KOSRAE STATE COURT TRIAL DIVISION
Cite case as Malem v Kosrae State Government, 9 FSM Intrm 233 (Kos. S. Ct. Tr. 1999)

MALEM MUNICIPAL GOVERNMENT,
Plaintiff,

vs.

KOSRAE STATE GOVERNMENT,
Defendant.

__________________________________________

CIVIL ACTION NO. 30-98

MEMORANDUM OF DECISION

Aliksa B. Aliksa
Acting Chief Justice

Trial: June 9-10, 1999
Decided: June 10, 1999
Opinion Entered: June 21, 1999
Hearing: July 8, 1999
Modified: July 19, 1999

APPEARANCES:

For the Plaintiff:
Chang William
Kosrae State Legislature
P.O. Box 187
Lelu, Kosrae FM 96944

For the Defendant:
Steve George
Office of the Kosrae Attorney General 
P.O. Box 1301
Lelu, Kosrae FM 96944

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HEADNOTES

Contracts
A contract is a promise between two parties for the future performance of mutual obligations which the law will enforce in some way. For the promise to be enforceable, there must be an offer and an acceptance, definite terms, and consideration for the promise. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts
In determining whether the terms of a contract should be enforced, the court will consider the parties' justified expectations, any forfeiture that would result if enforcement were denied, and any special public interest in the enforcement of the particular term. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts; Contracts - Parol Evidence
When both plaintiff and defendant were aware of the project's changed specifications; when defendant was present at the project site on the first day of construction and on several days throughout the project term; when defendant had ample notice and knowledge that the project specifications had been changed; and when defendant did not, at any time, notify, stop or interfere with plaintiff's work and completion of the project, it would be unfair to enforce the contract term that required a writing signed by both parties to amend the agreement's terms and conditions. The parol evidence rule does not bar evidence of subsequent modification of a contract. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts
When one party fails to perform their promise, there is a breach of contract. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts - Damages
When the defendant has breached its contract with the plaintiff, the plaintiff, who has completed the contract, is entitled to recover the difference between the contract amount and the amount the defendant has already paid. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts - Damages
Prejudgment interest is also recoverable in cases where the plaintiff is entitled to recover a liquidated sum of money. Malem v. Kosrae, 9 FSM Intrm. 233, 236 (Kos. S. Ct. Tr. 1999).

Contracts - Damages; Usury
When the amount awarded for prejudgment interest is more than the amount designated as usurious, it is excessive and must be reduced. Malem v. Kosrae, 9 FSM Intrm. 233, 237 (Kos. S. Ct. Tr. 1999).

Contracts - Damages
When there is no statutory rate for prejudgment interest and when there is no contract provision or limitation for the award of prejudgment interest, the court may use its discretion to determine the prejudgment interest rate and may accept as reasonable the statutory 9% post-judgment interest rate. Malem v. Kosrae, 9 FSM Intrm. 233, 237 (Kos. S. Ct. Tr. 1999).

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COURT'S OPINION

ALIKSA B. ALIKSA, Acting Chief Justice:

This matter was called for trial on June 9, 1999. Plaintiff was represented by Chang William. Steve George from the Office of the Attorney General appeared for the Defendant. Plaintiff presented testimony from several witnesses: Mayor Maheta Kilafwasru, Robert Jonas, Jefferson Timothy, Bruce Howell and Frankie Dizon. Pete Olano appeared as a witness for Defendant State of Kosrae. Closing arguments were heard on June 10, 1999. Following closing arguments, I delivered the decision and judgment of the Court. This Memorandum of Decision summarizes the reasoning of this Court.

I. Factual Background

This matter involves a breach of contract claim by Plaintiff Malem Municipal Government against the Defendant State of Kosrae. On January 21, 1998, Pete Olano, Administrator of the Division of Construction and Engineering submitted a Request for Proposal (RFP) to the Mayor Maheta Kilafwasru of Malem Municipality. The RFP was for the construction of reinforced concrete foundations for three rainwater catchment tanks at the Malem Elementary School. The cost proposal was to include labor, equipment and incidental items to complete the project.

