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AMICUS CURIAE BRIEF OF THE ASSOCIATED GENERAL
CONTRACTORS OF CALIFORNIA
IN SUPPORT OF RESPONDENT AMELCO ELECTRIC
TABLE OF CONTENTS
I. INTRODUCTION
II. THE COURT SHOULD AFFIRM
THE COURT OF APPEAL'S HOLDING THAT THE DOCTRINE OF ABANDONMENT APPLIES
TO PUBLIC CONSTRUCTION PROJECTS.
A. The Doctrine of Abandonment
Is Well-Established Under California Law for Private Construction Projects.
B. The Court Should Decline City's
Invitation to Eliminate the Doctrine of Abandonment in California.
C. Applying the Doctrine of Abandonment
to Public Construction Projects Is Consistent with Prior Law and Public
Policy.
III. CONCLUSION
I. INTRODUCTION
AGC urges the Court to affirm the Second Appellate
District's holding in this case that the doctrine of abandonment applies
to construction contracts with public owners. While this is a question
of first impression in California, the State's existing law inevitably
leads to the conclusion that the decision below was correct. California
law says:
(1) The doctrine of abandonment applies to private construction
contracts.
(2) Breaches of public contracts are subject to the same
rules and remedies as private contracts.
Putting these two well-established rules of
California law together, the doctrine of abandonment should apply to public
contracts in this State.
The Court of Appeal's decision below is not
only consistent with existing law, it is good public policy. First and
foremost, the abandonment doctrine leads to a fair and just result. By
making excessive changes after contract award to a project being built
to its specifications, an owner may cause several things to happen: it
may cause the contractor to be damaged, it may make it impossible for
the contractor to make a claim for its damages in accordance with the
change order provision in the parties' contract, and it may make it impossible
to prove that specific damages were caused by any specific change. The
abandonment doctrine allows the contractor to recover all of its damages
from the owner when those changes cause all of these things to happen.
Further, application of the doctrine to public construction contracts
is good public policy because it will provide an incentive for public
owners to plan and manage their projects responsibly, which will in turn
lead to projects that cost taxpayers less money and better serve their
intended public purposes.
The Court should affirm the Court of Appeal's
application of abandonment to public contracts as good law and good policy.
II. THE COURT SHOULD
AFFIRM THE COURT OF APPEAL'S HOLDING THAT THE DOCTRINE OF ABANDONMENT
APPLIES TO PUBLIC CONSTRUCTION PROJECTS
A. The Doctrine of Abandonment
Is Well-Established Under California Law for Private Construction Projects.
California courts have expressly recognized
the doctrine of abandonment for private construction contracts for almost
50 years. The trilogy of California cases on abandonment of construction
contracts -- Opdyke & Butler v. Silver (1952) 111 Cal. App. 2d
912; Daugherty Co. v. Kimberly-Clark Co. (1971) 14 Cal. App. 3d
151; and C. Norman Peterson Co. v. Container Corp. of America (1985)
172 Cal. App. 3d 628 -- have never been questioned by this Court or by
any other California court.
1. The only elements of abandonment under California
law are (1) the owner imposes
an excessive number of changes and (2) those changes cause the scope
of work
under the original contract to be altered
In Peterson, the First Appellate District
summarized the requirements for abandonment of construction contracts
in California:
[W]hen an owner imposes upon the contractor an excessive
number of changes such that it can fairly be said that the scope
of the work under the original contract has been altered, an abandonment
of contract properly may be found.
Peterson, supra, 172 Cal. App. 3d at
640 (citing Daugherty, supra, 14 Cal. App. 3d at 156, and
Opdyke, supra, 111 Cal. App. 2d at 916-919). Thus, Peterson,
Opdyke, and Daugherty require that a court find only two things
in order to find abandonment: (1) that the number of changes on a project
were excessive and (2) that, as a result of these changes, the scope of
the work under the original contract has been altered.
The courts in Peterson, Opdyke, and
Daugherty all looked at a number of factors to determine whether
the two requirements for abandonment are met. As to the first requirement
-- an excessive number of changes -- the size, complexity, and expected
duration of a project are all relevant considerations. As a result, the
California abandonment cases looked at factors such as (1) the number
of changes made; (2) the number of changes anticipated when the project
started; (3) the size of those changes; and (4) the length of time in
which the changes were made. See, Peterson, supra, 172 Cal. App.
3d at 641-642; Opdyke, supra, 111 Cal. App. 2d at 916-918; Daugherty,
supra, 14 Cal. App. 3d at 155-156; see also, Dodge v. Harbor Boat
Building Co. (1950) 99 Cal. App. 2d 782, 790 (finding that subcontractor
was entitled to reasonable value of its work where the prime contractor
issued over 100 changes). As to the second requirement -- that the changes
caused the scope of the work to be altered -- relevant considerations
include the amount of extra work the changes caused the contractor to
perform, the extent to which the contractor's work was redesigned, and
the magnitude of the extra costs the changes caused the contractor to
incur. Peterson, supra, 172 Cal. App. 3d at 641-642; Opdyke,
supra, 111 Cal. App. 2d at 916-918; Daugherty, supra, 14 Cal.
App. 3d at 155-156. The California abandonment cases have treated these
factors as evidence of whether the two requirements for abandonment are
met; none of them established any of these factors as additional separate
requirements.
2. City tries to expand the elements for abandonment
beyond what California law requires.
In attempting to overturn the decision of the
lower court, City attempts to impose a variety of new requirements for
abandonment. None of these supposed new elements of abandonment are consistent
with previous California cases, with decisions in other jurisdictions,
or with the sound policy reasons for the doctrine of abandonment.
a. A party does not need to prove actual, mutual
intent as a separate element of its abandonment claim.
