A California appeals court has upheld a $5 million award in favor of Whiting-Turner Contracting Company and against the owner of a 12-story, Virgin-brand hotel in San Francisco. Whiting-Turner agreed to construct the hotel for a guaranteed maximum price of $36 million pursuant to a modified AIA standard form agreement and general conditions. The contract called for Whiting-Turner to receive a 3% fee and to pay liquidated damages if it missed the substantial completion deadline of May 10, 2017. Importantly, the parties recognized that the design was incomplete at the time of contracting and therefore agreed that certain scopes would be designed to budget. If the final designs exceeded the budget, Whiting-Turner would be entitled to additional cost and/or time.

As in all projects that become cases, disputes arose. One major dispute involved changes to the incomplete design. Whiting-Turner claimed that the owner’s delays in finalizing and continuously changing the design caused it to miss the substantial completion deadline, while the owner faulted Whiting-Turner’s plumbing, drywall, and framing subcontractors. The owner ultimately withheld payment of significant sums, Whiting-Turner exercised its right to suspend work, and the owner terminated the contract for default after efforts to meet and resolve the disputes failed. After a 79-day bench trial, the trial “referee” (i.e., judge) deemed the owner responsible for delays, its termination wrongful and awarded Whiting-Turner damages of $5 million. The appellate court affirmed in an unpublished decision released last week that is worth reading in its entirety.

Among other things, the appellate court’s decision highlights one danger of fighting on two fronts: taking inconsistent positions. A key piece of evidence that Whiting-Turner successfully used against the owner was the owner’s testimony in a separate lawsuit against Virgin. In that testimony, the owner blamed Virgin for all project delays by continuously changing the design resulting in a “nightmare” that continued well after the original completion deadline. The appellate court held this testimony was properly admitted into evidence as an admission by the owner and demonstrated that there were material issues involving design completion, redesign, and modifications that resulted in substantial delays to the project.

Also noteworthy in the appellate court’s decision was its discussion of whether, under the contract and California law, delays should have been apportioned between the parties for purposes of calculating any offset due to liquidated damages. The trial court had held that apportionment of delays was unnecessary. The appellate court disagreed, holding that “when some delay is caused by the owner and some is caused by the contractor, the better-reasoned approach is to apportion delay so that liquidated damages provisions are enforced.” The appellate court nonetheless affirmed because the owner had not met its burden of proving what that apportionment should be.

Finally, the appellate court upheld the trial court’s damage award, which the owner contended was calculated using the disfavored “total cost method.” Under California law, contractors seeking to use the total cost method must demonstrate (1) the impracticality of proving actual losses directly; (2) the contractor’s bid was reasonable; (3) its actual costs were reasonable; and (4) it was not responsible for the added costs (see Amelco Electric v. City of Thousand Oaks, (2002) 27 Cal.4th 228, 244). The court held that these requirements apply in cases involving completed projects, not in cases involving wrongful termination: 

We do not agree with [Owner] that the referee awarded total cost damages without requiring Whiting-Turner to satisfy the Amelco requirements. Instead, Whiting-Turner is correct that the total cost claim cases are distinguishable (and do not apply here) because they involve completed projects—not projects where a contractor has been prevented from completing the work because it has been wrongfully terminated.

Here, the referee found that “[Owner] materially breached the Contract by wrongfully terminating Whiting-Turner, entitling Whiting-Turner to damages.” When an owner cannot prove that its termination of a contractor’s performance was justified, it may be liable to the contractor for wrongful termination damages—measured by “the amount of his loss, which may consist of his reasonable outlay of expenditures toward performance as well as the profits which he would have made by performance.” (emphasis in original

A copy of the court’s entire decision is located here.