Rentenbach Engineering v. Gen. Rlty. Ltd.

Citations: 707 S.W.2d 524; 1985 Tenn. App. LEXIS 3349

Court: Court of Appeals of Tennessee; December 6, 1985; Tennessee; State Appellate Court

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General Realty, Ltd. and its general partner, Sam Urman, appealed a Chancery Court judgment that reformed a construction contract with Rentenbach Engineering Company, awarding Rentenbach approximately $503,000, including compounded pre-judgment interest. The defendants raised three main arguments: 1) the court wrongly relied on parol evidence to alter an unambiguous contract that included an integration clause; 2) even if the parol evidence was admissible, it did not meet the clear and convincing standard; and 3) the court improperly compounded pre-judgment interest. 

The case arose when Urman, who faced language difficulties, purchased the Andrew Johnson Hotel and sought bids for its renovation. Rentenbach's bid of $4,439,000 was the lowest but exceeded Urman's budget. After negotiations, it was claimed that a handshake agreement was reached to reduce the bid, which Urman denied. The court found Urman's testimony vague compared to Rentenbach's representative, Joseph R. Talentino. The alleged agreement included a revised contract sum of $3,750,000, achieved by removing a 5% contingency and reducing certain costs. However, this revised contract was not formally accepted, and a final agreement was signed during a subsequent meeting at the defendants' attorney's office.

At a meeting characterized by chaotic discussions, key attendees included Robert A. Finley, the Defendants' attorney, architects Mr. Peters and Mr. Zukerman, senior estimator Mr. Talentino, and Rentenbach executives including President William A. Fortune. Although Mr. Talentino discussed the deletion of a contingency clause with Mr. Urman, the signed contract retained this clause. Upon discovering the error, Mr. Fortune informed Mr. Finley, who attempted to reach Mr. Urman but could not due to his absence abroad. Consequently, Mr. Finley signed a letter from Mr. Fortune acknowledging the oversight. After Mr. Urman's return, a change order was prepared to delete the contingency, but Mr. Urman refused to sign it. Mr. Finley testified that he relied on Mr. Fortune's assurance regarding the agreement when signing the letter.

The Defendants contested the admissibility of parol evidence of mutual mistake, citing the parol evidence rule and the contract's integration clause, which asserts the contract encompasses the complete agreement, superseding all prior negotiations. They referenced several Tennessee cases to support their claim that such evidence should have been excluded. However, these cases were deemed non-controlling, as they did not pertain to reformation suits. The only cited reformation case found the parol evidence to be incompetent, but numerous Tennessee cases support the admission of such evidence. The Defendants further argued that allowing parol evidence in reformation requests could undermine the parol evidence rule.

A higher standard of proof than mere preponderance of the evidence is required, characterized by phrases such as "clear and convincing" and "clear, cogent and convincing," as established in various Tennessee cases. The Trial Court did not explicitly determine if the proof met this stringent standard but indicated a preference for Mr. Talentino's testimony over Mr. Urman's, concluding that a mutual mistake regarding the deletion of a contingency fund occurred. Meeting minutes from a May 24, 1981, gathering confirmed the deletion of the 5% contingency fund requirement from the contractor's contract. The Court found that the Plaintiff met the necessary proof for relief, and contrary to the Defendants' claims, Rentenbach was not grossly negligent, thus allowing for reformation under equitable principles. The Court referenced the precedent that equity can intervene when a fundamental mistake prevents mutual agreement and no gross negligence is involved. Additionally, the issue arose regarding the calculation of interest on retained funds; Mr. Urman mixed the retainage funds with other monies, withdrawing interest as it accrued. The contract stipulated that unpaid payments would accrue interest at a specified rate or the prevailing legal rate, and relevant Tennessee law mandates that retained amounts be placed in a separate escrow account.

Retained funds deposited for contractors, subcontractors, materialmen, or laborers become their sole property upon deposit. Upon satisfactory contract completion, evidenced by a written release from the owner or contractor, all funds in the escrow account, including interest, must be paid to the owed party. If the owner or contractor does not execute the release, the owed party may seek remedy in court, with no liability incurred by the escrow agent for nonpayment. The Chancellor concluded that interest should be compounded due to Mr. Urman's failure to maintain it in a separate account, which violated statutory requirements. This supports the appropriateness of the Chancellor's decision. The Trial Court's ruling is affirmed, and the case is remanded for judgment collection, with appeal costs assigned to the Defendants and their surety.