Winforge, Inc. v. Coachmen Industries, Inc.

In the

United States Court of Appeals

For the Seventh Circuit

No. 10-3178

W INFORGE, INC., et al.,

Plaintiffs-Appellants,

v.

C OACHMEN INDUSTRIES, INC., et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 1:06-CV-619—Sarah Evans Barker, Judge.

A RGUED O CTOBER 25, 2011—D ECIDED JULY 30, 2012

Before E ASTERBROOK, Chief Judge, H AMILTON, Circuit

Judge, and M YERSCOUGH District Judge.Œ

M YERSCOUGH, District Judge. Winforge, Inc. (“Winforge”),

and its president, Byron McMahon (“McMahon”),

brought this diversity suit against Mod-U-Kraf Homes,

LLC (“Mod-U-Kraf”), All-American Homes, LLC (“All-

Œ

Of the Central District of Illinois, sitting by designation.

2 No. 10-3178

American”), and Coachmen Industries, Inc. (“Coachmen”),

alleging that the defendants breached the terms of a

hotel development agreement between the parties.

Winforge and McMahon claimed that the defendants’

alleged breach resulted in delay and costs that caused

the plaintiffs to default on the separate construction loan

agreement between the parties. The defendants filed a

cross-complaint alleging that Winforge and McMahon,

and not the defendants, breached the development agree-

ment.

After a bench trial, the district court ruled in favor of

the defendants and found that the parties had never

entered into a final, enforceable contract. Additionally,

the district court found that, if a final contract had

been formed, the defendants had not breached the con-

tract. The district court entered final judgment in

favor of the defendants, entitling them to the funds still

due and owing on the construction loan as well as

any and all associated costs and fees. Winforge and

McMahon appealed. For the following reasons, we affirm.

BACKGROUND

The district court provided detailed findings of fact in

its written decision. See Winforge, Inc., et al. v. Coachmen

Industries, Inc., et al., No. 1:06-CV-619, 2010 WL 3326856

(S.D. Ind. Aug. 20, 2010). Neither party contends that

the district court’s recitation of the facts is inaccurate.

The relevant facts are as follows.

No. 10-3178 3

1. The Parties

Appellant Winforge is a corporation organized under

the laws of North Carolina, with its principal place of

business in North Carolina, and has two shareholders.

Appellant McMahon, a citizen of North Carolina at the

time the Complaint was filed, holds an 80-percent share

of Winforge. Donny Thomas, who is not a party in this

case, owns a 20-percent share of Winforge. McMahon

and Thomas formed Winforge in 2004 for the purpose

of developing a large hotel in Pigeon Forge, Tennessee.

Appellees Mod-U-Kraf and All-American are modular

manufacturers that build and deliver modular sections

for use as building components in construction at

project sites for project developers such as Winforge.

Mod-U-Kraf is a Virginia corporation with its principal

place of business in Virginia, and All American is an

Indiana corporation with its principal place of business

in Indiana. Appellee Coachmen is an Indiana corpora-

tion, with its principal place of business in Indiana, and

acted as the lender in this case.

2. Pre-Agreement Developments

In 2002, Mike Lee, who is not a party in this case, began

investigating the possibility of developing a large hotel

constructed with modular units. Lee is an experienced

developer of hotel projects and the owner of Flagship

Development, LLC, a hotel development company.

During his investigation, Lee spoke with Mod-U-Kraf,

a modular manufacturer that had previously been suc-

4 No. 10-3178

cessful with modular construction for large building

projects.

In fall of 2002, Lee met with Dan Brown, a sales repre-

sentative of Mod-U-Kraf, and Jeff Powell, Mod-U-Kraf’s

general manager, at Mod-U-Kraf’s Virginia factory. Lee

learned about Mod-U-Kraf’s previous experience with

modular construction and spoke with Brown and Powell

about a potential modular hotel project. At a second

visit to Mod-U-Kraf’s Virginia factory, Lee met with

Steve Kerr, Executive Vice-president of All-American,

and Joseph Tomczak, Chief Financial Officer of Coachmen.

Brown made a presentation about the possible ef-

ficiencies of building a large hotel using modular con-

struction.

In November 2002, Lee sent a letter to John Trant,

a representative of Coachmen, outlining the broad para-

meters of a potential business relationship. No agree-

ment was reached, but Coachmen expressed interest in

entering into such an agreement. Next, Lee sought to

secure a franchisor for the hotel. Lee contacted Cendant, a

large hotel franchisor that owns the “Wingate” hotel

brand.1 Lee explained to Cendant what he had learned

about the benefits of modular hotel construction. In

April 2003, Lee sent a letter to Kerr of All American,

Tomczak of Coachmen, and Powell of Mod-U-Kraf in-

dicating that Cendant had recommended using Matrix

Hospitality, LLC, a hotel development company owned

by McMahon, to develop the contemplated hotel project.

1

Cendant is now known as Wyndham Hotel Group.

No. 10-3178 5

In his April 2003 letter, Lee proposed that the hotel

would be a Wingate Inn hotel, that Mod-U-Kraf would

build the modular units, and that Coachmen would

provide the financing for the project.

Later, in spring 2003, McMahon and Thomas

toured Mod-U-Kraf’s factory in Virginia. McMahon was

impressed with the factory and became convinced

that modular construction could be better built and more

cost-effective than traditional construction.

On June 24, 2003, McMahon and Powell signed a letter

of intent outlining a preliminary understanding be-

tween Matrix Hospitality, Mod-U-Kraf, and Coachmen

with regard to the construction of a modular hotel in

Pigeon Forge, Tennessee. On August 19, 2003, McMahon

hired Lee as project manager for the Pigeon Forge pro-

ject. On September 28, 2003, McMahon, on behalf of

Winforge, signed a franchise agreement with Wingate

Inn, which secured the Wingate hotel brand for the

Pigeon Forge hotel.

3. The Parties Sign the Development Agreement and Loan

Agreement

On April 13, 2004, Mod-U-Kraf and Winforge executed

a Development Agreement (“Agreement”) regarding the

development of a Wingate Inn Hotel in Pigeon Forge,

Tennessee (the “Project”). According to the Agreement,

Winforge sought to “utilize modular construction for

the buildings which will comprise a portion of the Pro-

ject.” For that purpose, “Winforge [sought] to purchase

6 No. 10-3178

from [Mod-U-Kraf] the modular sections for the

buildings to be incorporated into the Project and also to

engage [Mod-U-Kraf] to provide the setting of the

modular buildings.” The Agreement also provided that

Flagship Development, Lee’s company, would be the

project manager for the Project, contracted by Winforge.

Winforge and Flagship Development were to “prepare

the site” and select a general contractor for the Project

that was to be approved by Coachmen.

Attached to the Agreement as Exhibit A was the “Pre-

liminary Scope of Work” provision, which described the

functions and work to be performed by Mod-U-Kraf,

Winforge, and the general contractor.2 The Preliminary

Scope of Work provision is the primary subject of the

parties’ dispute in this case. The April 13, 2004 Pre-

liminary Scope of the Work provided, in pertinent part:

1.0 General

1.1 The following document shall set out the specifica-

tions, scope of work, drawings, and pricing as pre-

pared by Mod-U-Kraf Homes LLC. The document

further serves to set out the responsibilities of

each of the following parties: Coachmen Industries,

Inc. (COA), Lender; Winforge, Inc., Owner/Buyer

(Winforge), Mod-U-Kraf Homes, LLC (MUK), Modular

manufacturer.

1.2 Mod-U-Kraf shall manufacture modular units

at the Mod-U-Kraf manufacturing facilities in accor-

2

The “Preliminary Scope of Work” provision was incorporated

into the Agreement at Section 1 of the Agreement.

No. 10-3178 7

dance with the approved Specifications and Drawings.

Drawings to meet local, state, 3rd party and franchisor

requirements. To include only materials and on-site

services specified as supplied by MUK.

