Title: Olsen v. T.A. Tyre General Contractor, Inc.
Citation: N/A
Docket Number: 523, 2005
State: Delaware
Issuer: Delaware Supreme Court
Date: August 24, 2006

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
CHRISTOPHER OLSEN and 
 
§ 
ELIZABETH B. DEAN,  
 
§ 
 
 
 
§ 
No. 523, 2005     
 
Defendants Below,  
§ 
 
Appellants/Cross- 
 
§ 
 
Appellees, 
 
§ 
Court Below:  Superior Court    
 
 
 
§ 
of the State of Delaware in and  
              v. 
 
 
§ 
for Sussex County 
 
 
 
§ 
T.A. TYRE GENERAL CONTRACTOR, 
§ 
C. A. No. 04L-03-001 
INC., 
 
 
§ 
  
 
 
 
§ 
 
 
Plaintiff Below, Appellee/ § 
 
 
Cross Appellant. 
 
§ 
 
 
Submitted: June 21, 2006 
 
Decided: 
August 24, 2006 
 
 Before STEELE, Chief Justice, BERGER and JACOBS, Justices. 
 
O R D E R 
 
 
This 24th day of August 2006, upon consideration of the briefs of the parties 
and the record in this case, it appears to the Court that: 
1. 
Christopher Olsen and Elizabeth Dean (the “owners”), who are the 
defendants-below appellants, contracted with the plaintiff-below appellee, T.A. 
Tyre General Contractor, Inc. (the “contractor”), to build a home on the owners’ 
property located at 413 Burton Avenue in Lewes, Delaware.  That contract is the 
subject of this litigation.  The owners claim that Superior Court erred by:  (i) 
considering sua sponte an affirmative defense that the contractor had not asserted 
 
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at trial, thereby depriving the owners of notice and a meaningful opportunity to be 
heard; (ii) ruling that the liquidated damages clause of the contract was an 
unenforceable penalty; and (iii) awarding certain fees under the doctrine of 
quantum meruit.  On its cross-appeal, the contractor claims that Superior Court 
erred by not awarding it $27,765.04 in additional fees on a quantum meruit basis.  
For the reasons next discussed, we reverse the order dismissing the liquidated 
damages claim, and reverse in part and affirm in part the award of fees under the  
quantum meruit doctrine.      
 
2. 
On November 10, 2002, the parties executed a contract to build a 
home.  The contract called for construction to start 6 to 8 weeks after the signing, 
and to be completed within 7 months of starting.  A liquidated damages clause 
provided that $200 a day could be deducted from the contract price if the project 
was not substantially complete within 90 days of the projected completion date.  
The contract further provided that all change orders were to be in writing and 
signed by both parties, and that any disputes were to be addressed first by the 
architect, John Mateyko, as the arbiter of first resort.   
 
3. 
Construction began in February 2003, and a certificate of substantial 
completion was issued on February 13, 2004.  Before that certificate issued, the 
contractor demanded payment from the owners of an additional $30,000 for 
change orders, all of which were dated February 3, 2004 and unsigned.  The 
 
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architect reviewed those change orders and recommended that the owners pay only 
$2,544.19, but left it to the owners to decide whether or not to pay.  
 
4. 
The owners then asserted a claim against the contractor for liquidated 
damages totaling $43,000, because the home was completed 215 days late.  The 
architect reviewed that claim and determined that the contractor was responsible 
for 194 days of liquidated damages, totaling $38,800.  The contractor then filed a 
Superior Court action to impose a mechanic’s lien on the home in the amount of 
$23,909.28.  The owners counterclaimed in that action for breach of contract, 
seeking to recover the architect’s $38,800 suggested liquidated damages award.   
5. 
The Superior Court held a three-day trial on these claims.  The trial 
court rejected the liquidated damages claim, having ruled sua sponte that the 
liquidated damages clause was unenforceable as a penalty.  The trial court also 
rejected the contractor’s $27,765.04 quantum meruit claim, except for $2,544.19 of 
unsigned change orders approved by the architect.  Both parties appeal from those 
rulings.  
 
6. 
The owners claim that the trial court erred by determining sua sponte 
that the liquidated damages clause of the contract was unenforceable as a penalty.  
That ruling was procedurally unfair, the owners argue, because the trial court 
required them, without any prior notice, to prove the clause’s validity, thereby 
depriving them of a meaningful opportunity to do so.  The owners also claim that 
 
4
the trial court’s conclusion that the liquidated damages provision was 
unenforceable is legally erroneous as a substantive matter.  We first address those 
claims.   
 
7. 
The trial court concluded that the liquidated damages provision was a 
penalty because:  (1) the damages would be $73,000 per year on a home that cost 
only slightly over $300,000 to build; (2) the liquidated damages provision 
contained the term “penalty,” which suggested that it was punitive; and (3) to the 
extent the provision stripped away the 90-day grace period if the contractor was 
one day late after the 90 day period, it was punitive.  The trial court further found 
that the owners had otherwise failed to show that the provision was valid. 
 
