Contractor can sue owner for abandonment

Real Estate Weekly, Sept 18, 1991 by Peter Goetz

Contractor can sue owner for abandonment

In C. Norman Peterson Co. vs. Container Corporation of America, 218 Cal. Rptr. 295 (1985), an appellate court in California permitted a general contractor, under a contract having a guaranteed maximum price, to recover the actual reasonable value of its work in performing and completing a project, despite a finding that the owner had breached and abandoned the contract.

In C. Norman, supra, plaintiff, as general contractor, and defendant, as owner, entered into a contract for the modernization of the owner's papermill. The contract contained a specific completion date and time was of the essence.

As required by the contract, the general contractor performed its work in three phases; first, while the papermill was in operation; second, while the papermill was shutdown; and third, during a two-month clean-up period. Phase Two was critical in order to ensure that the papermill could recommence operations.

Upon completion of the project, the general contractor brought suit against the owner to recover its actual total costs expended in completing the project due to numerous errors and changes in the constructions drawings which resulted in extra work beyond the scope of the original contract.

It was brought out at trial that the general contractor was required to start its work with inadequate mechanical drawings which were to be revised by the engineer on the project. However, the engineer apparently missed most of the deadlines for delivering these revised drawings, and final drawings were not furnished to the general contractor until more than one year after the general contractor had begun its work. Even then, the drawings contained serious errors and omissions.

It was also stated at the trial that during the critical shutdown period the final drawings issued by the owner were still inadequate and further revisions were required. Due to time constraints, the general contractor was forced to proceed with oral change orders. Moreover, the engineer on the project expended a total of more than 16,000 hours redesigning the project while the general contractor was performing its work. By the project's completion, the general contractor had spent over $3 million more in direct labor and material costs than anticipated.

In light of the history of the project, the lower court ruled that the owner had breached and abandoned the contract and that, as a result, the guaranteed maximum provisions of the contract were not applicable and, therefore, the general contractor was entitled to recover the reasonable costs of its work.

The owner appealed the lower court's decision on several grounds. The owner argued that the lower court's findings that the contract had been abandoned and breached was inherently inconsistent since completion of the contract is inconsistent with the holding that the contract was abandoned.

The appellate court, however, disagreed, and held that the theory of abandonment is considered differently in a construction contract from other types of contracts. It stated:

"In the specific context of a construction contract, however, it has been held that when an owner imposes upon a 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. (citations omitted) ... The contractor, with the full approval and expectation of the owner, may complete the project (citations omitted) although the contract may be abandoned, the work is not."

The appellate court affirmed the lower court's findings of abandonment by stating that "The change orders and extra work imposed by the defendant (owner) upon the plaintiff [general contractor] were of such magnitude as to change the scope of the work originally contemplated under the contract." Accordingly, the court allowed the general contractor to recover the reasonable value of the work performed on a quantum meruit basis. For those not familiar with Latin, the term quantum meruit means the fair price and reasonable (actual) value of the work performed.

The appellate court also ruled that the owner breached the contract in the process of abandoning same. With respect to the owner's argument that it is impossible to have an abandonment and breach of the same contract, the court reminded the owner of the uniqueness of construction contracts and explained that the owner's breaches of contract were the "precipitating cause" of the abandonment. However, the court stressed that although a contract can be breached and abandoned this does not provide for a double recovery and the injured party is only entitled to recover the unpaid reasonable costs of its work. It should be pointed out that this California decision is certainly not consistent with law throughout the various states. In many states, a contractor cannot invoke the remedy of quantum meruit if the contract has been substantially completed.

The C. Norman court explains what is required for a finding of abandonment of a construction contract. Changes imposed upon the contractor by the owner must be of "such magnitude" to severely change the scope of work under the contract. The decision also establishes the type of damages that are recoverable in an abandonment situation when the contractor completes its work. The contractor is entitled to the reasonable value of its work performed and not measured by the original contract price.