1.3 MUK shall provide modular units and material

noted on plans for installation and completion of

a Wingate Inn. This will include all architectural

drawings, structural calculations for modular unit

construction, mechanical, electrical systems for

modulars, and sprinkler system.

1.4 WINFORGE will be responsible for overseeing

the completion of the modular units tie-in and com-

ponents such as the following to complete the

Wingate Inn on-site:

• Plumbing connections between levels

• Plumbing connections to city sewer & water

• Electrical connections and equipment as noted on

plans

• Elevator

• Roof Façade (Completion of Parapet Wall)

• Finish Decor at all common areas, drop ceiling,

HVAC 3 System, Lights, Finish Floor, Drywall &

Finish as shown, Entry Doors, FF&E materials, etc.

• For additional material and task, reference to

plans[.]

3

“HVAC” is an abbreviation for “heating, ventilation, and air

conditioning.”

8 No. 10-3178

Pursuant to Section 4 (“Foundation”) of the Pre-

liminary Scope of Work, Mod-U-Kraf was responsible for

“provid[ing] architectural drawings and foundation

footprint . . . and receiv[ing] all state, local and county

approvals,” and the general contractor was “responsible

for the engineering of the foundation.” The Preliminary

Scope of Work also enumerated other responsi-

bilities relating to the transport of the modular units

from Mod-U-Kraf’s factory to the project site as well

as work to be completed on the project site.

Throughout 2003 and early 2004, the parties’

pre-agreement negotiations focused on the provisions

of the Scope of Work, and the Scope of Work attach-

ment was revised at least ten times before being attached

to the April 13, 2004 Agreement as the “Preliminary” Scope

of Work. After signing the Agreement, the parties con-

tinued to negotiate the terms of the Scope of Work. In

July 2004, Mod-U-Kraf sent a proposal for a final version

of the Scope of Work to Lee. Lee testified that he did not

review it because it was not “red-lined” to highlight

the proposed changes and did not indicate changes in

pricing. In September 2004, Powell sent another draft of

the Scope of Work to Lee but, for the same reasons, Lee

did not review the draft.

The parties dispute the finality of the Preliminary

Scope of Work. Winforge contends that the April 13, 2004

version was final and controlled the parties’ responsi-

bilities, but the defendants contend that the parties never

reached a final agreement regarding the Scope of Work.

The district court noted that, during a January 25, 2005

No. 10-3178 9

conference call between the parties, Lee stated that he

thought the Preliminary Scope of Work had been modi-

fied or was open to modification. However, McMahon

expressed his belief and hope that the parties would

continue to honor the Preliminary Scope of Work as final.

Separate from the Agreement, Winforge and Coach-

men entered a loan agreement on April 14, 2004 (“Loan

Agreement”), under which Coachmen agreed to provide

financing for the Project for a term of 150 days.

4. Winforge and Mod-U-Kraf Begin Development of the

Project

From April 13, 2004 to June 23, 2004, Mod-U-Kraf acted

as the modular manufacturer under the Agreement. On

June 23, 2004, Mod-U-Kraf, with Winforge’s agreement,

passed all of its rights and responsibilities under the

Agreement to All American.

Prior to All American’s assumption of those rights

and responsibilities, Mod-U-Kraf had begun to perform

its part of the Agreement. On April 22, 2004, Cendant, the

franchisor, acknowledged that Mod-U-Kraf’s architec-

tural plans for the modular units were “100% complete.”

Cendant informed Winforge of this fact. However, other

aspects of the planning for the Project, separate from the

modular unit designs, remained incomplete and were

required for State approval. These aspects included a

number of Mod-U-Kraf’s obligations, such as the designs

10 No. 10-3178

for the PTAC 4 (air conditioning) units and the sprinkler

system, and a number of Winforge’s obligations, such as

the designs for the elevator, plumbing, HVAC, electrical,

and mechanical systems.

Upon learning that the modular plans were 100%

complete, Winforge began on-site work in Pigeon Forge.

Winforge hired a site supervisor and retained an on-site

engineering firm and a foundation-engineering firm.

At this time, as the district court described in its

findings, the Project “proceeded in fits and starts.”

Mod-U-Kraf did not prepare or submit a finished plan

for State approval because Mod-U-Kraf believed that

Winforge was required to provide Mod-U-Kraf with

design information for a number of aspects of the

Project, including the elevator, plumbing, HVAC, elec-

trical, and mechanical systems, before Mod-U-Kraf could

submit its plans for State approval. Further, Winforge

instructed Mod-U-Kraf not to complete certain tasks

that were originally Mod-U-Kraf’s responsibility under

the Preliminary Scope of Work.

Specifically, in June 2004, Winforge instructed

Mod-U-Kraf not to proceed with the development and

design of the sprinkler system, which had been de-

signated Mod-U-Kraf’s responsibility under the Prelimi-

nary Scope of Work. By agreement of the parties,

Winforge assumed responsibility for the design and

approval of the sprinkler system. Winforge also verbally

4

“PTAC” is an abbreviation for “packaged terminal air

conditioner.”

No. 10-3178 11

agreed to take over responsibility for providing plans

for the PTAC units, EPDM roof membrane, parapet wall

removal, and fire alarm system, all of which were

initially Mod-U-Kraf’s responsibility under the Prelim-

inary Scope of Work.5 Mod-U-Kraf, believing that Mod-U-

Kraf required Winforge’s approval on these portions of

the Project, never developed designs or entered into

sub-contracts for these portions of the Project.

On June 22, 2004, Mod-U-Kraf submitted its plans for

approval by the State of Tennessee’s third-party adminis-

trator, T.R. Arnold and Associates (“T.R. Arnold”). T.R.

Arnold is a review agency approved by the State to con-

duct design review and approval on behalf of the State.

After reviewing submitted plans, T.R. Arnold commonly

issues a “deviation report” that identifies “deviations,” or

failures to comply with Tennessee State Code. Mod-U-Kraf

submitted its plans in June 2004, knowing that the

plans were a work in progress, in order to generate a

deviation report that would allow Mod-U-Kraf to refine

the plans while it awaited other designs from Winforge.

Mod-U-Kraf hoped that being aware of what issues

needed to be addressed, sooner rather than later, would

expedite the construction process.

T.R. Arnold returned a deviation report that listed

twenty-three deviations. The deviations related to the

sprinkler design, elevator design, mechanical and

electrical plan design, fire alarm design, and insulation

5

In exchange for Winforge’s assumption of these duties, Mod-

U-Kraf was to receive reduced payment from Winforge.

12 No. 10-3178

design. T.R. Arnold representative Ray Helmer testified

that such deviation reports are commonly issued and

are to be expected for modular designs.

5. All-American Assumes Mod-U-Kraf’s Rights and Responsi-

bilities Under the Agreement

On June 23, 2004, all of Mod-U-Kraf’s rights and obliga-

tions under the Agreement passed to All-American.

Mod-U-Kraf informed Winforge that the substitution

had become necessary due to delays in the design pro-

cess. Winforge agreed to the transfer of responsibility.

Between June and October 2004, Winforge obtained

designs of the sprinkler system and elevator, the need for

which had been identified in the June 2004 deviation

report issued by T.R. Arnold. After incorporating the

newly acquired designs, All American submitted revised

plans to T.R. Arnold in September 2004. This time, T.R.

Arnold issued a new deviation report that identified

only two items. The first item was a minor issue that All

American corrected quickly. The second item was a

more substantial deviation that called for the com-

pleted design of the mechanical and electrical plan for

the Project. Resolution of this item required the assistance

of professionals yet to be hired by Winforge. Although

overall approval of the plans still required the develop-

ment of the mechanical and electrical plan identified in

the deviation report, in October 2004, T.R. Arnold ap-

proved the modular portion of the plans, certifying

them as fully compliant with the Tennessee State Code.

No. 10-3178 13

Final approval by the State required the additional step

of submitting the plans to the State, which receives and

reviews plans approved by the third party administrator.

