LA Unified School Dist. v. Great Amer. Ins. 6/5/08 CA2/2

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State: California

Court: 1st District Court of Appeal 1st District Court of Appeal

Docket No: B189133

Case Date: 09/17/2008

Preview:Filed 6/5/08

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO LOS ANGELES UNIFIED SCHOOL DISTRICT, Plaintiff and Respondent, v. GREAT AMERICAN INSURANCE COMPANY et al., Defendants and Appellants. B189133 (Los Angeles County Super. Ct. No. BC247848)

APPEAL from an order of the Superior Court of Los Angeles County. Wendell Mortimer, Jr., Judge. Affirmed in part, reversed in part, and remanded.

Wilson Elser Moskowitz Edelman & Dicker, John J. Immordino and Susannah M. Dudley for Defendant and Appellant Great American Insurance Company.

Monteleone & McCrory, Joseph A. Miller and Leighton T. Brown II for Defendant and Appellant Hayward Construction Company, Inc.

Bergman & Dacey, Inc., Gregory M. Bergman, John P. Dacey, and Jorge J. Luna for Plaintiff and Respondent.

In this consolidated appeal, defendants and appellants Hayward Construction Company, Inc. (Hayward) and Great American Insurance Company (Great American) (collectively, appellants) appeal from a final judgment entered after the trial court granted a motion for summary adjudication and motion for judgment on the pleadings in favor of plaintiff and respondent Los Angeles Unified School District (District), and entered dispositive rulings in favor of the District on remaining legal issues. Appellants also appeal from the trial court's award of attorney fees. We reverse the judgment and reverse the attorney fee award. FACTUAL BACKGROUND 1. The Project The Queen Anne Place school project (the project) involved construction of a new elementary school in Los Angeles. In March 1996, following competitive bids required by law, the District contracted with Lewis Jorge Construction Management, Inc. (Lewis Jorge) to construct the project for approximately $10.1 million. By late 1998, the District became dissatisfied with Lewis Jorge, and on February 9, 1999, the District declared Lewis Jorge to be in material breach and default. At that time, Lewis Jorge claimed it had completed work totaling $9.4 million, or approximately 93 percent of the original contract price.1 On April 27, 1999, the District's governing board adopted a declaration of emergency pursuant to Public Contract Code section 20113,2 which allowed the District to enter into a contract to complete the project without advertising for or inviting bids. The District then sought completion cost proposals from other general contractors. Completion of the project required correction of certain work performed by Lewis Jorge.

The default precipitated a lawsuit among the District, Lewis Jorge, and various subcontractors, which was resolved by settlement in 2003.
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All further statutory references are to the Public Contract Code, unless otherwise

stated.

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To assist potential contractors, the District created a "pre-punch list" that identified the remaining work and work to be corrected. The District received cost estimates from three general contractors, including Hayward, and ultimately selected Hayward to complete the project. 2. The Completion Agreement Between Hayward and the District In June 1999, Hayward and the District entered into a completion contract for the project (completion agreement). Paragraph 8 of the completion agreement states that the contract "can be generally described as `a cost plus percentage fee (10%) with a guaranteed maximum,'" pursuant to which the District agreed to pay Hayward for cost of work, labor, and actual costs, plus a fee of 10 percent calculated as a markup on the actual costs incurred. Paragraph 11 states: "Contractor guarantees that the maximum amount payable by the District for the Cost of the Work plus the Contractor's Fee described in Paragraph 10 will not exceed Four Million Five Hundred Thousand Dollars ($4,500,000.00)." In paragraph 15, the parties agreed that the scope of Hayward's work included the items listed on the pre-punch list. That paragraph states: "The Contractor's obligation to complete the work in accordance with this Completion Agreement and the Contract Documents shall include the responsibility to correct deficiencies in the work performed by the former contractor, without limitation, as noted on the current correction list issued by the District." The "correction list" referred to in this paragraph consists of a 22-page pre-punch list prepared by the District's architect, and an 86-page pre-punch list prepared by the District's inspectors. The final entry on the architect's pre-punch list states: "Corrections or comments made in regard to the pre-punch list during this review do not relieve the Contractor from compliance with the requirements of the drawings and specifications. This review is only for General Conformance with the design concept of this project and general compliance with the information given in the Contract Documents. The Contractor is responsible for confirming all quantities, dimensions and techniques of 3

