Shea-Kaiser-Lockheed-Healy v. Department of Water & Power

73 Cal. App. 3d 679, 140 Cal. Rptr. 884, 22 U.C.C. Rep. Serv. (West) 607, 1977 Cal. App. LEXIS 1882

• Court: California Court of Appeal
• Decided: September 26, 1977
• Docket: Civ. 49264
• Status: Published

Opinions

Opinion

COBEY, J.

Defendant and cross-complainant, Department of Water and Power of the City of Los Angeles (DWP), appeals from a judgment against it and in favor of plaintiff Shea-Kaiser-Lockheed-Healy, a joint venture (SKLH), made and entered following trial to the court. The judgment is in the principal amount of $225,152 and contains unchallenged awards of prejudgment interest and costs. The judgment also provides that DWP shall take nothing on its cross-complaint.¹

The damage award is made up of $211,152 for aggregate demanded and delivered in excess of the requirements of the contract between the parties and $14,000 for the disproportionate amount of three-fourth inch aggregate demanded and delivered.

Since for reasons hereafter stated we propose to affirm these two damage awards, we will not consider the alternate damage award of $128,700.²

Background

This litigation arises from the fact that during a three and one-half year contract between the parties the market value of the aggregate sold under the contract by SKLH to DWP increased to such a degree that it substantially exceeded the contract price.

As already mentioned, the case is before us on rehearing. In our vacated opinion herein we previously held that the judgment had to be reversed because the damage awards violated competitive bidding requirements. We now believe that since such requirements apply only to the procedure by which the price of goods purchased by a public entity is set (see Miller v. McKinnon, 20 Cal.2d 83, 87-88 [124 P.2d 34, 140 A.L.R. 570]) and have no application as such to the determination of damages to be assessed against a public entity for breach of a purchase contract, they are irrelevant to the propriety of the damage awards before us. These awards were made for breach of contract; they were not made pursuant to contract. They do not represent a recovery of price by SKLH from DWP but instead a recovery of court-ordered damages from DWP. Accordingly they are not precluded by competitive bidding requirements. (Cf. Byson v. City of Los Angeles, 149 Cal.App.2d 469, 472-473 [308 P.2d 765]; Lee C. Hess Co. v. City of Susanville, 176 Cal.App.2d 594, 598 [1 Cal.Rptr. 586]; Bilardi Constr., Inc. v. Spencer, 6 Cal.App.3d 771, 778-779 [86 Cal.Rptr. 406].)

Facts

On or about September 26, 1968, DWP formally invited bids for furnishing and delivering aggregate for concrete and other uses for its Castiac power project in accordance with its specification 709. SKLH was the lowest responsible bidder for this sales contract. On or about December 19, 1968, SKLH and DWP entered into a written contract under which SKLH agreed to furnish and deliver to DWP during an approximately three and one-half year period, ending on July 1, 1972, aggregate for the aforementioned purposes. The contract between the parties included detailed specifications and addenda. These specified that: (1) for the purpose of comparing bids to determine the lowest bidder, it would be assumed that specified quantities of five kinds of aggregate totalling 495,000 tons would be purchased by DWP under the contract; (2) DWP would purchase under the contract specified quantities of the same five kinds totalling 386,000 tons. Additionally the contract granted to DWP an option of purchasing “additional quantities of aggregate up to the Department’s maximum requirements for operation and storage during the contractual period.” Finally, the contract set the maximum rates of delivery at 1,700 tons per day and 6,800 per week.

By letter dated October 13, 1970, SKLH requested from DWP “a schedule of estimated aggregate requirements to completion.” DWP replied by letter dated November 9, 1970, with an estimate of 400,000 tons (or 700,000 tons overall), but noted that contract 709 did not specify “the ultimate quantity of aggregate to be purchased by the Department.” The following May SKLH requested a breakdown of the sizes of aggregate required as deliveries were not following the bid proportions in this respect. The next month SKLH informed DWP that it would not deliver aggregate beyond the 700,000 ton figure. After further exchange of correspondence between the parties SKLH notified DWP by letter dated July 27, 1971, that its attorneys had advised it that, under California Uniform Commercial Code section 2306, subdivision (1), and a comment thereto, the contract between the parties contained an implied maximum quantity of 604,000 tons which SKLH did not intend to exceed. At the time of this letter SKLH’s deliveries had not reached 604,000 tons. DWP rejected this interpretation of the contract and SKLH then stated that it would continue delivery of aggregate under protest with an explicit reservation of all rights. About this time SKLH again called to DWP’s attention that sand and three-fourth inch aggregate were being demanded and delivered in proportions greatly in excess of those bid.