If the State approves the plans, the State issues a Letter

of Filing, which constitutes final State approval of the

plans. On October 19, 2004, the State of Tennessee’s

Code Enforcement Division found that T.R. Arnold had

performed a substandard review of the plans. On

October 21, 2004, the State sent a letter to T.R. Arnold

setting forth a list of areas in which the plans failed to

comply with the Tennessee Code. These areas included:

(1) failure to clearly identify whether All American or

Mod-U-Kraf was responsible for the modular construc-

tion; (2) failure to affix certain engineering seals; (3) failure

to complete HVAC, plumbing, and mechanical designs.

None of the deviations listed by the State related to

the design of the modular units themselves. Rather, the

deviations related only to other aspects of the Project. In

December 2004, T.R. Arnold issued another deviation

report to All American, reiterating the same issues identi-

fied by the State.

Because of the stated deviations, the State refused to

issue a Letter of Filing. Under state law, All American

could not begin construction of the modular units

without a Letter of Filing. Helmer, T.R. Arnold’s represen-

tative, testified that the State’s decision to reject the

plans was “very unusual” and “contrary to the standard

way of doing business in the State of Tennessee.” Helmer

testified that, based on his experience, the State’s Letter

of Filing ordinarily related only to the modular unit

designs and not designs related to site work. Here, the

14 No. 10-3178

modular units had been deemed fully compliant and

complete, but the State rejected the plans based on devia-

tions related to site work.

6. Coachmen Denies Further Draws on the Construction Loan

In February 2005, Coachmen denied Winforge’s request

for a further draw on the construction loan under the

Loan Agreement and informed Lee that money would

be withheld until Winforge proceeded with its obliga-

tions to develop the Project. Up to this point, Coachmen

had provided Winforge with significant funding from

the construction loan. Despite receiving these funds,

Winforge had not hired a general contractor, as it was

required to do under the Agreement. Instead, Winforge

had chosen to assign Lee and McMahon to the role of

general contractor at various points. The defendants

believed that neither McMahon nor Lee was qualified

to perform those duties.

7. The State of Tennessee Issues the Letter of Filing

On March 3, 2005, Winforge finally completed the

design of the mechanical and electrical plans. All

American incorporated those designs into the plans

and submitted revised plans to T.R. Arnold, which re-

sponded with a new deviation list. All American then

incorporated the necessary changes indicated in the

deviation report and submitted revised plans in

May 2005. T.R. Arnold approved the May 2005 plans

and forwarded those plans to the State.

No. 10-3178 15

On May 13, 2005, the State responded with a list of

forty-eight deviations relating to three key substantive

design issues: a faulty sprinkler design, an inadequate

fire alarm design, and a faulty smoke egress design for

the lobby area. Again, none of the deviations related to

the modular plans themselves.

In August 2005, Winforge successfully produced a

code-compliant sprinkler design. In the same month, the

parties also resolved the lobby egress issue. After in-

corporating the necessary changes, All American resub-

mitted the plans to T.R. Arnold, which once again ap-

proved the plans and forwarded them to the State. On

August 30, 2005, the State issued a Letter of Filing for

the Project, finally authorizing All American to begin

construction of the modular units.

8. The City of Pigeon Forge Rejects the Building Permit

Application for the Project

Before All American could commence construction of

the modular units, however, a building permit had to be

obtained from the City of Pigeon Forge. Winforge was

supposed to obtain that permit. Although Winforge

produced a “Building Permit Application,” Winforge

never completed or submitted the document, leaving

certain items on the form blank or marked “TBD” (to be

determined). Because Winforge had not yet secured the

building permit and had still not hired a general contrac-

tor, All American hired a general contractor, D.F. Chase,

to seek the building permit. D.F. Chase filed a building

permit application with the City of Pigeon Forge. However,

16 No. 10-3178

on February 13, 2006, the City of Pigeon Forge rejected

the application because the City’s sewer system lacked

capacity to handle the Project. The rejection letter clearly

indicated that an earlier application would have likely

been approved because the sewer issue had not arisen

until just before D.F. Chase had applied for the permit.

This letter strongly suggested that the permit would

likely have been approved if Winforge had submitted

the permit application on time.

Without a building permit, the Project was at a perma-

nent standstill. Therefore, All American never began

manufacturing the modular units, concluding that the

units could never be incorporated into the Project due

to the lack of a building permit.

On February 23, 2006, Coachmen notified Winforge

that it was in default on the Loan Agreement. During

the course of the development of the Project, Lee and

McMahon had obtained draws on the construction

loan amounting to more than forty percent of the total

projected cost of the Project, paying themselves and

the entities they had employed on the Project approxi-

mately $1.2 million. However, neither Mod-U-Kraf nor

All-American had received any payment from the funds

obtained through the construction loan.

On March 24, 2006, Coachmen notified Winforge that

Coachmen intended to institute foreclosure proceedings

and attached a Note of Foreclosure stating that the prop-

erty was to be sold on April 21, 2006. On November 15,

2006, the real estate was sold. Coachmen held the highest

bid and purchased the property for $1.8 million. On

No. 10-3178 17

January 30, 2007, Coachmen auctioned the personal

property that it held as collateral pursuant to a Security

Agreement between the parties. The net proceeds of

$283,142.79 were paid to Coachmen and applied against

the loan deficit.

9. Winforge and McMahon Bring Suit in District Court

Winforge and McMahon brought suit against Mod-U-

Kraf, All-American, and Coachmen, believing that the

defendants were at fault for the losses incurred and had

caused the loan default. Winforge and McMahon sought

to defeat the foreclosure and hold Mod-U-Kraf, All Ameri-

can, and Coachmen responsible for breach of contract.

Mod-U-Kraf, All American, and Coachmen filed a counter-

claim against Winforge and McMahon, also alleging

breach of contract. The parties filed cross-motions for

summary judgment. The district court denied Winforge

and McMahon’s motion and granted in part and denied

in part the defendants’ motion. The defendants then

filed a motion to compel arbitration under the arbitra-

tion clause found in the Agreement. The district court

denied the motion, finding that the defendants had

already implicitly agreed to have the district court

resolve their legal dispute.

After a four-day bench trial, the district court entered

judgment in favor of the defendants, finding that no final

contract was ever formed and that, even if there were

a contract, the defendants had not breached it. Winforge

and McMahon appealed, challenging both findings.

18 No. 10-3178

DISCUSSION

Initially, we must determine whether we have subject-

matter jurisdiction. See Carroll v. Stryker Corp., 658 F.3d

675 (7th Cir. 2011) (“[W]e have an independent obliga-

tion to satisfy ourselves that jurisdiction is secure before

proceeding to the merits.”). Winforge and McMahon

rely on diversity of citizenship for federal jurisdiction

under 28 U.S.C. § 1332. At oral argument, we questioned

the parties as to whether the requirements of diversity

of citizenship under § 1332 was satisfied. Winforge is a

North Carolina corporation with its principal place of

business in North Carolina. Coachmen and All American

are Indiana corporations with their principal place of

business in Indiana, and Mod-U-Kraf is a Virginia corpora-

tion with its principal place of business in Virginia.

McMahon’s citizenship, however, was not clear from

the parties’ jurisdictional statements. The complaint

stated that McMahon was a “resident” of North Carolina,

but the district court’s written opinion states that

McMahon is a “resident” of Athens, Greece. The plain-

tiffs’ docketing statement filed with this Court states

that McMahon is a resident of North Carolina. Both

the plaintiffs’ supplemental statement of jurisdiction

and the jurisdictional section of the plaintiffs’ brief assert

that McMahon is a citizen of North Carolina.

An allegation of residence is not sufficient to estab-

lish citizenship, which requires domicile. See Heinen v.

Northrop Grumman Corp., 671 F.3d 669, 670 (7th Cir.

