Item 9 Staff Report Request for Amicus Participation in Amelco Electric v. City of Thousand Oaks, Supreme Court Case No. S091069, 2nd Civil No. B129406 at no Cost to the TownMEETING DATE: 6!4/01
ITEM NO. ca
COUNCIL AGENDA REPORT
DATE: May 25, 2001
TO: MAYOR AND TOWN COUNCIL
FROM: ORRY P. KORB, TOWN ATTORNEYOfr
SUBJECT: REQUEST FOR AMICUS PARTICIPATION INAMELCO ELECTRIC v. CITY
OF THOUSAND OAKS, SUPREME COURT CASE NO. S091069, 2ND CIVIL
NO. B129406, AT NO COST TO THE TOWN
RECOMMENDATION:
Authorize the Town Attorney to include the Town of Los Gatos as an amicus curiae in the case of
Amelco Electric v. City of Thousand Oaks, Supreme Court, case number S091069, 2nd civil case
number B129406, at no cost to the Town.
BACKGROUND:
In February 2000 the Town joined in the amicus brief in this case filed in the appellate court. The
case affected cities' liability for contractors' claims beyond the contract price. The City of Thousand
Oaks contracted with the lowest bidder to perform electrical work on its Civic Center project.
During the work on the project, change orders were required and agreed upon, adding additional
amounts to the original contract amount. To the City's surprise, after completion of the job the
contractor made an additional claim for yet extra compensation. The jury awarded the contractor
an additional $2.1 million under the "total cost recovery" from a breach of contact and contact
"abandonment" doctrines, legal theories allowing compensation in the absence of contracts which
are not ordinarily applied to public entities.
The same basic issues require review by the Supreme Court as raised before the Court of Appeal.
If the appellate court's decision is allowed to stand contractors would not be bound by the contract
PREPARED BY: ORRY P. KORB, TOWN ATTORNEY
OPK:LMB/wp [N:'ATV\AmeIco.TCR.wpol
Reviewed by: (' -KIanager Clerk Finance Community Development
Rev: 5/25/01 1
Reformatt7/ 19i99
File# 301-05 & 704-15.86
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: REQUEST FOR AMICUS PARTICIPATION IN AMELCO ELECTRIC v. CITY
OF THOUSAND OAKS, SUPREME COURT CASE NO. S091069, 2ND CIVIL
NO. B129406, AT NO COST TO THE TOWN
May 25, 2001
price nor even by the agreed -upon amendments to the contract. Cities would be faced with
uncertainty in contracts. They would be unable to effectively plan or budget, nor would they be able
to maintain any control in providing public works projects at the lowest cost to the public as required
by law.
Attachments: Memo dated April 30, 2001 from Brown, Infield & Canzoneri
Distribution: Nowland C. Hong, Brown, Winfield & Canzoneri, 300 South Hope Street, #1500,
Los Angeles, CA 90071
BROWN , WI N FI ELD & CANZONERI
INCORPORATED
kv
300 SOUTH GRAND AVENUE. SUITE 1500
LOS ANGELES. CALIFORNIA 90071-3125
TELEPHONE (213) 687-2100 / TELECOPIER 687-2149
MEMORANDUM
TO: ALL CALIFORNIA CITY ATTORNEYS
FROM: NOWLAND C. HONG
DATE: April 30, 2001
RE:
RECEIED
MAY 4 - 2001
TOWN A TTNv.
JOINING IN THE AMICUS BRIEF IN SUPPORT OF THE CITY OF
THOUSAND OAKS IN THE PETITION OF REVIEW GRANTED BY THE
SUPREME COURT ON THE DECISION OF THE COURT OF APPEAL IN
THE Amelco Electric v. City of Thousand Oaks, Supreme Court Case No.
S091069; 2d Civil No. B129406:
ISSUE: APPLICABILITY OF THE DOCTRINES OF:
(1) "ABANDONMENT" TO A PUBLIC WORKS CONSTRUCTION
CONTRACT; AND
(2) "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
We request your city's Amicus assistance by joining that brief (on a no -cost basis) regarding
the Supreme Court's review of the Court of Appeal's opinion affirming a judgment against the City
of Thousand Oaks for $2.1 million in additional compensation to a public works construction
contractor. That judgment was based on "total cost recovery" from breach of contract and contract
"abandonment" doctrines. These doctrines allow for the creation of an implied contract or quantum
meruit recovery contrary to the holdings of Miller v. McKinnon (1942) 20 Ca1.2d 83 and South Bay
Senior Housing Corp. v. City of Hawthorne (App. 2 Dist. 1997) 56 Cal.App.4th 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 project on a low
81432.3 999100-0001 04/30/2001 - 3:13 pm
Memorandum to ALL CALIFORNIA CITY ATTORNEYS
April 30, 2001
Page 2
profit and no overhead basis. Pursuant to the written contract, progress payments were made and
releases were 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. The City then appealed the judgment
entered against it. The Court of Appeal, Second Appellate District, Division Six affirmed the
judgment. Thereafter, the City petitioned the Supreme Court for review which was granted.
