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HomeMy WebLinkAboutAGENDA REPORT 2000 0216 CC REG ITEM 11MITEM -11* CITY (1F %1001tP�RK, C kI.IFORNU City COancll Nf Celin q, �f t1100 MOORPARK CITY COUNCIL AGENDA REPORT iIY: TO: Honorable City Council FROM: Deborah S. Traffenstedt, City Clerk SST DATE: February 7, 2000 (CC Meeting 2/16/00) SUBJECT: Consider Amicus Support in Appeal of the Trial Court's Adverse Judgement in Amelco Electric v. City of Thousand Oaks (Division Six of the Second Appellate District Court, Civ. No. B129406) BACKGROUND The City Attorney has forwarded a request for amicus support for apps -i� ::f !ham Trial Court's idv­�­e i.,i rho Amelco lecrric v. Cir11 of Thousand Oaks cage. The �'~ Artorr.er� has advised that the City Council should consider joining in the amicus brief. The attached letter from the 1 anal firm tha!- wi l l be preparing the amicus brief for the League of California Cities Legal Advocacy Committee states that `he amicus brie` IS due around mid-February 2000. Staff contacted t:ie atr.orney ;iandl ing the City cf Thousand Oaks' appeal and was informea that a �Vloorpark City Council decision to join in the amicus brief on Feb -uary !6 would not be too la--e. DISCUSSION The background of the case and the pr -many issues in this lawsuit are summarized on the attached letter. This case involves a $2.1 million d0lh3r "total cost recovery" verdict acainst the City of Thousand Oaks for both a breach of the writ en contract and for abandonment for a public works contract. Under the abandonment theory, if tied to a cost recovery claim, the contractor is not bound by the contract price or the negotiated change orders, and the city becomes liable for any and all contractor inefficiencies. The attached letter states: with limited public funds, a city should be able to reasonably budget for its public projects, relying on negotiated change orders and releases. A contractor Honorable City Council February 7, 2000 Page 2 should not be able to unilaterally determine the contract has been abandoned, thereby creating fiscal budgeting havoc. It is common place that in constructing a public project there will be some change in the work. If the public entities have an exposure to an abandonment claim where written change orders are agreed to, every contractor will be encouraged to make such iridefinite claims. Keep-Jng separate and accurare -(, cords of the actual costs to tre contractor of any add. t icn_jl work or cl.anljca is the most reliable method of qualifying costs or damages. The 'to--al cost' method negates the bargain bott: parties made. That doctrine should not be used to convert public contracts from a fixed price low b; d arrangement to a cost plus contract. STAFF RECOMMENDATION Direct the City Attorney to sLg:i the representation form authorizing the City of Moorpark to be added to the amictis brief. Attachment: Letter dated January 20, 2000 NOwLAND C MONO TO: PARKER, MILLIKEN, CLARK, O'HARA & SAMUELIAN A PROFE95IONAL CORPORATION ATTORNEYS AT LAW 333 SOUTH HOPE STREET, 27r' FLOOR LOS ANGELES, CALIFORNIA 4007 1 - i 488 TELEPHONE (2 1 3) 683 -6500 January 20, 2000 ALL CALIFORNIA CITY ATTORNEYS cLAUOE , PARKEP (1 87 9521 RAL)-M KONLMCKP : 9CO- I -1715) 1AC9MIL[ (21 3) 683'84569 wwflEP•S DIRECT DIAL NUMBER (213) 1583'8580 RECEIVED-- JAN 2 7 2000 CITY CLERK'S DEPARTMENT CITY OF MOORPARK RE: JOINING IN THE AMICUS BRIEF FOR THE APPEAL OF THE TRIAL, COURT'S ADVERSE JUDGMENT IN THE Amelco Electric v. City of Thousand Oaks (in Division Six of the Second Appellate District Court, Civ. No. B129406): ISSUE: APPLICABILITY OF THE DOCTRINES OF: (1) "TOTAL COST RECOVERY" BY A CONSTRUCTION CONTRACTOR, ALLOWING THE RECOVERY OF ALL COSTS, PROFITS AND OVERHEAD INCURRED ON A JOB BEYOND THE AMOUNT SET IN THE CONTRACT; AND (2) "ABANDONMENT" TO A PUBLIC WORKS CONSTRUCTION CONTRACT. We request your city's Amicus assistance by joining that brief (on a no -cost basis) regarding the appellate court's review of a judgment against the City of Thousand Oaks for 12.1 million in additional compensation to a public works construction contractor. That judgment was bases on the "total cost recovery'' and contract --abandonment" doctrines. These doctrinc!s allow for the creation of an implied contract or quantum meruit recovery contrary to the holdings of Miller v. McKinnon (1942) 20 Cal.2d 83 and South Bay Senior Housing Corp. v. City of Hawthorne (App. 2 Dist. 1997) 56 Cal.AppAth 1231. The League of California Cities' Legal Advocacy Committee has approved the preparation of an Amicus brief in this matter. Our firm will be preparing that Amicus brief. BRIEF DESCRIPTION OF CASE The plaintiff, Amelco Electric, was the low bidder for electrical work of the Thousand Oaks $64 million