2012) (citing Gilbert v. David, 235 U.S. 561, 35 S. Ct. 164, 59

L. Ed. 360 (1915); Steigleder v. McQuesten, 198 U.S. 141, 25

No. 10-3178 19

S. Ct. 616, 49 L. Ed. 986 (1905); Denny v. Pironi, 141 U.S.

121, 11 S. Ct. 966, 35 L. Ed. 657 (1891); Robertson v. Cease,

97 U.S. 646, 24 L. Ed. 1057 (1878)). Further, a United States

citizen who establishes domicile in a foreign country is

no longer a citizen of any State of the United States and

destroys complete diversity under 28 U.S.C. § 1332.

Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 828, 109

S. Ct. 2218, 2220-21 (1989).

At oral argument, we directed the parties to file addi-

tional jurisdictional statements to clarify McMahon’s

citizenship. The parties’ amended jurisdictional state-

ments indicate that McMahon was a citizen of the United

States residing and domiciled in North Carolina on

April 17, 2006, the date on which the complaint was

filed. McMahon moved to Athens, Greece about two

years later. Because we determine jurisdiction based on

citizenship at the time the case was filed, we conclude

that McMahon is a citizen of North Carolina for pur-

poses of diversity jurisdiction in this case. See Hukic v.

Aurora Loan Servs., 588 F.3d 420, 427 (7th Cir. 2009) (citing

Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 124

S. Ct. 1920, 158 L. Ed. 2d 866 (2004)). Accordingly, we

find that the requirements of diversity jurisdiction are

satisfied.

I. Standard of Review

In an appeal from a bench trial, we review the district

court’s findings of fact and applications of law to those

findings of fact for clear error. Trustees of Chi. Painters and

20 No. 10-3178

Decorators Funds v. Royal Int’l Drywall and Decorating, Inc.,

493 F.3d 782, 785 (7th Cir. 2007) (quoting Keach v. United

States Trust Co., 419 F.3d 626, 634 (7th Cir. 2005)). “A

finding is ‘clearly erroneous’ when although there is

evidence to support it, the reviewing court on the entire

evidence is left with the definite and firm conviction that

a mistake has been committed.” United States v. United

States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 542, 92 L.

Ed. 746 (1948). “The party alleging error bears the burden

of demonstrating that particular factual findings were

clearly erroneous.” Carnes Co. v. Stone Creek Mech., Inc., 412

F.3d 845, 847 (7th Cir. 2005). We review the district court’s

conclusions of law de novo. Platinum Tech., Inc. v. Fed. Ins.

Co., 282 F.3d 927, 930-31 (7th Cir. 2002).

A. This Court Reviews the District Court’s Determination that

No Contract Existed for Clear Error.

Winforge argues that we should apply de novo review

to the district court’s determination that no contract

existed. Winforge contends that under both federal law

and Virginia law, the existence of a contract is a question

of law that should be reviewed de novo where, as

argued here, the facts surrounding contract formation

are undisputed.

In this Court, “[t]he fixing of the boundary between

questions of law and questions of fact, is a matter of

federal procedural law and therefore governed by federal

rather than state law in diversity as in other federal suits.”

Dilworth v. Dudley, 75 F.3d 307, 309 (7th Cir. 1996). Under

No. 10-3178 21

federal procedural law, the existence of a contract is a

mixed question of law and fact that is subject to clear error

review. E.C. Styberg Eng’g Co., 492 F.3d 912, 917 (7th Cir.

2007).

In this case, the facts were in dispute. The district court

considered the facts surrounding contract formation,

particularly the parties’ words and actions, and deter-

mined, as a matter of fact, that the parties never

intended to be bound by the Agreement and attached

Preliminary Scope of Work signed on April 13, 2004.

Based on its findings of fact, the district court concluded

that the Agreement was not an enforceable contract

because the parties never achieved mutuality of assent

to the central terms of the Agreement. Accordingly,

we review the district court’s determination that no

contract existed for clear error. See E.C. Styberg Eng’g Co.,

492 F.3d at 917; see also Thomas v. Gen. Motors Acceptance

Corp., 288 F.3d 305, 307 (7th Cir. 2002)).

B. This Court Reviews the District Court’s Determination

Regarding Breach of Contract for Clear Error.

“Although the interpretation of an established written

contract is generally a question of law for the court, the

question of whether or not a particular breach of a

contract is material is a question of fact.” Int. Prod. Special-

ists, Inc. v. Schwing Am., Inc., 580 F.3d 587, 594 (7th Cir.

2009) (citations omitted). Therefore, we interpret the

contract de novo and review the district court’s determina-

tion of whether the contract was materially breached

for clear error. Id. at 594-95.

22 No. 10-3178

II. The District Court’s Determination that No Contract

Existed Was Not Clear Error.

The district court found that the parties never

achieved a “distinct intention common to both” as to the

central aspects of the contract. Winforge, 2010 WL 3326856,

at *9 (citing Moorman v. Blackstock, Inc., 276 Va. 64, 75,

661 S.E.2d 404, 409 (Va. 2008)). Therefore, the district

court found that the contract lacked mutuality of assent

as to essential terms and that no contract ever existed.

Winforge, 2010 WL 3326856, at *9. On appeal, Winforge

urges this Court to find the Agreement enforceable

because (1) the parties thoroughly negotiated and signed

the Agreement and (2) the defendants waived objection

to the validity of the contract by acknowledging its

validity before and after the district court’s entry of

judgment.6

6

In its brief, Winforge also contends, without citing to any

authority, that the Agreement is a valid contract because the

parties mutually undertook to perform according to the terms

of the Agreement for a period of 20 months after signing the

Agreement. However, in its reply brief, Winforge clarifies

that “Winforge’s reliance on the parties’ conduct is not

intended to establish, but rather to explain, the terms of the

agreement.” Based on this clarification, we need not discuss

Winforge’s initial argument that the Agreement should be

enforced based on the parties’ course of dealing. Moreover,

we note that examination of the parties’ performance after

signing the Agreement certainly does not help Winforge’s

case. In its findings of fact, the district court determined that

(continued...)

No. 10-3178 23

A. The District Court Did Not Clearly Err in Its Determina-

tion that the Agreement Lacked Mutuality of Assent and,

Therefore, Was Not a Valid Contract.

We first address Winforge’s argument that the district

court should have found the Agreement enforceable

because the parties thoroughly negotiated and signed it.

Winforge argues that the district court erred in finding

that subsequent drafts of the Scope of Work indicated

lack of assent to the original Agreement signed on April 13,

2004 and that the district court erred in failing to

consider the “legal presumption of assent that arises

under Virginia law when an agreement is written and

signed.” Appellants’ Brief 20 (citing Browne v. Kline

Tysons Imp., Inc., 190 F. Supp. 2d 827, 830 (E.D. Va. 2002)).

In support, Winforge draws our attention to the fact

that, prior to signing the Agreement, the parties

negotiated the terms of the Agreement and Preliminary

Scope of Work for almost ten months and exchanged

at least ten drafts of the Scope of Work. Winforge also

argues that the fact that the Agreement required that any

change to the Agreement or Scope of Work be done by a

written change order further establishes that the Agree-

ment was final.

6

(...continued)

Winforge failed to perform a number of tasks clearly assigned

to it under the Agreement, including hiring a general con-

tractor. Winforge also failed to timely complete the designs

of the elevator, mechanical and electrical system, HVAC

system, and plumbing system and failed to secure the neces-

sary building permit from the City of Pigeon Forge.

24 No. 10-3178

We find no error in the district court’s conclusion that

the Agreement, although negotiated and signed, was not

an enforceable contract. The parties are in agreement that,

pursuant to the terms of the Agreement, Virginia law

applies to the resolution of all contractual disputes be-

tween the parties. Under Virginia law, Winforge and

McMahon, as the parties seeking to enforce the contract,

bore the burden of proving the existence of the contract.

