Title: Davis v. Holsten
Citation: N/A
Docket Number: 050215
State: Virginia
Issuer: Virginia Supreme Court
Date: November 4, 2005

Present:  All the Justices 
 
KENNETH A. DAVIS 
 
v.  Record No. 050215     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
November 4, 2005 
STEPHEN HOLSTEN, ET AL. 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Stanley P. Klein, Judge 
 
In this appeal, Kenneth A. Davis asserts that the trial 
court erred in ruling that substantial compliance does not 
apply to an escrow agreement obligating him to remove and 
replace synthetic stucco siding and rotten wood from a house 
and seeks a reversal of the trial court's finding that he did 
not comply with the terms of the agreement.  Because we 
conclude that the trial court was correct in its application 
of the law and that its findings of fact are supported by the 
record, we will affirm the judgment of the trial court. 
FACTS AND PROCEEDINGS 
On July 11, 2002, Davis contracted to sell his Fairfax, 
Virginia, home to Stephen E. and Tami S. Holsten.  At the time 
of contracting, the house was coated with Exterior Insulation 
Finishing System (EIFS), a type of synthetic stucco, which had 
caused water damage to the home.  Paragraph 33 of the sales 
contract stated that prior to the date of settlement, Davis 
would "have or cause to have the Stucco replaced with hard 
coat Stucco."  If the repairs were not made prior to 
 
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settlement, Davis would escrow $50,000 until "repairs are made 
and Stucco is replaced along with any rotted or damaged wood."  
Davis had not made the repairs by the date of settlement; 
thus, he, the Holstens, and Virginia Settlement Group, L.L.C. 
(VSG), an escrow agent, executed a contract entitled "Escrow 
Agreement" (the Agreement).  Paragraph 2 of the Agreement 
incorporated the provisions of Paragraph 33 of the sales 
contract and required Davis to deliver $50,000 to VSG at 
settlement and to engage a contractor to do the work within 
ten days of the execution of the Agreement.  Under the 
Agreement, when the obligations set out in Paragraph 2 were 
completed, VSG would release the escrowed funds to Davis.  If 
the obligations were not completed within one year, VSG would 
pay the escrowed funds to the Holstens upon their written 
notification that the repairs and replacement were not 
completed.*  Paragraph 4 of the Agreement also provided that 
Davis would indemnify the Holstens for losses, damages, costs, 
and attorney's fees associated with completing the 
reinstallation. 
On August 19, 2002, Davis hired a contractor to perform 
the work required under the Agreement.  The work did not 
progress smoothly.  In an exchange of correspondence in early 
                     
* The parties later amended the escrow agreement to allow 
Davis one year and one month to complete the work.  
 
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2003, the Holstens notified Davis of their dissatisfaction 
with the contractor's progress, stating the work was 
" 'complete' but not done."  In a February 6, 2003 letter, 
Davis informed the Holstens that he had inspected the 
reinstallation and believed he was entitled to the escrowed 
money.  He stated that he had contracted for the repair work 
within ten days of closing and that "[t]he stucco is replaced 
along with any wood."  Davis told the Holstens he expected "no 
delays" from them. 
By a letter of the same date, Davis reported to VSG that 
"the repairs are now completed" and that it should consider 
the letter as Davis' demand for release of the escrowed funds.  
In the letter, Davis acknowledged matters of disagreement 
between himself and the Holstens but asserted that the 
Agreement does not allow withholding release of the funds 
"over a few very small details." 
VSG refused to release the funds, stating that Davis' 
demand "did not create an absolute right to receive" the funds 
and that it could not release the funds "unless and until it 
is clear that the terms of the escrow have been met."  Davis 
then filed a Bill of Complaint against the Holstens and VSG 
for specific performance of the Agreement and for breach of 
contract.  He contended that since he had performed, or at 
least substantially performed, all of his obligations under 
 