construction; coordinating all work with that of all other trades and performing his work in a safe, acceptable and satisfactory manner." Each page of the pre-punch list prepared by the District's inspectors contains the following caption: "This is a courtesy pre-punch list and should not be taken as a final inspection punch list. This is not the punch list of minor corrective items made at the final inspection." After Hayward and the District executed the completion agreement, Great American issued a performance bond for $4.5 million that guaranteed Hayward's performance of the contract. 3. Hayward's Work and the District's Advance of Sums Exceeding $4.5 Million Not long after Hayward commenced work, a dispute arose between Hayward and the District concerning work that was not listed in either of the pre-punch lists. This work included correcting defects in the stucco work and subsurface defects in the bathroom tile work. In December 1999, Hayward advised the District that many unforeseen conditions made it necessary to increase the contract price beyond $4.5 million. In May 2000, the Board of Education allocated $3 million to complete the project. After the Board's action, the District issued a purchase order for $2 million to complete the project. Payment was made to Hayward under an express reservation of rights, which stated that "the advancing of costs to [Hayward is] without prejudice to all of the District's rights to recover the monies advanced against all responsible parties, including [Hayward] and its surety company if appropriate." In early February 2001, the parties met to discuss the payments. On February 16, 2001, the District wrote Hayward a letter explaining the District's position that cost of the work in excess of $4.5 million, plus certain change orders, were Hayward's contractual responsibility. The District demanded that Hayward and its surety, Great American, return more than $1 million the District paid to Hayward over and above the $4.5 million contract price. Hayward and Great American refused, and in March 2001 the District commenced this action.

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PROCEDURAL BACKGROUND 1. The Complaint The District's complaint alleged breach of contract, breach of performance bond, and declaratory relief. The District sought a declaration that the completion agreement required Hayward to "complete construction of the Queen Anne Place Elementary School Project, including all deficiencies existing in the Project at the time [Hayward] commenced work thereat whether such deficiencies were latent or patent," and that Hayward "agreed to so perform, all for the guaranteed maximum price payable by the District of $4,500,000.00." Hayward and Great American filed answers to the complaint, and Hayward cross-complained for breach of contract, rescission, and declaratory relief.3 2. The District's Motion for Summary Adjudication In June 2003, the District moved for summary adjudication on the issue of contract interpretation. Specifically, the District sought a ruling that Hayward was contractually obligated to complete all work on the project, including all deficiency corrections, for a guaranteed maximum cost of $4.5 million. In opposition, Hayward argued that triable issues of material fact precluded summary adjudication of this issue and that the completion agreement was ambiguous as to the scope of Hayward's obligation to correct deficient work. Hayward proffered extrinsic evidence to support its position and argued that the trial court was required to consider this evidence on a provisional basis before determining whether or not the contract was ambiguous. The District objected to Hayward's evidence as "inadmissible extrinsic evidence being presented to vary, alter and/or add to the terms of an integrated written instrument in violation of California law." The trial court agreed with the District, and on August 29, 2003, issued a minute order sustaining the District's objections to evidence in support of Hayward's opposition to the summary adjudication motion. Without indicating whether or not it had given

The action was consolidated with a related action, Mobley v. Lewis Jorge Construction Manufacturing, Inc., case No. BC193087, which subsequently settled.

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provisional consideration to Hayward's evidence, the trial court concluded that "[t]he contract is not ambiguous." The trial court then granted the District's motion for summary adjudication on the issue of contract interpretation, concluding: "Hayward had a duty under the contract to complete the project by performing all work in conformance with the Completion Agreement and the Contract Documents including the responsibility to correct deficiencies in the work performed by the former contractors without limitation as notes on the then-current correction list issued by the District. In the contract each of the parties contracted for certain risks in exchange for certain benefits. Hayward was required to do the work for an amount not to exceed $4.5 million." 3. The District's Motion to Bifurcate Legal Issues and Motion for Judgment on the Pleadings In September 2003, the District moved to bifurcate trial on six legal issues, and the trial court granted the District's request to try two of these issues: (1) whether contract modifications were required to be in writing, approved by the District's board, and signed by both parties; and (2) whether District field representatives had legal authority to modify the contract. The District also filed a motion for judgment on the pleadings relating to Hayward's rescission and declaratory relief claims. In its motion, the District argued that the completion agreement was a contract awarded pursuant to statutory competitive bidding requirements and could not be set aside as a matter of law. The District maintained that the completion agreement was a continuation of the competitively bid Lewis Jorge contract, which was never extinguished, but which had been "transitioned" to Hayward pursuant to article 16 of the Lewis Jorge contract.4