Brown v. Brown, 53 Va. App. 723, 728, 674 S.E.2d 597,

599 (2009). Winforge was required to establish mutuality

of assent, or “the meeting of the minds” of the parties,

which is an essential element of any contract. Moorman, 276

Va. at 75, 661 S.E.2d at 409 (citing Phillips v. Mazyck, 273

Va. 630, 636, 643 S.E.2d 172, 175 (2007)). “Until the parties

have a distinct intention common to both . . . there is a

lack of mutual assent and, therefore, no contract.” Id.

Mutual assent is determined “exclusively from those

expressions of [the parties’] intentions which are com-

municated between them.” Lucy v. Zehmer, 196 Va. 493,

503, 84 S.E.2d 516, 522 (1954) (citations and internal

quotation marks omitted); see also Phillips, 273 Va. at 636,

643 S.E.2d at 175 (stating that courts are to determine

mutual assent from the parties’ words or acts). Winforge

and McMahon also had the burden of proving that the

Agreement contained essential terms. McKay Consulting

v. Rockingham Mem’l Hosp., No. 5:09-CV-00054, 2010 WL

3200061, at *9 (W.D. Va. Aug. 11, 2010). In Virginia, the

essential terms of an agreement for services include “the

nature and extent of service to be performed, the place

where and the person to whom it is to be rendered, and

the compensation to be paid.” Reid v. Boyle, 259 Va. 356,

No. 10-3178 25

370, 527 S.E.2d 137, 145 (2000) (quoting Mullins v. Mingo

Lime & Lumber Co., 176 Va. 44, 10 S.E.2d 492, 494 (1940)).

An agreement lacking these terms will not be enforced.

Mullins, 176 Va. at 50, 10 S.E.2d at 494.

The district court’s conclusion that the Agreement

lacked mutuality of assent is supported by the evidence.

In reaching its conclusion, the district court cited evidence

that the parties continued to exchange new drafts of

the Scope of Work even after they had signed the Agree-

ment on April 13, 2004. The court noted that, in July 2004,

Mod-U-Kraf sent a proposed final draft of the Scope of

Work to Lee, who was working on behalf of Winforge.

Lee did not review the July 2004 draft and, instead, re-

quested that Mod-U-Kraf provide a “red-lined” version

of the Scope of Work that would highlight the changes

and describe how the newly proposed terms would

affect the pricing of the Project. In September 2004, Mod-U-

Kraf sent another proposed draft of the Scope of Work

to Lee, but Lee again did not review the draft because

it was not red-lined to highlight changes. The district

court noted that “[n]othing in the record indicates that

Lee declined to review these proposed revisions because

he believed the negotiations were already complete.”

Winforge, 2010 WL 3326856, at *9. The district court consid-

ered these facts to be evidence that the terms of the

Scope of Work remained under negotiation and were not

agreed upon well into the summer of 2004. The district

court also cited evidence that Lee and McMahon had

different views regarding the finality of the Preliminary

Scope of Work. During a January 25, 2005 conference

call between the parties, Lee stated that he thought

26 No. 10-3178

the Preliminary Scope of Work had been modified or was

open to modification, but McMahon expressed his

belief and hope that the parties would continue to

honor the Preliminary Scope of Work as binding.

Based on Lee’s and McMahon’s statements, evidence

that the parties continued to negotiate the Scope of Work

long after they had signed it, and the fact that no final

version of the Scope of Work had been agreed upon, the

district court concluded that the Agreement, with the

attached Preliminary Scope of Work, was preliminary

and not final. The district court concluded as follows:

Given these clear indications by the parties that

the Scope of Work accompanying the Develop-

ment Agreement was ‘Preliminary,’ as well as signifi-

cant evidence that the parties continued to negotiate

the Scope of Work well after the date they signed the

Development Agreement and that no final version of

the Scope of Work was ever agreed upon, it is obvious

that the parties’ initial ‘preliminary’ agreement as to

these key performance terms was not, in fact, final.

Thus, because the essence of the parties’ dispute in

this litigation regards different interpretations and

understandings of the terms contained in that Pre-

liminary Scope of Work, the parties never achieved a

‘distinct intention common to both’ as to central

aspects of the contract. Moorman, 661 S.E.2d at 409.

Accordingly, the contract between the parties lacked

mutuality of assent as to essential terms; indeed, no

contract ever, in fact, existed. Id.

Winforge, 2010 WL 3326856, at *9.

No. 10-3178 27

Winforge argues that the district court erred in con-

sidering facts related to Mod-U-Kraf’s July 2004 draft of

the Scope of the Work to be an indication that the Agree-

ment remained under negotiation. Winforge contends

that Mod-U-Kraf’s July 2004 draft of the Scope of Work

was a “request to modify” the existing contract rather

than an indication that no contract existed. According

to Winforge, Mod-U-Kraf’s proposed revision could not

have reached “back in time” to invalidate an agreement

that had already been negotiated and signed and “con-

tained all necessary material terms.” Winforge contends

that Lee’s decision not to review the July 2004 draft

was evidence of Lee’s lack of assent to the new pro-

posed terms but not lack of assent to the already formed

contract. Winforge additionally argues that the fact that

changes were proposed does not mean that the parties

lacked assent to the original Agreement because the

original Agreement contemplated changes, which were

required to be in writing pursuant to Section 14 of the

Agreement.

We find no clear error in the district court’s conclusion

that Mod-U-Kraf’s July and September 2004 drafts of the

Scope of Work, coupled with Lee’s responses to those

drafts, indicated that the parties had not mutually as-

sented to the April 2004 Preliminary Scope of Work. We

conclude that the district court’s findings that the parties

continued to exchange drafts of the Scope of the Work

long after signing the Agreement, that no final Scope of

Work had been agreed upon, and that Lee and McMahon

had different views regarding the finality of the document

provide substantial and sufficient support for the court’s

28 No. 10-3178

conclusion that the parties never reached mutuality

of assent as to the Agreement.

Winforge further argues that the district court, in

finding that the Agreement lacked mutual assent, failed

to consider the legal presumption of assent that arises

under Virginia law when an agreement is written and

signed. Winforge cites Browne, 190 F. Supp. 2d at 830,

for the proposition that “[o]ne who signs a contract is

presumed to know and assent to the terms contained

therein.” However, even a signed writing is not a con-

tract if there is no mutual assent or “distinct intention

common to both,” which is essential to any contract.

Moorman, 276 Va. at 75, 661 S.E.2d at 409 (citing Phillips,

273 Va. at 636, 643 S.E.2d at 175). Here, the district court

found, and we agree, that the parties never agreed as to

the essential terms of the Agreement. In Browne, the

court considered whether a consumer had agreed to

submit all claims to arbitration when he signed a Buyer’s

Order consummating the sale of a used car, where the

back of the Buyer’s Order stated that the claim would

be resolved by binding arbitration. 190 F. Supp. 2d at 830.

The court found that the consumer’s intent to submit

all claims to arbitration was shown through his signature

on the Buyer’s Order because “[o]ne who signs a con-

tract is presumed to know and assent to the terms con-

tained therein.” Id. at 830. In Browne, the issue of whether

the parties had mutually assented to the contract was not

before the court. In the present case, by contrast, the

issue is not whether the parties were aware of the terms

in the Agreement when they signed it; rather, the issue

is whether the parties mutually assented to the terms

No. 10-3178 29

necessary to form a contract. The district court con-

cluded that no contract had been formed because the

parties never mutually assented to the essential terms.

We find no clear error in that finding.

Finally, Winforge asks this Court to determine as a

matter of law that the Agreement contained all terms

necessary for formation. Specifically, Winforge con-

tends that Mod-U-Kraf’s obligations were clearly set

forth in sections 1.2, 1.3, 4.1, and 10.4 of the Scope of

Work. Winforge also contends that the Agreement set

forth the timing for the completion of the obligations

and set forth the contract price pursuant to exhibits to

the Agreement.

The district court did not make specific conclusions as

to whether essential terms were lacking from the con-

tract. Instead, the court held that the contract lacked

mutual assent as to essential terms. Because we have

already concluded that the district court did not clearly

err in finding that the contract lacked mutual assent as

to essential terms, we need not decide the question

of whether the contract lacked specific essential terms.

