MEMORIAL HOSPITAL , d/b/a
NEWMAN REGIONAL HEALTH CENTER,
Plaintiff/Appellee,
v.
WALTON CONSTRUCTION COMPANY, INC.,
Defendant,
EVERTON OGLESBY ASKEW ARCHITECTS,
Defendant/Appellant,
FAIRBURY GLASS CO., INC., d/b/a
CONCORDIA MIRROR AND GLASS COMPANY,
Defendant,
BELLES & ASSOCIATES, INC.,
Defendant,
and
AMCO INSURANCE COMPANY,
Defendant.
SYLLABUS BY THE COURT
Under the facts of this case and for the reasons fully set forth in the opinion, we hold: (1) The actions of a county hospital in constructing and leasing a medical office building is a proprietary and not a governmental function; (2) pursuant to K.S.A. 60-521, the limitations periods prescribed in Article 5 of Chapter 60 of the Kansas Statutes Annotated apply to actions brought in the name of the county hospital acting in a proprietary function or activity in the same manner as to actions by private parties; (3) equitable estoppel does not exist to prevent an architectural firm under a written contract with the county hospital from pleading and relying on the statute of limitations defense; (4) the 3-year period of limitations of K.S.A. 60-512(1) applies to and bars any recovery by the county hospital against the architectural firm for breach of implied warranty of workmanlike performance; (5) the 5-year period of limitations of K.S.A. 60-511(1) applies to and bars any recovery by the county hospital against the architectural firm for breach of the terms of a written contract; and (6) the architectural firm is granted judgment against the county hospital based on its statute of limitations defenses.
Appeal from Lyon District Court; JOHN O. SANDERSON, judge. Opinion filed January 12, 2007. Reversed.
Wyatt A. Hoch and Carolyn L. Matthews, of Foulston Siefkin LLP, of Wichita, and James D. Oliver, of Foulston Siefkin LLP, of Overland Park, for appellant.
Harold S. Youngentob, John A. Bausch, and Nathan D. Leadstrom, of Goodell, Stratton, Edmonds & Palmer, L.L.P., of Topeka, for appellee.
Before MALONE, P.J., CAPLINGER, J., and LARSON, S.J.
LARSON, J.: This is Everton Oglesby Askew Architects' (EOAA) direct appeal from (1) the district court's ruling that Newman Memorial Hospital, d/b/a Newman Regional Health Center (Newman) was not subject to EOAA's statute of limitations defense because Newman was acting in a governmental and not a proprietary manner in building and leasing an office building to physicians at commercial rates; (2) rulings relating to its contract for architectural services to Newman; (3) rulings relating to the jury trial where EOAA was found liable for damages of $907,693; (4) denial of EOAA's motion for judgment as a matter of law; (5) denial of EOAA's motion alleging the jury's verdict was not supported by substantial competent evidence; and (6) jury instructions given and denied which are claimed to constitute reversible error.
FACTUAL AND PROCEDURAL BACKGROUND
The medical office building
Newman is a county hospital located in Emporia, Lyon County, Kansas. It is organized and exists pursuant to the provisions of K.S.A. 19-4601 et seq. which allow establishment of a hospital but do not require it. There is likewise no statutory or other legal obligations to build and maintain an office building for physicians, but it is a permitted activity.
In 1994, the Newman Board of Trustees began consideration of constructing an office building next to the hospital for rental to physicians or other tenants. The minutes of the Newman Board of Trustees' meeting of June 28, 1995, contained the following statement relating to the construction of a medical office building:
"Dr. Geitz advised he has had strong feelings about this building for 1-1/2 years and the need to have adequate space available for physicians being recruited. Physicians being brought in who are not connected with any group have no place to go. He noted the community will have a problem over the next few years with seven primary care doctors over the age of 60; it is already difficult for people who need doctors to get in to see them. Dr. Geitz referred to Mr. Hanna's concern that this project will be harmful to local developers; however, the need has not been met by local developers. If the Hospital doesn't do something, something is going to be done. Dr. Geitz expressed his concern that an outside agency could come into the community and build the necessary facility, establishing outpatient/radiology/lab services as well, and taking business away from the community and Hospital."
