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By Jon T. Anderson
Howrey LLP
For California contractors involved in disputes, the "standard"
approach to avoiding limitations on contractor recovery
because of a contractual guaranteed maximum price condition
is to argue for application of the theory of abandonment
of contract recognized in C. Norman Peterson Co. v. Container
Corp. of America, 172 C.A.3d 628, 218 Cal.Rptr. 592
(1985). This decision allowed a contractor to recover its
actual costs of performance plus fee in excess of the contractor's
guaranteed maximum price in the context of substantial project
change and owner (and contractor) non-compliance with contract
change order and payment procedures. The Court of Appeal
in Peterson upheld such recovery on the grounds that
the owner, having abandoned the contract, could not rely
upon the guaranteed maximum price provision to limit the
contractor's recovery of costs (plus fee) actually incurred
in the performance of the work. 172 C.A.3d at 644-5, 646.
When
executed, the contract maximum was $4,789,000, plus a $300,000
fee. Pursuant to change order provisions, this amount was
later revised upwards to $5,937,114.... The trial court
found that [contractor's] expenditures and the reasonable
value of its services was $8,194,713.02, and based its award
on the latter figure. Appellant's [ i.e., owner's] initial
argument is that awarding damages based on total costs runs
contrary to the terms of the contract....
Due
to the owner's breach and abandonment of the contract, the
trial court concluded "the guaranteed maximum provisions
of the contract are not applicable and [contractor] is entitled
to recover the unpaid reasonable costs of its work."
We hold that the trial court's conclusion was a proper one. The
conclusion of "abandonment" as expressed in Peterson
may appear startling, but as the court noted, the doctrine
of abandonment has special application to construction contracts,
where the parties often continue to complete a project notwithstanding
the legal conclusion that the contract was abandoned. Thus,
at 172 C.A.3d at 640:
| Although
the contract may be abandoned, the work is not. Under
this line of reasoning, the trial court was well justified
in determining that, by their course of conduct, the parties
had abandoned the terms of the written contract while proceeding
to complete the mill restoration project. [original emphasis] |
The
Peterson case arose from extreme facts of project disruption
that limit its application to situations where, although
there may have been some project disruption, the principal
factor creating dispute is the owner's nonpayment during
construction and, especially, near completion. In this latter
situation, contractors should be aware of a variant approach
to obtaining full compensation suggested by the comment
at 1 Witkin, Summary of California Law, Contracts,
§793, to the effect that, in the event of nonpayment
of a progress payment, "a contractor may rescind
and recover the reasonable value of work already done."
[emphasis added].
This
principle is unusual because the "normal" American
rule is that nonpayment of a progress or installment payment
simply is a temporary excuse for performance unless the
delay is so long as to constitute a material breach of
contract sustaining a claim for damages. The differing
California approach is attributed to Barris v. Atlas
Rock Co.,
118 C.A. 606, 5 P.2d 670 (1931), which concerned non-payment
of several invoices under a haulage contract for dam
construction. The decision examines even older cases
to extract the rule that "[a] nonpayment breach
gave rise only to an action on a quantum meruit." Id.
at 611. That is, the contractor would have a claim
to payment for work but not a claim for damages --
but the opinion also goes on to observe:
"Nothing said herein is to be construed as limiting
[contractor], in his action upon a quantum meruit, to
recovery based upon the contract rates. He may recover
whatever he proves the services to be reasonably worth." Id.
at 613. In other words, the contractor's claim arising
out of non-payment was not limited by the compensation
terms of the contract. This conclusion significantly expands
the possible situations in which quantum meruit recovery
can be obtained and provides an avenue around the limitations
on contractor compensation flowing from a guaranteed maximum
price (or, indeed, a fixed price).
There
is extended criticism of Barris in Integrated,
Inc. v. Alec Fergusson Electrical Contractor, 250 C.A.2d
287, 296, 58 Cal.Rptr. 503 (1967) that it "leads to
the anomalous situation that failure to make progress payments
is deemed ... of sufficient materiality to justify abandonment
or rescission and recovery on quantum meruit, but not such
a total breach as would entitle the contractor to sue for
damages." The Integrated case, therefore, qualified
the Barris rule as applying only to non-payment constituting
"a substantial failure to comply" with the contract.
Id. at 297. This qualification does not, however,
preclude the uniquely important aspect of the Barris
case: the conclusion that an owner's non-payment can lead
to a contractor's quantum meruit claim not limited by contractual
terms.
It
is interesting to speculate on possible applications of
the Barris principle to modern construction contracting
situations. As one example, although most construction lawyers
would not accord preclusive effect to a unilaterally issued
"not to exceed" (NTE) change order, assuming (as
is usually the case) the parties' contract expresses a payment
obligation for work performed under such circumstances,
it would at least be arguable that any non-performance of
the payment obligation would accelerate the contractor's
entitlement to obtain full, quantum meruit-based cost recovery.
Considering the risks contractors are often thought to face
with respect to NTE changes, this could be a significant
benefit. As another example, at least in a case where the
missed or late payment is substantial, one can envision
use of Barris so as to "convert" the contract
to a quantum meruit compensation standard for that portion
of a contractor's work for which timely payment was not
made. If the contractor is in a loss position, the ability
effectively to reprice even a portion of the total contract
effort could be very beneficial.
Construction
contract disputes typically are fact-intensive and situation-specific.
But legal theory has a role to play as well. The Peterson
decision explained the application of abandonment doctrine
so as to provide a means for equitable compensation of a
contractor notwithstanding an apparently preclusive guaranteed
maximum price provision. The Barris case suggests
another approach to this common construction problem, with
the advantages that the approach is long established under
California law and not subject to the requirement of substantial
project disruption addressed in Peterson.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
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