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New Jersey Superior Court Appellate Division Reforms Unit Price in Public Contract Where Contractor Knew Estimated Quantities Were Grossly Understated and Had Unbalanced Its Bid To Take Advantage of Error
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Dugan Construction Company, Inc. v. New Jersey Turnpike Authority
941 A.2d 622 (N.J. Super. Ct. App. Div. 2008)
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| The Superior Court of New Jersey, Appellate Division, recently had to decide whether a contractor was entitled to the contractual per unit price for the removal of substantial quantities of groundwater where the estimated quantity in the bid documents was grossly understated and contractor failed to bring the error to the public entities’ attention. Analyzing the case utilizing principles of patent ambiguity and reformation, the Court held that the mistake in the bid documents warranted reformation of the contract and the contractor was only permitted to recoup the actual value of the work performed.
The New Jersey Turnpike Authority (“NJTA”) issued a request for bids for work which included remediation of soil and groundwater (the “Project”). The Schedule of Items of Work attached to the bid request required the bidders to provide unit prices for certain items of work. Among the items were unit prices for storage, handling and transportation of approximately 2200 gallons of hazardous wastewater and 55 gallons of non-hazardous wastewater. Dugan Construction Co., Inc. (“Dugan”) was the successful bidder on the Project. Dugan bid $50 per gallon for non-hazardous wastewater and only $4 per gallon for hazardous wastewater.
Shortly after being awarded the contract, Dugan arranged to subcontract the groundwater removal portion of its work. It obtained a bid from JCA Associates which presented alternate methods of removal under which 42,840 or 255,680 gallons of groundwater would need to be removed. Dugan also contacted a waste disposal entity and arranged to dispose up to 200,000 gallons of wastewater. Ultimately, Dugan disposed of approximately 200,000 gallons of wastewater. Based upon the removal method utilized, Dugan was only required to pay JCA $57,000 for its services.
The Contract required bidders to review the bid documents and bring to NJTA’s attention any ambiguities or errors. Despite the obvious error in the stated 55 gallons of non-hazardous liquid waste and Dugan’s knowledge of the error, Dugan did not bring the issue to NJTA’s attention.
Dugan made an application to be reimbursed for the full 200,000 gallons of groundwater removed at the $50 per gallon unit price listed in its contract. This resulted in Dugan’s demand to NJTA for more than $9.5 million for disposal of non-hazardous wastewater. NJTA refused to pay Dugan and Dugan in turn sued NJTA for the $9.5 million.
NJTA filed a motion for summary judgment arguing that Dugan was aware of the error in the estimated number of gallons of wastewater to be removed and failed to report the error in accordance with the contract. NJTA’s expert opined that Dugan intentionally unbalanced its bid in an effort to obtain unreasonable profits. The court rejected Dugan’s claim that notice was provided via daily well logs provided to NJTA during the two week removal process. The trial court ruled in favor of NJTA on its motion for summary judgment motion ruling that bid documents and the estimated 55 gallons for non-hazardous wastewater were “patently ambiguous.”
Dugan appealed the trial court’s ruling to the Appellate Division. The Appellate Division agreed with the trial court’s conclusion that there was evidence that Dugan knew of the mistake at the time it put together its bid proposal and that Dugan intentionally provided an unbalanced bid in order to unreasonably increase profits. The Appellate Division also concurred with the trial court’s determination that Dugan had an obligation under the contract to report known errors to NJTA and its failure to do so deprived NJTA the opportunity to issue a change order.
The Appellate Division considered the patent ambiguity doctrine relied upon by the trial court. It explained that the doctrine provides that if a patent ambiguity exists in the bid request, the contractor is required to seek clarification from the owner prior to submitting a bid. The court explained that where patent ambiguity exists, the ambiguity will not be construed against the draftsman, as is usually the case in contract interpretation. Although endorsing the doctrine of patent ambiguity, the Appellate Division concluded that the situation was more akin to a mistake and turned its analysis to equitable principles of reformation and rescission.
Recognizing that the contract was already performed, the Appellate Division noted that reformation, rather than rescission, of the contract was the appropriate remedy. Noting that reformation is appropriate where there is mutual or unilateral mistake, the court set forth the elements of a claim for rescission, opining that the same elements are relevant to the analysis of reformation. Those elements included: (1) a mistake which would result in an unconscionable contract if enforced; (2) the mistake is material to the agreement; (3) the party making the mistake exercised reasonable care; and (4) the relief from the mistake would not seriously prejudice the other party. The court further reviewed cases where relief was afforded to contractors and/or owners on public contracts in the face of unilateral mistakes under certain circumstances.