A decision was made by the Newman Board of Trustees to proceed with the project of establishing a medical office building.
In June 1995, Newman contracted with EOAA to provide architectural services for the design and construction of the medical office building. EOAA had previously provided architectural services to Newman for a construction project.
The agreement for architectural services
On June 15, 1995, EOAA and Newman entered into a written agreement titled "Standard Form of Agreement Between Owner and Architect" (hereinafter "Agreement") which was the standard contract published by the American Institute of Architects, but contained numerous and substantial modifications involving deleted language and additions showing provisions of the Agreement had been negotiated by the parties.
Numerous other parties became involved in the planning for and construction of the office building. Some were initial defendants in this case, but all except EOAA either settled or were dismissed prior to the jury trial. We will mention each one briefly but only as their obligations and actions relate to the issues on appeal between EOAA and Newman.
Newman hired Walton Construction Company, Inc. (Walton) as its construction manager for the project. Walton provided two full-time employees to supervise the work of contractors and assure the quality of their work. Walton sought and obtained bids for the project, but each contractor had its own contract with Newman, not with Walton.
Firms hired by Walton which had contracts with Newman included Belles & Associates, Inc. (Belles) for site grading, foundation, and structural steel, and Concordia Mirror and Glass Company (Concordia) to furnish and install the windows.
Under the Agreement, Newman was required to furnish the services of a geotechnical engineer to investigate, evaluate, and report on soil conditions at the building site. The Agreement (paragraph 4.9) stated EOAA was entitled to rely on the accuracy and completeness of the geotechnical engineer's report. Newman contracted with Barnett, Stuart, and Associates of Topeka, a division of Terracon Consultants, to provide these services.
Although Newman selected and furnished the report of the geotechnical engineer referred to above, EOAA hired numerous other engineering consultants for the project, including structural, mechanical, plumbing, and electrical engineers. For structural engineering services, EOAA hired EMC Structural Engineers, who designated Mark Buchanan as structural engineer of record for the project.
Certain provisions of the Agreement between EOAA and Newman are particularly applicable to the issues in this case. The negotiated Agreement contained the following provision dealing with the statute of limitations:
"9.3 Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion for acts or failures to act occurring prior to Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion."
With regard to the construction phase of the project, the Agreement provided, in relevant part:
"2.6.5 The Architect shall visit the site at intervals appropriate to the stage of construction or as otherwise agreed by the Owner and Architect in writing to become generally familiar with the progress and quality of the Work completed and to determine in general if the Work is being performed in a manner indicating that the Work when completed will be in accordance with the Contract Documents. However, the Architect shall not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work. On the basis of on-site observations as an architect, the Architect shall keep the Owner informed of the progress and quality of the Work, and shall endeavor to guard the Owner against defects and deficiencies in the Work. . . .
"2.6.6 The Architect shall not have control over or charge of and shall not be responsible for construction means, methods, techniques, sequences or procedures, or for safety precautions and programs in connection with the Work, since these are solely the Contractor's responsibility under the Contract for Construction. The Architect shall not be responsible for the Contractor's schedules or failure to carry out the Work in accordance with the Contract Documents. The Architect shall not have control over or charge of acts or omissions of the Contractor, Subcontractors, or their agents or employees, or of any other persons performing portions of the Work. However, if the Architect becomes aware of failures of the Contractor to carry out the Work in accordance with the Contract Documents, the Architect shall immediately notify the Owner of such failures."
The last sentence of paragraph 2.6.6 was a typed-in addition to the standard AIA contract language.