Although the California cases indicate that
mutual intent of the parties to abandon the contract is also an element
of abandonment, this is not, in effect, a separate requirement, because
it will be implied if the two basic requirements discussed above are et.
Peterson, supra, 172 Cal. App. 3d at 643; Opdyke, supra,
111 Cal. App. 2d at 916; Daugherty, supra, 14 Cal. App. 3d at 156.
In other words, if an owner issues an excessive number of changes which
alter the scope of the work, that alone indicates that the owner intends
to abandon the contract. Likewise, if the contractor agrees to go beyond
the original scope of work by performing excessive changes directed by
the owner, that implies that the contractor intends to abandon the contract.
1/
Opdyke makes this apparent. In that
case, the contractor did "not rely upon any evidence of express abandonment";
rather, he argued "that abandonment may be implied from the acts of the
parties." 111 Cal. App. 2d at 916. The Third Appellate District affirmed
the trial court's judgment for the contractor based on abandonment even
though the contractor offered no testimony "that the parties ever expressly
agreed to abandon the written contract." Instead, he "simply assumed,
according to his testimony, that such abandonment and adoption had been
worked by reason of the constant changes, and the constant interference
with the work, by [the owner]." Id. at 914. The primary evidence
the court looked to for support of the trial court's abandonment finding
was testimony that the owner directed numerous changes and the effect
those changes had on the project specifications, both of which "evinced
a high degree of uncertainty on the part of [the owner] as to what he
wanted done." Id. at 916-918. Proof that the parties ignored change
order procedures was simply "more evidence" of acts by the parties from
which a mutual intent to abandon could be inferred. Id. at 918
("[t]here was other evidence that should be mentioned, tending
to the same conclusion," including the parties' ignoring of the contract's
change order provisions) (emphasis added).
Likewise, in Daugherty, the Third Appellate
District first discussed the evidence of the amount of the contractor's
added costs, the number of changes, the extent of the design changes,
the sizes of the individual changes, and the contractor's expectations
regarding changes at the time of contacting. 14 Cal. App. 3d at 155-156.
The court reversed the trial court's summary judgment for the defendant-owner
on the contractor's abandonment claim based on its conclusion that, "because
of the tremendous number of changes, there was an issue as to whether
the contract had been abandoned by the parties and they proceeded apart
from the contract." Id. at 156. In other words, the number of changes
alone was sufficient to create a triable issue. Citing Opdyke (supra,
111 Cal. App. 2d at 916), the court reinforced this conclusion with the
statement that "[a]abandonment of the contract can occur in instances
where the scope of the work when undertaken greatly exceeds that called
for under the contract." Id. These conclusions were not qualified.
The court did not say, for example, there was a triable issue because
there were both excessive changes and the parties ignored the change order
procedures in their contract. While the court noted that there was evidence
that the parties ignored change order procedures, the court says nothing
to indicate that this was necessary to its decision.
Contrary to City's assertions (Opening Brief
at p. 16), the California rule as to implied intent to abandon is consistent
with the law of most other jurisdictions adopting the abandonment doctrine
or the very similar "cardinal change" doctrine. Federal courts, applying
the cardinal change doctrine, do not require any proof of intent. 2/
And of the 23 states other than California that recognize
either doctrine,3/ only Michigan requires
proof of actual intent to abandon. R. M. Taylor, Inc. v. General Motors
Corp. (8th Cir. 1999) 187 F.3d 809, cert. denied, 528 U.S.
1159 (2000). For example, the two other states' cases cited by City for
the proposition that proof of mutual intent is required (Opening Brief
at p. 16) both state that such intent may be implied by the parties' conduct.
H.T.C. Corp. v. Olds (Colo. App. 1971) 486 P.2d 463, 466 ("It
is the settled and general rule that a contract may be abandoned by mutual
consent and that such consent may be implied from the acts and conduct
of the parties"); L.K. Comstock & Co., Inc. v. Becon Constr. Co.
(E.D. Ky. 1993) 932 F. Supp. 906, 933 ("[p]arties can be shown to have
abandoned the contract expressly or implicitly" and "a fact finder can
infer abandonment from attendant circumstances and the conduct of the
parties"). In H.T.C. Corp., the court discussed the contractor's
evidence that the owner ordered "numerous," "extensive" changes and made
no mention of the contract's change order process or whether the parties
followed it. 486 P.2d at 465-466. It then held that "there was substantial
evidence upon which the trial court could base its finding that there
had been an abandonment of the original contract." Id. at 467.
And in L.K. Comstock, a special master found that the evidence
indicated that the extent of the changes ordered was within the parties'
expectations at contracting and that the parties did not "conform strictly"
with the contract's change order process. 932 F. Supp. at 935. Under those
circumstances, the special master found that the evidence of abandonment
was insufficient to meet Kentucky's clear and convincing standard of proof.
Id. at 936.4/
This makes sense. The number of changes on
a project will only be excessive and alter the scope of work if those
changes go far beyond the changes the parties anticipated at contracting.
As such, issuing such excessive changes shows that the owner intended
to abandon the "meeting of the minds" embodied in the contract. This is
no different than any other evidence that a party intended to go beyond
or outside agreed contract terms, whether they be change order requirements,
notice requirements, or any other express or implied terms.
It is this indication of intent to abandon,
implied from the excessive number of changes, which distinguishes the
California abandonment cases and this case from the cases cited by City
for the proposition that contractors cannot recover it they do not comply
with the change order provisions in their contracts. Opening Brief
at p. 16. In all of the cases cited by City, the owner-directed changes
were anticipated by the parties at contracting and were thus not excessive.