B. Defendants Have Not Waived Their Challenge to the

Validity of the Agreement

Winforge argues that the defendants should be pre-

cluded from contesting the validity of the Agreement

because they “consistently and repeatedly reaffirmed” the

validity of the Agreement in pleadings before and after

the district court’s entry of judgment. Winforge first

30 No. 10-3178

claims that the defendants acknowledged the validity of

the Agreement because they did not challenge its validity

in their Answer. We disagree. We first note that con-

testing the validity of an alleged contract is not an enumer-

ated affirmative defense that is waived if not included

in an answer. See Fed. R. Civ. P. 8(c). This Court has

previously noted that the appropriate analysis for deter-

mining whether a defense is an affirmative defense

when not specifically listed in Rule 8(c) “is not well

settled, especially in diversity cases.” Brunswick Leasing

Corp. v. Wis. Cent., Ltd., 136 F.3d 521, 530 (7th Cir. 1998).

This Court has identified two approaches for deter-

mining whether a defense not specifically enumerated in

Rule 8(c) is an affirmative defense: a defense is an affirma-

tive defense (a) “if the defendant bears the burden of

proof” under state law or (b) “if it [does] not controvert

the plaintiff’s proof.” Brunswick Leasing Corp., 136 F.3d at

530. Under either approach, contesting the validity of

the contract in a breach of contract action is not an af-

firmative defense because, under Virginia law, the exis-

tence of the contract is an issue on which the plaintiff

bears the burden of proof. See Brown, 53 Va. App. at 728,

674 S.E.2d at 599. The defendants did not bear the

burden of proving that the Agreement was not a

valid contract.

Winforge next argues that Defendants have waived

their challenge to the validity of the Agreement because,

at trial, Powell (Mod-U-Kraf’s general manager) testified

regarding the negotiation and execution of the Agree-

ment but never suggested that it was not a valid contract.

However, admitting that the Agreement was negotiated

and signed certainly does not amount to an admission

No. 10-3178 31

that the Agreement was a valid contract. As we stated

above, even a signed, written contract is not enforceable

if it lacks mutual assent, as was the case here. Moorman,

276 Va. at 75, 661 S.E.2d at 409. Further, it is well-estab-

lished that waiver only applies when there has been

“ ‘the voluntary or intentional relinquishment of a known

right.’ ” Vershaw v. Northwestern Nat’l Life Ins. Co., 979

F.2d 557, 560 (7th Cir. 1992) (citation omitted). The trial

transcript shows that Powell never voluntarily or inten-

tionally relinquished the defendants’ challenge to the

validity of the contract.

Winforge also argues that the defendants have waived

their challenge to the validity of the contract because

the defendants’ Motion to Compel Arbitration, brought

before the district court, asserted entitlement to relief that

arose exclusively out of the Agreement. We disagree. The

defendants’ attempt to compel arbitration was not an

admission that the Agreement was valid and enforceable.

Further, disputes concerning the validity of a contract may

properly be the subject of arbitration when the parties

so intend. See Matterhorn, Inc. v. NCR Corp., 763 F.2d

866, 868, 872 (7th Cir. 1985). We also disagree with

Winforge’s position that the defendants’ Motion for

Attorneys Fees, also before the district court, constituted

an acknowledgment of the validity of the Agree-

ment. That Motion sought relief under the separate

Loan Agreement between the parties and did not

mention the Development Agreement.

Additionally, Winforge claims that the defendants

are precluded from challenging the validity of the

contract because the district court, in its Order on Sum-

32 No. 10-3178

mary Judgment, found that the parties entered into the

Agreement. Winforge raised the same argument before

the district court. The district court, in its Findings of

Fact and Conclusions of Law, responded that the defen-

dants were not precluded from raising their defense

to formation because the court’s previous “finding” in

the summary judgment order that the parties had entered

into the Agreement “was not based on any specific

factual or legal findings as to validity or enforceability,

which issues manifested fully at trial.” Winforge, 2010

WL 3326856, at *8 n.11 (citing Occidental Fire & Cas. Co. v.

Cont’l Bank N.A., 918 F.2d 1312, 1230 (7th Cir. 1990)).

We agree with the district court and conclude that the

defendants are not precluded from arguing that no

contract existed.

In sum, we find that the district court did not err in

concluding that the Agreement is not a valid contract

because it lacked mutuality of assent, and we find that

the defendants never waived their claim that the Agree-

ment is not a valid contract.

III. The District Court Did Not Err in Finding that

the Defendants Did Not Breach the Contract.

The district court also found that, even if the Agreement

were a valid contract, the defendants had not breached it.7

The district court found that Mod-U-Kraf had completed

7

For convenience, we refer to the Agreement and Preliminary

Scope of Work, together, as the “contract” in this section of

the opinion.

No. 10-3178 33

all of its obligations to produce building plans and

obtain approvals for those plans as defined by the clear

language of the contract and modified by a June 2004 oral

modification. Any failure to obtain the approvals on time,

the district court concluded, was due to Winforge’s—not

Mod-U-Kraf’s—failure to timely perform its obligations

under the contract. The district court also concluded that,

even though the defendants were obligated under the

contract to construct the modular units, their failure to

do so was not a breach because that failure was due to

Winforge’s deficient performance of Winforge’s duties

under the contract.

On appeal, Winforge challenges the district court’s

conclusion that the defendants did not breach the

contract and argues: (1) the district court incorrectly

interpreted the plain language of the contract to find

that Mod-U-Kraf’s obligation to prepare plans and

obtain approvals for those plans was limited to its respon-

sibility to provide modular units and did not extend to

the building as a whole; (2) the district court erred in

concluding that the parties had orally modified the con-

tract in June 2004 to assign a number of Mod-U-Kraf’s

responsibilities under the contract to Winforge; and (3) the

district court erred by excusing Mod-U-Kraf’s obligation

to construct the modular units. Underlying all three

arguments is Winforge’s main contention that, under the

plain language of the contract, Mod-U-Kraf and All-

American were required to prepare all drawings, designs,

and plans for the entire hotel building—not just for the

modular units—and obtain all necessary approval for

34 No. 10-3178

those plans, including all building permits, by Decem-

ber 31, 2004. Winforge maintains that the defendants’

failure to timely do so constituted breach of the contract,

as did their failure to construct any of the modular units.

Although we have already concluded that the Agree-

ment is not an enforceable contract, we nonetheless

have considered Winforge’s arguments on appeal and

find that the district court did not clearly err in finding

that, even if the Agreement were a valid contract, the

defendants had not breached it.

In Virginia, “ ‘[t]he elements of a breach of contract

action are (1) a legally enforceable obligation of a defen-

dant to a plaintiff; (2) the defendant’s violation or breach

of that obligation; and (3) injury or damage to the

plaintiff caused by the breach of obligation.’ ” Sunrise

Continuing Care, LLC v. Wright, 277 Va. 148, 154, 671

S.E.2d 132, 135 (2009) (quoting Filak v. George, 267 Va.

612, 619, 594 S.E.2d 610, 614 (2004)). A plaintiff bears the

burden of proving a breach by the defendant. Sunrise

Continuing Care, LLC, 277 Va. at 154, 671 S.E.2d at 135.

