Opinion ID: 2585212
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Heading Rank: 1

Heading: Does the Abandonment Theory of Liability Apply Against a Public Entity?

Text: In general, under long-standing California law, if a public contract is declared void, a contractor may not be paid for work performed under that contract. ( Miller v. McKinnon (1942) 20 Cal.2d 83, 89, 124 P.2d 34 ( Miller ).) In Miller, we explained, Persons dealing with the public agency are presumed to know the law with respect to the requirement of competitive bidding and act at their peril.... [¶] ... If, as we have seen, the contract is absolutely void as being in excess of the agency's power, the contractor acts at his peril, and he cannot recover payment for the work performed. ( Miller, at p. 89, 124 P.2d 34.) Similarly, this court has not generally allowed quantum meruit recovery for extra work performed beyond the contract requirements. ( Zottman v. San Francisco (1862) 20 Cal. 96, 101, 105-106, 1862 WL 509 ( Zottman ).) In Zottman, the contractors were hired by the City of San Francisco to do work improving Portsmouth Square, including constructing a fence around the square. ( Id at p. 99, 1862 WL at .) After the contract was entered into, the officials appointed by the city's common council, in [the] presence of the City Attorney, the President of the Board of Aldermen, and of different members of the Board, ordered the contractors to perform ... extra work ... that is, to construct a stone base in place of the one of wood, and to paint the iron of the fenceand assured them that the city would pay them therefor.... [A]U the members of the Common Council must have been aware of the order to the contractors, as the work was in full view from the windows of the Council chambers, and was the subject of general conversation and approval by the members at their various sessions and elsewhere, and no opposition to it was ever expressed by any member. ( Id at p. 99, 1862 WL at .) When the contractors were not paid for the extra work, they sued the city, and nonsuit was entered in the city's favor. ( Id. at p. 100, 1862 WL at -4.) We affirmed on the ground the city charter authorized only a contract given to the lowest bidder. ( Zottman, supra, 20 Cal. at pp. 103, 108, 1862 WL at , 7.) A contract made in disregard of these stringent but wise provisions cannot be the ground of any claim against the city.... The mode in which [the Common Council] could bind the [municipal] corporation by a contract for the improvement of city property was prescribed by the charter, and no validity could be given by them to a contract made in any other manner. ( Id at pp. 101-102, 1862 WL at .) We observed, `It may sometimes seem a hardship upon a contractor that all compensation for work done, etc, should be denied him; but it should be remembered that he, no less than the officers of the corporation, when he deals in a matter expressly provided for in the charter, is bound to see to it that the charter is complied with. If he neglect[s] this, or choose[s] to take the hazard, he is a mere volunteer, and suffers only what he ought to have anticipated. If the statute forbids the contract which he has made, he knows it, or ought to know it, before he places his money or services at hazard.' ( Id. at pp. 104-105, 1862 WL at -6; Los Angeles Dredging Co. v. Long Beach (1930) 210 Cal. 348, 353, 291 P. 839 [it is settled that the mode of contracting, as prescribed by the municipal charter, is the measure of the power to contract; and a contract made in disregard of the prescribed mode is unenforceable]; First Street Plaza Partners v. City of Los Angeles (1998) 65 Cal.App.4th 650, 669, 76 Cal. Rptr.2d 626 [No case has ever held that a city may be bound to a contract by estoppel]; id. at p. 671, 76 Cal.Rptr.2d 626 [[T]he proposition that a contract with a city is not binding unless formed in accordance with the city charter has been in place in California at least since the time of the Civil War, and is based on analogous authority traceable back to Chief Justice Marshall].) The question in this case is whether a public entity is liable under an abandonment theory to a contractor when it makes numerous changes to the contract work, and these changes allegedly make it difficult and more costly to perform the contract because of delay, interference with the work of other trades, and other problems not captured in the price of the executed change orders. In California, the Courts of Appeal have concluded that private parties may impliedly abandon a contract when