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City Contract May Not Be Modified Orally or by Course of Dealing, Court Holds
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February 21, 2011
By Peter K. Zweighaft
R&D Consultants, Inc., a civil engineering company, contracted with the City of Carlsbad, California, to redesign a municipal golf course for a fixed price of $556,745. The contract provided that it could be amended only by a written agreement signed by both parties. During construction, the parties entered into four written change orders, increasing the base contract price by $63,525.50. For each, the engineering company submitted a fixed price proposed change order. The city’s project manager frequently authorized the engineering company to start on the extra work before the city signed the change order.
After those change orders, the engineering company raised concerns about having to perform additional extra work. The city told the engineering company that it believed that all of its needed changes finally had been resolved and asked for a complete and final scope of work and price for it. The engineering company proposed to complete the project for an additional $209,956, which included $69,073 in extra work already completed.
The city contended that the price was excessive and included in-scope work and said the price exceeded funds available. The city instructed the engineering company to reduce the price to below $100,000. Ultimately, the parties signed a fifth change order authorizing work to proceed on a time-and-materials basis for a not-to-exceed price of $99,810. The change order stated that it covered the engineering company’s entire scope of work. Once again, work began before the signed change order was issued.
After the project was completed, the engineering company filed a lawsuit seeking to recover an additional $109,093.81 for extra work that it claimed was outside the scope of the contract and the change orders. The city argued that the engineering company’s claim was barred because the contract required any modification to be in a writing signed by the parties and by Government Code §40602, which requires the mayor or another officer designated by ordinance to sign all city contracts. The engineering company argued that the written change order requirement was modified by the city’s practice of orally authorizing extra work and orally directing that extra work begin before a written change order was signed and issued.
There was conflicting testimony about communications between the engineering company and the city after the fifth change order. The trial court instructed the jury that “parties to a contract may agree to modify its terms. You must decide whether a reasonable person would conclude from the words and conduct of [the engineering company]… and [the] City… that they agreed to modify the contract…. A Contract in writing may be modified by oral agreement to the extent the oral agreement is carried out by the parties.” The jury returned a verdict in the engineering company’s favor, awarding it the full amount of the damages it sought. The city appealed.
The Court of Appeal reversed the award to the engineering company. P&D Consultants, Inc. v. City of Carlsbad, 190 Cal.App.4th 1332 (2010).
The Court of Appeal looked no further than the contract to reverse the jury’s award: “The plain language of the contract limits the City’s power to contract to the prescribed method” (a written change order). It added: “Unlike private contracts, public contracts requiring written change orders cannot be modified orally or through the parties’ conduct.” The appeals court concluded that the city was not bound by any oral modification to the contract, and if the engineering company performed services in reliance on an oral representation made by the city’s project manager, the engineering company acted at its own peril.
Because it considered the contract determinative, the appeals court did not consider whether Government Code §40602 also was applicable.
In an effort to find a signed writing supporting its extra work claim, the engineering company cited ¶4 of the contract’s scope of work, which stated: “Services not specifically identified in the scope of services above will be considered additional work, and will be authorized by the City as an executed amendment to the contract prior to commencement of work. This work will be based on labor rates of P&D and the project subconsultants at the time of approval by the City.” The engineering company argued to the trial court that this clause allowed it to perform extra work orally directed by the city even in the absence of a meeting of the minds regarding the cost of the work. The trial court rejected the argument, noting that the language itself specifically required an executed change order before the start of work.
In the Court of Appeal, the engineering company argued that the city breached ¶4 by failing to negotiate a contract amendment in good faith. Because this theory of liability was not presented in the trial court, the Court of Appeal held that the engineering company could not raise this argument on appeal.
The appeals court also affirmed the trial court’s nonsuit of the engineering company’s claims for quantum meruit and breach of implied contract.
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