Under those circumstances, the courts in those cases held the contractors
were bound by contractual change order requirements. Huber, Hunt &
Nichols, Inc. v. Moore (1977) 67 Cal. App. 3d 278, 301-302; Acoustics,
Inc. v. Trepte Constr. Co. (1971) 14 Cal. App. 3d 887; A. Teichert
& Son, Inc. v. State (1965) 238 Cal. App. 2d 736, 757-758; see
also, Bares v. City of Portola (1954) 124 Cal. App. 2d 813,
819 (contractor failed to prove work performed was "in excess of the performance
required of him under the contract"). But the facts in those cases are
fundamentally different from the facts here where the changes were so
extensive as to affect virtually every part of the work. 5/
b. A party alleging abandonment does not need to
prove the date on which abandonment occurred. None of the California
abandonment cases require that a party alleging abandonment prove
the date on which abandonment occurred.
To the contrary, in Opdyke, the contractor
"could fix no definite date" for the event culminating in the abandonment.
Supra, 111 Cal. App. 2d at 915. The court found this to be irrelevant,
stating that
the precise or even the approximate day the written
contract was abandoned and the oral one adopted, if such occurrences
took place, is not material.
Id. at 915-916 (emphasis added).
This conclusion is consistent with the nature
of abandonment. Abandonment is the culmination of an excessive number
of changes, rather than one single event. 6/
There is no particular instant that both parties "decide" to abandon the
contract. Rather, it is implied based on the excessive number of changes.
City argues that Amelco was required to prove
when the contract was abandoned because the date of the breach is a required
element of a plaintiff's prima facie case for breach of contract. This
is incorrect. Even in garden variety breach of contract actions, the plaintiff
is not required to prove the date, as opposed to the fact, of the alleged
breach. Reichert v. General Ins. Co. (1968) 68 Cal. 2d 822, 830
(listing the elements for recovery under breach of contract); see also,
4 B.E. Witkin, California Procedure, "Pleading," ¤ 464 (3rd Ed.
1985). If a plaintiff proves that the defendant breached the contract
and caused plaintiff to be damaged, the plaintiff is entitled to recover.
Id. There is no reason (and City does not offer one) to apply a
more difficult standard in abandonment claims; to the contrary, since
the date of abandonment would in most cases be more difficult to prove
than the date of breach in other cases, and since that difficulty is created
by the defendant-owner, there is a good reason to apply a less difficult
standard for proving abandonment than traditional breach.
Adding a requirement, as City urges, that an
abandonment plaintiff prove when the abandonment occurred is contrary
to the rule in California that a plaintiff must prove the fact of damage
with certainty but need not prove the amount of damage with certainty.
Zinn v. Ex-Cell-O Corp. (1944) 24 Cal. 2d 290, 297-298; California
Lettuce Growers v. Union Sugar Co. (1955) 45 Cal. 2d 474, 486-487;
Cassinos v. Union Oil Co. (1993) 14 Cal. App. 4th 1770, 1784. If
an abandonment occurred and damaged Amelco (as it proved at trial), when
that abandonment occurred is potentially relevant only to the amount of
recoverable damages. But given the jury's unequivocal finding that City
breached the contract, Amelco was entitled to (and did in fact) use less
specific methods of establishing its damages.
Allowing a contractor demonstrating abandonment
to recover damages without imposing an additional requirement that it
prove when the abandonment occurred does not mean that the contractor
will receive a windfall. There is no indication that Amelco received such
a windfall here. Amelco did not seek all of its increased costs but rather
presented a modified total cost claim. 7/
The modified total cost approach requires reduction of damages to
account for costs for which the contractor is responsible, whether as
a result of underbidding or its own performance mistakes. The jury here
was instructed to award only those damages which were attributable to
the City's breach. The jury's damage award -- reduced from even Amelco's
proposed modified total cost calculation -- demonstrates that the jury
took seriously its obligation to award the damages which it determined
the City had caused and nothing more.
c. A party alleging abandonment does not need to
prove a change in the nature of the final construction product.
Under the California cases, abandonment will
be found where the number of changes on a project are so excessive as
to change the scope of the work. Peterson, supra, 172 Cal. App.
3d at 640 (citing Daugherty, supra, 14 Cal. App. 3d at 156, and
Opdyke, supra, 111 Cal. App. 2d at 916-919). The rule stated by
these cases does not mean, as City urges (Opening Brief at p. 18),
that the changes must result in an entirely different end product. It
does not mean that a contractor has to prove it originally contracted
to build a shack and ended up building the Taj Mahal.
Instead, as the discussions in Peterson
and Daugherty demonstrate, the extent of alteration in the work,
rather than in the nature of the final construction product, are the relevant
consideration in determining whether changes effect an abandonment of
a construction contract. In Peterson, supra, 172 Cal. App. 3d at
637, the owner made numerous changes to the plans for a mill modernization
project, and, while the court discussed the loss of productivity and increase
in costs that resulted, it does not even mention the difference, if any,
between the mill as specified in the original contract and as modified
under the changed specifications. Likewise, in Daugherty, supra,
14 Cal. App. 3d at 156, the court discussed the number of changes in the
plans for a mill construction and the resulting increase in the contractor's
costs. The only mention of the changes' effect on the mill itself was
a reference to "upgrading the mechanical and electrical installation."
Id. In neither of these cases is there any indication that the
court considered a change in the nature of the final construction product
necessary to show that there was an abandonment, so long as the work performed
differed materially from the work the parties anticipated.