Civic Center project. Amelco's bid and contract were for $6.1 million. Perhaps, due to the limited construction activity at that time, the contractor aggressively bid the LEAGUE AMICUS ASSISTANCE Page 1 06; 01. project on a low profit and no overhead basis. Pursuant to the written contract, progress payments were made and releases obtained. However, after finishing the job, the contractor made, to the City's surprise, a "total cost recovery"claim for extra compensation in the amount of $1.7 million. The claim included monies to recover all of the contractor's costs, plus an amount for overhead and profit on the entire job. The claim was based on an alleged breach of the written construction contract, and also on the equitable theory of implied "abandonment" of that written contract. The City had 32 change orders on this large project. All change orders followed the formal and written process set forth in the contract. These change orders added $1.1 million to the original contract amount, which represented only an 18% increase to the initial total contract. The contractor tracked other costs and impacts of City actions or changes to the project, but it did not do so concerning the alleged impacts due the City's breaches. Although a large sophisticated electrical contractor, it simply testified that due to the numerous sketches, record keeping of the actual impacts was too difficult. Thus, Amelco never established at trial a fixed cost impact or a direct causal relationship between any City action (be it the sketches or whatever) and its damages. Rather, they asked for a "total cost recovery", summarizing "they died of a thousand cuts" from handling these informational sketches. A $2.1 million dollar "total cost recovery" verdict was rendered by the jury against the City for both a breach of the written contract and for abandonment. WHY THIS CASE MERITS CITYATTENTION Cities have numerous limitations on their authority to contract, particularly public works contracts which must be awarded to the lowest responsive bidder. Under the abandonment theory, if tied to a cost recovery claim, the contractor is not bound by the contract price or the negotiated change orders, and the city becomes liable for any and all contractor inefficiencies (costs plus profit/overhead, or practically a blank check). That type of lawsuit is really a quantum meruit action, which the courts have traditionally denied against public entities. With limited public funds, a city should be able to reasonably budget for its public projects, relying on negotiated change orders and releases. A contractor should not be able to unilaterally determine the contract has been abandoned, thereby creating fiscal budgeting havoc. it is common place that in constructing a public project there will be some change in the work. If the public entities have an exposure to an abandonment claim where written change orders are agreed to, every contractor will be encouraged to make such indefinite claims. Keeping separate and accurate records of the actual costs to the contractor of any additional work or changes is the most reliable method of qualifying costs or damages. The "total cost" method negates the bargain both parties made. That doctrine should not be used to convert public contracts from a fixed price low bid arrangement to a cost plus contract. LEAGUE AMICUS ASSISTANCE Page 2 ISSUES OF AN AMICUS BRIEF 1. No quantum meruit recovery against public entities. One who makes a contract with a public entity takes notice of those limitations on its power to contract. Morrison Homes Corp. v. City of Pleasanton (1976) 58 Cal.App.3d 724, 727. "And even though the person with whom the contract was made has supplied labor and materials in the performance of the contract and the public agency has received the benefits thereof, he has no right of action to recover in quantum meruit the reasonable value thereof." (Citations omitted) "The competitive bidding requirement is founded upon a salutary public policy declared by the legislature to protect the taxpayers from fraud, corruption, and carelessness on the part of public officials and the waste and dissipation of public funds. " Miller v. J. M. Mckinnon (1942) 20 Cal.2d 83, 88. Generally, when a statute limits a city's power to make contracts to a certain prescribed method, impliedly prohibiting any other method, a contract that does not conform to that prescribed method is void and no implied liability can arise for benefits received by the city. A "total cost recovery" converts a fixed price low bid contract to a quantum meruit recovery, or the contract into a cost plus contract. 