4
the Agreement, the Holstens and VSG had breached their duty to 
him by failing to release the $50,000 in escrow.  Prior to 
trial, VSG paid into court the escrowed funds and was 
dismissed as a party. 
At trial, various experts testified regarding the stucco 
reinstallation.  Ronald E. Wright, an expert in engineering 
and in providing estimates for costs related to residential 
construction, testified on behalf of Davis.  The trial court 
refused to allow Wright to testify whether, in Wright's 
opinion, the work the Agreement required was "substantially 
complete."  The trial court concluded such testimony was not 
relevant; the contracting parties "could have said substantial 
performance . . . .  But the parties didn't do that . . . .  
Every contract has a term of reasonableness that is part of it 
. . . .  But that is a far cry from substantial completion."  
Davis objected to this ruling.  Wright was allowed to testify 
that he estimated the total cost to repair the installation 
was $4,692 and that apart from the specific repairs about 
which he had testified, the installation was "complete." 
Stanley Yeskolski, a certified EIFS inspector, testified 
for the Holstens.  Prior to the litigation, the Holstens had 
engaged Yeskolski to inspect the property and prepare a stucco 
inspection report.  At trial, Yeskolski testified on proper 
stucco reinstallation procedures and on the shortcomings of 
 
5
the repair work.  He testified that, among other things, 
crucial expansion joints were not installed at the front of 
the house and all the EIFS had not been removed from the 
exterior of the home.  Yeskolski did not "think the 
installation was complete" because of the elements left out or 
performed incorrectly.  
The Holstens also called Ralph D.(Donnie) Davis, a 
specialist in EIFS repair and restoration.  Based on his 
inspection of the home prior to the reinstallation and his 
visual observations of the home after reinstallation, he 
opined that all of the rotten wood under the synthetic stucco 
had not been removed.  Donnie Davis, like Yeskolski, 
identified a number of problems with the stucco reinstallation 
and recommended "completely removing it, put[ting] it in the 
dumpster, and start[ing] over" at a cost he estimated to be in 
excess of $50,000. 
 
At the close of Davis' case in chief, the trial judge 
granted the Holstens' Motion to Strike Count I for specific 
performance because VSG had paid the funds into court and was 
no longer a party to the case.  After the parties rested, the 
trial court, again relying on the language of the Agreement, 
concluded that the greater weight of the evidence did not show 
that the conditions for release of the escrowed funds were met 
because EIFS stucco remained under a bay window and control 
 
6
and expansion joints reasonably necessary for appropriate 
repairs had not been installed.  Accordingly, the trial court 
held that Davis had not carried his burden of proof to show 
that the Holstens had breached the Agreement and entered 
judgment in favor of the Holstens.  From that decision, Davis 
appeals to this Court. 
DISCUSSION 
Although Davis raises three assignments of error on 
appeal, his basic contention is that under the facts of this 
case, "a reasonable person could find that Davis completed, or 
at least substantially completed, his obligations under the 
escrow agreement."  We begin by considering Davis' claim that 
the trial court erred in concluding that substantial 
compliance does not apply to the Agreement in this case. 
The Agreement 
The Agreement the parties executed does not contain any 
reference to substantial completion; nevertheless, Davis 
contends that substantial compliance applies to all 
construction contracts and the Agreement is in the nature of a 
construction contract.  Even if the Agreement is not a 
construction contract, Davis argues this Court should apply 
the principle of substantial compliance because performance 
here cannot be measured in terms of strict compliance in the 
absence of a definition of "completion."  He also states that 
 
7
the indemnity provision in Paragraph 4 of the Agreement is 
rendered meaningless if substantial compliance is inapplicable 
to this Agreement.  We consider these arguments in order. 
A. 
Davis argues that this Court has held that substantial 
compliance applies to contracts and specifically to 
construction contracts.  See, e.g., Buena Vista Co. v. 
McCandlish, 92 Va. 297, 304-05, 23 S.E. 781, 783-84 (1895); 
Kirk Reid Co. v. Fine, 205 Va. 778, 787-89, 139 S.E.2d 829, 
835-37 (1965).  Davis asserts that because the Agreement in 
this case incorporated Paragraph 33 of the original sales 
contract, "it should be determined in terms of contract law 
and equity" and if a party has substantially received the 
benefit of the bargain, that party should be compelled to 
complete its part of the bargain by paying for the benefit 
received.  Continuing, Davis argues that the obligations under 
the Agreement are in the nature of construction obligations 
and, therefore, the Agreement is a construction contract 
subject to the principle of substantial compliance.  We 
disagree with Davis. 
 