In addition, federal courts apply the similar
cardinal change doctrine in cases where the end product is substantially
similar to that which the contractor originally contracted to build. In
Edward R. Marden Corp. v. United States (Ct. Cl. 1971) 442 F.2d
364, 369-370, for example, the contractor entered into a contract with
the US Navy to build an aircraft maintenance hangar in accordance with
specifications issued by the Navy. After the contractor built the hangar,
it collapsed due to a defect in the construction sequence called for in
the specifications. 8/ The Navy ordered
the contractor to reconstruct the hangar. Clearly, the scope of the contractor's
work had changed, even though the final construction product
had not. Under those circumstances, the court found a cardinal change:
In the present case the reconstructed hangar was,
presumably, the identical hangar called for in the original
specifications. In other words, in directing reconstruction
of the hangar, the Government did not alter the design or other
physical characteristics of the structure. We do not view this
as a crucial difference, however. Where a cardinal change is
concerned, it is the entire undertaking of the contractor, rather
than the product, to which we look.
442 F.2d at 370 (emphasis added).
Air-A-Plane Corp. v. United States (CT
CL 1969) 408 F.2d 1030, a case from the Court of Claims on which City
relies, makes the same point. There, a contractor had entered into a fixed
price contract with the Army Chemical Corps to build smoke generators.
During performance, the Army made "a large number of changes" in the contractor's
work, which increased the contractor's costs. Id. at 1031-1032.
After the Army's contracting officer denied a substantial portion of the
contractor's claim for an equitable adjustment in the contract price to
account for the impacts these changes had on its costs, the contractor
challenged that denial in the Armed Services Board of Contract Appeals.
The Board found that the contractor "in bidding on the contract, had not
anticipated that any substantial number of changes would be ordered."
Id. at 1031. It also found that the changes were so numerous "that
the contract took on the aspect of a design or development contract."
Id. at 1032. As was true of Amelco's work for City in this case,
portions of the contractor's work in Air-A-Plane were changed several
times, and others, while not themselves changed, were affected by changes
to other portions of the work. And it found that "[t]he frequency and
nature of the changes were disruptive of [the contractor's] production."
Despite those findings, the Board held that the contractor's recovery
was limited to the adjustments made under the contract's changes provision.
The contractor appealed to the United States Court of Claims, alleging
"that [the Army] breached the contract because the changes imposed amounted
in toto to a cardinal change, beyond the scope of the Changes article."
Id.
In its opinion, the Court of Claims stated
the basic standard for a cardinal change: "whether the modified job Ôwas
essentially the same work as the parties bargained for when the contract
was awarded.'" Id. at 1033 (citations omitted). Whether there was a cardinal
change in a particular case
can be resolved only "by considering the
totality of the change and this requires recourse to its magnitude
as well as its quality." [citations omitted] . . . "There is
no exact formula * * * . Each case must be analyzed on its own
facts and in light of its own circumstances, giving just consideration
to the magnitude and quality of the changes ordered and their
cumulative effect upon the project as a whole."
Id. (quoting Wunderlich Contracting
Co. v. United States (CT CL 1965) 351 F.2d 956, 966). Applying these
general standards to the facts, as found by the Board below, the Court
of Claims stated "that the [contractor's] claim of a cardinal change is
very substantial and far from frivolous." Id. The court remanded,
instructing the Board to hear contractor's cardinal change claim on its
merits. Id. at 1033, 1038. In so doing, the court again made clear
that the extent of change necessary for a cardinal change may occur as
a result of the number of changes, not just as a result of a change in
the nature of the end product.
In any event, even if a change in the final
product were a requirement for abandonment, Amelco would have met its
burden. Amelco had a contract directly with City to build the electrical
system for the City's civic center. Substantial evidence was presented
that this system was significantly altered as a result of the excessive
changes directed by City. The evidence established that City changed every
part of the electrical work at least once, it changed some parts many
times, and it changed other areas of work which impacted the electrical
work. See, Amelco Electric v. The City of Thousand Oaks
(2000) 82 Cal. App. 4th 373, 380-381. Such a situation is more than sufficient
to show that City and Amelco abandoned their contract for the electrical
system, even if, as City contends, "[t]he size, height, number of floors,
uses and location of the building" in which Amelco installed the electrical
system "never changed" (quoting Reply Brief at p. 18).
d. A party alleging abandonment does not need to
prove it complied with contractual notice requirements.
Requiring a contractor to prove that it complied
with notice provisions in its contract, as City urges here, would be inconsistent
with California authority that a party that breaches a contract is not
entitled to rely on provisions in that contract to require the non-breaching
party to provide it notice of its own breach. D.A. Parrish & Sons v.
County Sanitation Dist. (1959) 174 Cal. App. 2d 406, 414; Hawley
v. Orange County Flood Control Dist. (1963) 211 Cal. App. 2d 708,
715. City argues in its Opening Brief (at pp. 20-21), that the Court of
Appeal in this case misread DA Parrish, but it is City that misreads
that case. In DA Parrish, the court addressed the question of whether
a notice requirement in a contract provision for extra work required the
contractor to provide notice of its damages caused by delays arising from
defects in the owner's specifications. The court provided two separate
grounds for its answer in the negative: first, the clause dealt with extra
work, not delays, so it did not apply to the contractor's claim, and,
second, forfeiture clauses like the notice clause at issue had "been interpreted
by this court not to apply to claims arising from breaches of the contract
caused by the other party." 174 Cal. App. 2d at 414.
