|
 | |
|
Contractor Denied Lost Future Profits Despite Wrongful Termination by Project Owner
|
| |
|
September 12, 2005
|
| |
|
|
|
Howrey LLP
The owner, Pomona Unified School District, hired a contractor to make building improvements to its elementary school. After delays in completion of the work, the owner terminated the contractor, and its performance bond surety hired a completion contractor to finish the project of its performance on the contract. The contractor sued the owner on several grounds, including breach of contract on the basis of alleged wrongful termination of its performance of the contract. The contractor sought to recover its lost future profits from unidentified projects that it could not bid because the surety had reduced its bonding capacity as a result of the termination.
The evidence at trial showed that before termination, the contractor had a bonding limit of $10 million per project, with an aggregate limit of $30 million for all work in progress. After termination, the contractor's bonding capacity was reduced to a $5 million per project limit, with an aggregate limit of $15 million for all work in progress. The evidence showed that eventually the contractor ceased bidding altogether and closed down. A financial analyst testified to the contractor's prior profitability and damages.
The jury awarded the contractor $3,148,197 in profits that the contractor did not realize "due to the loss or reduction of its bonding capacity." The Court of Appeal affirmed the award as to the recovery of lost profits, holding that the lost profits were part of the contractor's general damages.
The California Supreme Court granted the owner's petition for review. The court addressed whether lost profits on future unidentified contracts are recoverable either as general or special damages "when as a consequence of the property owner's breach, the contractor's surety reduces the contractor's bonding capacity." The court concluded that lost future profits were not recoverable under the facts of this case. Lewis Jorge Construction Management, Inc. v. Pomona Unified School District, 34 Cal.4th 960 (2004).
The court explained that general or direct damages are those "that flow directly and necessarily from a breach of contract, or that are a natural result of a breach." The court concluded that the lost future profits on unidentified construction projects were not directly or necessarily a result of the owner's wrongful termination. Rather, the lost profits resulted from the surety's decision to cease bonding the contractor.
The court also reasoned that when the contractor bid the project, "the benefit of its contractual bargain for profits was capped by whatever net profit it had assumed in setting its bid price." The parties' original bargain did not include potential profits on future construction projects, and lost future profits thus were not recoverable as a general damage.
The court explained that special or consequential damages are those losses that do not arise directly and inevitably from the breach but instead are "special" or "particular" to the breach. "Special damages are recoverable if the special or particular circumstances from which they arise were actually communicated to or known by the breaching party (a subjective test) or were matters of which the breaching party should have been aware at the time of contracting (an objective test)."
The evidence did not establish that the owner could have reasonably contemplated that its breach would lead the surety to reduce the contractor's bonding capacity and, in turn, cause the contractor to lose profits on future contracts. At the time of contracting, the owner did not know the contractor's financial condition or what criteria the surety used to evaluate the contractor's bonding limits. According to the court, absent such specialized knowledge, the owner could not have reasonably foreseen that the contractor would have suffered such a loss. Accordingly, lost future profits were not recoverable as a special damage.
If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2005 Howrey LLP
|
| | |