they fail to follow change order procedures and when the final product differs substantially from the original. ( Opdyke & Butler v. Silver (1952) 111 Cal. App.2d 912, 913-914, 916, 918-919, 245 P.2d 306 ( Opdyke ) [owner made numerous changes, the parties consistently ignored the requirement that changes be in writing and priced before the work was done, and owner paid sums substantially over the maximum contract limit without requesting justification for the extra work]; Daugherty Co. v. Kimberly-Clark Corp. (1971) 14 Cal.App.3d 151, 154-156, 159, 92 Cal.Rptr. 120 [summary judgment reversed because of disputed issues of fact on abandonment and other issues; noted the parties consistently ignored the procedures provided by the contract for the doing of extra work, and that [abandonment of the contract can occur in instances where the scope of the work when undertaken greatly exceeds that called for under the contract].) In C. Norman Peterson Co. v. Container Corp. of America (1985) 172 Cal.App.3d 628, 632-634, 218 Cal.Rptr. 592 ( Peterson ), Container Corporation of America (CCA) contracted with C. Norman Peterson Co. (CNP) to modernize CCA's recycling mill based in part on drawings by CCA's engineer Industrial Mechanical Corporation. During the first 14 months, the work was to be performed while the papermill was in operation. During the next two months, work was to be performed while the mill was shut down. This shutdown period was the most critical phase of the project; time was of the essence during this period so the mill could be restarted. There was then to be a two-month cleanup period. ( Id. at p. 633, 218 Cal.Rptr. 592.) During the shutdown phase hundreds of changes were ordered, and the written change order procedure was abandonedit became `strictly oral' ( Id. at p. 637, 218 Cal.Rptr. 592.) On appeal, the court affirmed the judgment entered in CNP's favor. It noted, a construction contract is abandoned when an owner imposes upon the 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. ( Peterson, supra, 172 Cal. App.3d at p. 640, 218 Cal.Rptr. 592.)  [Abandonment requires a finding that both parties intended to disregard the contract. ( Id. at p. 643, 218 Cal.Rptr. 592; Ben-Zvi v. Edmar Co. (1995) 40 Cal. App.4th 468, 474, 47 Cal.Rptr.2d 12 [Abandonment occurs ... only where both contracting parties agree `that the contract is terminated and of no further force and effect'].) Although the contract may be abandoned, the work is not. ( Peterson, at p. 640, 218 Cal.Rptr. 592.) In Peterson, there were hundreds of changes, many of them significant, resulting in extra work having to be performed by CNP. As in Opdyke, the requirement for written change orders was ignored during most of the project period, and it was completely abandoned during the critical shutdown stage. ( Peterson, supra, 172 Cal.App.3d at p. 641, 218 Cal.Rptr. 592.) Moreover, the Industrial Mechanical Corporation engineer spent 16,414 hours redesigning the project after work had begun. ( Id. at pp. 636, 642, 218 Cal.Rptr. 592.) The Court of Appeal also upheld the trial court's further finding that CCA had breached the contract. ( Peterson, supra, 172 Cal.App.3d at pp. 642-644, 218 Cal. Rptr. 592.) [R]ather than being inconsistent with abandonment, . . . breaches by CCA were actually the precipitating cause for the construction contract being abandoned within the meaning of Daugherty and Opdyke and the subsequent implicit understanding by the parties to proceed with the project on a quantum meruit basis. So long as there was no double recovery based on the trial court's dual findings, we conclude the trial court could properly find both a breach of the contract and a subsequent abandonment of the contract brought about by the breach. ( Id. at pp. 643-644, 218 Cal.Rptr. 592.) Dodge v. Harbor Boat Bldg. Co. (1950) 99 Cal.App.2d 782, 222 P.2d 697 ( Dodge ) also appears to be cited by Amelco as an abandonment case, but it does not seem to rely on this theory. In Dodge, National Ship Service Co., Inc. (National Ship) performed subcontracting work for Harbor Boat Building Co. (Harbor Boat) mothballing two naval vessels. ( Id. at pp. 784-785, 222 P.2d 697.) While the project was ongoing, the Navy stated that change orders would be issued to account for certain extra work, and invited the contractors to submit a request. ( Id. at p. 786, 222 P.2d 697.) National Ship submitted to Harbor Boat a detailed description of its $79,592.65 of extra work ( id. at p. 789, 222 P.2d 697) requested by Harbor Boat that was `different from the original