The discussion of Parrish in Hawley, supra,
confirms that it is City, rather than the Court of Appeal below, that
misreads Parrish. The Hawley court observed:
The Parrish case itself held that a requirement
for 10-day notice on claims for extra work did not apply to
claims for extra work caused by the public body's breach of
contract through that body's errors in the layout of sewer line
which in effect amounted to breach of contract, causing unconscionable
delay through the necessity of laying out a new course.
211 Cal. App. 2d at 715.
Holding Amelco to the notice requirements in
the change order provision in its contract with City here would be contrary
to DA Parrish. The City's actions in ordering an excessive number
of changes so as to alter the nature of the work undertaken amounts to
a breach of the City's implied warranty that the specifications were adequate.
The City cannot rely on the notice requirements in the contract's changes
clause to avoid the consequences of its own breach.
B. The Court Should Decline City's
Invitation to Eliminate the Doctrine of Abandonment in California.
1. The abandonment doctrine is consistent with other
rules of contract interpretation.
The central tenet of contract interpretation
is giving effect to what the parties intended. Civil Code ¤ 1636. This
often requires courts to go beyond express contract language to deal with
situations beyond the parties' anticipation at the time of contracting.
Hawley, supra, 211 Cal. App. 2d at 713-714 ("While the intention
of the parties is derived initially from the language used in the written
contract, ÔThe words, phrases and sentences employed are to be construed
in the light of the expressed objectives and fundamental purposes of the
parties to the agreement' [citation omitted]"). In such cases, courts
will imply reasonable terms on the theory that, had the parties anticipated
the unanticipated event, they most likely would have included a reasonable
term to deal with that event. Cf. Tonkin Constr. Co. v. County of Humboldt
(1987) 188 Cal. App. 3d 828, 832 ("a contract includes not only the terms
that have been expressly stated but those implied provisions indispensable
to effectuate the intention of the parties") (citing Civil Code ¤ 1656;
Sacramento Navigation Co. v. Salz (1927) 273 US 326, 329).
For example, where public construction contracts
contain "no damages for delay" provisions stating that the contractor
is not entitled to recover any damages resulting from owner-caused delays,
courts have implied a reasonable limitation on such provisions, both before
and after the Legislature acted to make such limitations statutory in
Public Contract Code ¤ 7102. In cases where the delay is extreme, such
that it is beyond what the parties contemplated when they entered into
their contract, courts have awarded damages to contractors, despite the
no damages for delay provisions in their contracts. Howard Contracting,
Inc. v. G. A. MacDonald Constr. Co., Inc. (1998) 71 Cal. App. 4th
38, 50-51 (rejecting argument by cross-defendant/appellant city that clause
precluded contractor recovery of damages caused by city's breach of contract)
(citing Public Contract Code ¤ 7102); McGuire & Hester v. City and
County of San Francisco (1952) 113 Cal. App. 2d 186, 191 (same result
before ¤ 7102 was enacted); Milovich v. City of Los Angeles (1941)
42 Cal. App. 2d 364, 373 (same).
Abandonment is no different. Change order provisions
deal with the changes the parties anticipate at contracting. Where the
number of those changes goes so far beyond that which the parties expected
that the scope of the contract work has been altered, courts will apply
the abandonment doctrine to imply reasonable limits on the applicability
of those change order provisions and allow the contractor to recover the
cumulative costs increased by those changes.
2. Public policy supports the abandonment doctrine.
The abandonment doctrine leads to fair and
just results. When an owner directs an excessive number of changes that
cause a contractor to incur added costs which neither party anticipated
at the time of contracting, the doctrine puts the responsibility for those
added costs on the party that caused them. When the contractor incurs
those added costs cumulatively, such that they cannot be identified or
measured accurately at or near the time they occur, the doctrine prevents
the owner, as the party that caused the added costs, from escaping liability
by invoking change order or notice procedures in the contract. And when
the excessive number of those changes make it difficult (or impossible)
for the contractor to prove the amount of added costs with certainty,
the doctrine prevents the owner, as the party who caused those difficulties,
from escaping liability by arguing the contractor cannot meet its burden
of proof as to the precise dollar value of those damages.
The doctrine recognizes some undeniable realities
in construction. On virtually all construction contracts, the parties
anticipate at the time of contracting (1) that the owner knows what it
wants and (2) that, when the owner provides specifications, it has taken
reasonable steps to ensure that they are correct and complete. When an
owner undertakes the design aspect of the work, it impliedly warrants
that its design is not defective. Souza & McCue Constr. Co. v. Superior
Court (1962) 57 Cal. 2d 508, 510; see also, United States v. Spearin
(1918) 248 US 132, 136-137. The contractor is entitled to rely on that
warranty. The doctrine of abandonment recognizes this and provides an
effective means of making the owner responsible for all of the added costs
caused by its breach of that warranty.
In addition, most construction projects are
extremely complex, involving many different trades performing work interconnected
with the work of others. On the normal job, a contractor can anticipate
that the owner may direct some level of changes in the work design, materials
or schedule, and is equipped to determine the costs of such changes close
to the time in which they occur. In unusual cases, however, the alterations
in the work may occur to an extent which the parties did not, and could
not, have anticipated in their contract. That may be either because the
alterations required are very different in nature from the changes that
normally occur on similar projects or because they are far more numerous
than parties reasonably would expect. Particularly where there is an extraordinary
number of changes, inefficiencies occur which increase a contractor's
costs. But this cost increase may only be detected long after the inefficiencies
were first created and, even then, the amount of the increase is often
impossible to determine with certainty. Because the excessive number of
changes was not anticipated at contracting, the change order provisions
in the parties' contract were not designed to deal with the situation
and to compensate the contractor fairly. The owner who causes the excessive
number of changes should bear the additional costs not addressed by the
contract procedures. In addition, in many cases the changes ordered by
the owner provide additional value to the owner; it would be unfair to
allow owners to enjoy that additional value without paying for it. The
doctrine of abandonment recognizes all of this and puts the responsibility
for added costs on the owner.