About the beginning of January 1972 DWP directed SKLH to deliver aggregate at essentially the maximum contractual rates of delivery largely to a new stockpile area on the east side of Castiac Creek. SKLH replied that it would do so only under the aforementioned conditions of protest and reservation of rights and that it might cease delivery on two weeks notice. A few days later, SKLH asked DWP for estimates of the various sizes of aggregate that DWP would require to complete the contract. DWP furnished such estimates, but repeated that the contract did not specify “the ultimate quantity of aggregate to be purchased by the Department.”³ Toward the end of January 1972 SKLH advised DWP that it would continue “to deliver material as required by the Department until July 1, 1972,” but that these deliveries would be made under protest and reservation of rights. By the end of the contract period on July 1, 1972, SKLH had delivered to DWP 795,957 tons of aggregate pursuant to DWP’s demands therefor.'

Discussion

1. The $211,152 Damage A ward

The principal issue between the parties is whether the sales contract between them contains an implied maximum quantity of 604,000 tons as asserted by SKLH. The trial court so found and on this basis further found that DWP breached the contract by demanding and obtaining 191,957 tons in excess of this maximum to the damage of SKLH in the amount of $211,152. The trial court reached these conclusions by applying to the contract between the parties the median theory set out in official comment 3 to California Uniform Commercial Code section 2306, subdivision (l).⁴

It seems clear that the applicable provisions of the California Uniform Commercial Code govern the sales contract before us. (3) DWP, although a public entity, is subject to the code in the sales transaction under review. (See §§ 2103, subd. (l)(a), 1201, subds. (28), (29), (30); see also Northern Helex Company v. United States (1972) 455 F.2d 546, 553 [197 Ct.Cl. 118].) The decisive questions, though, are whether section 2306, subdivision (1), applies to the contract between the parties and, if it does, whether the trial court was correct in using the median theory of comment 3 in applying the subdivision.⁵

The subdivision in pertinent part reads: “A term which measures the quantity by . . . the requirements of the buyer means such actual . . . requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate . . . may be . . . demanded.” Under section 1201, subdivision (42), “‘[t]erm’ means that portion of an agreement which relates to a particular matter.”

The portion of the agreement at issue is found in addendum No. 1 to the special conditions of the detailed specifications, and in an unmodified portion of those conditions. The portion is entitled “Quantity” and first contains a statement that “[f]or the purpose of comparing bids to determine the lowest bidder, it will be assumed that the following respective quantities of aggregate will be purchased during the contractual period.” There follows specific quantities for the five kinds of aggregate covered by the contract. These total 495,000 tons, although this total is not expressly stated. Then “[t]he Department, however, agrees to purchase aggregate during the contractual period in the following respective quantities":” Five specific quantities for the various kinds of aggregate are then listed. These total 386,000 tons, but again the total of this minimum obligated purchase is not expressly stated.

The quantity condition then goes on to conclude as follows: “In consideration of the agreed purchase and in addition thereto, the Department shall have the option of purchasing, from time to time during the contractual period, additional quantities of aggregate up to the Department’s maximum requirements for operation and storage during the contractual period. Said option shall be exercised by the issuance and delivery to the Contractor of orders for any portion thereof by the Purchasing Agent or his duly authorized representatives.”

It seems clear that the subdivision applies to this quantity condition of the contract between the parties. It is that portion of their agreement which measures the quantity called for by the agreement, namely, “the Department’s maximum requirements for operation and storage during the contractual period” to the extent the same may be ordered by DWP under its option.

The trial court found that DWP breached the contract between the parties “by demanding that plaintiff furnish 795,957 tons of aggregate, said amount being unreasonably disproportionate to the stated estimate of requirements contained in the contract.” This finding is based in part upon a preceding finding that the bidding estimate of 495,000 tons is a “stated estimate” within the meaning of the subdivision.

DWP challenges this use of the bidding estimate. It must be conceded that this use is different from the stated purpose for which the estimate was placed in the contract. But it is, nevertheless, an estimate stated in the contract and one upon which the bidders’ bond was computed. Furthermore, it is the basis for the statement in the notice of award of the contract issued by DWP that DWP’s maximum requirements for operation and storage during the contractual period are estimated at $940,500. This monetary figure is obtained by multiplying the contract price of $1.90 a ton (without discount of 10 cents per ton for payment within 30 days) by the bidding estimate of 495,000 tons.