The geotechnical report, building design, and construction
Barnett's report documented EMC's findings based on subsurface exploration and made recommendations for foundation construction noting the medical office building was planned to have a "slab-on-grade" at the first floor level. A slab-on-grade is a concrete floor placed directly on the soil with a structural slab being one that supports itself without coming into contact with the soil. Comparatively speaking, a slab-on-grade floor is very economical in that it can cost only one-fifth of the cost of a structural slab floor.
The Barnett report made detailed recommendations regarding both foundation support and the preparation of the site for that type of foundation. As to the risk of floor movement, the report stated:
"The procedures recommended above for moisture control during and after construction of the floor slab subgrade and use of low plasticity and low volume change material should reduce the potential for subgrade volume change and floor slab movement resulting from variations in moisture content. However, since highly plastic soils on the site extend to a considerable depth, some long term volume change of the subgrade could occur and should be considered. If it is desired to further reduce the potential for subgrade volume change, the use of a greater thickness of low plasticity soil beneath the floor slab would be necessary. To eliminate the risk of floor movement, a structural slab should be considered."
The medical office building was constructed using a slab-on-grade on the first floor, as was an adjacent building for which EOAA had been the architect.
Construction was completed on the medical office building to the point where it could be occupied by tenants in late February or early March 1997; this point and time in the construction process is known as "substantial completion." The certificate of substantial completion referred to in paragraph 9.3 of the Agreement was issued on February 18, 1997.
The record reflects that by July 17, 1997, Newman had knowledge of water leaking through or around the windows in the medical office building and that the leaking caused damage to interior finishes. Concordia was the window contractor. It is also uncontroverted that by May 5, 1998, Newman was aware that the first floor concrete slab was heaving, causing damage to brick veneer, floor tile, doors, and drywall. Belles was the contractor that installed the slab. Belles and Concordia were obligated contractually to correct defects upon notice, which was given, and warranty work was apparently done during late 1997 and 1998.
Filing of this lawsuit and pretrial proceedings
Although negotiations between the parties apparently existed, the record reflects that on July 31, 2002, Newman filed a petition against EOAA, Walton, Fairbury Glass Co., Inc., d/b/a Concordia Mirror and Glass Company, Belles, and AMCO Insurance Company alleging breach of contract, breach of express and implied warranties, negligence, and strict liability. Newman subsequently added as defendants David J. Sprague, d/b/a Concordia Mirror and Glass Company, Concordia Mirror and Glass Company, Inc., Belles, Inc., and Fidelity and Deposit Company of Maryland (Fidelity). In their answers, the defendants, including EOAA, denied liability and alleged affirmatively as a defense that Newman's causes of action were barred by the applicable statute of limitations.
After a period of discovery, EOAA and the other defendants filed a joint motion for summary judgment, contending Newman's construction and leasing of the medical office building were proprietary functions and, therefore, Newman's claims were subject to the applicable statute of limitations and time barred because they were filed after the expiration of the longest applicable limitations period of 5 years as provided in K.S.A. 60-511(1).
Newman responded and admitted it was aware of the window and slab problems respectively by July 1997 and May 1998, but considered these facts immaterial or irrelevant because defendants continued to negotiate with Newman concerning remedial repairs throughout 2000 and 2001. Newman did not controvert the defendants' statement that EOAA design services did not include an express warranty on EOAA's professional services.
Additionally, Newman filed a cross-motion for summary judgment, claiming immunity from the statute of limitations based on the contention that its construction of the medical office building was a governmental, not proprietary, function. Alternatively, Newman argued if it was not immune from the statute of limitations, its claims of breach of contract and breach of express warranty did not accrue until sometime after July 31, 1997, and, thus, those claims were not time barred. Finally, Newman urged the district court to find the defendants were estopped from asserting a statute of limitations defense due to their deliberate engagement in continued negotiations regarding remedial repairs.