City argues that allowing abandonment claims
will encourage contractors to submit artificially low bids (Opening
Brief at 14). But this contention ignores that abandonment is difficult
to prove and, as a result, very rare. A contractor that underbids its
jobs with the expectation that the owner will order an excessive number
of changes that alter the scope of work will be out of business quickly.
It is no coincidence that there are only three reported decisions applying
the abandonment doctrine in California over the past 50 years. The test
fashioned by California courts for recovery under that doctrine is very
hard to meet, and no reasonable contractor would bid on a job expecting
to be able to rely on the doctrine later.
3. At least 23 other states, the District of Columbia,
and federal courts recognize the abandonment doctrine in some form.
Whether they call it "abandonment," "cardinal
change," or something else, at least 23 other states, the District of
Columbia, and the Federal courts, allow contractors to recover their added
costs caused by excessive, owner-directed changes which alter the scope
of the work under the parties' original contract. 9/
Only one state, Mississippi, has expressly declined to
adopt this approach. Litton Systems, Inc. v. Frigitemp Corp. (S.D.
Miss. 1985) 613 F. Supp. 1377. Far from being a minority view, as City
suggests,10/ California law is consistent
with almost every one of the many other jurisdictions which have considered
abandonment.
C. Applying the Doctrine of Abandonment
to Public Construction Projects Is Consistent with Prior Law and Public
Policy.
1. It is well-established under California law that
public owners are subject to liability for breach of contract the
same as private parties.
Although construction contracts with public
owners are subject to statutory competitive bidding requirements, once
a public owner awards a contract in compliance with those requirements,
"it is liable for a breach of its agreement in like manner as an individual."
Souza, supra, 57 Cal. 2d at 510; see also, Bilardi Constr.,
Inc. v. Spencer (1970) 6 Cal. App. 3d 771, 774 (contract provision
limiting city's liability under contract to money in special fund did
not limit amount of damages contractor could recover for city's breach
of contract); Tonkin Constr. Co. v. County of Humboldt (1987) 188
Cal. App. 3d 828, 831-832; 1 B.E. Witkin, Summary of California Law,
"Contracts," ¤¤ 81, 87 (9th Ed. 1987). There are two reasons for this:
(1) competitive bidding laws deal with procurement, rather than performance,
of contracts, and (2) when a public entity enters into a contract it waives
sovereign immunity for liability under the contract.
Competitive bidding requirements do not affect
the rules for determining what is a breach of contract or what remedies
are available for breach. Shea-Kaiser-Lockheed-Healy v. Dept. of Water
& Power (1977) 73 Cal. App. 3d 679, 684. Rather, "such requirements
apply only to the procedure by which the price of goods purchased by a
public entity is set." Id. (citing Miller v. McKinnon (1942)
20 Cal. 2d 83, 87-88). In Shea, the Department of Water & Power
("DWP") made an argument similar to one City makes here. The trial court
had found that the DWP breached its contract with Shea and held the DWP
liable for the value of materials Shea delivered to it under their contract.
On appeal, the DWP argued that the trial court's damage award violated
competitive bidding laws because the award was based on quasi-contract
or implied contract. The Second Appellate District rejected this argument
stating that competitive bidding requirements were "irrelevant
to the propriety of the damage awards before [the court]." Id.
(emphasis added). Since court awards of damages for breach are not made
"pursuant to contract," they "are not precluded by competitive bidding
requirements." Id.
Sovereign immunity also does not prevent a
contractor under contract to a public owner from recovering damages caused
by the public owner's breach of contract, just as it could under a construction
contract with a private owner. Souza, supra, 57 Cal. 2d at 510;
1 B.E. Witkin, Summary of California Law, "Contracts," ¤ 87 (9th
Ed. 1987).
A contractor has the same right to recover
for breach of the owner's implied warranty that its plans and specifications
are correct and complete whether that owner is public or private. Souza,
supra, 57 Cal. 2d at 510-511; Warner Constr. Corp. v. City of Los
Angeles (1970) 2 Cal. 3d 285, 293-294 (quoting Souza); E.H.
Morrill Co. v. State (1967) 65 Cal. 2d 787, 791; Tonkin Constr.,
supra, 188 Cal. App. 3d at 832. Just as with private owners, public
owners warrant that the specifications they issue are correct, and contractors
are entitled to rely on that warranty. Id. In the context of public
contracts, contractor may reasonably rely on the correctness of the owner's
specifications in determining its costs as the basis for its bid. Id.
And, to the extent that the specifications prove to be incorrect or incomplete,
the public owner, like private owners, is liable for the cost of extra
work which is necessitated by the owner's breach of warranty. Id.
Unlike the contracts involved in many of the
cases cited by City (Opening Brief at 31-34), there is no contention here
that the contract awarded by City to Amelco in this case violated any
competitive bidding laws 11/ or that
the parties agreed to a modification of the contract in violation of those
laws. 12/ As such, the defense available
to the public owners in those cases, i.e., that the contracts in those
cases were void (i.e., treated as if they never existed), are not available
to City in this case, and City is subject to the same contract remedy
rules that apply to contracts between private parties. 13/
2. Many of the other jurisdictions that have adopted
abandonment doctrines have applied those doctrines to public construction
contracts.