Obviously this bidding estimate, prepared and promulgated by DWP, should have been a substantially reliable indicator of the quantity of aggregate that DWP expected to purchase under the contract. In fact, it was not a figure plucked from the air, but one developed by DWP’s representatives from estimates of the amount of concrete they thought DWP would need to build the structures required for the project. This was a matter peculiarly within the knowledge of DWP.⁶

This brings us to the question whether it was improper fof the trial court to use the median theory of official comment 3 in determining an implied maximum quantity. Admittedly, even an official comment is not part of a statute, but as long as the comment is a reasonable application of the statute consistent with its purpose, it may be followed. (See Weistart, Requirements and Output Contracts: Quantity Variations Under the U.C.C., 1973 Duke L.J. 599, 607-608; cf. Arellano v. Moreno, 33 Cal.App.3d 877, 884 [109 Cal.Rptr. 421].) In our view comment 3 meets this standard.

It is true that its application in this case resulted in less elasticity than the circumstances underlying the making of the contract might otherwise indicate, but this result stems in substantial part from DWP’s decision to place its minimum obligated purchase quantity at roughly 80 percent of its bidding estimate.⁷ This was undoubtedly done to encourage bidding for the contract and thus DWP has been hoist by its own petard.

DWP contends that we should not give this effect to section 2306, subdivision (1), because such effect was avoided by the contract of the parties. All that it advances in support of this contention, though, is the previously mentioned expressly stated purpose of the bidding estimate. We do not believe that the application of section 2306, subdivision (1), to a contract may be avoided so indirectly and, in any event, the very subdivision relied on by DWP (§ 1102, subd. (3)) provides further that the obligation of reasonableness, among others, “may not be disclaimed by agreement.”⁸ The unreasonably disproportionate exception of section 2306, subdivision (1), is clearly but a specific application of the obligation of reasonableness running throughout the code. (See e.g., § 2311, subd. (D.)

DWP also advances the argument that neither party intended this result — the implied maximum quantity of 604,000 tons. This possibly could be so,⁹ but even the gap-filler provisions of the code have substantive effects. In other words, the contract before us was made subject to this subdivision of the code and its requirements of good faith and reasonable elasticity were thereby added to the obligations of the parties under their contract. (See Flagg v. Sloane, 135 Cal.App. 334, 336 [26 P.2d 874]; Bell v. Minor, 88 Cal,App.2d 879, 881 [199 P.2d 718].) This result also accords with the policy of the aforementioned section 1102, subdivision (3), that the obligations of good faith and reasonableness, among others, may not be disclaimed by agreement of the parties.

DWP’s final contention in this area is that SKLH waived this breach by continuing to deliver on demand after the implied maximum of 604,000 tons had been reached. As previously noted, however, such delivery was expressly made under protest and with an explicit reservation of rights. It therefore did not prejudice any of the rights reserved by SKLH, including the right to sue DWP in damages for this breach. (§ 1207.)¹⁰

Having disposed of the issue of DWP’s liability for this breach, we now turn to the propriety of the $211,152 damage award itself. Here DWP first asserts that its demand for a quantity unreasonably disproportionate to its bidding estimate constitutes only an excuse for nonperformance by SKLH and cannot be a basis for a damage award in favor of SKLH. DWP cites no authority for this novel proposition. We are unaware of any and we reject it.¹¹

The question remains whether the record supports this damage award. In this connection, the trial court found that “[t]he fair market value of said 191,957 excess tons of aggregate at the time and place of its delivery to defendant was $2.90 per ton, but plaintiff was paid only $1.80 per ton for said excess tonnage by defendant.” This difference between the fair market value as found by the trial court and the discounted contract price of $1.80 a ton amounts to $211,152.70.

(See fn. 12.), In its intended decision in this case,¹² the trial court said that it arrived at its finding of fair market value of $2.90 per ton by considering not only the contract price of aggregate but also bid prices and sales by and to others adjusted for time and other circumstances. DWP has challenged the,accuracy of this finding,¹³ but this difference between market value and contract price seems to us to be a proper measure of the detriment SKLH suffered by reason of this breach by DWP of the contract. (See Civ. Code, §§ 3300, 3353.)