After a hearing on the summary judgment motions and some additional briefing where Newman asserted its cause of action against EOAA accrued August 13, 1999, the date EOAA advised Newman it had contacted the window manufacturer regarding remedying the window problems, the district court denied the defendants' joint summary judgment motion. In doing so, the district court order stated:
"It is the Court's ruling that there is an issue of material fact whether the movants are estopped from asserting defenses of expiration of the limitation statute. As to Concordia Mirror and Glass and Belles & Associates, Inc., there are material issues of fact as to whether the statute of limitations expired on or before 31 July 2002.
"If there are material issues of fact whether the statute of limitations expired as to Concordia Mirror and Glass and Belles & Associates, there are material issues of fact whether the statute of limitations expired as to the architect and general contractor."
The district court, however, granted Newman's cross-motion for summary judgment, holding Newman was not subject to the statute of limitations defense because its construction and leasing of the medical office building was a governmental and not a proprietary function. In doing so, the court relied on the language contained in a property tax exemption statute, K.S.A. 2002 Supp. 79-201a Second. The court stated that if narrowly construed, the statute would apply only to ad valorem taxation but if broadly construed, it would conclusively determine the construction and operation of the medical office building was a governmental function, which the district court so found.
As the result of settlements, Newman claims against Walton, Fairbury, Sprague, Concordia, AMCO, and Belles were dismissed with prejudice. Fidelity was later granted summary judgment. This left EOAA as the sole remaining defendant at the time the case went to a jury trial.
Jury trial proceedings
Newman's claims against EOAA were based at trial on breach of contract and breach of implied warranty of performance in a workmanlike manner of the contract for architectural services in the following ways:
"1. Defective design which did not properly take into consideration expansive soil on site;
"2. Providing inadequate design details;
"3. Failure to follow up on soil report and to properly take the expansive nature of the soil under the site into consideration in the design of the building;
"4. Improperly allowing the concrete slab to be placed directly upon soil despite knowledge of soil movement;
"5. Improperly inspected work of contractors;
"6. Improperly allowed installation of grade beams without requiring they be tied to piers;
"7. Improperly gave certification for payment of work of contractors when such work was defective and deficient; and
"8. Improperly accepted building despite defects in design and work."
Newman primarily contended the design of the building was defective, EOAA failed to take into account the expansive soil at the building site and improperly called for slab-on-grade under those conditions, and improperly inspected the work of contractors, especially that dealing with the installation of windows.
EOAA denied that it breached the design contract; alleged it was contractually entitled to and did rely on Barnett's geotechnical report which included recommendations for a slab-on-grade construction; and with respect to the inspection allegation, contended it notified Newman and Walton when it became aware of the leaking windows and is not responsible under the design contract for the contractors' failure to follow the contract documents.
Trial testimony
The jury trial covered a 9-day period with numerous expert witnesses testifying and a large number of exhibits presented, including the contract for architectural services between Newman and EOAA.
It is not necessary for the result we reach to detail the testimony of each witness, but we will highly summarize Newman's main contentions and the evidence presented relative thereto and EOAA's numerous defenses and the applicable evidence supporting them.
Central to Newman's claims that EOAA's building design was faulty was the usage of slab-on-grade flooring which had heaved up 2 inches, causing substantial damage to the building. Evidence showed the architect knew that soil movement can be counteracted by use of caissons, a raised structural slab which supports itself or the removal of elastic soil under a building and its replacement with engineered-approved fill soil.
Newman's expert, Stan Pedersen, a Kansas licensed architect, testified the design team failed to fully consider Barnett's report which suggested use of structural slab to eliminate movement and further did not adequately inquire as to the magnitude of expected soil movement.
Mark Peterman, a licensed structural engineer, testified for Newman and opined the design team failed to design for ground movement, failed to even consider a structural slab and that it was a departure from standard engineering practice to design the floor without so inquiring.
Newman argues on appeal that the testimony of EOAA's structural engineer, William Francis O'Donnell, did not reflect much disagreement with their expert. O'Donnell testified his design was based on not over 1/2 inch of soil movement but faulted the Barnett report for not providing proper recommendations.
