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United Systems of Arkansas, Inc. v. Beason & Nalley, Inc.

Court of Appeals of Arkansas, Divisions II, III

October 8, 2014



Newland & Associates, PLLC, by: Joel F. Hoover and Ashley D. Peeples, for appellants.

Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., by: Stuart P. Miller, Anton L. Janik, Jr., and Brian A. Pipkin, for appellees.


This is an appeal from a judgment of dismissal with prejudice on the pleadings of appellant United Systems' lawsuit against appellees Beason & Nalley, Inc.; its former director and owner, Chad Braley; and its former consultant, David Miller (collectively referred to hereafter as Beason & Nalley). Appellant argues that the trial court erred in finding that grounds for dismissal existed. We agree, and we reverse and remand.

United Systems hired Beason & Nalley in 2008 to prepare Incurred Cost Submission (ICS) reports that United Systems was required to submit in connection with a subcontract that United Systems had on a federal government project. United Systems chose Beason & Nalley for this work because Beason & Nalley held itself out as an expert in U.S. government contracts and the preparation of reports and documents required in connection with such contracts. Beason & Nalley prepared the ICS reports, but these reports erroneously deducted certain costs that were not deductible pursuant to applicable regulations. United Systems hired a different firm to correct the errors so that it could submit compliant ICS reports and sued Beason & Nalley for breach of contract and negligence. Beason & Nalley moved to dismiss on the pleadings for failure to state a claim, and the motion was granted. Because the case had previously been dismissed, the second dismissal was with prejudice. See Ark. R. Civ. P. 41(b).

In reviewing a trial court's decision on a motion to dismiss under Ark. R. Civ. P. 12(b)(6), we treat the facts alleged in the complaint as true and view them in the light most favorable to the party who filed the complaint. Hendrickson v. Carpenter, 88 Ark.App. 369, 199 S.W.3d 100 (2004). In testing the sufficiency of the complaint on a motion to dismiss, all reasonable inferences must be resolved in favor of the complaint, and the pleadings are to be liberally construed. Id. Our rules require fact pleading, and a complaint must state facts, not mere conclusions, in order to entitle the pleader to relief. Id. We look to the underlying facts supporting an alleged cause of action to determine whether the matter has been sufficiently pled. Id.

Beason & Nalley moved for dismissal on three grounds: first, that United Systems' claim for contract damages must fail because the damages sought were consequential, and the contract demonstrated that there was no tacit agreement by Beason & Nalley to be liable for consequential damages; second, that the indemnity clause of the contract barred United Systems from bringing any claim against Beason & Nalley with respect to their contract or its performance; and third, that no action against Beason & Nalley would lie because United Systems had admitted that the actions of Keith Reed, United Systems' chief financial officer, were the proximate cause for the submission of improper expenses on the ICS reports prepared by Beason & Nalley. The trial court's order did not specify the ground or grounds on which the court based its order of dismissal, but the court nevertheless erred because none of these arguments provide grounds for dismissal.

Direct or Consequential Damages

The distinction between direct and consequential damages was recently discussed in Hobson v. Entergy Arkansas, Inc., 2014 Ark.App. 101, at 12–13:

The purpose of damages in a contract action is to place the injured party in the same position he would have been in had the contract been performed. Howard W. Brill, Law of Damages § 17:1 (5th ed. 2004); Acker Constr., LLC v. Tran, 2012 Ark.App. 214, 396 S.W.3d 279. The law makes a distinction between the general damages suffered in a breach-of-contract case and consequential damages. General damages are those that necessarily flow from the breach. Brill, supra § 4:2. Consequential damages refer to damages that are only indirectly caused by the breach-instead of flowing directly from the breach, they result from some of the consequences of the breach. Id.; Acker, supra.

Here, United Systems sought damages of $29, 976.11 against Beason & Nalley, that being the amount that United Systems paid another firm to correct the errors in the ICS reports prepared by Beason & Nalley. There is no more natural and direct result of the failure to perform under a contract than the reasonable cost of obtaining substituted performance. Damages that seek to compensate a plaintiff for the value of the performance promised are direct rather than consequential. 24 Richard A. Lord, Williston on Contracts § 64:12 (4th ed. 2002) (citing Schonfeld v. Hilliard, 218 F.3d 164 (2d Cir. 2000)). Beason & Nalley's claim that the damages sought were other than direct is unsupported by either logic or authority.

Indemnity Clause

It is possible to contract to indemnify an indemnitee for the indemnitee's own negligence, but a high standard is generally required before a contract will be so interpreted. Restatement (Third) ...

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