First, the Agreement is not a construction contract.  The 
Agreement does not anticipate that Davis would engage in any 
construction activities.  Davis' obligations under the 
Agreement were limited to contracting for the repair work 
 
8
within ten days of the execution of the Agreement and 
depositing $50,000 with the escrow agent.  Davis was entitled 
to the escrowed funds if within one year and one month the 
EIFS stucco was removed and replaced with hard coat stucco and 
the rotted or damaged wood was removed and replaced.  
Construction activities were necessary to meet the obligations 
under the agreement; nevertheless, the Agreement was not a 
construction contract between Davis and the Holstens.  The 
relevant construction contract was between Davis and the 
contractor he engaged to perform the repairs. 
 
Similarly the parties' incorporation of Paragraph 33 of 
the sales agreement did not make the Agreement a sales 
contract.  The sales contract was completed at closing.  The 
Agreement was a separate contract and compliance or default 
under the Agreement had no effect on the sale of the house. 
B. 
The Agreement, as titled by the parties, was an escrow 
agreement.  It set out specific conditions for the release of 
the escrowed funds and made no reference to or provision for 
substantial compliance with those conditions.  We have not had 
occasion to consider whether an escrow agreement, a contract 
in which a third party holds property that is to be released 
to another party to the contract upon completion of certain 
conditions precedent, see Humphreys v. R. & M. R. R. Co., 88 
 
9
Va. 431, 451, 13 S.E. 985, 992 (1891), should be subject to 
substantial completion.  
Davis argues that courts have required parties to comply 
strictly with the provisions of an escrow agreement only when 
completion of the conditions precedent was straightforward.  
See, e.g., Jones v. Gregg, 293 S.W.2d 545, 551 (Ark. 1956) 
(describing a seller providing an abstract of good and 
marketable title); In re Creative Data Forms, Inc., 41 B.R. 
334, 336 (Bankr. E.D. Pa. 1984) (discussing a debtor 
defaulting on loan repayments); Commonwealth Land Title Ins. 
Co. v. 1616 Reminc Ltd. P'ship, 13 B.R. 948, 951 (Bankr. E.D. 
Va. 1981) (regarding a defendant who refused to release funds 
in escrow when the condition governing release was simply the 
passage of four years).  Davis contends the conditions in this 
Agreement are not straightforward because the term 
"completion" is open to interpretation.  Thus, Davis asserts 
that strict compliance should not be applied. 
We do not find Davis' arguments persuasive.  Rather, we 
agree with the clear weight of authority that, unless the 
agreement provides otherwise, substantial performance will not 
be applied to an escrow agreement and compliance must be 
strict.  See, e.g., Commonwealth Land Title Ins. Co., 13 B.R. 
at 951 (strictly construing term in escrow agreement which 
required disbursement of any remaining funds in escrow after 
 
10
four years from date of contracting); In re Creative Data 
Forms, Inc., 41 B.R. at 336-37 (declining to release $100,000 
held in escrow account for debtor because the debtor failed to 
make some repayments on money it had borrowed); Jones, 293 
S.W.2d at 551 (declining to apply substantial performance to 
release of escrowed funds, when release was conditioned upon 
sellers of real estate timely providing an abstract of good 
and marketable title); Love v. White, 363 P.2d 482, 484 (Cal. 
1961)(holding:  "In this state the terms and conditions of an 
escrow must be performed.  The doctrine of substantial 
performance does not apply, and no title passes prior to full 
performance of the terms of the escrow agreement."); Watts v. 
Mohr, 194 P.2d 758, 761 (Cal. Ct. App. 1948) (refusing to 
apply substantial performance and to order release of funds 
from escrow where one party had failed to deliver timely to 
escrow agent a $6000 note and deed of trust to complete real 
estate transaction); Taft v. Taft, 26 N.W. 426, 430 (Mich. 
1886) (holding:  "performance of the condition must be 
absolute and accurate, and cannot be dispensed with on any 
otherwise substantial performance."); Hart v. Barron, 204 P.2d 
797, 808 (Mont. 1949) (finding part performance did not apply 
to escrow agreement for sale of land where buyer did not 
timely pay taxes or obtain a loan, both of which were 
conditions precedent to escrow agent delivering deed to 
 