specifications or not specified at all' ( Id. at p. 787, 222 P.2d 697.) National Ship invited Harbor Boat to inspect its records; Harbor Boat accepted them as correct. ( Id. at p. 791, 222 P.2d 697.) Harbor Boat submitted a consolidated request to the Navy which did not separately delineate National Ship's costs. ( Id. at pp. 789, 791, 222 P.2d 697.) While Harbor Boat was paid $141,622 from the Navy for the extra work, it paid National Ship nothing. ( Id at p. 789, 222 P.2d 697.) The trial court awarded National Ship a net judgment of $61,610, apparently on a quantum meruit theory. ( Id. at p. 791, 222 P.2d 697.) The Court of Appeal affirmed, noting there was an implicit determination by the trial court that the value of the work done by National Ship provided a proper basis for a judgment in its favor and that it was unnecessary to sue on the original contract. ( Dodge, supra, 99 Cal.App.2d at p. 790, 222 P.2d 697.) The court noted that a different result would not have been reached if plaintiff had sued upon the contract, and also for the extra work. ( Id at p. 791, 222 P.2d 697.) Hence, in Dodge, it appears the contractor carefully delineated its $79,592.65 in costs ( Dodge, supra, 99 Cal.App.2d at p. 789, 222 P.2d 697) from the extra work requested by Harbor Boat that was `different from the original specifications or not specified at all' ( Id. at p. 787, 222 P.2d 697.) Harbor Boat was paid for that and its own extra work, but failed to pass on any portion of the Navy's payment to National Ship. This obvious inequity does not suggest the Court of Appeal concluded the contract was abandoned, but rather that National Ship was found to be entitled to payment for at least a portion of the authorized extra work. Indeed, the Court of Appeal noted that a different result would not have been reached if plaintiff had sued upon the contract, and also for the extra work. ( Id. at p. 791, 222 P.2d 697.) The United States Federal Court of Claims has historically recognized government breach of contract liability under the doctrine of cardinal change. Here, Amelco asserts the abandonment doctrine is coextensive with the cardinal change doctrine. In fact, the theories are fundamentally different. Under Opdyke and Peterson, once the parties cease to follow the contract's change order process, and the final project is materially different from the project contracted for, the contract is deemed inapplicable or abandoned and is set aside. The plaintiff may then recover the reasonable costs for all of its work. ( Peterson, supra, 172 Cal.App.3d at p. 645, 218 Cal.Rptr. 592; see Opdyke, supra, 111 Cal.App.2d at p. 919, 245 P.2d 306.) There is little, if any, separation between the theory of liability and the measure of damages. This is the approach Amelco urges we apply here. Under the cardinal change doctrine, the cardinal change constitutes a material breach of the contract. ( Alliant Techsystems, Inc. v. U.S. (Fed.Cir.1999) 178 F.3d 1260, 1276 ( Alliant) . ) The contractor may recover breach of contract damages for that additional work. ( Saddler v. United States (Ct.Cl.1961) 152 Ct.Cl. 557, 287 F.2d 411, 414-416 [cardinal change entitled contractor to expenses properly attributable to changes defendant required]; Air-Plane Corporation v. United States (1969) 187 Ct.Cl. 269, 408 F.2d 1030, 1033.) There is no hint in any Federal Circuit or Court of Claims case to which we have been directed that the terms of the federal contract are held inapplicable or set aside for the period prior to the breach, or that the government's payments for other work not affected by the cardinal change are suddenly compensated on a quantum meruit basis. (See, e.g., Stone Forest Industries, Inc. v. U.S. (Fed.Cir.1992) 973 F.2d 1548, 1552 [If only a severable portion of a contract was breached, the non-breaching party can recover damages for that portion of the contract but its remaining contractual duties are not discharged] and cited in Alliant, at p. 1276; Stone Forest Industries, at p. 1552 [if a contract is not clearly divisible ... the breaching party can not require the non-breaching party to continue to perform what is left of the contract]; Alliant, at p. 1276 [Such a material breach has the effect of freeing the contractor of its obligations under the contract, including its obligations under the disputes clause].) Moreover, the jury in this case was never instructed on the cardinal change theory. We therefore do not reach the issues of whether the cardinal change theory applies in California, and whether the change here was cardinal.