2. The $14,000 Award

So far as liability is concerned, the $14,000 damage award rests upon essentially the same legal basis as the larger damage award' just discussed. In the contract the stated (bidding) estimate for three-fourths inch aggregate is 116,500 tons. The total amount of such aggregate delivered under protest by SKLH to DWP was 225,177 tons. This delivery exceeded the 20 percent elasticity limit by 30,717 tons. Stated otherwise, DWP’s demand for three-fourths inch aggregate was unreasonably disproportionate to its bidding estimate in this amount. As explained in the trial court’s intended decision, the $ 14,000 damage award is based upon the additional plant operational costs incurred in producing this excess proportion of three-fourths inch aggregate.

Disposition

The judgment is affirmed.

Ford, P. J., concurred.

1 DWP in its final brief on rehearing for the first time challenges this provision in the judgment. This challenge comes too late. (See Phelps v. Mayers, 126 Cal. 549, 551 [58 P. 1048].) In the trial court counsel for DWP twice conceded that the evidence did not preponderate in favor of its cross-complaint. Furthermore, DWP now seeks to change the factual basis for its cross-complaint from a claim that it received less in quantity than that for which it paid to a claim instead of inferior material. The factual basis for its cross-complaint cannot be changed on appeal. (See Miller v. Bay Cities Water Co., 157 Cal. 256, 285-286 [107 P. 115].)

2 This damage award rests upon findings of bad faith on the part of DWP in its excessive stockpiling of aggregate during the last six months of the contract for use following the expiration of the contract.

3 These estimates were revised upward in May 1972.

4 This comment reads: “If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur.”

We note that the comment refers to “the agreed estimate,” while the subdivision uses instead the term “stated estimate.” We have found no explanation for this difference in terminology.

Under the median theory the difference between a stated estimate of purchases in the sales contract and the minimum amount the buyer is obligated to purchase, likewise stated in the contract, 'is treated as the limit of elasticity in a requirements contract. In other words, the maximum quantity implied is obtained by adding that difference to the stated estimate. Here, under the trial court’s application of the theory, the minimum obligated purchase is 386,000 tons, the stated (bidding) estimate is 495,000 tons, and the difference between these two figures is 109,000 tons. This means that the elasticity limit of this contract so construed is roughly a 20 percent deviation from the median.

All code references hereafter are to the California Uniform Commercial Code unless otherwise indicated.

5 Estimates are treated differently under the subdivision than they were in pre-code days. (See Comment, The Extent of the Obligations to Buy and Sell in Requirements Contracts (1968) 3 U.S.F.L.Rev. 99, 111.)

The only prior case, of which we know, using both this subdivision and this comment is Routine, Inc. v. Savannah Steel Company (1968) 117 Ga.App. 353 [160 S.E.2d 659. 660-661].

6 This bidding estimate proved to be quite low. The reasons for its being so appear to have been the omission therefrom of certain structures such as the tailbay slab, certain changes in structural design such as in the tailbay walls and the provision of sheer walls for the power house, and later decisions by DWP to use substantial quantities of concrete for other purposes such as the backfill around the walls of the power house and the buried portions of the penstocks. For some reason DWP decided to put the contract for aggregate purchase out for bids long before its design of the project was completed (including even the choice of the concrete mixes) and the designs of the structures were actually completed as they were constructed. SKLH appears to have known generally that this was the situation.

7 Eighty percent of 495.000 tons is 396,000 tons. We do not know why the minimum figure used was 386,000 tons.

8 The subdivision further provides that “the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.” No such standards appear in the contract before us.

9 Apparently at the time the contract was bid neither party anticipated the very substantial increase in the market value of aggregate during the life of the contract.

10 Section 1207 reads: “A party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as Svithout prejudice,’ ‘under protest’ or the like are sufficient.”

11 Official comment 4 to the section on seller remedies in general (§ 2703) reads: “It should also be noted that this Act requires its remedies to be liberally administered and provides that any right or obligation which it declares is enforceable by action unless a different effect is specifically prescribed (§ 1-106).” Section 1-106 appears in the California Code as section 1106.

12 This document designated herein as “ruling on submitted matter” may be examined by us to clarify the findings of the trial court. (See Union Sugar Co. v. Hollister Estate Co., 3 Cal.2d 740, 750-751 [47 P.2d 273]; Frustuck v. City of Fairfax, 212 Cal.App.2d 345, 366 [28 Cal.Rptr. 357].)

13 DWP calls attention to a restriction upon the sale of the aggregate involved to public entities generally. To give effect to this restriction in computing damages would permit DWP to take advantage of its own wrong. (See Civ. Code, § 3517.) We will not do this.