Newman also presented a soil engineer, Ron Reed, who concluded the damage to the first floor was caused by expansive clay under the slab. He testified the Barnett report was sufficient without specifying the amount of soil movement expected. Reed opined that a much larger replacement of the clay soil should have been utilized, up to 12 to 14 feet.
EOAA countered by showing EOAA and Barnett had both worked on an adjacent building in which a slab-on-grade floor had been used successfully with a replacement of 24 inches of low plasticity. On the medical office building, the Barnett report had recommended only replacement of a minimum of 18 inches of low plasticity soil although up to 4 feet of soil had ultimately been replaced.
EOAA further showed that although Peterman testified the slab-on-grade should be replaced with a structural slab in a letter to Newman, he had indicated that such a replacement was "not economically feasible." Peterman acknowledged another building which was adjacent to the medical office building had been built with a slab-on-grade first floor and did not experience significant slab movement. In addition, Newman's architectural expert Pedersen testified he has not recommended the use of a structural slab for a building in the past 10 years.
EOAA said the Barnett report had suggested the structural slab to eliminate the risk of soil movement but did not affirmatively recommend implementation of a structural slab on the project. Central to EOAA's defense was the fact its agreement with Newman stated it should "rely upon both the accuracy and completeness of [geotechnical report]."
As to damages, EOAA contended Newman's evidence was premised on tearing out the entire first floor and replacing it with a structural slab floor, which EOAA claimed was not intended or practical. Half of the first floor had been completed slab-on-grade without any problem and the testimony of Newman's expert, Philip Schultze, of a general contracting firm, was "preliminary," could be off plus or minus 20 to 30 percent and did not properly calculate the floor to be replaced.
Newman countered the EOAA's damage arguments by pointing to the testimony of Schultze being admitted showing his estimate of the cost of making the building "right," the testimony of Peterson as to the cost of the structural slab, and the testimony of Harold Blits, Newman's director of facility management, concerning the costs of repairs taken and those needed.
It is sufficient to say there was conflicting testimony as to the building design and the damages or absence thereof. The legal effect of the contractual language was a question for the court and not the jury.
There was also conflicting evidence as to the responsibility for and the inspection of the installation of the windows. Newman presented testimony showing the windows were not installed as required by the manufacturer's instructions and that EOAA's on-site architect, Sam Anderson, should have viewed an installation in detail, which he failed to do. Newman's testimony was that EOAA should have performed 28 visits over "80-some-odd man days" but only 13 observation reports of the required 28 contractual visits could be found.
EOAA's testimony showed that adequate and sufficient inspections were made, Newman received reports as soon as defects were known, primarily the alleged defects in the windows were the result of Newman's contract with the window installer, and the specific provision of the agreement between Newman and EOAA stated that EOAA "shall not be responsible for the contractor's . . . failure to carry out the work in accordance with the contract documents."
There were numerous trial rulings and instructions which were objected to by EOAA which we need not now detail but which were reserved and raised.
At the conclusion of the trial, the jury found EOAA breached both its contract with Newman and the implied warranty of workmanlike performance. The jury awarded damages of $1,059,289 for the cost of repairs to the medical office building and $133,404 for loss of rental income. The verdict was accepted, but the district court found EOAA was entitled to a credit of $285,000 against the jury's award of damages for amounts received by Newman in settlements with other parties. The judgment entered was for $907,693 plus costs.
Posttrial proceedings
Although EOAA had unsuccessfully moved for judgment as a matter of law after Newman concluded its presentation of evidence contending as a matter of law it was not contractually responsible for the contractors' faulty work on windows and masonry and, further, it was contractually entitled to rely on the accuracy and completeness of the geotechnical engineer's report regarding the slab, EOAA again moved posttrial for judgment for the same reasons.
In the alternative, EOAA moved for a new trial challenging the court's admission of damages relating to the costs of a structural slab, asserting violations of an order in limine, challenging the failure to give a betterment instruction, and challenging the changing of an instruction regarding the contract after defense counsel completed his closing argument.