8. 
From a review of the record, it appears that the validity of the 
liquidated damages clause was never fully litigated.  Nor did the trial court apply 
the two-pronged test for analyzing the clause’s validity mandated by Brazen v. Bell 
Atlantic Corporation.1  Failure to afford the parties an opportunity to argue that 
legal issue was unjust, particularly because the trial court concluded that the 
owners had not met their burden of proving the clause’s validity.  Therefore, the 
                                                          
 
1 695 A.2d 43, 48-49 (Del. 1997) (holding that the two-pronged test for analyzing a liquidated 
damages clause’s validity considers: (1) the certainty of the actual damages and (2) the 
reasonableness of the liquidated damages amount agreed upon).  “Where the damages are 
uncertain and the amount agreed upon is reasonable, such an agreement will not be disturbed.”  
Id.  We also note that the trial court placed undue reliance on the use of the term “penalty” in the 
clause’s text.  Use of the word “penalty” or “liquidated damages” in a contract is not conclusive 
as to the character of the disputed provision.  In the Matter of the Receivership of D. Ross & Son, 
Inc., 95 A. 311, 315 (Del. Ch. 1915).   
 
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order dismissing this claim must be reversed, and the claim remanded to the 
Superior Court to allow the parties an opportunity to litigate whether the disputed 
provision is a liquidated damages provision or a penalty under Brazen and its 
progeny.   
9. 
The owners’ final claim is that the Superior Court erred by awarding 
$2,544.19 to the contractor on a quantum meruit basis.  On its cross-appeal the 
contractor argues that the trial court was correct in awarding the $2,544.19, but 
erred in declining to award payment for the remaining 43 unsigned change orders 
under the same quantum meruit theory.  We review these claims for abuse of 
discretion.2   
10. 
The trial court considered the 43 unsigned change orders, and held 
that the change orders did not qualify for payment under the contract, because the 
contract language specifically required that all change orders must be signed by all 
of the parties.  The trial court did find, however, that in his memorandum dated 
February 19, 2004, the architect reviewed the same 43 change orders and 
concluded that the contractor should be compensated only $2,544.19.  The trial 
court credited the architect’s analysis of those particular change orders and 
awarded the $2,544.19 amount to the contractor.   
                                                          
 
2 See Chavkin v. Cope, 243 A.2d 694, 695 (Del. 1968).   
 
6
11. 
On their cross appeal, the owners claim that the $2,544.19 amount 
was not recoverable either under the contract or under the doctrine of quantum 
meruit, and that the architect’s recommendation cannot alone render those invalid 
change orders compensable.  The contractor responds that the award was made on 
the basis of quantum meruit, and not on the contract, and therefore should be 
upheld.   
12. 
The architect’s memorandum, upon which the trial court relied, does 
not disclose the basis for awarding the $2,544.19 of change order payments.  The 
architect classified the $2,544.19 of compensable change orders as “extra work, 
determined by the Architect to have, with sufficient clarity, substantive merit as 
additional work.”  The architect then proceeded to explain, with varying degrees of 
specificity, why he would approve each of the particular component items.  Most 
of the explanations, however, stated no more than “approved.”  The architect’s 
memorandum included a statement made by the contractor (at the time it delivered 
the additional change orders in question) that “I was not going to charge you for 
any of these items as extras and just consider that part of the work but when you 
did not pay me my draw last week I decided to go for it and treat them as ‘Change 
Orders.’” 
13. 
Without further explanation by the trial court as to why it found the 
architect’s analysis persuasive and why as a matter of law $2,544.19 of those items 
 
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were recoverable, we cannot uphold the award, even the $2,544.19.  The trial court 
ruled that none of the 43 change orders was recoverable under the contract 
language because they were all unsigned.  Nor can the doctrine of quantum meruit 
provide a vehicle for recovery.  To recover in quantum meruit, the performing 
party under a contract must establish that it performed services with an expectation 
that the receiving party would pay for them, and that the services were performed 
under circumstances that should have put the recipient on notice that the 
performing party expected the recipient to pay for those services.3  Here, however, 
the architect’s memorandum specifically quotes the contractor’s statement that it 
did not intend to bill the owners for those items, which negates the quantum meruit 
requirement that the performing party expected payment.  Because the trial court 
provided no explanation for why it relied on the architect’s analysis, the $2,544.19 
award was arbitrary and cannot stand. 
14. 
Finally, we reject the contractor’s claim that the trial court should 
have awarded it payment for all 43 unsigned change orders.  Although the trial 
court did not explain why it rejected the contractor’s quantum meruit claim for 
those change orders, there was sufficient evidence to support the court’s 
conclusion that “no basis [existed] to support the contractor’s other claims.”   
                                                          
 
3 Constr. Sys. Group, Inc. v. The Council of Sea Colony, Phase I, 1995 Del. LEXIS 379 (Del. 
Supr.). 
 
 
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15. 
First, the contractor’s own statement establishes that it did not intend 
to bill the owners for the 43 items until the parties’ relationship became 
adversarial.  Moreover, during the meetings between the owners, architect and 
contractor where new plans and revisions were discussed, the contractor never 
disclosed to the owners that those 43 revisions (for which the contractor later 
created the unsigned change orders) could result in additional costs.  Based on this 
evidence, the trial court could have reasonably found that the owners were never 
given notice that they would be expected to pay for those unsigned change orders.  
Because there was sufficient evidence to negate each prong of the quantum meruit 
analysis, we uphold the Superior Court’s denial of the contractor’s quantum meruit 
claim for the 43 unsigned change orders.4    
NOW, THEREFORE, IT IS ORDERED that the judgments of the Superior 
Court are REVERSED IN PART, AFFIRMED IN PART, and REMANDED 
IN PART for proceedings consistent with this Order. 
 
 
 
 
 
 
BY THE COURT: 
 
 
 
 
 
 
 
/s/ Jack B. Jacobs  
 
 
 
 
 
 
          Justice 
                                                          
 
4 We decline to address the owners’ statute of limitations argument on this claim, because the 
owners failed to raise it in their opening brief.  Murphy v. State, 632 A.2d 1150, 1152 (Del. 
1993).