We now consider whether the abandonment theory of liability applies against a public entity. We conclude it does not, since such a theory is fundamentally inconsistent with the purpose of the competitive bidding statutes. Under the abandonment doctrine, once the parties cease to follow the contract's change order process, and the final project has become materially different from the project contracted for, the entire contractincluding its notice, documentation, changes, and cost provisionsis deemed inapplicable or abandoned, and the plaintiff may recover the reasonable value for all of its work. Were we to conclude such a theory applied in the public works context, the notion of competitive bidding would become meaningless. Even assuming there is substantial evidence of abandonment in this case, the entire notion of the parties abandoning a public works contract, with its strict statutory requirements, is anomalous. General law cities, such as the City of Thousand Oaks, are statutorily required to award public contracts in excess of $5,000 to the lowest responsible bidder. (Pub. Contract Code, § 20162.) We have generally not allowed recovery on a quantum meruit basis where there is a defect in the bidding rendering the contract void. ( Miller, supra, 20 Cal.2d at p. 89, 124 P.2d 34.) Amelco asserts this principle is inapplicable when the underlying contract was valid when entered into, and that the competitive bidding laws are irrelevant to the propriety of the award in this case. However, if we were to agree the City's numerous changes could result in the public contract being set aside in its entirety, Amelco would find itself in no different situation, and should receive no different treatment, than a contractor who has performed under a void contract. The City would not have had the authority to contract with Amelco for a quantum meruit payment, free from any of the prior contract's restraints, but would have been required to bid the project. A fortiori the court [is] without authority to abrogate the bidding statute and make a new contract between the parties which the defendants were powerless to do. ( Paterson v. Board of Trustees (1958) 157 Cal.App.2d 811, 819, 321 P.2d 825.) [I]t is clear `that neither the doctrine of estoppel nor any other equitable principle may be invoked against a governmental body where it would operate to defeat the effective operation of a policy adopted to protect the public' ( Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 316, 96 Cal.Rptr.2d 747, 1 P.3d 63 ( Kajima) . ) We have stated that the competitive bidding statutes are `enacted for the benefit of property holders and taxpayers, and not for the benefit or enrichment of bidders, and should be so construed and administered as to accomplish such purpose fairly and reasonably with sole reference to the public interest.` ( Id. at pp. 316-317, 96 Cal.Rptr.2d 747, 1 P.3d 63.) It is difficult, however, to ascertain how the general public benefits by allowing a contractor to claim abandonment of the public works contract following completion of the work, and recover for the reasonable value of its work; indeed, just the opposite seems true. Permitting such recovery would appear to unduly punish the tax-paying public. Moreover, allowing a contractor to claim, following completion of the work, that the parties implicitly set aside a public works contract implicates significant public policy concerns. Under the abandonment doctrine, the plaintiff need not demonstrateand even now Amelco cannot stateat what point the contract was abandoned. As one of Amelco's experts testified, So there's no one point in time where Amelco could have sat back and said, gee, they've abandoned the contract, except maybe at the end when they got all their costs together and they looked back and said, wow, what just happened to us. And I guess that's when they knew it was abandoned. Amelco's project manager did not even determine Amelco had a claim on the project until November 1994, after the work was completed. Under Amelco's approach, a certain number of changes may be permissible, but at some indeterminate point, the next requested change makes the number excessive, the competitively bid contract is set aside, and the contractor recovers on a quantum meruit basis from the beginning of the project onward. Such a vague definition fails to provide any meaningful guidance as to when that line has been crossed. Public entities would not receive timely notice of claims that would allow them to make project management, budget, or procedural adjustments during the course of construction. Rather, contractors would be permitted to wait until a project was completed before giving notice of too many changes, thus creating intolerable uncertainty in the budgeting and financing of construction projects. In addition, allowing contractors to recover in quantum meruit for the actual as opposed to the bid cost of a project would encourage contractors to bid unrealistically low with the hope of prevailing on an abandonment claim based on the numerous changes inherent in any large public works project. One of the purposes of the public contracting laws is to prevent collusion and favoritism in selecting contractors. (Pub. Contract Code, § 100, subd. (d) [Legislature's intent in enacting Public Contract Code includes eliminating] favoritism, fraud, and corruption in the awarding of public