Finding that an error existed in the estimated quantities for non-hazardous wastewater, that Dugan knew of the error and did not bring it to NJTA’s attention, and that without reforming the contract the contract would be unconscionable, the Appellate Division permitted Dugan to only collect a fair price for the work provided. As a result, the Appellate Division remanded the case for the trial court to enter judgment in the amount of $52,300, the determined value of the work provided by Dugan’s subcontractor. The court further ruled that Dugan was not entitled to interest in light of its inequitable conduct.
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U.S. Supreme Court Holds That Parties May Not Contract for Expanded Judicial Review of an Arbitration Award in Proceedings Governed by the Federal Arbitration Act
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Hall Street Associates, LLC v. Mattel, Inc.
2008 U.S. LEXIS 2911 (U.S. Mar. 25, 2008).
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| In a 6-3 decision, the Supreme Court held that in an arbitration case subject to the Federal Arbitration Act (“FAA”), the scope of judicial review of an award could not be expanded by agreement of the parties beyond the grounds for vacating or modifying an award specified in the FAA.
The case originally stemmed from a lease dispute between the toy maker Mattel and its landlord, Hall Street Associates. Mattel terminated its lease when the property’s water tested for high levels of contaminants, which was the result of the previous tenant’s use of the property as a manufacturing site. Hall Street filed suit claiming that a provision in the lease obligated Mattel to indemnify Hall Street for the costs of cleaning up the site.
The parties agreed to submit the claim to arbitration, and drew up an arbitration agreement which included a provision expanding district court review of an award to include review for legal error. The arbitration took place, and the arbitrator ruled in favor of Mattel.
Hall filed for district court review of the arbitrator’s award for errors of law. After several rulings by the lower courts, the Supreme Court granted certiorari to determine whether the parties could supplement by contract the FAA’s provisions governing judicial review of awards.
The Supreme Court reviewed the FAA and held that Mattel and Hall could not supplement by contract the FAA’s mechanisms for judicial review. The Court noted that the FAA provides that a court “must” confirm an arbitration award “unless” otherwise provided in other sections of the FAA. Further, the Court reasoned that the grounds for vacating an award under the FAA were limited to the circumstances of extreme arbitrator misconduct, and that limiting judicial review to this extent comports with the FAA’s policy of favoring arbitration.
Accordingly, the Court held that the FAA’s specified grounds for vacating or modifying awards provide the sole bases for review of an award made in an arbitration subject to the FAA.
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U.S. District Court in Vermont Holds That Material Breach of Contract Required to Constitute Default Under Performance Bond So As to Trigger Surety Obligation and Commence Running of Statute of Limitations – Nonmaterial Breaches Preceding Abandonment Did Not Commence Running of Statute, So That Case Was Not Time Barred
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John A. Russell Corp. v. Fine Line Drywall, Inc. and Acstar Insurance Co.
2008 U.S. Dist. LEXIS 13098 (D.Vt., February 21, 2008)
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| The United States District Court for the District of Vermont held that only a material breach of contract constitutes a default triggering the year-long period provided by 8 V.S.A. § 3663 for commencing an action.
In John Russell Corp., Subcontractor began work on the metal framing and gypsum drywall systems of a project in November 2003 and ceased work on November 10, 2004. Prior to beginning work, Subcontractor secured a performance and payment bond (the "Bond") with Contractor as obligee. During the Fall of 2004, Subcontractor's presence at the job site was sporadic. Daily work logs indicated that Subcontractor was absent from the job site on six occasions during September and October 2004, the periods of absence ranging from one to five days. After November 10, 2004, Subcontractor never returned to the work site. Contractor made repeated attempts to contact Subcontractor to determine whether it planned to complete performance of its obligations under the Subcontract. Subcontractor did not respond to any of those attempts and had no further communication with Contractor. By early December 2004, Contractor "suspected [that Subcontractor had] abandoned the project."
The Bond provided for payment of up to $ 1,186,034 (the full amount payable to Subcontractor under the Subcontract) unless "the Principal [Subcontractor] shall well and truly perform all the work specified in said contract, and shall promptly make payments to all persons supplying the Principal with labor and materials in the prosecution of the work provided for in said contract." The Bond also contained a time limitation provision: "[N]o suit or action shall be commenced hereunder after the expiration date of one year following the date on which Principal ceases work on said contract or the date on which final payment under the contract falls due, or the date on which goods and services were received by obligee, whichever occurs first." Contractor filed a complaint on December 6, 2005, seeking payment from Surety under the Bond.
The District Court entered summary judgment against Surety on Contractor’s claim. Surety, in a Motion for Reconsideration, then challenged the District Court's decision arguing that the Court erred when it held that only a material breach of the Subcontract constituted a default under the Bond, thus triggering the year-long period provided by 8 V.S.A. § 3663 for commencing an action – truncating the time within which Contractor had to file an action on the Bond.
