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(A
revised version of this article will appear in The Construction
Lawyer, Volume 23, No. 2, Spring 2003, published by
the American Bar Association's Forum on the Construction
Industry.)
By
John W. Ralls
Thelen Reid Brown Raysman & Steiner LLP
A
contractor agreed to perform dredging work for a sanitation
district. The project involved dredging a lake and placing
the dredged material on three islands in the lake. The dredging
contractor's work was to commence after another contractor
had constructed seawalls around the three islands.
Shortly
before the dredging work was to begin, the contractor notified
the owner's engineer that there was a problem with the plan
for placing dredged material on the islands. The contractor
explained that the islands were rounded on top and that
material placed on the islands would run off into the lake.
The contractor's project manager testified that either the
islands had to be "bowled out in the middle" and/or
silt fences had to be installed. There was evidence that
the owner's engineer had told the contractor that the islands
would be bowled out before the dredging work began. But,
this was not done.
The
contractor sent a letter to the owner's engineer stating
that the contractor was not prepared to begin work without
a change order providing additional compensation for preparing
the islands for placement of dredged materials. The letter
went on:
"[I]f
the [owner] is unwilling to issue the Change Order, then
there appears to be only two other alternatives. First,
[the owner] could rebid the dredging portion of the contract,
and include the areas left unaddressed such as the island
preparation…. The second alternative is less attractive
in that it requires all parties to prepare for litigation
and rely upon the judicial system for determination…."
The
owner's engineer responded with a letter stating that the
owner did not have an obligation to prepare the islands
to receive dredging materials.
After
this exchange of letters, the project went into a "sort
of… never-land" in which the dredging contractor
did not commence work and the engineer and the owner did
not demand that work be commenced. There was some testimony
that the sanitation district was facing pressure from residents
to find an alternative location to place the dredged material.
More
than two years later, the contractor brought suit to recover
lost profits and the expenses it incurred preparing to begin
work on the project.
After
a bench trial, the trial court determined that the contractor
had repudiated the agreement by sending the letter demanding
a change order. The court determined that the repudiation
precluded any claims for recovery by the contractor, both
legal (breach of contract) and equitable (detrimental reliance).
The
contractor appealed, and the Nebraska Supreme Court affirmed.
Anderson Excavating and Wrecking Co. v. Sanitary Improvement
District No. 177, 265 Neb. 61, 654 N.W.2d 376 (2002).
The
contractor contended that its suit was in equity because
it sought to recover damages for "detrimental reliance."
Relying on Restatement (Second) of Contracts §349,
the Nebraska Supreme Court found that the contractor "was
seeking reliance damages for breach of contract which is
an action at law."
The
court said the key issue was whether the contractor's letter
amounted to a repudiation. Under Nebraska law and the Restatement
(Second) of Contracts §253 (2), one party's repudiation
of a duty to render performance under a contract discharges
the other party's remaining duties to render performance.
A repudiation is: (1) a statement by the obligor
to the obligee indicating that he or she will commit a breach
that would of itself give the obligee a claim for damages
for total breach; or (2) a voluntary affirmative
act which renders the obligor either unable or apparently
unable to perform without such a breach. See, Restatement
(Second) of Contracts §250.
The
court found that a reasonable reading of the contractor's
letter "shows that [the contractor] would not perform
the contract as originally agreed. Thus, it was not clearly
erroneous for the trial court to have found that the letter
was a repudiation of the contract."
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2003 Thelen Reid Brown Raysman & Steiner LLP
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