contracts].) One can imagine a situation where a friend of a public official bids extremely low, with the understanding that numerous changes in the contract, many perhaps not even affecting the contractor, will be forthcoming. Such scenarios would simply provide an end run around the public works bidding requirements. Moreover, if abandonment is recognized as a theory of recovery for public works, the possibility of significant monetary gain alone may encourage frivolous litigation and further expend public resources. ( Kajima, supra, 23 Cal.4th at p. 317, 96 Cal.Rptr.2d 747, 1 P.3d 63.) Finally, prudence is warranted whenever courts fashion damages remedies in an area of law governed by an extensive statutory scheme. ( Ibid. ) Public Contract Code section 7105 provides in part that a public works contract required to be awarded by competitive bid, may be terminated, amended, or modified only if the termination, amendment, or modification is so provided in the contract or is authorized under provision of law other than this subdivision. The compensation payable, if any, for amendments and modifications shall be determined as provided in the contract. The compensation payable, if any, in the event the contract is so terminated shall be determined as provided in the contract or applicable statutory provision providing for the termination. (Pub. Contract Code, § 7105, subd. (d)(2).) Amelco contends Public Contract Code section 7105 applies only to compensation for termination, amendment, or modification of a contract, not to damages for its abandonment. Under the abandonment theory, however, the original contract is set aside and the contractor paid for the reasonable value of its work. It is difficult to understand how such a radical change is not a modification or termination of the public contract subject to section 7105. Indeed, given a public works project must generally be governed by a valid contract, abandonment cannot be one of the changes authorized under provision of law contemplated by section 7105. Amelco observes Civil Code section 3262, pertaining to mechanic's liens, was amended in 1993 to include abandonment in subdivision (d)(1) and (2). Subdivision (d)(1) and (2) specifies that waiver and release forms required from a contractor to receive progress payments must contain substantially the following language: This release of any mechanic's lien, stop notice, or bond right shall not otherwise affect the contract rights, including rights between parties to the contract based upon a rescission, abandonment, or breach of the contract, or the right of the undersigned to recover compensation for furnished labor, services, equipment, or material covered by this release if that furnished labor, services, equipment, or material was not compensated by the progress payment. (Italics added.) Amelco argues that by this amendment, the Legislature has clearly recognized the doctrine of abandonment in the construction contract context. Asserting Civil Code section 3262 is applicable to both private and public contracts, Amelco argues it evidences a legislative intent that abandonment claims are valid against public agencies and not inconsistent with the statutory competitive bidding scheme it created. It is not clear what the Legislature meant in amending the sample forms in Civil Code section 3262. The amended language does not, however, ineluctably mean the Legislature is endorsing the abandonment theory for public contracts. It may mean nothing more than if such a claim is available, it is not waived by signing the release. Indeed, it is unlikely the Legislature intended to recognize the abandonment doctrine for public works as well as private contracts. Such a conclusion, arguably overturning decades of case law regarding the unavailability of quantum meruit recovery against a public entity, would no doubt be more prominently featured than by simply amending a sample form regarding mechanic's liens. While Amelco relies on California abandonment cases, such as Opdyke, supra, 111 Cal.App.2d 912, 245 P.2d 306, and Peterson, supra, 172 Cal.App.3d 628, 218 Cal. Rptr. 592, they are distinguishable on the ground they involved private, not public, parties. Amelco is one of the largest electrical contractors in the country, and certainly was aware at the time it was building this project that public works contracts are the subject of intensive statutory regulation and lack the freedom of modification present in private party contracts. Amelco also asserts the City is liable for a breach of its agreement in the same manner as a private party. That is correct, and in this case the jury found the City had breached the contract. Recovery for a specific breach, however, with its requirements of causation and damages, is far different from abandonment, in which the entire competitively bid contract is set aside, and the contractor recovers on a quantum meruit basis from the beginning of the project onward. The dissenting opinion broadly refers to the rule usually applied in this country. (Dis. opn. of Werdegar, J, post, at p. 918, 38 P.3d at p. 1135.) It cites, however, no out-of-state or federal authority upholding the abandonment doctrine in the public works context. Rather, it relies solely on the cardinal change doctrine, which as we have already described, is materially different from abandonment. (See ante, pp. 907-908, 38 P.3d at pp. 1126-1127.)