Amelco cites a number of other state and federal
cases which apply the abandonment doctrine or something similar to construction
contracts (Amelco Brief at pp. 34-35, n. 15-17). It is noteworthy
that the cited cases from five different states and all of the federal
cases, involve public contracts. Arizona, Arkansas, New York, Oregon,
and Washington courts have all decided that abandonment applies to contracts
with public owners. 14/ And, of course,
the similar federal doctrine of cardinal change was invented for federal
government contracts. City has not cited, and AGC has been unable to locate,
a single reported case from any jurisdiction refusing to apply the abandonment
doctrine to public contracts. 15/
E.W. Johnson, supra, 264 Ark. 523, is
typical of the consistent application of the abandonment theory to public
contracts. There, a city had directed numerous changes (id. At
528, n. 2), which the trial court found constituted a breach of contract
(id. At 532-533). On appeal, the city argued "that the contract
permits the owner to make changes in the work of the contractor without
invalidating the contract." Id. at 533. The Arkansas Supreme Court
was unpersuaded and affirmed the trial court holding that the city "breached
the warranty of the plans and specifications submitted to the [contractor]
resulting in cardinal changes in the contract." Id. at 525, 535.
3. Applying abandonment to public projects serves
the same public policy objectives served by its application to private
projects and additional public policy objectives as well.
Application of the abandonment doctrine in
cases like this one would serve several important public policy objectives.
First, applying the doctrine of abandonment in public construction would
lead to fair and just results. It is just as fair to hold a public owner
as a private owner responsible for the added costs it causes a contractor
to incur by directing an excessive number of changes which neither party
anticipated at the time of contracting. And it is just as fair to prevent
a public owner from escaping liability simply because its own actions
have made it difficult or impossible for the contractor to identify and
measure its resulting cost increases in compliance with the change order
and notice provisions in the contract or to prove the amount of its added
costs with certainty. Justice requires application of the abandonment
doctrine for public contracts even more so than for private ones because
contractors are precluded by law (Public Contract Code section 1104) from
designing public projects. As a result, the contractor on a public contract
cannot be said to have accepted the risks associated with declining design
responsibility; instead, the contractor must rely on the accuracy of the
public owner's design and plans in bidding the project.
Second, the abandonment doctrine encourages
responsible planning of projects by public owners, which in turn leads
to a better product at a lower price. It lets owners know that they will
bear all of the costs that result from their ordering excessive
changes altering the scope of their contractors' work. This rule provides
a strong disincentive to public owners from putting projects out to bid
without planning those projects carefully. Such careful planning will,
in turn, lead to public works that are built more efficiently, with fewer
delays, and at a lower cost. It will also lead to better thought out projects
that more effectively meet the public purposes for which they were intended.
Finally, by discouraging public owners from putting contracts out for
bid with incomplete plans, the abandonment doctrine supports the goals
of the competitive bidding statutes by fostering more meaningful competition
for public contracts.
Similarly, once public projects are underway,
the potential application of the abandonment doctrine to those projects
will encourage public owners to manage those projects responsibly. When
deciding whether to order wholesale changes, the public owner will know
that the more additional changes it directs the more likely it will alter
the scope of the contractor's work beyond that in the original contract,
and it will know that it may have to pay for added costs associated with
those changes, even if they are determined outside of change order procedures.
Armed with this knowledge, owners can weigh the benefits of the change
with its true costs and make a reasoned decision of whether the
public work would benefit from widespread changes on a project.
III. CONCLUSION
Under the doctrine of abandonment, California,
like many other jurisdictions, allows construction contractors to recover
their damages when an owner issues an excessive number of changes that
alter the scope of the contractor's work. Because some of these damages
are cumulative, California does not require contractors to comply with
contract notice or change order provisions as a prerequisite to their
recovery. And because these damages cannot be attributed to any particular
change, California allows contractors to prove those damages indirectly
(for example, by using the modified total cost method). All of this leads
to a fair and just result by making the party that caused the additional
costs liable for those costs.
Although California has not yet applied the
abandonment doctrine to public construction contracts, such an application
is consistent with California law in similar contexts and is good public
policy. California applies the same rules of contract interpretation and
remedies to both public and private owners. This includes implying reasonable
limits on the application of contract clauses when circumstances are different
than what the parties anticipated at contracting. And, it is just as fair
to hold a public owner responsible for added costs caused by its excessive
changes as it is to do so for private owners. Finally, applying the abandonment
doctrine to public owners serves an additional public interest by encouraging
public owners to carefully plan and manage public construction, which
will lead to lower costs and better products.
In this case, the jury found that City damaged
Amelco by ordering an excessive number of changes and substantially altering
the scope of Amelco's work. These damages were not adequately accounted
for in the change orders made on the project. The Court of Appeal affirmed
the award, holding that it was consistent with prior California abandonment
and public contract decisions. Now, this Court should do the same.
Dated: May __, 2001
Respectfully submitted,
ROGERS, JOSEPH, O'DONNELL & PHILLIPS
Neil H. O'Donnell
Aaron P. Silberman
Attorneys for Amicus Curiae, the Associated General Contractors of California
Footnotes
- See, e.g., Hayden v. Astoria (1915) 74 Or.
525, 533 (changes which substantially increased portions of the contractor's
work "must be considered as not being within the contemplation
of the parties at [contracting]" and, therefore, in regard to the
project as constructed, "there was no meeting of the minds of the
parties as to the amount of compensation"); H.T.C. Corp. v.
