Trial Court Erred in Granting Summary Judgment in Favor of School District on Claims Stemming from Completion Contract

Los Angeles Unified Sch. Dist. v. Great Am. Ins. Co., 163 Cal. App. 4th 944 (2008)

In this case, the District had contracted with a construction company to build a new elementary school for approximately $10.1 million.  Unsatisfied with the work, the District adopted a declaration of emergency under Public Contract Code § 20113, allowing the District to enter into a completion contract without inviting bids.  Defendant Hayward Construction Company was awarded the contract and Great American Insurance Company issued a performance bond for $4.5 million.  In the completion agreement, Hayward guaranteed that the maximum amount payable by the District for the cost of the work plus the contractor’s fee would not exceed $4.5 million.  Hayward’s scope of work included items listed on two “pre-punch lists,” identifying the remaining work to be completed or corrected.

Hayward subsequently informed the District that unforeseen circumstances concerning work that was not included in either of the pre-punch lists required an increase of the contract price beyond the contract maximum.  Payment was made to Hayward under a separate agreement preserving the District’s right to recover the money from all responsible parties, including Hayward and its surety.  When Hayward and its surety refused the District’s demand for return of more than $1 million, the District filed a complaint for breach of contract, breach of performance bond and declaratory relief.  Hayward cross-claimed for breach of contract, rescission and declaratory relief.

The trial court granted the District’s motion for summary judgment based on both the District’s emergency declaration under § 20113 and the trial court’s determination that the completion agreement was not a separate contract but a continuation of the (competitively-bid) original contract.  The court entered judgment in the amount of $1,333,696 against Hayward and Great American, jointly and severally, with prejudgment interest.  The court also entered judgment in favor of the District on all causes of action asserted in Hayward’s cross-complaint.

The trial court’s decision was reversed and remanded on appeal.  Hayward and Great American contended that the trial court committed reversible error by not considering extrinsic evidence proffered in support of Hayward’s interpretation of the completion agreement based on the parol evidence rule.  The court of appeal reasoned that, in deciding whether to admit extrinsic evidence, the trial court must first provisionally receive all credible evidence concerning the parties’ intentions to determine ambiguity.  If, in light of the extrinsic evidence, the trial court decides the language is reasonably susceptible to the interpretation urged, the extrinsic evidence is then admitted to aid in the interpretation of the contract.  The court of appeal noted that the trial court did not make an express finding that the contract was not reasonably susceptible to Hayward’s interpretation.  It also noted that the contract language itself was not so clear and explicit that it was unambiguous on its face.  The court of appeal held that the parol evidence rule, therefore, did not exclude the extrinsic evidence from company employees regarding obligations under the completion agreement.   The court of appeal thus remanded the matter to the trial court to consider extrinsic evidence relevant to interpretation of the contract and to determine the scope and extent of Hayward’s contractual obligations in light of any admissible extrinsic evidence.

Hayward also contended that it was error for the trial court to have granted the District’s motion for judgment on the pleadings as to Hayward’s cross-claims for rescission and declaratory relief.  The District had argued that the completion agreement was a public contract which arose initially by competitive bidding subject to § 7105(d)(2) and neither Hayward nor the trial court could rescind the contract to invoke some form of equitable recovery.  Hayward argued that the trial court’s decision was erroneous because it adjudicated matters beyond those pleaded in the cross-complaint, and because, as a matter of law, the remedy of rescission was available when a public entity’s misrepresentation and concealment of material information constitute a breach of contract.

The court of appeal noted that § 7105(d)(2) applies to public contracts “required to be let or awarded on the basis of competitive bids pursuant to any statute,” and found that it was inapplicable to the completion agreement. The court also found that the continuing contract exception, which the District had relied on as the basis for claiming that the completion contract was subject to competitive bidding requirements, was also inapplicable. Thus, it concluded that the trial court had erred when it concluded that § 7105(d)(2) barred Hayward’s rescission causes of action as a matter of law.

The court of appeal also noted a conflict of authority as to whether a contractor must prove intentional concealment by the public agency in order to recover on a claim for nondisclosure of material facts.  It held that Hayward could maintain a cross-action for breach of contract based on nondisclosure of material information if it could establish that the District knew material facts concerning the project that would have affected Hayward’s bid or performance and failed to disclose those facts to Hayward.