Los Angeles Unified School District v. Great American Insurance Company
Filed June 5, 2008
Court of Appeal of the State of California, Second Appellate District Division of Two
Cite as 2008 SOS 3362

Contractor May Recover for Extra Work Caused by a Breach of Contract

The Queen Anne Place school project involved construction of a new elementary school in Los Angeles. In March 1996, following competitive bids, the Los Angeles Unified School District contracted with Lewis Jorge Construction Management, Inc. to construct the project for approximately $10.1 million.

By late 1998, the District became dissatisfied with Lewis Jorge, and on February 9, 1999, the District declared Lewis Jorge to be in material breach and default.

On April 27, 1999, the District’s governing board adopted a declaration of emergency pursuant to Public Contract Code section 20113. The District then sought completion cost proposals from other general contractors. Completion of the project required correction of certain work performed by Lewis Jorge.

To assist potential contractors, the District created a “pre-punch list” that identified the remaining work and work to be corrected. The District received cost estimates from three general contractors.

Hayward Construction Company, Inc. was ultimately selected to complete the project.

In June 1999, Hayward Construction Company, Inc. and the Los Angeles Unified School District entered into a completion contract for the project. The contract stipulates that the Contractor guarantee that the maximum amount payable by the District will not exceed $4,500,000.00.

The parties also agreed that the scope of Hayward’s work included the items listed on the pre-punch list.

Following the execution of the completion agreement, Great American issued a performance bond for $4.5 million that guaranteed Hayward’s performance of the contract.

Not long after Hayward commenced work, a dispute arose between Hayward and the District concerning work that was not listed in either of the pre-punch lists, which included correcting defects in the stuccowork, and subsurface defects in the bathroom tile work.

On December 1999, Hayward advised the District that many unforeseen conditions made it necessary to increase the contract price beyond $4.5 million.

In May 2000, the Board of Education allocated $3 million to complete the project. After the Board’s action, the District issued a purchase order for $2 million to complete the project. Payment was made to Hayward under an express reservation of rights to recover the monies advanced against all responsible parties, including Hayward and its surety company whenever appropriate.

On February 16, 2001, the District wrote Hayward a letter explaining the District’s position that cost of the work in excess of $4.5 million, plus certain change orders, were Hayward’s contractual responsibility and demanded that Hayward and Great American to return what the District has paid to Hayward over and above the $4.5 million. Hayward Construction Company, Inc and Great American refused.

In March 2001, the Los Angeles Unified School District commenced an action against both Hayward Construction Company, Inc. and Great American Insurance Company for breach of contract, breach of performance bond, and declaratory relief in the Superior Court of Los Angeles County.

Hayward Construction Company, Inc. and Great American Insurance then filed their answers to the complaint, with Hayward filing a cross-complaint for breach of contract, rescission, and declaratory relief.

The trial court then granted the District’s motion for summary adjudication on the issue of contract interpretation.

In September 2003, the Los Angeles Unified School District moved to bifurcate trial on six legal issues. The District also filed a motion for judgment on the pleadings relating to Hayward’s rescission and declaratory relief claims.

In January 2004, the trial court granted the District’s motion for judgment on the pleadings.

On May 19, 2004, the trial court ruled that Hayward Insurance Company Inc. could not maintain a cause of action for breach of contract based on misrepresentation.

The trial court further determined that Great American was jointly and severally obligated to repay amounts owed by Hayward to the District. A judgment of $1,333,696.38 was entered against Hayward and Great American, jointly and severally.

Thus, Hayward Construction Company Inc. and Great American Insurance Company filed an appeal in the Court of Appeal of the State of California, Second Appellate District, Division Two attacking the findings of the trial court.

In part, the Court of appeals held that where the record did not indicate the trial court’s consideration of defendant’s extrinsic evidence, trial court erred by dismissing the evidence under the parole evidence rule and granting summary judgment in plaintiff’s favor.

Rescission claims may be asserted against a public entity. A contractor may recover for extra work caused by a breach of contract. Contractor may maintain a cross-action for breach of contract by a public agency based on nondisclosure of material information if contractor can establish that agency knew material facts concerning the project that would affect contract’s bid or performance, and failed to disclose those facts.

Where contractor suddenly and unexpectedly walked off the job, requiring public agency to take immediate action to prevent damage or deterioration of the facility, these facts met the statutory definition of "emergency" pursuant to Public Contract Code Sec. 20113.