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buyer); Valentine Oil Co. v. Powers, 59 N.W.2d 150, 157 (Neb. 
1953) (refusing to order release of funds in escrow and citing 
inapplicability of substantial performance to escrow 
agreements where a party to oil and gas escrow agreement 
failed to continue drilling for oil as required by agreement). 
Furthermore, we reject Davis' argument that we should not 
strictly apply the provisions of this Agreement because of 
uncertainty over the word "completion."  A principle of 
interpretation applicable to escrow agreements applies to all 
such agreements, not just to some escrow agreements.  As the 
trial court observed, it is not the province of the courts to 
add words to parties' contracts and their failure to provide a 
definition of "completion" does not provide a basis for 
applying a principle of construction other than that 
applicable to escrow agreements. 
C. 
Finally, we reject Davis' argument that strictly 
construing the Agreement negates the indemnity provision in 
Paragraph 4.  Davis argues that Paragraph 4 obligates him to 
indemnify the Holstens if they had to complete the tasks of 
removing and replacing the EIFS stucco and rotten wood, even 
if Davis had received the escrowed funds.  Paragraph 4, 
however, refers to situations in which the Buyer, the 
Holstens, has received some of the escrowed funds and 
 
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obligates Davis to "indemnify and hold harmless [the Holstens] 
from any loss or damages, including all costs and attorney's 
fees, as a result of any expense that [the Holstens] may incur 
in completing [Davis'] work as stated herein."  As the trial 
court correctly stated, this provision protects the Holstens 
and makes Davis responsible in the event the cost of 
completing the work exceeds $50,000. 
In summary, the trial court correctly declined to apply 
substantial compliance to the Agreement and, accordingly, did 
not err in refusing to allow Davis' expert to testify 
regarding substantial completion of the repairs. 
The Evidence 
 
Davis also claims on appeal that the trial court erred in 
finding that he failed to complete his obligations under the 
Agreement.  Because the trial judge heard the evidence ore 
tenus and was able to judge the credibility of the witnesses, 
we must afford his decree the same weight as a jury verdict 
and uphold his findings unless they are plainly wrong or 
without evidence to support them.  See Shooting Point, L.L.C. 
v. Wescoat, 265 Va. 256, 264, 576 S.E.2d 497, 501 (2003) 
(citing Tauber v. Commonwealth, 263 Va. 520, 526, 562 S.E.2d 
118, 120 (2002); Chesterfield Meadows Shopping Ctr. Assocs., 
L.P. v. Smith, 264 Va. 350, 355, 568 S.E.2d 676, 679 (2002)).  
Further, we will construe the facts in the light most 
 
13
favorable to the Holstens, who prevailed below.  See Tauber, 
263 Va. at 525, 562 S.E.2d at 120 (citing Hoffman Family, 
L.L.C. v. Mill Two Assocs. P'ship, 259 Va. 685, 696, 529 
S.E.2d 318, 325 (2000)). 
 
Davis argues that the trial court erroneously relied on 
the conditions the Holstens imposed in their correspondence 
with Davis and, thus, enlarged Davis' obligations when 
determining Davis failed to complete the Agreement.  For 
example, although the Holstens sought a warranty for the 
repair work and a home inspection in that letter, the 
Agreement did not impose as a condition precedent to the 
release of the funds either an extended warranty on the stucco 
installation or a home inspection.  Further, the Agreement 
made no mention of performance in a workmanlike manner.  Thus, 
Davis concludes that the trial court imposed conditions not 
present in the Agreement on the release of the escrowed funds. 
 
The record does not support Davis' contention.  The trial 
court did not base its ruling on the Holstens' demands.  
Rather the trial court found the job incomplete based on 
expert testimony, uncontroverted at trial, that EIFS stucco 
was left under the bay window in violation of an express term 
of the Agreement and that some expansion joints, necessary for 
the replacement of the stucco, were not installed.  Donnie 
Davis also testified that not all the rotten wood under the 
 
14
stucco had been removed and replaced.  Finally, Davis himself 
acknowledges that the contractor failed to remove EIFS stucco 
from beneath the bay window. 
 
This record supports the trial court's conclusion that 
Davis did not carry his burden of proof in his breach of 
contract count to show that he had strictly complied with the 
provisions of the agreement and, therefore, that he was 
entitled to release of the funds. 
 
For the foregoing reasons, we will affirm the judgment of 
the trial court. 
Affirmed.