Facts

This dispute involved the construction of a large residential complex for venture capitalist Jeff Drazan and his wife Stacy Drazan on 12 acres in Woodside. The project included a 13,000 square-foot main house, a guesthouse, a pool house, pool and spa, a tennis pavilion and tennis court, a horse stable, a four-car garage, and significant landscaping. The Drazans set up a California limited liability company, named Frog Creek Partners, LLC, to own their project.

In October 2002, Frog Creek contracted with Vance Brown Inc., a Palo Alto, California-based general contractor, to build the project.

On February 2005, when the project was between 65 and 70 percent complete, Vance Brown terminated its work based on the claim that it was not being paid contract amounts and Frog Creek thereafter hired a replacement contractor to finish the job.

Shortly after Vance Brown's election to terminate the work, Frog Creek filed suit against Vance Brown in San Mateo County Superior Court (Case No. 445004). Vance Brown responded by recording a mechanics' lien against the project and moving to compel arbitration as required under the terms of the construction contract.

According to Vance Brown's counsel, the arbitration clause was included in the contract at Frog Creek's insistence. Frog Creek, however, asserted there was no meeting of the minds between the parties in that Frog Creek did not sign Vance Brown's version of the contract.

For the next two years, the parties litigated the arbitrability issue, which involved two separate appeals to the California Court of Appeal.

In early 2008, the San Mateo County Superior Court ordered the matter to arbitration. The central issue in the arbitration was whether Vance Brown was legally entitled to terminate its work on the project at the point of 70 percent completion based on a dispute over payment amounts owed.

CLAIMANT'S CONTENTIONS:
Vance Brown contended that, during the course of construction, the Drazans made over 5,000 changes that significantly increased the costs and timing of Vance Brown's performance. Vance Brown further contended that the Drazans refused to recognize most of their changes and, as a result, significant disputes arose between the parties over the amounts that Vance Brown was entitled to bill Frog Creek on a monthly basis for its work.

Vance Brown contended that these disputes were exacerbated when Frog Creek began withholding retention amounts from its monthly payments based on a claim that a "line of credit" that Jeff Drazan purportedly had obtained from a former college roommate qualified as legitimate financing that entitled Frog Creek to retain such amounts and when Frog Creek began to manipulate the contract schedule of values. Vance Brown alleged that, by the end of 2004, Frog Creek had underpaid the total billings to date by an amount in excess of $1 million.

Vance Brown contended that Frog Creek was obligated to execute change orders to increase the contract price accordingly and that Brown was entitled to bill for the actual costs of its performance.

Vance Brown contended that, as a result of the billing dispute, it was contractually entitled to terminate its work and to be paid for the full value of its work.

Finally, Vance Brown contended that it was entitled to prove the bulk of its damages using a modified total cost method of damage calculation based on the excessive number of overlapping changes made by the Drazans that were not possible to track discretely.

RESPONDENT'S CONTENTIONS:
Frog Creek contended that Vance Brown was a commercial/industrial contractor that, from the outset, had misrepresented to Frog Creek its ability to build a high-end custom residence. Further, Frog Creek contended that, because Vance Brown had limited residential construction experience, Vance Brown underbid the project in order to secure the work from Frog Creek. Once Frog Creek awarded the project to Vance Brown on the basis of Vance Brown's misrepresentations, Vance Brown's work on the project was disorganized, delayed, and substandard. Materials were not ordered in a timely fashion, Vance Brown did not properly staff the project, and Vance Brown did not have any custom, residential subcontractors that it could use on the project. Delays and cost overruns began soon after Vance Brown began work.

Frog Creek further contended that Vance Brown initiated its own changes in the field without seeking approval from Frog Creek and, long after the fact, submitted change orders to Frog Creek in violation of the Construction Agreement as a means of recovering cost overruns and losses Vance Brown incurred as a result of its underbidding of the project and its haphazard work. Frog Creek alleged that when Vance Brown attempted to recover charges for work that had not been approved, Vance Brown submitted fraudulent invoices that misrepresented the work actually completed so as to induce Frog Creek to pay Vance Brown money that was not owed.

Frog Creek further alleged that when Frog Creek discovered Vance Brown's accounting manipulations, Frog Creek began withholding payments from Vance Brown. Finally, Frog Creek alleged, when Frog Creek refused to pay Vance Brown's monthly invoices, Vance Brown voluntarily contacted the Town Building Department to report alleged permit violations that Vance Brown itself had effectuated. After several months, during which the project lay largely fallow, and Vance Brown refused to perform any work on large portions of the project due to its own initiated shut-down, Frog Creek was able to clear the project and get Woodside approval to continue work. At that time, Frog Creek alleged, Vance Brown continued to perform only minimal work on the project until it finally abandoned the project altogether.

Frog Creek alleged it incurred substantial costs in having to hire an entirely new contractor to complete the project that Vance Brown had abandoned.

Frog Creek not only disputed that Vance Brown was owed anything in connection with the Construction Agreement, but that Frog Creek had sustained damages in excess of $3,000,000 as a result of Vance Brown's repeated breaches of the Construction Agreement.

Result

On Feb. 12, 2010, the panel rejected Frog Creek's contentions and ruled that Frog Creek had materially breached the construction contract and that Vance Brown's termination of the work was justified. The panel awarded Vance Brown $5,090,013 against Frog Creek, which included damages of $1,905,903, attorney fees of $2,517,687, and costs of $666,422, nearly 100 percent of Vance Brown's total claim. The panel denied Frog Creek's counterclaim (for amounts in excess of $3 million) in its entirety. On April 7, 2010, the award was confirmed in its entirety. The judgment is now final and has been paid in full. On July 27, 2010, the court entered an order awarding Brown an additional $663,293 in pre-arbitration legal fees. The full amount of this order has also been paid.

Other Information

According to respondent's counsel: Frog Creek was awarded $125,000 for attorneys' fees incurred in defeating Vance Brown's motion to compel arbitration and denying Vance Brown's claim of $128,000 for attorneys' fees for this motion to compel arbitration. An appeal of the award is pending. According to claimant's counsel: Claimant's counsel notes that, in its decision, the panel repeatedly found Jeff Drazan's testimony "not credible" stating that it "defied logic." Vance Brown is still in the process of pursuing additional pre-arbitration fees.