It is undisputed that Mod-U-Kraf was responsible

for providing the modular units under the contract and

that Mod-U-Kraf ultimately did not construct any

modular units. However, Mod-U-Kraf could not com-

mence construction of the modular units until the neces-

sary plans were prepared and then approved by the

appropriate entities. Therefore, as the district court

noted, the parties’ dispute over who breached the

contract centers on who was responsible for the failure

to obtain timely approval of the Project plans from the

No. 10-3178 35

State and the City of Pigeon Forge. That question, in

turn, depends on who was responsible for preparing the

plans and securing the approvals. Winforge argues that

the failure to obtain timely approval was the defendants’

fault because the contract assigned to the defendants

the responsibility of completing all plans related to the

hotel building and securing all franchiser, third-party,

state, and local approvals for those plans by December 31,

2004. The defendants argue, and the district court found,

that the failure to obtain timely approval was the fault

of Winforge. The district court found that, under the

contract, the defendants’ design and approval duties

were limited to the modular unit design and those

other duties specifically enumerated, and the defendants

successfully fulfilled those obligations. The district court

found that, under the terms of the contract, as orally

modified in June 2004, Winforge was responsible for a

number of other designs that had to be incorporated

into the Project plans before the plans could be approved.

The district court concluded that Winforge’s delay in

providing those designs caused the defendants’ delay

in obtaining State approval. Additionally, the district

court found that Winforge was responsible for obtaining

the final building permit from the City of Pigeon Forge

and that Winforge’s failure to timely apply for that

permit resulted in the permanent stagnation of the Project.

On appeal, Winforge first argues that the district court

incorrectly interpreted the plain language of the Agree-

ment and Scope of Work with respect to the parties’

responsibilities to complete the plans for the building

and obtain approval of those plans. Winforge contends

36 No. 10-3178

that the plain language of the Scope of Work makes

clear that Mod-U-Kraf was solely responsible for pro-

viding “all architectural drawings needed in order to

obtain approval involving the building itself from the

ground up” by December 31, 2004. Therefore, Winforge

contends, Mod-U-Kraf’s failure to obtain timely approval

constituted breach of the contract. Winforge argues that

the district court incorrectly interpreted Sections 1.2 and

1.3 of the Scope of Work to mean that Mod-U-Kraf’s

obligation to prepare “drawings” and obtain approval

for those drawings was “clearly limited to its responsi-

bility for providing modular units, not to the building

project as a whole.” According to Winforge, there is no

distinction between “modular units” and “the building

project as a whole” because the building consisted only

of modular units. Winforge contends that it was only

responsible for the design and approval of plans related

to the area outside of the building.

In the absence of ambiguity, a court interprets the

agreement by examining solely the language of the con-

tract. School Bd. of City of Newport News v. Commonwealth

of Virginia, 279 Va. 460, 467-68, 689 S.E.2d 731, 735

(2010). “ ‘The primary goal in the construction of written

contracts is to determine the intent of the contracting

parties, and intent is to be determined from the

language employed, surrounding circumstances, the

occasion, and apparent object of the parties.’ ” Flippo v.

CSC Assocs. III, LLC, 262 Va. 48, 64, 547 S.E.2d 216, 226

(Va. 2001) (quoting Christian v. Bullock, 215 Va. 98, 102,

205 S.E.2d 635, 638 (1974)).

No. 10-3178 37

We agree with the district court that the plain language

of Section 1.2 and 1.3 of the Preliminary Scope of Work

does not support Winforge’s argument that Mod-U-

Kraf was responsible for all the drawings and approvals

related to the entire building. Sections 1.2 and 1.3 of the

Preliminary Scope of Work read as follows:

1.2 Mod-U-Kraf shall manufacture modular units at

the Mod-U-Kraf manufacturing facilities in ac-

cordance with the approved Specifications and Draw-

ings. Drawings to meet local, state, 3rd party and

franchiser requirements. To include only materials

and on-site services specified as supplied by MUK.

1.3 MUK shall provide modular units and material

noted on plans for installation and completion of

a Wingate Inn. This will include all architectural

drawings, structural calculations for modular unit

construction, mechanical, electrical systems for

modulars, and sprinkler system.

These two provisions make clear that Mod-U-Kraf was

responsible for preparing all architectural drawings for

the modular units, securing local, state, third party, and

franchiser approval for those drawings, and pro-

viding the structural calculations, mechanical system, and

electrical system for the modular units. The provision

also states that Mod-U-Kraf was responsible for the

sprinkler system.8 Nowhere in these provisions is there

8

The district court found that Winforge subsequently trans-

ferred the responsibility for the sprinkler design from Mod-U-

(continued...)

38 No. 10-3178

any indication that Mod-U-Kraf was responsible for

preparing drawings for the entire building. Rather, all

references to Mod-U-Kraf’s responsibility to prepare

drawings or obtain approvals for those drawings are in

reference to Mod-U-Kraf’s responsibility to provide

modular units.

The district court properly applied the principle of

ejusdum generis to conclude that Sections 1.2 and 1.3 refer

specifically to Mod-U-Kraf’s duty to manufacture and

provide modular units for the Project. Under this rule,

“ ‘when general and specific words are grouped, the

general words are limited by the specific.’ ” Wood ex rel.

Wood v. Henry County Pub. Schs., 255 Va. 85, 94-95, 495

S.E.2d 255, 260 (1998) (citation omitted). In Section 1.2,

Mod-U-Kraf’s responsibility to prepare “[d]rawings to

meet local, state, 3rd party and franchiser requirements”

is clearly limited by the preceding sentence, which

states that Mod-U-Kraf is responsible for manufac-

turing modular units “in accordance with the approved

Specifications and Drawings.” Similarly, Section 1.3 is

limited by its first sentence, which states that Mod-U-Kraf

“shall provide modular units and material noted on

plans for installation and completion of a Wingate Inn.”

Section 1.3 then states, “This will include all architectural

drawings.” Mod-U-Kraf’s responsibility to complete “all

architectural drawings” is limited by the preceding sen-

8

(...continued)

Kraf to Winforge in June 2004 through oral modification of

the Agreement.

No. 10-3178 39

tence, which refers to Mod-U-Kraf’s responsibility to

produce modular units. In sum, the plain language of

Sections 1.2 and 1.3 of the Scope of Work indicates that

Mod-U-Kraf’s responsibilities to prepare drawings and

obtain approvals were limited to Mod-U-Kraf’s responsi-

bility to manufacture modular units. Sections 1.2 and 1.3

clearly do not assign Mod-U-Kraf responsibility for

designing plans and obtaining approvals for the entire

building, from the ground up, as Winforge claims.

Winforge further argues that the building consisted

“only of modular units.” Therefore, Winforge argues, Mod-

U-Kraf’s responsibility to provide “all architectural draw-

ings,” even if interpreted to mean all drawings for the

modular units, must refer to all drawings for the entire

building. We are not convinced by this argument. The

Scope of Work explicitly refers to building components,

to be completed on-site, that are distinct from the

modular units. Section 1.4 of the Scope of Work assigns

the task of “overseeing the completion of” a number

of those components to Winforge:

1.4 WINFORGE will be responsible for overseeing the

completion of the modular units tie-in and com-

ponents such as the following to complete the

Wingate Inn on-site:

• Plumbing connections between levels

• Plumbing connections to city sewer & water

• Electrical connections and equipment as noted on

plans

40 No. 10-3178

• Elevator

• Roof Facade (Completion of Parapet Wall)

• Finish decor at all common areas, drop ceiling,

HVAC System, Lights, Finish Floor, Drywall & Finish

as shown, Entry Doors, FF&E materials, etc.

• For additional material and task, reference to plans[.]

The plumbing connections between levels of the building,

electrical connections, elevator, roof facade, parapet

wall, and HVAC system are all components of the

building itself, to be completed on-site, that are distinct

from the modular units.

Winforge argues that Section 1.4 refers only to

Winforge’s responsibilities “to provide labor and

material after the design, approval and construction of

the modular units in connection with assembly of

modular units on site.” Winforge insists that the design

and approval of these components were exclusively the

responsibility of Mod-U-Kraf, while Winforge was only

tasked with construction-related activities. We disagree

with Winforge’s reading of this provision. Section 1.4

clearly assigns to Winforge the responsibility of com-

pleting these crucial building components, and nowhere

else in the Agreement or Scope of Work—certainly not

in Section 1.2, 1.3, or 1.4—is the design or approval of

these components separately identified as the responsi-

bility of Mod-U-Kraf.

