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(A version of this article appears in the California
Construction Law Reporter, published by the West Group.)
By James E. Acret
It
was a familiar story. A city with grandiose plans for a
combination city hall and performing arts center put the
project out for bid before working drawings had been fully
finished and co-ordinated. The project was under construction
according to a scheme under which major trades contracted
directly with the city, their activities coordinated by
a construction manager. The city issued 248 sketches that
changed electrical work. Every part of the electrical system
was changed at least once. In one room alone there were
40 changes. Electrical contractor Amelco was flummoxed.
Although 32 negotiated change orders increased the contract
price by more than $1 million, Amelco still lost more than
$2 million but could not produce evidence to tie the overruns
in labor, equipment and materials to specific changes.
The
city had breached its contract by failing to provide proper
drawings and by requiring excessive changes. How was Amelco
to prove its damages? Damages for breach of contract must
be such as were within the contemplation of the parties
at the time when the contract was formed or at least foreseeable
at that time. A claimant must show specific damages were
caused by a particular breach. But a just claim should not
be defeated merely because it is impossible to prove the
exact amount of damages.
Fanciful
computations of costs to cover the lack of specific data
could invite a counterattack based on the False Claims Act.
Amelco needed a legal theory that would fill the gap. Three
theories were available: total cost, rescission and abandonment.
Under
total cost theory, a contractor unable to prove exact
damages may be paid the total cost of the work.
Under
rescission theory, a contractor can respond to an
unexcused material breach of contract by canceling the contract
and recovering the reasonable value of its work.
Under
abandonment theory, a contractor can show that parties
abandoned the contract and recover the reasonable value
of its work.
Amelco
proceeded to litigate abandonment and total cost at the
same time. A jury found that the city both had abandoned
and breached the contract, and awarded $2,134,586 on the
abandonment count and an identical $2,134,586 on the breach
of contract count. The California Supreme Court reversed,
throwing out the abandonment claim and sending the total
cost claim back to the trial court for retrial on the issue
of damages. Amelco Electric v. City of Thousand Oaks,
___ Cal.4th ___, 2002 DJDAR 1285 (Cal. 2002).
Abandonment
The
opinion teaches that abandonment jurisprudence does not
apply to California public contracts. Application would
undermine the objectives of competitive bidding statutes.
It would open the door for a contractor to connive with
a public official to submit a low bid with a secret understanding
to abandon the contract and thus give the contractor a demand
upon the public fisc unlimited by the contractor's low bid.
This
is a farfetched conspiracy theory. A conniving official
does not need to resort to abandonment to enrich a contractor.
Abandonment is complicated! It requires a deficient set
of plans and lots of changes! It requires a lawsuit! The
most effective way for a corrupt official to funnel money
to a contractor would be by issuing change orders, not by
conniving at abandonment.
Total Cost
The
court approved employment of total cost jurisprudence on
claims against public agencies but laid down some rules
for proving damages that will be difficult for Amelco or
any other contractor to fulfill. Amelco must assign costs
to specific breaches of contract and prove that those costs
were caused by the city and not partly by Amelco or another
trade contractor.
The
Amelco decision will make bidding California public
work less attractive. The risk is increased that an agency
might supply a deficient set of plans, breach the contract
and get away with it because the contractor cannot produce
sufficiently clear proof of damages.
Rescission and Stopping the Work
A
contractor might consider rescission instead of abandonment,
but the Supreme Court's rationale would apply equally to
both. Odds are if a public contract cannot be abandoned,
it also cannot be rescinded.
The
dissenting opinion in Amelco suggests another legal
tactic: Stopping the work. But for most projects, that option
is not available because most public contracts include a
provision that in the event of a dispute, the contractor
will not stop the work. Contractors will be advised to recognize
every potential claim from its inception, forget about depending
on the agency to issue reasonable change orders and assign
the forensic personnel necessary to track costs.
Private Work
The
Amelco decision impliedly accepts the validity of
abandonment jurisprudence as applied to private projects.
It is also significant that the Supreme Court accepts the
total cost theory while at the same time making a total
cost claim a lot tougher to prove.
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