A Memorandum of Agreement (MOA) between Plaintiff Malem Municipal Government and Defendant State of Kosrae was executed on February 11, 1998. The MOA specified the terms of the agreement between the parties. Construction drawings and a list of materials were included in the MOA as attachments. The MOA specified that Plaintiff would perform in strict accordance with the construction drawings and the list of materials. The Memorandum also specified that Defendant would pay the Plaintiff the total amount of three thousand six hundred dollars ($ 3,600) for performance.

The MOA did not specify a location for the water catchment tank systems. A new location which was more favorable for the project's purpose of collecting rainwater from the school roofing was chosen when the project was started. On the first day of construction, Pete Olano, Administrator for DC&E, was present at the work site. Mr. Olano observed that the new project site was not the original planned location, but he did not object to the change. The Mayor of Malem, who signed as contractor under the MOA, was not informed where the project was to be located. Whether or not the foundations were to be built under a two story building was not known to the Mayor. The Mayor testified that the location of the project was agreed to by the Principal of Malem Elementary School. Mr. Olano accepted the location selected for the project.

The new location for the water catchment tank system required a change to the project specifications. Instead of installing three layers of concrete block for the foundation, Plaintiff installed only one layer of concrete block. This change was made so that the water catchment tank would sit low enough to collect the rainwater from the roofing and gutters. Installation of three layers of concrete block would have resulted in the water tanks being too high to catch the water from the roofing and gutters. During the course of construction of the foundations, personnel from DC&E inspected the project on several occasions, from the beginning of the project through its completion. At these inspections, the personnel from DC&E saw that the scope of the work had been changed by reducing the number of concrete block layers. However, DC&E did not notify, stop or otherwise interfere with the Plaintiff at any time from completing the project, as modified.

After the completion of the project, Defendant paid the Plaintiff the sum of $ 2,034, intended as payment in full for Plaintiff's performance.

II. Legal Reasoning

A contract is a promise between two parties for the future performance of mutual obligations which the law will enforce in some way. For the promise to be enforceable, there must be an offer and an acceptance, definite terms, and consideration for the promise. Ponape Constr. Co. v. Pohnpei, 6 FSM Intrm. 114, 123 (Pon. 1993). Here the Plaintiff and Defendant executed a contract on February 11, 1998, the Memorandum of Agreement (MOA), for the construction of three reinforced concrete foundations for rainwater catchment tanks. The terms and conditions of the MOA included construction drawings and a list of materials.

The MOA required that any changes to the terms and conditions be made in writing, signed by both parties. (MOA, paragraph 11). Changes were made to the terms and conditions of the MOA, specifically to the construction drawings, where the three layers of concrete block were reduced to one layer of concrete block. This change was made by the Plaintiff, with notice to and with the knowledge of the Defendant. Personnel from DC&E had knowledge of the changes to the specifications, yet they did nothing to notify or to stop the Plaintiff from constructing the foundations according to the changed specifications. In determining whether the terms of a contract should be enforced, the court will consider the parties' justified expectations, any forfeiture that would result if enforcement were denied, and any special public interest in the enforcement of the particular term. Falcam v. FSM, 3 FSM Intrm. 194, 197-98 (Pon. 1987).

In this case, both Plaintiff and Defendant were aware of the changed specifications for the project. Defendant, through DC&E personnel, were present at the project site on the first day of construction and on several days throughout the project term. Defendant had ample notice and knowledge that the project specifications had been changed to reduce the number of concrete block layers to accommodate the new location for the water tanks. Defendant did not, at any time, notify, stop or interfere with Plaintiff's work and completion of the project. Based upon these facts, the Court concludes that it would be unfair to enforce Paragraph 11 of the MOA, which would have required a writing signed by both parties to amend the terms and conditions of the MOA. The parol evidence rule does not bar evidence of subsequent modification of a contract. FSM Dev. Bank v. Bruton, 7 FSM Intrm. 246, 251 (Chk. 1995).