Article 16 of the Lewis Jorge contract provides in part: "If, in the opinion of the District, the Contractor at any time during the progress of the work refuses or neglects to supply a sufficiency of material and labor, or fails to perform any provision of this contract, including safety requirements, the District may without prejudice to any other remedy do any or all of the following: (1) make good such deficiencies or complete the

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In January 2004, the trial court granted the District's motion for judgment on the pleadings, relying on California case law holding that a contractor may not abandon a public contract and seek recovery under equitable remedies, because public works contracts may only be made under prescribed modes. (See Amelco Elec. v. City of Thousand Oaks (2002) 27 Cal.4th 228 (Amelco).) The trial court stated: "Hayward is subject to a public contract which arose initially by competitive bidding. It was altered and modified as required by Public Contract Code Section 7105(d)(2) through Article 165 as well as Public Contract Code Section 20113. This transition does not exempt it from Public Contract Code Section 7105(d)(2).6 Neither Hayward nor the Court can, therefore, rescind the contract to invoke some form of equitable recovery." On the two bifurcated legal issues, the trial court concluded "that all change orders for payment for extra work must be in writing and signed by the parties," and "that all change orders for extra work must be in writing and approved by [the District]." It also concluded that "the field representative[s] of the District did not have the authority to alter, amend, modify and/ or change in any way the Completion Agreement and the Contract Documents." The trial court then invited briefing on the question of whether or

contract by whatever method the District may deem expedient, and the cost and expense thereof shall be deducted from the contract amount; (2) initiate default procedures; and (3) initiate procedures to declare the Contractor a nonresponsible bidder for a period of from two to five years." Although unclear, the reference to "Article 16" appears to be to the default provisions set forth in article 16 of the Lewis Jorge contract, and not to paragraph 16 of the completion agreement, which governs contract modifications and changes. Public Contract Code section 7105, subdivision (d)(2) provides, in part that contracts of public agencies "required to be let or awarded on the basis of competitive bids pursuant to any statute may be . . . modified only if the . . . modification is so provided in the contract or is authorized under provisions of law other than this subdivision."
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not there were any writings which conform to paragraph 16 of the completion agreement obligating the District to pay more than the $4.5 million plus executed change orders. Hayward identified a purchase order which it claimed obligated the District to pay more than $4.5 million. On March 3, 2004, the trial court ruled against Hayward, finding, among other things, that the purchase order did not bind the parties because it was not signed. The trial court then concluded that the District "was only obligated to pay the $4.5 million contract price plus executed change orders." In its March 3, 2004 minute order, the trial court requested briefing by the parties identifying any remaining legal issues. 4. The Remaining Issues In response to the trial court's March 3, 2004 order, the District submitted briefs on four legal issues: (1) whether Hayward was obligated to repay the District $1,144,738.15 in funds advanced over and above the $4.5 million contract price; (2) whether Great American was jointly and severally obligated to repay the $1,144,738.15; (3) whether Hayward's claims for interest, penalties, and attorney fees were no longer viable; and (4) whether Hayward's breach of contract cause of action based on misrepresentation was no longer viable. The District maintained that these issues could be decided as a matter of law, in light of the trial court's previous rulings on the District's motion for summary adjudication and motion for judgment on the pleadings. Hayward argued that the trial court's prior rulings were erroneous and that unresolved factual issues precluded the trial court from deciding, as a matter of law, the issues identified by the District. Great American joined in Hayward's arguments and claimed the right to assert all of Hayward's affirmative defenses. Great American also identified the following remaining legal issues relating to the District's claim on the performance bond: (1) whether Hayward completed the projected and corrective work noted on the punch list for $4.5 million, thereby exonerating Great American's obligation on the performance bond; (2) whether the work performed by Hayward over the $4.5 million was outside the scope of the contract; (3) whether Great American is liable under the terms of the 8