Winforge also argues that the district court incorrectly

concluded that Winforge was responsible for obtaining

No. 10-3178 41

the necessary and crucial building permit from the City

of Pigeon Forge. According to Winforge, Mod-U-Kraf

was responsible for obtaining all building approvals,

including the permit from the City. However, Section 9

of the Agreement makes clear that Mod-U-Kraf was not

responsible for all building approvals. Section 9 pro-

vides that Winforge was responsible for other “licenses,

permits, approvals” for which Mod-U-Kraf would not

be responsible, “including the building permits”:

9. BUILDING PERMIT, FEES AND APPROVALS.

Except for those licenses, permits and fees related to

the Work which are the responsibility of MUK pursu-

ant to this Agreement, Winforge and the General

Contractor or the Project Manager shall secure and

pay for all other licenses, permits, approvals . . .

required for the development, construction, use or

occupancy of permanent structures or for permanent

changes in existing facilities, including the building

permits.

Based on this provision, we agree with the district court

that Winforge was responsible for obtaining the building

permit from the City of Pigeon Forge. Additionally, the

parties’ actions show that the parties understood that

responsibility to be Winforge’s. The district court found

that Winforge had prepared an incomplete application

for the building permit from the City of Pigeon Forge. It

was only after Winforge had delayed submitting the

application that Mod-U-Kraf, on its own initiative, hired

a general contractor, who completed and submitted the

application.

42 No. 10-3178

We conclude that the plain language of the contract

provides that Mod-U-Kraf’s responsibilities to complete

designs and obtain approval were limited to its responsi-

bilities to provide the modular units and certain other

specifically noted responsibilities, such as the sprinkler

design (which was later transferred to Winforge through

oral modification). Winforge was responsible for ob-

taining the building permit from the City. Moreover,

we note that undisputed facts cited by the district court

clearly show that the parties understood Mod-U-Kraf’s

design and approval responsibilities to be generally

limited to the modular units and that the parties under-

stood Winforge to be responsible for the design of a

number of building components distinct from the

modular units. Mod-U-Kraf was repeatedly delayed in

securing State approval of its plans because it was

waiting for Winforge to provide code-compliant designs

necessary for State approval, including designs for the

HVAC, plumbing, mechanical, and sprinkler systems.

Winforge ultimately completed those tasks in sum-

mer of 2005.

Winforge’s next argument is that the district court

erred in its finding that Mod-U-Kraf’s obligations to

complete certain designs had been transferred to

Winforge due to a June 2004 oral modification to the

Agreement. Winforge argues that because the Agreement

provided that all modifications had to be in writing, the

fact that there was no written modification establishes

that no modification ever occurred.

Modification of a contract may be established with

evidence of the parties’ course of dealing. Cardinal Dev.

No. 10-3178 43

Co. v. Stanley Constr. Co., 255 Va. 300, 305, 497 S.E.2d 847,

851 (1998). This is true even where the contract required

all modifications to be in writing. Reid, 259 Va. at 369-70,

527 S.E.2d at 145. We find that the district court did not

clearly err in concluding that the parties accomplished

an oral modification of the contract in June 2004

whereby Winforge assumed responsibility for a number

of duties that were originally assigned to Mod-U-Kraf

under the Agreement. The district court cited evidence

showing that in June 2004, Winforge communicated

verbally to Mod-U-Kraf that Winforge would take

over responsibility for providing the designs for the

sprinkler system, PTAC units, and other mechanical and

electrical components of the building, tasks that were

originally assigned to Mod-U-Kraf under the Agreement.

The court also found that before that time, Winforge

had instructed Mod-U-Kraf not to work on the sprinkler

system design. The district court also found that, in

exchange for Winforge’s assumption of the duty to

provide the designs for these components, Mod-U-Kraf

would receive less money from Winforge. The court

found that Mod-U-Kraf agreed to the changes and did not

pursue designs of these components after that time. The

district court concluded that these events constituted

an oral modification of the Agreement, even though

the Agreement stated that modifications were to be

made in a written change order. The court also found

that, consistent with the modification, Winforge later at-

tempted to obtain designs and State approval for those

components. In some cases, Winforge succeeded in

completing those tasks. Based on these facts, the dis-

44 No. 10-3178

trict court concluded that the parties had modified

the Scope of Work through the oral modification in

June 2004. We find that the evidence sufficiently sup-

ports the conclusion that the parties had agreed to an

oral modification of the contract.

Finally, Winforge argues that the district court erred

when it excused Mod-U-Kraf’s obligation to construct the

modular sections. Winforge claims that Mod-U-Kraf’s

failure to construct the modular units constituted

breach because the Agreement unambiguously required

Mod-U-Kraf to manufacture and deliver the modular

units by December 31, 2004. Winforge argues that Mod-U-

Kraf “is not entitled to relief from its obligation to con-

struct the modular units based upon its own prior breach.”

We agree that the Agreement assigned to Mod-U-Kraf

the task of manufacturing and delivering the modular

units.9 However, we find that the district court properly

9

Winforge repeatedly argues that the Agreement stated that

Mod-U-Kraf was responsible for completing the design, ap-

proval, and construction of the modular units by December 31,

2004, citing to the Schedule of Work attached to the Agree-

ment as Exhibit D. We have reviewed the text of the Agree-

ment and Exhibit D, and the December 31, 2004 deadline

is nowhere to be found. Exhibit D only states the following:

“Modular rough set operations shall commence no later

than ______, 2004 and shall be substantially complete by ______,

2004. Siding shall be substantially complete by ______, 2004.”

Moreover, Winforge, in its brief, incorrectly claims that the

district court determined that the express language of the

(continued...)

No. 10-3178 45

excused Mod-U-Kraf’s performance of this obligation

based on a number of critical factors. First, the Project

plans were rejected by the City of Pigeon Forge

in August 2005, which meant that the Project was at a

permanent standstill. At that time, it was reasonable

for Mod-U-Kraf to decide that it would be futile to con-

struct the modular units knowing that they could never

be used for the Project. Second, we think the district

court did not err in its determination that the failure

to secure the building permit from the City was due

to Winforge’s failures, not Mod-U-Kraf’s or All Amer-

ican’s failures. Winforge never hired a general contractor

and never paid Mod-U-Kraf, despite being required to

do so under the Agreement. Additionally, the evidence

shows that Winforge failed to timely complete the

designs for a number of building components that were

its responsibility under the Agreement, as orally modified

in June 2004, including the elevator, plumbing, HVAC,

electrical, and mechanical systems. These designs were

crucial to the approval process because they were

required to be incorporated into Mod-U-Kraf’s plans

before those plans could receive State approval. Deviation

reports issued by the State showed that the deviations

related largely to those components for which Winforge

was responsible. Winforge’s failure to timely provide

9

(...continued)

Agreement obligated Mod-U-Kraf to construct and deliver the

modular units by December 31, 2004. The district court never

stated that December 31, 2004 was Mod-U-Kraf’s deadline for

constructing and delivering the units.

46 No. 10-3178

those designs resulted in delay in the approval process.

Finally, the district court found that Winforge failed

to timely submit a completed building permit applica-

tion to the City, even though securing that permit was

Winforge’s responsibility under Section 9 of the Agree-

ment. The evidence indicates that, if Winforge had sub-

mitted the application on time, the City would have

approved it. Based on our interpretation of the contract

and our consideration of the district court’s findings

of fact, we find that the district court did not err in con-

cluding that the delays in getting approval by the State

were the fault of Winforge and not Mod-U-Kraf.

Therefore, we find that, based on its findings of fact,

the district court reasonably concluded that the Mod-U-

Kraf’s failure to construct any modular units did not

constitute a breach of the contract because its failure to

do so was due to Winforge’s deficient performance of

its obligations under the contract, not Mod-U-Kraf’s or

All American’s deficiencies.

CONCLUSION

For the foregoing reasons, we A FFIRM the district court’s

judgment.

A FFIRMED

7-30-12