Surety offered evidence of "Subcontract Change Order" documents submitted by Contractor. Based on these documents, Surety alleged that there were deficiencies in Subcontractor's performance of its obligations under the Subcontract throughout 2004. Surety further contended that those documents demonstrated that Contractor was aware of and sought to correct Subcontractor's deficient work "as early as March 2004" – and that these deficiencies, however minor, constituted a default under the Bond and triggered the year-long period provided by 8 V.S.A. § 3663. Surety itself never alleged deficiencies in Subcontractor's performance before November 10, 2004, constituted a material breach of the Subcontract.
The District Court noted that the adoption of Surety’s interpretation would breed confusion, as based on its suggested expansive and unprecedented approach, the most inconsequential act or omission, if not in strict compliance with the contract, could trigger the year-long statutory period. Surety exemplified this point by arguing that a subcontractor's failure to use enough fasteners on a segment of drywall could constitute a default. The Court found Surety's suggested approach unreasonable, as it provided no minimum threshold, and would therefore cause parties to bicker endlessly about how many missing drywall screws or clips constituted a failure to "well and truly perform" – sending the suretyship relationship, already fraught with anxiety, into a state of near-existential uncertainty.
Holding that "a surety's bond obligation is . . . triggered by the bonded contractor's material default of its performance or payment obligations under the bonded contract," the court found that Subcontractor neither materially breached nor repudiated its performance obligations under the Subcontract until after November 10, 2004. Accordingly, the time-limitation provisions in the Bond impermissibly truncated the year-long statutory period mandated by Vermont law. The District Court thus voided the offending provisions in the Bond, and upheld the grant of summary judgment to Contractor.
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Colorado Court of Appeals Holds Differing Site Condition, Mutual Mistake and Negligent Misrepresentation Claims Viable
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URS Group, Inc. v. Tetra Tech FW, Inc. and Foster Wheeler Environmental Corporation
2008 Colo. App. LEXIS 159 (February 7, 2008)
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| The Court of Appeal of Colorado held that the plaintiff subcontractor did not assume the risk of differing site conditions and thus its claims for differing site conditions and mutual mistake were viable. Moreover, the Court held that the economic loss rule did not bar plaintiff’s negligent misrepresentation claim, because the alleged misrepresentation occurred during negotiations before the contract was formed.
Tetra Tech FW Inc. and Foster Wheeler Environmental Corporation (collectively (“TTFW”) was the program management contractor for the arsenal remediation project under a contract with the United States Army (the “Project”). TTFW issued a request for proposal (the “RFP”) seeking bids for a soil remediation project which included foundation demolition work. URS Group, Inc. (“URS”) submitted a bid of $10,857,570 and was awarded the subcontract (the “Subcontract”). URS commenced demolition and encountered problems removing the foundations. URS alleged that the concrete structures encountered during demolition did not conform with to the information provided in the RFP. Consequently, URS submitted a claim under the subcontract’s differing site condition clause to increase the contract price by $9,166,925. TTFW refused to pay the claimed amount and URS initiated the above captioned suit seeking, among other relief, relief for differing site conditions under theories of breach of contract, breach of the duty of good faith and fair dealing, mutual mistake, equitable adjustment and negligent misrepresentation. After a bench trial, the trial court found in favor of TTFW on all differing site condition claims finding that URS assumed the risk of differing site conditions and thus the URS’ theories of recovery which were premised on differing site conditions must fail. The Trial court failed to consider URS’ negligent misrepresentation claim. URS appealed the decision.
The gravamen of the trial court’s denial of the differing site condition claims was that URS assumed the risk of differing site conditions. The trial court found that by entering into a fixed price contract, URS had assumed the risk of encountering subsurface conditions. URS argued, and the Court agreed, that this holding ignored the risk allocation function of the subcontract’s differing site conditions clause. The Court noted that the relevant portions of the clause provided:
“(a) The Contractor shall promptly, and before conditions are disturbed, give written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in the contract….
(b) …If the conditions do materially so differ and cause an increase or decrease in the Contractor’s cost of, or the time required for, performing any part of the work under this contract…an equitable adjustment shall be made under this clause and the contract modified in writing accordingly.”
The Court held that the trial court erred in concluding that URS could not recover additional compensation for differing subsurface conditions simply because it entered into a fixed price contract. The Court explained that the purpose of a differing site conditions clause is “to take at least some of the gamble on subsurface conditions out of bidding.” The clause thus encourages more accurate bidding. “Where a fixed price contract has a [differing site conditions] clause, the contractor may be entitled to an equitable adjustment if subsurface conditions are materially different from those indicated in the contract.”