performance bond for sums paid by the District in excess of $4.5 million; (4) whether, in light of the trial court's ruling on the District's motion for summary adjudication that the contract was not ambiguous, Hayward's obligations under the completion agreement were limited to patent defects pursuant to paragraph 13 of that agreement; and (5) what preclusive effect, if any, the Consent of Surety had on Great American's defenses. On May 19, 2004, the trial court ruled that Hayward could not maintain a cause of action for breach of contract based on misrepresentation, because "Hayward's recitation of the facts does not contain any showing that any omissions were actively concealed or that material information was intentionally omitted by" the District. The trial court further determined that Great American was jointly and severally obligated to repay amounts owed by Hayward to the District. The court stated: "The issues raised by Great American regarding Hayward's obligations have been previously decided. Great American's performance bond is a broad form bond obligating it jointly and severally with Hayward to repay the [D]istrict the monies it overpaid Hayward under its reservation of rights." The trial court then ordered Hayward and the District to file briefs "setting forth any remaining legal issues." In response, Hayward briefed two issues: (1) whether or not the District breached implied warranties that the plans and specifications were complete, accurate, and free from defects; and (2) whether the District breached the implied covenant of good faith and fair dealing. On September 1, 2004, the trial court ruled against Hayward on these two issues. The parties agreed to meet and confer and to file a joint statement on the remaining legal issues. The parties agreed that certain issues involved factual questions to be presented to a jury at trial.7 The parties also agreed that issues relating to the District's entitlement to

These issues concerned the District's claim on Hayward's license bond, the District's claims with regard to the HVAC system and the grass field, Hayward's claim for interest on allegedly late progress payments, and the dates of the checks issued for the $1,144,738.15 advanced by the District.

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prejudgment interest, attorney fees and costs should be resolved through posttrial motions. The parties were unable to reach agreement on a joint statement, however, and submitted separate briefs on the remaining legal issues. In its brief, the District argued that several of Hayward's and Great American's affirmative defenses to the District's claim for repayment of $1,144,738.15 were based on undisputed facts that had been presented previously to and considered by the trial court in ruling on the District's motion for summary adjudication and motion for judgment on the pleadings. The District maintained that unless Hayward or Great American presented new facts supporting those affirmative defenses, the trial court's prior rulings were dispositive as a matter of law. Hayward contended that issues remained concerning several of its affirmative defenses. Great American joined in Hayward's contentions and in addition, claimed the following of its own affirmative defenses remained for trial: waiver, estoppel and unclean hands; fraud, misrepresentation and concealment; District's breach of contract and contract terms; mistake; mitigation of damages; fault of others; no proximate cause; and failure of conditions. 5. The November 10, 2004 Hearing A hearing on the remaining legal issues was held on November 10, 2004. The minute order for that hearing states: "As to Hayward's and Great America[n]'s request for trial on the affirmative defenses to [the District's] breach of contract action, this Court has previously ruled. These issues were previously raised or could have been raised prior to the Court's rulings as reflected in the minute orders of August 29, 2003, January 14, 2004 and March 3, 2004." On November 19, 2004, Great American filed an exception to the trial court's November 10, 2004 ruling, claiming that the issues on the affirmative defenses were never determined, or were erroneously determined, in prior hearings and rulings, and that Great American had been denied due process because the trial court's November 10, 2004 ruling was without notice or opportunity to be heard. At a status conference on September 2, 2005, the trial court granted Great American leave to file a motion for an order determining that the completion agreement 10

was legally invalid because the District's emergency declaration pursuant to section 20113 was inadequate. Great American filed its brief in support of this motion on October 14, 2005. On October 14, 2005, Great American also filed a request for clarification on the trial court's ruling granting the District's motion for summary adjudication. On November 22, 2005, the trial court stated that its ruling granting the District's motion for summary adjudication was based on both the District's emergency declaration pursuant to section 20113 and the trial court's determination that the completion agreement was not a separate contract but a continuation of the competitively bid Lewis Jorge contract. The trial court also concluded that the completion agreement was not illegal but "was validly let and modified pursuant to Public Contract Code

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