Olds (Colo. App. 1971) 486 P.2d 463, 466 ("A contract will
be treated as abandoned when the acts of one party, inconsistent with
its existence, are acquiesced in by another") (citations, of Nebraska
and Oklahoma cases, omitted). Back
- California courts look to federal decisions as persuasive
authority in public construction cases. See, e.g., Pacific Architects
Collaborative v. California (1979) 100 Cal. App. 3d 110, 125. Back
- See cases cited in Opening Brief at p. 16;
Amelco Brief at pp. 34-35, n. 15-17; and Reply Brief at
pp. 16-17, n.2; see also, Nat Harrison Assoc., Inc. v. Gulf States
Utilities Co. (5th Cir. 1974) 491 F.2d 578, 583, reh'g denied,
493 F.2d 1405 (applying Louisiana law); Oberer Constr. Co. v. Park
Plaza, Inc. (Oh. Ct. App. 1961) 179 N.E.2d 168, 171; Fuller Co.
v. Brown Minneapolis Tank & Fabricating Co. (E.D. Pa. 1987)
678 F. Supp. 506, 509 (applying Minnesota law); Nat'l Environmental
Service Co., Inc. v. Hompeplace Homes, Inc. (Tex. App. 1998) 961
S.W. 2d 632, 635. The states other than California to adopt abandonment
or cardinal change doctrine are (1) Alabama, (2) Arizona, (3) Arkansas,
(4) Colorado, (5) Indiana, (6) Kentucky, (7) Louisiana, (8) Maine, (9)
Maryland, (10) Michigan, (11) Minnesota, (12) Missouri, (13) New York,
(14) North Dakota, (15) Ohio, (16) Oklahoma, (17) Oregon, (18) Rhode
Island, (19) Texas, (20) Utah, (21) Washington, (22) Wisconsin, and
(23) Wyoming. The District of Columbia has also implicitly recognized
the abandonment doctrine. Blake Constr. Co., Inc. v. C. J. Coakley
Co., Inc. (D.C. CT App. 1981) 431 A.2d 569, 578-579 (subcontractor
entitled to recover for damages from delays caused by general contractor
not contemplated by the parties at contracting or "amounting to
an abandonment of the contract"). Back
- Contrary to City's assertion, neither L.K. Comstock
nor any other Kentucky case holds that "compliance with the change
order process negates a claim of abandonment" (quoting Opening
Brief at p. 16). Back
- Even if Amelco had been required to prove that the
parties ignored the change order procedures in their contract to show
that the parties intended to abandon the contract, Amelco met its burden
here. It submitted substantial evidence at trial that, due to City's
excessive changes, City directed Amelco to do its work on a "price
and proceed" basis, i.e., perform changes in the work before
change ordered could be negotiated. See, Amelco Brief at p.
14. Back
- A California court recognized, albeit outside the
abandonment context, that a contractor may incur added costs due to
a public owner's ordering numerous changes which cumulatively alter
the character of the contractor's work. State of California v. Guy
F. Atkinson Co. (1986) 187 Cal. App. 3d 25, 32. In Atkinson,
the trial court confirmed an arbitration award to a contractor, in which
the arbitrator stated: "There were cumulative effects of all of
the ordered changes. It is not feasible or possible to separately identify
or measure those costs which were incurred by Atkinson as a result of
the actions of the State." Id. at 29 n.2. The Court of Appeal
affirmed. Back
- AGC agrees with Amelco that substantial precedent
indicates that the total cost method of calculating damages may be used
in appropriate circumstances. City of Salinas v. Souza & McCue
Constr. Co. (1967) 66 Cal. 2d 217, 225; Atkinson, supra,
187 Cal. App. Back
- The plans failed to require that "the tie rods
had to be installed before the arches were released on the buttresses."
442 F. Supp. at 370. Back
- See, footnote 2, infra. Back
- Opening Brief at p. 16 ("Few other states
recognize the abandonment doctrine"). Back
- Miller v. McKinnon (1942) 20 Cal. 2d 83, 87-88
(Court voided contract because public owner did not put contract out
for competitive bid); South Bay Senior Housing v. City of Hawthorne
(1997) 56 Cal. App. 4th 1231, 1235 (same). Back
- Paterson v. Bd of Trustees (1958) 157 Cal.
App. 2d 811, 818-819 (Court voided contract modification agreed to by
a public official in excess of his authority); Greer v. Hitchcock
(1969) 271 Cal. App. 2d 334, 336 (same). Back
- Two cases cited by City -- Zottman v. City and
County of San Francisco (1862) 20 Cal. 96, 99-102, which was decided
by this Court almost 140 years ago, and Contra Costa Constr. Co.
v. Daly City (1920) 48 Cal. App. 622, which was decided by the First
Appellate District 65 years before Peterson -- involve claims for extra
work ordered on a valid public contract but contain no discussion about
whether the ordered changes were excessive or altered the scope of the
contract work. To the extent that the Court finds that either of these
cases applies to abandonment situations, like those found here and in
the California abandonment cases, AGC submits that Zottman and
Contra Costa should be overruled. Back
- See, e.g., County of Greenlee v. Webster (1923)
25 Ariz. 183; Housing Authority of the City of Texarkana, Arkansas
v. E.W. Johnson Constr. Co. (1978) 264 Ark. 523; Westcott v.
State (1942) 36 N.Y.S.2d 23; Hayden, supra, 74 Or. 525; and
Kieburtz v. City of Seattle (1915) 84 Wash. 196; see also,
Scherer Construction, LLC v. Hedquist Construction, Inc. (Wyo. 2001)
18 P.3d 645, 656 (assumes, without deciding, that cardinal doctrine
applies to public owners). Back
- As Amelco notes in its brief (at p. 35), the one
jurisdiction to reject the doctrine of abandonment generally is Mississippi.
The case Amelco cites -- Litton Systems, Inc. v. Frigitemp Corp.
(1985) 613 F. Supp 1377 -- involves a private project. Back
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