Ruling shows the battle of the many construction contracts

CONSTRUCTION CORNER

Construction can be a messy affair. In a sense, that is to be expected when you are building a complex structure involving the coordination of multiple layers of contracting parties and numerous individuals; in the natural environment and in the elements; subject to an increasing array of laws, regulations, ordinances and codes; and often at the cost of hundreds of thousands if not millions or billions of dollars.

So too can the interpretation of construction contracts.

There are the plans, the specifications, the general conditions, the special conditions, the addenda, the prime contract, the subcontracts, the purchase orders, and the change orders, to name just a few. These documents, found in typical project file, should ideally be consistent and complimentary with one another. The reality is that the parties bound by those contracts often have very different interests and interpretations of those documents.

Watson Bowman Acme Corporation v. RGW Construction, Inc., 2 Cal. App. 5th 279 (2016), highlights the problems which can arise from these numerous documents and the lengths that juries and judges must sometimes go to interpret what those agreements mean.

The Caltrans Project

Watson Bowman involved a California Department of Transportation project for the construction of an overpass on Highway 99 near Merced. RGW Construction, Inc. was the successful low bidder on the project. RGW ordered sealed expansion joints from Watson Bowman Acme Corporation.

But there was a problem.

On bid day, Watson submitted a quote to provide "four-cell" expansion joints at a price of $605,990, referred to as "Quote 02." After being awarded the contract, RGW contacted Watson and told it that their quote was much higher than other quotes received by RGW. Watson responded that the other quotes RGW had received might be lower than Watson's because they didn't account for a "skew angle" which in their experience would be required by Caltrans.

RGW requested that Watson submit another quotation without inclusion of the skew angle. Thereafter, Watson submitted another quote to provide "two-cell" expansion joints at a price of $222,957.68, referred to as "Quote 06." RGW later sent a purchase order to Watson which Watson signed and returned.

Watson later prepared shop drawings for RGW which were submitted to Caltrans. Caltrans rejected the drawings. RGW returned the drawings to Watson with a cover letter directing Watson to revise and resubmit the drawings.

And therein lied the rub.

In RGW's view, it was simply directing Watson to submit drawings satisfying Caltrans' specifications and for which no additional compensation was owed. In Watson's view, RGW was asking for a different product than what was described in its purchase order and for which additional compensation was owed.

Watson later submitted drawings for the "four-cell" system described in Quote 02 which was approved by Caltrans. Watson also resubmitted its Quote 02 and requested a change order to reflect the nearly $400,000 difference between Quote 02 and Quote 06. RGW refused and Watson sued.

At trial, the jury found that Watson was entitled to the $605,990 purchase price contained in Quote 02, but that the joint seals furnished by Watson were defective and that RGW suffered damages of $111,771.08, and awarded Watson a total of $383,032.32 after reducing the amount by sums previously received by Watson from RGW.

RGW appealed.

The Appeal

What Contract Applies: Quote 02, Quote 06, or the Purchase Order?

The Court of Appeal explained that one of the basic tenants of contract law is that there must be "mutual assent or consent" by the parties to the terms of their agreement in order for a contract to be formed, and because the only agreement signed by both parties was RGW's purchase order, the purchase order (not Watson's Quote 02 or Quote 06) governed the terms of the parties' agreement.

Were the Terms of the Purchase Order Unambiguous?

Next, the Court of Appeal explained that courts will generally enforce the terms of the agreements reached by the parties, but where terms are ambiguous, courts will look to parol evidence -- that is, evidence outside of the parties' agreement, to ascertain the intent of the parties.

Here, the purchase order stated in part:

"Acceptance copy must be signed and returned immediately. Seller by signing this order, by acknowledging the order or by delivering purchases described above, warrants that seller has read and agrees to the terms and conditions on the face of and attached to this order; that seller has read and is familiar with the contract documents described above or otherwise incorporated herein as full as if written herein; and that all purchases hereunder will be and are finished in accordance with the terms of this order; the contract documents and seller's samples (if any) approved by the contractor."

The phrase "described above," the court explained, was not ambiguous and meant just as stated what was "described above," which was Quote 06.

But, argued RGW, the purchase order also included language in which Watson warranted that the items ordered would conform to Caltrans' specifications and they didn't:

"8. Seller expressly warrants that all items ordered by specifications will conform thereto and the drawings, samples or other description furnished or adopted by the Buyer, or, if not ordered to specifications, will be suitable for the purpose intended and that all articles will be of good materials and workmanship, and free from defect. The foregoing are in addition to all other warranties either express or implied."

However, the court said, the purchase order also included language providing that the specifications would apply "unless expressly changed by this Purchase Order":

"A. This Purchase Order is issued in performance of Contract No. 10-0K0204 dated between [RGW] and Caltrans as Owner. [Watson] is bound to [RGW] by the terms of said Contract and the Plains and Specifications there under, and shall conform to and comply with all the terms thereof and shall assume toward [RGW] all the duties and obligations that [RGW] has assumed toward [Caltrans] (unless expressly changed by this Purchase Order), insofar as they are applicable to the item purchase[d] hereunder."

And, here, explained the court, it was ambiguous whether the purchase order changed the terms of the specifications because the purchase order -- which included the phrases "Quote Number/Price confirmation Number - XXXXXX-XX" and "Wabco Modular STM600 w/ bulkhead plates" -- may have been intended to change or supersede the specifications issued by Caltrans. (Note: However, Quote 02 also stated that the "[d]ocuments utilized to develop this quote" were the plans and specifications.)

And that ambiguity was decided by the jury in favor of Watson:

"The jury's answer of '$605,990' to [the] first question necessarily implies that the jury found (1) the parties intended to expressly change the specifications when they referred to a particular model number for the joint seal assemblies; (2) after Caltrans returned the shop drawings for the two-cell joint seal assemblies, RGW presented Watson with written instructions to change the item ordered ... ; and (3) Watson was entitled to a price adjustment ... because of RGW's change order."

Conclusion

I could easily see a court going the other way in a case like this (e.g., you warranted that your materials would comply with the specifications, and they did not, and those specifications were not changed by the purchase order since Quote 02 expressly stated that the "[d]ocuments utilized to develop the quote" were the plans and specifications themselves). I could also see a court reaching the same conclusion but on different grounds (e.g., it would constitute an unfair forfeiture to require Watson to eat the difference between Quote 02 and Quote 06).

The takeaway though is that much of today's construction contract drafting is done not only to memorialize scope, price and time, but also with an eye toward shifting as much risk as possible (e.g., indemnity provisions, no damages for delay provisions, no consequential damages provisions, provisions limiting recovery to what the general contractor is able to recover from the owner), with the end result being that there is often less certainty than more as to who will end up holding the bag.