The district court denied EOAA's motion for judgment as a matter of law, finding the jury was properly instructed and there was substantial evidence to support the jury's verdict. The court refused to grant a new trial, finding because the damage award was less than what was requested by Newman, the court would not speculate as to the type of floor the jury considered in determining the amount of damages for the first floor repairs.
EOAA has timely appealed, raising numerous issues.
THE APPEAL
Issues raised on appeal
EOAA raises the following issues on appeal:
"1. [Newman] filed this action after the statute of limitations expired.
"A. Did the trial court err in holding that constructing and owning a medical office building for lease to commercial tenants was a governmental function in which plaintiff was immune from a statute of limitations defense?
"B. Did the trial court err in holding that EOAA was estopped to assert a limitations defense when the purported ground for the estoppel was conduct of other defendants (e.g., investigation of a bond claim by a subcontractor's surety)?
"2. [Newman] claimed EOAA was liable for . . . (leaking windows damage) resulting from breach of contract by the construction manager/general contractor and its supplier/installation subcontractor in installing windows and masonry.
"A. Did the trial court err in denying architect EOAA judgment as a matter of law because its contract with plaintiff expressly provided (1) that EOAA was not liable for the contractors' failure to carry out the work in accordance with their contracts and (2) that EOAA only agreed to inspect for purposes of being 'generally informed' of progress and to report defects actually known?
"B. Did plaintiff fail to prove the essential element of damages because it had no evidence of any separate damages attributable to the architect's alleged failure to adequately inspect?
"3. The geotechnical engineer's report gave specific directions it deemed adequate for installing a slab-on-grade first floor. [Newman] claimed [EOAA] . . . should have discovered that the report was inaccurate and incomplete and, upon requesting additional information, should have recommended construction of a much more costly structural slab floor.
"A. Did the trial court err in denying EOAA judgment as a matter of law because EOAA's contract with plaintiff expressly provided that EOAA could rely on both the 'accuracy and completeness' the geotechnical engineer's report?
"B. Did plaintiff fail to prove an essential element of a breach of contract claim because it did not prove any compensable damages, claiming instead damages for an upgrade or betterment not contracted for which no witness recommended and was admitted to be 'not economically feasible' by plaintiff's own expert?
"4. In addition or in the alternative, should the court reverse judgment because the verdict was not supported by substantial evidence?
"5. In addition to or in the alternative, . . . should the court reverse and remand for a new trial based on numerous trial court errors in rulings of law, jury instructions, and admissions of evidence?"
Newman, as would be expected, argues that it is immune from the statute of limitations for its cause of action arising out of the construction of the medical office building; K.S.A. 60-521 is inapplicable as its construction and operation of the medical office building is a governmental function under the KPERS test; the legislature has not waived immunity from the statute of limitations for actions related to real estate; substantial evidence at trial supports the jury verdict finding the architect breached its contract; damages awarded by the jury were supported by substantial competent evidence; and there were no trial errors requiring reversal and, if there were errors, they were harmless.
Standards of review
As the standards of review differ as to each issue raised, they will be set forth as we consider the issues in our opinion.
ARGUMENTS, ANALYSIS, AND DECISION
Summary of arguments EOAA first argues the trial court erred in entering summary judgment in favor of Newman and against EOAA on its contention that the 5-year statute of limitations applicable to contract claims (K.S.A. 60-511[1]) barred Newman's contract cause of action. EOAA further contends Newman's claim for breach of the implied warranty of workmanlike performance is subject to a 3-year statute of limitations as provided by K.S.A. 60-512(1), relying on Zenda Grain & Supply Co. v. Farmland Industries, Inc., 20 Kan. App. 2d 728, 742, 894 P.2d 881 (1995).
The specific district court ruling EOAA claims to be erroneous is that Newman's construction and leasing of the medical office build