Paragraph 12 of the MOA permits the Defendant to cancel the MOA if the Plaintiff fails to complete the work consistent with the warranty given in the MOA. If the MOA is cancelled, the Defendant is liable only for the reasonable value of any work completed. Defendant did not cancel the MOA. Therefore, Defendant was not permitted to reduce the amount of payment to the Plaintiff under this provision.

When one party fails to perform their promise, there is a breach of contract. Ponape Constr. Co., 6 FSM Intrm. at 123. Here Defendant has failed to perform its promise under the MOA: to pay the Plaintiff the sum of three thousand six hundred dollars ($ 3,600). Defendant has breached its contract with the Plaintiff. Plaintiff is now entitled to recover the amount which is the difference between the contract amount and the amount which has already been paid by the Defendant: $ 1566.

Prejudgment interest is also recoverable in cases where the plaintiff is entitled to recover a liquidated sum of money. Such is the case here. See 1 Dan B. Dobbs, Handbook on the Law of Remedies, ch. 3 (1973). Accordingly, Plaintiff is entitled to recover interest from the date of completion of the project to the date of judgment in the amount of $ 498.94.

III. Conclusion

Based upon the evidence presented at trial of this matter, and in accordance with the findings and reasoning set forth above, let judgment be entered for the Plaintiff and against the Defendant in the amount of $ 2064.94.

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ORDER GRANTING DEFENDANT'S MOTION TO MODIFY JUDGMENT

The Court entered judgment in this case for the Plaintiff in the amount of $ 2,064.94 on June 21, 1999. Plaintiff was awarded the remaining amount due on the contract in the amount of $ 1,566 and pre-judgment interest in the amount of $ 498.94. On June 24, 1999, Defendant filed a Motion for Modification of Judgment. Plaintiff filed an Opposition to the Defendant's Motion on June 30, 1999. The Motion was heard before this Court on July 8, 1999. Chang William appeared for the Plaintiff. Steve George, from the Office of the Attorney General, represented the Defendant State of Kosrae.

Defendant's Motion seeks to modify the amount awarded as pre-judgment interest to 9 % per annum, for a total amount of $ 164.43. Defendant argued that the amount awarded as interest is calculated to be approximately 30% for 14 months. This is above the interest rate designated as usurious under Kosrae State Code, Section 13.518. Defendant argues that the statutory post-judgment interest percentage of 9% should be applied in this case.

Plaintiff argues that the 9% interest rate limit does not apply to amounts awarded as pre-judgment interest. Plaintiff further argues that the amount awarded in this case is less than the usury rate established in Kosrae State Code, Section 13.518.

The Court finds that the amount awarded for pre-judgment interest is more than the amount designated as usurious under the Kosrae State Code. Therefore, the amount awarded for pre-judgment interest is excessive and must be reduced.

The Kosrae State Code provides the statutory interest rate for post-judgment interest as 9%. There is no statutory interest rate specified for pre-judgment interest, therefore the Court may use its discretion in determining the percentage rate for pre-judgment interest. Further, there is no provision or limitation in the Memorandum of Agreement entered into by the parties for the award of pre-judgment interest.

The Kosrae State Code provides guidance as to the interest rate which is a reasonable amount for the economics of the State of Kosrae. For the purpose of establishing continuity and precedence in Kosrae State contract law, the Court accepts the 9% interest rate established in Kosrae State Code as a reasonable interest rate for pre-judgment interest awarded in contract cases, where there is no other applicable provision in the contract or other applicable law. Therefore, the pre-judgment interest awarded in this matter here must be reduced to 9% per year, for a total amount of $164.43.

Based upon the information submitted before this Court, and the Court having considered the Defendant's Motion, the Plaintiff's Opposition, the file in this matter, the Court's records and the interests of justice, Defendant's Motion to Modify the Judgment is granted. Let the judgment entered for the Plaintiff and against the Defendant be amended to reflect $ 1,566 awarded for contract damages, and $ 164.43 awarded for pre-judgment interest, for the total amount of $ 1,730.43.