WHY THIS CASE MERITS CITY ATTENTION
The same basic issues require review by the Supreme Court as were raised before the Court
of Appeal. Therefore, the following reasons and issues are similar to that which was urged in our
memorandum for the joining of your city in the League's amicus curie brief before the Court of
Appeal.
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,
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Memorandum to ALL CALIFORNIA CITY ATTORNEYS
April 30, 2001
Page 3
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.
ISSUES OF AMICUS BRIEF
1. 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 Ca1.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 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.
2. 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
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Memorandum to ALL CALIFORNIA CITY ATTORNEYS
April 30, 2001
Page 4
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. 1 M. Mckinnon (1942) 20 Ca1.2d 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.
3. 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.
4. 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 profit/no overhead basis, a verdict cannot include unexpected profit and
overhead.
STATUS AND JOINDER OR CONSENT
Wendy Lascher of Lascher & Lascher (of Ventura, CA, Tel. No. 805-648-3228) is handling
the City's appeal now filed with Supreme Court. Our Amicus brief is due on May 25, 2001. We
therefore request those cities wishing to join the Amicus, to return the attached written consent form
by May 18, 2001. Please specify how the name of the public entity or the City Attorney should be
printed on the brief.
81432.3 999100-0001 04/30/2001 - 3:13 pm
Memorandum to ALL CALIFORNIA CITY ATTORNEYS
April 30, 2001
Page 5
Thank you for your support,
DATED: April 30, 2001
cc: JoAnne Speers, League Staff
Kara Ueda, Municipal Legal Fellow
81432.3 999100-0001 04/30/2001 - 3:13 pm
BROWN, WINFIELD & CANZONERI, INC.
By.
Nowland C. Hong
Town Council Minutes June 4, 2001
Redevelopment Agency Los Gatos, California
PLANNING COMMISSION/PLANNING DEPARTMENT MONTHLY STATUS REPORT (07.38)
Informational report regarding activity ofPlanning Commission and Department was received and filed.
TREASURER'S REPORT (08.02)
Informational report submitted by the Treasurer to the Council for the month ended April 30, 2001 was
received and filed.
AMICUS BRIEF/AMELCO ELECTRIC VS. CITY OF THOUSAND OAKS (09.28)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council authorize the Town Attorney to
include the Town of Los Gatos as an amicus curiae in the case of Amelco Electric vs. the City of
Thousand Oaks, Supreme Court, case S091069, 2,d civil case B129406, at no cost to the Town.
Carried unanimously.
FARLEY ROAD 17435 & 17443/PLANNED DEVELOPMENT (11.15)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council accept report in the form ofPlanning
Commission minutes recommending approval of Development Application PD-99-1 and Negative
Declaration ND-99-2. Carried unanimously.
TERRENO DE FLORES 14950 & 14960/LOS GATOS BOULEVARD 14880 & 14890
PLANNED DEVELOPMENT (13.15)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council accept report in the form ofPlanning
Commission minutes recommending approval of Development Application PD-00-2 and Negative
Declaration ND-00-3. Carried unanimously.
PAVEMENT MANAGEMENT COOPERATIVE AGREEMENT/AMENDMENT 2 (15.33)
1996 MEASURE "B"/SANTA CLARA COUNTY TRANSPORTATION/RESOLUTION 2001-54
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council adopt Resolution 2001-54 entitled,
RESOLUTION OF THE TOWN OF LOS GATOS AUTHORIZING THE TOWN MANAGER
TO EXECUTE AMENDMENT #2 TO THE 1996 MEASURE "B" PAVEMENT
MANAGEMENT PROGRAM COOPERATIVE AGREEMENT. Carried unanimously.
BRUSH/HAZARDOUS VEGETATION ABATEMENT/RESOLUTION 2001-55 (16.33)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council adopt Resolution 2001-55 entitled,
RESOLUTION OF THE TOWN OF LOS GATOS DECLARING HAZARDOUS VEGETATION
(BRUSH) A PUBLIC NUISANCE AND PROVIDING FOR ABATEMENT. Carried unanimously.
VERDE COURT/TRACT 9153/RESOLUTION 2001-56 (17.25&15)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council adopt Resolution 2001-56 entitled,
RESOLUTION OF THE TOWN OF LOS GATOS ACCEPTING WORK OF PINN BROTHERS
CONSTRUCTION AND AUTHORIZING THE TOWN MANAGER TO EXECUTE
CERTIFICATE OF ACCEPTANCE AND NOTICE OF COMPLETION FOR RECORDING BY
THE TOWN CLERK. Carried unanimously.
ANNEX/BLOSSOM HILL ROAD #22/BLOSSOM HILL 15651/RESOLUTION 2001-57 (18.14)
Motion by Mr. Glickman, seconded by Mr. Blanton, that Council adopt Resolution 2001-57 entitled,
RESOLUTION OF THE TOWN OF LOS GATOS ORDERING THE REORGANIZATION OF
CERTAIN UNINHABITED TERRITORY DESIGNATED AS BLOSSOM HILL ROAD #22 TO
THE TOWN OF LOS GATOS. Carried unanimously.
TC:D13:MM060401 2