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By John W. Ralls
The
City of Thousand Oaks, California, set out to build a Civic
Arts Plaza consisting of an office building, a council chamber
and an auditorium. The city retained a construction manager
and solicited bids for multiple prime construction contracts,
including a contract for electrical work. The electrical
work was awarded to Amelco Electric for a lump sum price
of $6,158,378.
Amelco
claimed that its work was delayed and disrupted as a result
of hundreds of design changes and that the sheer number
of changes made it impossible to keep track of the impact
of any one change on the project. During the job, Amelco
requested 221 change orders. The city and Amelco agreed
to 32 change orders, which increased the contract price
by $1,009,728.
After
completing its work, Amelco submitted a total cost claim
and then sued the city for abandonment and breach of contract.
After a five-week trial, the jury found that the city had
breached and abandoned the contract and awarded Amelco $2,134,586,
more than 95 percent of what Amelco sought. The California
Court of Appeal affirmed.
The
California Supreme Court granted review and considered two
issues: (1) Whether the theory of abandonment of
contract applies against a public entity and (2)
Whether Amelco was entitled to have the jury instructed
on the total cost method of calculating damages. Amelco
Elec. v. City of Thousand Oaks, 2002 Cal. LEXIS 589,
2002 Cal. Daily Op. Service 1056 (Cal. Feb. 4, 2002)
Abandonment
In
prior decisions, California Courts of Appeal "have
concluded that private parties may impliedly abandon a [construction]
contract when they fail to follow change order procedures
and when the final product differs substantially from the
original." When abandonment is found, the contract
is set aside, and the contractor is entitled to recover
in quantum meruit. The court held that the abandonment
theory cannot be asserted against a public entity because
the theory is "fundamentally inconsistent with the
purpose of the competitive bidding statutes."
Amelco
asserted that competitive bidding laws were irrelevant.
The court disagreed and invoked the void contract rule,
"[I]f we were to agree the City's numerous changes
could result in the public contract being set aside in its
entirety, Amelco would find itself in no different situation,
and should receive no different treatment, than a contractor
who has performed under a void contract."
The
court also cited public policy concerns in support of its
holding. Competitive bidding laws are enacted for the benefit
of taxpayers while "allowing a contractor to claim
abandonment of the public works contract following completion
of the work, and recover for the reasonable value of the
work…, would appear to unduly punish the tax-paying
public." The court also was concerned that "allowing
contractors to recover in quantum meruit for the actual
as opposed to the bid cost of a project would encourage
contractors to bid unrealistically low with the hope of
prevailing on an abandonment claim based on the numerous
changes inherent in any large public works project."
Total Cost
To
use the total cost method of calculating damages, the city
contended that Amelco should have been required to establish:
(1) the impracticality of proving actual losses directly;
(2) the plaintiff's bid was reasonable; (3)
its actual costs were reasonable; and (4) it was
not responsible for the added costs. The city did not request
a jury instruction incorporating these four elements and,
therefore, was not in a position to claim error in the wording
of the damages instructions. Rather, the city contended
that the jury should not have been instructed on the total
cost measure at all.
The
court agreed because "Amelco failed to adduce evidence
to satisfy at least the fourth element of the 4-part test,
i.e., that it was not responsible for the added expenses."
After noting that the total cost approach is disfavored,
the court found Amelco's proof lacking in several respects:
Amelco
never attempted to demonstrate how a particular alleged
breach caused certain damages. Rather, Amelco conceded
no effort was made during the project to distinguish between
those inefficiencies that were Amelco's and those believed
to be the responsibility of the City (and presumably other
prime contractors and subcontractors)…. Nor did Amelco
demonstrate when any particular breach occurred. Rather,
it sought to recover all of its costs over the life of
the contract if the jury found at any undetermined point
the contract had been breached.
The
court also criticized the damages instruction given to the
jury, which was: "If you find that the City breached
or abandoned the contract, then Amelco is entitled to recover
the reasonable value of the work performed by it less the
payments made by the City, and less any cost incurred by
Amelco which are not fairly attributable to the City."
The court concluded that under the instruction, "The
jury was lead to believe if it found any basis for breach
of contract, regardless of when it occurred in the performance
of the contract, Amelco was entitled to receive damages
for the reasonable value of work performed by it during
the life of the contract."
The
court concluded, "Under these circumstances, the jury
should not have been instructed to calculate Amelco's loss
from any breach of contract under a total cost measure of
damages." The court remanded for a re-trial of damages
for breach of contract.
Dissent – Cardinal Change
Two
dissenting justices took issue with the court's abandonment
finding. The dissent argued that once a public contract
is awarded, the agreement should be construed by the same
rules that apply to private contracts. The void contract
rule should apply only when the contractual relationship
was void at inception. As for the majority's public policy
concerns, the dissent said that "no facts in this case
suggest Amelco somehow evaded the applicable competitive
bidding laws."
The
dissent also asserted that the majority's opinion was contrary
to the cardinal change doctrine, which is widely applied
to federal government construction contracts. "[T]he
rule usually applied in this country leans in a direction
contrary to the majority's rule here, for building contractors
that enter into construction contracts with the federal
government are afforded a remedy under the analogous cardinal
change doctrine when the government 'effects an alteration
in the work so drastic that it effectively requires the
contractor to perform duties materially different from those
originally bargained for.' " Quoting Allied Materials
& Equipment Co. v. United States, 569 F.2d 562,
563-564 (Ct. Cl. 1978).
Responding
to this point, the majority found that the abandonment doctrine
and the cardinal change doctrine were "fundamentally
different." According to the majority, under the abandonment
doctrine, "Once the parties cease to follow the contract's
change order process, and the final project is materially
different from the project contracted for, the contract
is deemed inapplicable or abandoned and is set aside. The
plaintiff may then recover the reasonable value for all
of its work." In contrast, under the cardinal change
doctrine, the cardinal change constitutes a material breach
of contract after which the contractor may recover breach
of contract damages for additional work. "There is
no hint in any Federal Circuit or Court of Claims case to
which we have been directed that the terms of the federal
contract are held inapplicable or set aside for the period
prior to the breach, or that the government's payment for
other work not effected by the cardinal change are suddenly
compensated on a quantum meruit basis."
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