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Contractor Prevails on $36 Million in Claims Against L.A., Allowed to Seek More Damages from Jury
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August 16, 2010
By Peter K. Zweighaft
The City of Los Angeles awarded Dillingham-Ray Wilson a contract to expand the Hyperion Wastewater Treatment Plant. During the project, the parties used two methods to price change orders. First, the contractor would submit an estimate of the cost of the changed work, and the parties would attempt to negotiate a lump sum price. Second, and only on “rare occasions,” Los Angeles would direct the contractor to perform change work on a time and material basis. The contract required detailed documentation of actual costs for change work proceeding under a T&M change order.
Ultimately, Los Angeles issued more than 300 change orders containing more than 1,000 changes to the plans and specifications. On rare occasions, Los Angeles ordered the contractor to perform changes on a time and materials basis. Usually, Los Angeles requested an estimate of the cost of the work, told the contractor to start work and agreed that the parties would negotiate a lump sum price later. The parties were able to agree on only some change orders.
When the project was completed, the contractor requested an equitable adjustment for unpaid change order work and for costs resulting from city interference and delays. Los Angeles assessed liquidated damages and refused to release the retention.
When the parties could not resolve the dispute, the contractor sued for breach of contract, and Los Angeles cross-complained for breach of contract and violation of the False Claims Act (Government Code §§12650, et seq.).
In pre-trial motions, the trial court excluded about $25 million of the contractor’s claims on grounds that the contractor had not documented its damages as required by the contract and that the contractor could not use engineer’s estimates or the total cost method to prove its damages.
The matter proceeded to trial on the contractor’s remaining claims against Los Angeles. The jury found that Los Angeles had breached the contract, and the contractor was awarded more than $36 million for delays, unpaid retention, prompt payment penalties, interest and attorney fees. The contractor appealed, raising three issues.
Issue No. 1: Whether ambiguities in contract provisions governing methods for calculating the cost of changed work resulted in an issue of fact to be resolved by a jury
Los Angeles argued that the contract required the contractor to proceed on a T&M basis, documenting actual costs, any time the parties failed to agree on a lump sum price for a change order. The trial court agreed and precluded the contractor from presenting any evidence that it was entitled to recover damages proved by any method other than one set out in the contract. The contractor was forced to rely on its documented actual costs every time the parties did not agree on a lump sum.
The contractor argued that the contract was ambiguous and that the cost of changed work could be calculated in multiple ways under it. The contractor argued that documentation by actual costs could be required only when the City directed work to proceed on a T&M basis. The contractor argued that the ambiguity was an issue for the jury to resolve.
The Court of Appeal agreed with the contractor, concluding that the contract was reasonably susceptible to more than one meaning and that parol evidence was admissible to aid in interpretation of the contract. The Court of Appeal held that both the parties’ course of dealing and custom and practice in the public works industry could be considered by the jury in interpreting the contract.
The Court of Appeal noted there was evidence that during performance Los Angeles did not reject contractor claims for lack of actual cost documentation because resolution of changes was dependent on engineering estimates. Los Angeles simply adopted its own engineering estimates as more accurate than the contractor’s.
The Court of Appeal also acknowledged evidence from the contractor that on large public works projects, T&M pricing is used only for emergency work and that pricing for change order work typically is negotiated on a lump sum basis.
Issue No. 2: Whether the contractor could use engineering estimates to calculate the cost of changed work
The contractor sought to use engineering estimates to calculate its damages when the contractor and the City could not agree on the cost of a lump sum change order. The trial court rejected this approach, forcing the contractor to rely on documentation of actual costs calculated on a time and material basis. On appeal, the contractor argued that it should be permitted to prove its damages with the best evidence available, even if that evidence consisted of engineering estimates.
The Court of Appeal linked this issue with the first issue and ruled that the jury’s interpretation of the contract would determine this issue. If the jury finds that the contract did not require the contractor to document its actual costs and if engineering estimates are the best evidence of damages available, then the contractor may use engineering estimates to prove damages.
On the other hand, if the jury finds that the contract required the contractor to document its actual costs, then the issue becomes whether the contractor’s failure to do so was a covenant (legally enforceable promise) or an unexcused condition. If the contractor’s obligation to document its actual costs was a covenant (or an excused condition), then the contractor could litigate its damages using engineering estimates, assuming they were the best evidence available. Only if the contractor’s obligation to document its actual costs was an unexcused condition will it have to prove damages by documenting its actual costs.
Los Angeles argued that the Public Contract Code superseded common law rules relating to proof of contract damages and precluded proof of damages in any way not provided in the contract. Public Contract Code §7105 (d) (2) provides:
| Contracts of public agencies, excluding the state, required to be let or awarded on the basis of competitive bids pursuant to any statute may be terminated, amended, or modified only if the termination, amendment, or modification is so provided in the contract or is authorized under provision of law other than this subdivision. The compensation payable, if any, for amendments and modifications shall be determined as provided in the contract….
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The Court of Appeal rejected Los Angeles’ argument and harmonized Public Contract Code §7105 (d) (2) with common law principles, holding that “Section 7105 impacts the measure of damages for public works contracts, but it does not impact the permissible method of proof.”
Issue No. 3: Whether the contractor is entitled to use the modified total cost method to prove the amount of damages
After defining the total cost and modified total cost methods of calculating damages, the Court of Appeal cited to State of California ex. rel. Department of Transportation v. Guy F. Atkinson Co., 187 Cal.App.3d 25 (1986) for the proposition that “the common law permits a public contractor to pursue either a total cost theory or modified total cost theory.” Although the California Supreme Court did not expressly rule on this issue in Amelco Electric v. City of Thousand Oaks, 27 Cal.4th 228 (2002), the Court of Appeal noted that Amelco did not disapprove of the Court of Appeal’s decision in Guy F. Atkinson. The Court of Appeal held that the contractor could use modified total cost methodology to prove the amount of its damages if the contract does require proof of actual costs.
The Court of Appeal also rejected Los Angeles’ cross-appeal disputing award of attorney fees to the contractor under the False Claims Act. The contractor had successfully defended against the False Claims Act accusations in the trial court.
The Court of Appeal affirmed the awards in favor of the contractor in all regards except it reduced the post-judgment award of interest from the prompt payment penalty rate to the statutory rate. It remanded the case for trial on all of the contractor’s excluded claims. Dillingham-Ray Wilson v. City of Los Angeles, 182 Cal.App.4th 1396, 106 Cal.Rptr. 691 (2010). The California Supreme Court denied Los Angeles’ petition for review.
The reasoning behind the Court of Appeal’s decision is best summed up in the very first sentence of the decision: “The City of Los Angeles (City) obtained millions of dollars worth of construction work that it does not want to pay for.”
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