2. Total cost recovery disfavored. Because the total cost method does not require the contractor to break down and prove its costs or to link each extra cost item directly to the owner's actions, that method of damages should be a disfavored remedy. Total cost allows the low bid contractor to recover its entire costs incurred on the job, including added on profit and overhead. In Huber, Hunt & Nichols v. Moore (1977) 67 Ca1.App.3d 278, the court did not allow the inadequacies of the contractor's accounting system to alter the contractor's normal burden of proving causation between the owner's acts and the contractor's damages. 3. Unjustified betterment. A fundamental principle in contract damages is the court should place the nonbreaching party in the same position it would have been if the contract had been fully performed. Its goal is not to make a better contract or to create profit where none existed. When a contractor has aggressively bid the project on a low profitino overhead basis, a verdict cannot include unexpected profit and overhead. 4. Abandonment. Abandonment of a written construction contract may be implied by the acts of the parties. Opdyke & Butler v. Benjamin Silver (1952) 111 Cal.App.2d 912. Abandonment has been justified because the scope of the work, when the contractor finally undertakes the actual work, greatly exceeded that called for under the original written contract. Daugherty v. Kimberly -Clark Corp. (1971) 14 Cal.App.3d 151,156. However, no California abandonment case has been found where a public entity was the owner. Public works projects must be awarded to the lowest LEAGUE AMICUS ASSISTANCE Page 3 0 el 0 16 bidder and meet certain statutory requirements. Abandonment converts the written low bid contract to a quantum meruit recovery. In addition, both the City and the contractor must act in such a way as to abandon this contract, and there must be excessive changes. C. Norman Peterson Co. v. Container Corp. of America (1985) 172 Cal. App.3d 628. In Peterson the contractor had a "not to exceed" cost of $4,789,000 and for a project to be completed in 18 months. Shortly after the bid, both parties became aware that the initial drawings were inadequate. Thereafter, revised drawings were made but some were up to 14 months late, yet the project was completed on time. The contractor repeatedly complained about lack of revised drawings and their additional costs. The contract set forth a formal procedure for change orders. However, there were so many changes that the formal written change order process became an expedited oral process. The hundred plus change orders added $3,405,713 to the original contract of $4,789,000, a 71 % increase. STATUS AND JOINDER OR CONSENT Wendy Lasher of Lascher & Lascher (of Ventura, CA, Tel. No. 805 -648 -3228) is handling the City's appeal now filed with Division Six of the Second Appellate District Court. The City's opening brief was filed in mid December 1999. Our Amicus brief is due around mid February 2000. We, therefore, request those cities wishing to join the Amicus, to return the attached written consent form by February 4, 2000. Please specify how the name of the public entity or the City Attorney should be printed on the brief. X for your support, / -)21�vz;n�e 4nF, Nowland C. Hong cc: Cynthia Morgan, League Staff Rene Chouteau Robert Flandrick Ariel Calonne Robert Shannon LEAGUE AMICUS ASSISTANCE Page 4 (30016.> AUTHORIZATION TO JOIN AMICUS BRIEF ❑ By Facsimile [(213) 683 -6669] Nowland C. Hong Parker, Milliken, Clark, O'Hara & Samuelian 333 South Hope Street 27' Floor Los Angeles, CA 90071 -1488 re: Amelco Electric v. City of Thousand Oaks; 21 Civ. No. B 129406 Authorization to Add City of [city name] to Amicus Curiae Brief Dear Mr. Hong: Pursuant to the city's policy regarding joinder in friend -of -the -court briefs, you are authorized to add the city of [city's name] under my name as the city's attorney to the friend -of -the -court brief you are preparing in the above matter. The city understands that you are preparing this brief on a pro bono basis under the supervision and guidance of an attorney from the League of California Cities' Legal Advocacy Committee. The city further understands there will be no cost to the city associated with joinder in this brief. This authorization extends only to adding the city's name to the amicus brief you are preparing in the above case at this stage of the litigation. You will need to get supplemental authorization from me to add the city's name to any further briefing efforts. Moreover, under the council's policy regarding amicus briefs, this authorization must be affirmatively expressed. Thank you for your advocacy efforts on behalf of public agencies in this matter. Very truly yours, SIGNATURE PRINT City Attorney [city attorney name] [city attorney name] [state bar number]