Having recognized that URS did not assume the risk of differing site conditions and thus may be entitled to an equitable adjustment of the contract, the Court also addressed the trial court’s denial of URS’ mutual mistake claim. The trial court’s denial was premised on the finding that URS had assumed the risk of differing site conditions. Because this was not the case, the Court found the mutual mistake claim viable.
Finally, turning to URS’ negligent misrepresentation claim, URS argues that the trial court erred in failing to address its claim. TTFW argued that URS could not prevail on the claim because the economic loss rule would bar recovery for negligent misrepresentation as URS suffered only economic damages flowing from a contractual duty and not another duty under tort law. The Court found that URS alleged that the negligent misrepresentation occurred before the parties entered into the subcontract and thus the economic loss rule would not bar such a claim.
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U.S. District Court in New York Draws Distinction Between Damages Recoverable for Defective Work in Tort and for Breach of Contract - Where Tort Claim Barred By Statute of Limitations, Owner Could Not Recover for Cost of Replacement of Structure Destroyed By Fire Allegedly Resulting From Defective Work of Renovation Contractor
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Regent Ins. Co. v. Storm King Contr., Inc.
2008 U.S. Dist. LEXIS 16513 (S.D.N.Y. Feb. 26, 2008)
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| In June 1999, the owner of The Emerson Inn hired Storm King to act as its general contractor in the remodeling and rebuilding of the Inn. Under their agreement, Storm King was not responsible for the design of the project or for compliance with applicable law, building codes, or regulations, and it was agreed that the remedy for any defective work would be limited to correction of the defects. Storm King entered into a subcontract with Sullivan Fire Protection for the installation of a fire sprinkler system. The subcontract incorporated the terms of the agreement between the owner and Storm King. Its scope of work section provided that Sullivan’s work was to be performed in accordance with the plans and specifications prepared by the design professional.
In April 2005, the Inn was completely destroyed by a fire originating in an outdoor garage enclosure located near the kitchen that spread rapidly and unimpeded throughout the building. In April 2006, the owner’s insurer filed a complaint against Storm King, Sullivan, and the design professional alleging the work had been performed in an improper and un-workmanlike manner, seeking the reconstruction value of the Inn. The defendants moved for summary judgment contending, among other things, that the plaintiff’s claim sought tort damages which were barred by the applicable three-year statute of limitations.
The plaintiff conceded the project was completed in May of 2000. Accordingly, the court held that the plaintiff’s right to seek recovery in tort had expired in May 2003 and plaintiff was limited to contract damages. The more complicated issue became identifying whether the damages plaintiff sought were tort or contract damages.
In making its analysis, the court noted that in determining whether a loss is in tort or in contract, the New York Court of Appeals has considered the nature of the injury, the manner in which the injury occurred, and the resulting harm. The court reviewed applicable precedent, observing that where a plaintiff seeks enforcement of the bargain, the action should proceed in contract, but where there is an “abrupt cataclysmic occurrence” resulting in injury to person or property, claims may also sound in tort. The court determined that the key consideration in the cases reviewed to have been that in personal injury or injury to property cases damages are recoverable only in tort and benefit of the bargain or general damages underlie a contract action. Plaintiff argued that by seeking the replacement value of the Inn, it was seeking only the value of its original bargain and therefore its damages were recoverable under a contract theory. The court disagreed, holding that some of the damages plaintiff sought were extraordinary damages caused by a fire, relief only available in tort, and a relief unavailable to plaintiff because the tort statute of limitations had expired.
Further, the court found New York had adopted the rule that the appropriate measure of damages for a breach of contract action in a construction case is the cost to replace or repair the alleged defect, or, the diminution in value attributable to the defect as of the date of completion. Although recognizing the power of parties to define the scope of their respective liability through contract so as to alter the default rule, the court found that the parties had not done so here. Plaintiff failed to show the parties had contemplated the “abrupt cataclysmic occurrence” of a fire at the Inn related to Storm King’s work. In fact, the parties had specifically waived consequential damages. The court found the waiver did not foreclose all remedies for breach, and furthermore that such a waiver was not barred by sections 5-322.1 or 5-323 of New York’s General Obligations Law which applied only to tort actions. Additionally, the contract language reflected the parties’ intent to limit the owner’s recovery to general construction contract damages, and the court held the insurer’s rights as subrogee to be derivative and likewise limited.
After a detailed analysis, the court concluded replacement value sought by plaintiff was recoverable only in tort and barred by the three-year tort statute of limitations. As a result, plaintiff was entitled to seek only the cost of repairing the alleged defects as of the date of project completion.
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