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Greg Opinski Construction, Inc. et al v. City of Oakdale

October 6, 2011

GREG OPINSKI CONSTRUCTION, INC. ET AL., CROSS-COMPLAINANTS, CROSS-DEFENDANTS AND APPELLANTS,
v.
CITY OF OAKDALE, CROSS-DEFENDANT, CROSS-COMPLAINANT AND RESPONDENT.



(Super. Ct. No. 381788) APPEAL from a judgment of the Superior Court of Stanislaus County. William A. Mayhew, Judge.

The opinion of the court was delivered by: Wiseman, Acting P.J.

CERTIFIED FOR PARTIAL PUBLICATION*fn1

OPINION

After a bench trial in this dispute between the City of Oakdale (city) and its general contractor on a building project, Greg Opinski Construction, Inc. (Opinski), the trial court awarded the city $54,000 in liquidated damages for late completion, $3,266 for repair of construction defects, prejudgment interest, and $97,775 in attorneys' fees. The claims in a cross-complaint by Opinski and its performance bond surety, Fidelity and Deposit Company of Maryland, were rejected.

In its statement of decision, the trial court stated that it would not consider whether the late completion was caused by actions of the city. This was because the contract required any extension of time to be obtained through certain procedures, procedures Opinski did not use, so the question of fault for the delays did not arise. Opinski argues that, in so ruling, the trial court contravened the rule laid down by our Supreme Court in Peter Kiewit Sons' Co. v. Pasadena City Junior College Dist. (1963) 59 Cal.2d 241 (Peter Kiewit). There the court held that an owner is not entitled to damages for late completion if the lateness was caused by the owner's conduct, even if the contract barred extensions of time unless requested under specified procedures and the contractor admittedly did not make a request.

In the published part of our opinion, we hold that this aspect of Peter Kiewit was superseded by a 1965 amendment to Civil Code section 1511, which allows parties to specify in a contract that a party intending to avoid the effect of its failure to perform by asserting that the other party's act caused the failure must give written notice of this intention within a reasonable time. In this case, the contractual provisions requiring certain procedures to be followed by a party requesting an extension of time amounted to the type of specification contemplated by the amendment to Civil Code section 1511. Since Opinski did not follow those procedures to claim an extension of time, it cannot rely on Peter Kiewit, and the trial court was correct to enforce the procedural requirements of the contract.

We also hold in the published part of our opinion that the court erred when it awarded prejudgment interest to the city. The city was holding retention funds in an escrow account created pursuant to Public Contract Code section 22300, in an amount that exceeded the damages upon which interest was awarded. The city was entitled to access the funds when it determined that Opinski had breached the contract. It had dominion and control of the funds from that point and therefore was not entitled to prejudgment interest.

The trial court ordered the retention funds in the escrow account to be used as a setoff against the judgment. With the interest included, the award consumed the entire escrow balance. The reversal of the interest award will mean that the escrow funds exceed the total amount awarded to the city. We remand so the trial court can modify the judgment to require the city to pay the residue to Opinski.

In the unpublished part of the opinion, we reject the remainder of Opinski's and the surety's arguments in these two appeals (Case Nos. F060219 & F060727).

FACTUAL AND PROCEDURAL HISTORIES

On May 3, 2004, Opinski entered into a contract with the city as the general contractor for the project. The city issued a "Notice to Proceed" effective the same day. The contract required the work to be completed within 300 calendar days and provided for liquidated damages of $250 for each day of delay. The 300th day was February 26, 2005, but, according to the architect's certification of substantial completion, the project was not substantially complete until September 30, 2005, more than seven months late.

The litigation began when a subcontractor sued Opinski for withholding payment. The subcontractor's claim was dismissed before trial and is not now at issue. Opinski cross-complained against the city for breach of contract. The city answered and cross-complained against Opinski and the surety, also for breach of contract.

Opinski's claim against the city was that the city wrongfully refused to pay a balance of $164,839 of the contract price plus $24,436 in excess of the contract price for proposed change orders the city had refused to approve, along with interest and contractual penalties. The $164,839 balance represented an unpaid portion of the "retention" funds. In a construction contract, a retention is a portion of the contract price that is withheld by the owner as a form of security in case of a dispute. "Authorities have noted that a retention occurs when the owner retains a percentage from each progress payment as a form of security against potential mechanics' liens and as security that the contractor will complete the work properly and repair defects." (Yassin v. Solis (2010) 184 Cal.App.4th 524, 534.) The contract in this case provided for a retention of 10 percent of the contract price. As the progress payments came due, the retention funds were deposited in an escrow account the parties established for that purpose.

The city's claim against Opinski was that Opinski owed $54,000 in liquidated damages for lateness, $10,000 for defective conditions, and interest. The city also claimed that it was withholding the balance of the contract price in escrow because it had received stop notices from three subcontractors. Stop notices are notices from subcontractors stating that the city should not pay the general contractor an amount the general contractor had failed to pay the subcontractor.

The city did not, however, argue that the stop notices ultimately meant the amount to be paid to Opinski should be reduced. In its post-trial brief, the city suggested that the court should award the city judgment against Opinski for the damages for lateness and defects, but should also direct the city to authorize the release of the funds in escrow to Opinski. Then, according to the city, Opinski should be ordered to pay the amounts at issue in the stop notices to the subcontractors.

The key provisions of the contract for purposes of these appeals concerned the means by which the contract price and the contract time (i.e., the time by which the project was to be completed) could be changed. The parties could only be bound by changes in the completion time or the price that were made in writing through specified procedures. These procedures were included in a lengthy set of provisions called the "General Conditions of the Contract." Paragraphs 11.2 and 12.1 of the General Conditions provided that the completion time and the contract price can be changed only by means of a change order. A change order is defined as a document signed by the contractor and the city that authorizes a change in the price, time, or other provision of the contract.

Paragraph 11.2 provided that "[n]o claim for an adjustment in the Contract Price will be valid if not submitted in accordance with this paragraph 11.2." Paragraph 12.1 included a similar provision about claims for adjustment to the contract time.

A change order altering the time or price could be executed by either of two routes. First, under paragraph 10.4.2, the parties could execute the order by mutual agreement. Second, under paragraph 10.4.3, an order could be issued to "embody the substance of any written decision rendered by Engineer pursuant to paragraph 9.11 ...." The engineer was defined as "[t]he person, firm or corporation which prepared the Plans and Contract Documents." The engineer for this project was the firm RRM Design Group.*fn2 Paragraph 10.4 provided that "Owner and Contractor shall execute appropriate Change Orders" covering changes to the time or price arrived at in one of these ways.

Paragraph 9.11 provided a process by which the engineer could be asked to rule on claims by the parties for changes in the time or price. "[C]laims under Articles 11 and 12 in respect [to] changes in the Contract Price or Contract Time" were to be "referred initially to Engineer in writing with a request for a formal decision ...." The party making the claim was required to give written notice of the claim to the engineer and to the other party "promptly (but in no event later than thirty days) after the occurrence of the event giving rise thereto ...." Data supporting the claim were required to be submitted "within sixty days after such occurrence" unless the engineer allowed additional time. After this, the engineer was to render a decision in writing within a reasonable time.

Paragraph 12.2 specified that an extension of time based on circumstances beyond the control of the contractor were to be granted after submission of a claim:

"The Contract Time will be extended in an amount equal to time lost due to delays beyond the control of the Contractor if a claim is made [therefor] as provided in paragraph 12.1. Such delays shall include, but not be limited to, acts of neglect by Owner or others performing additional work as contemplated by Article 7, or to fires, floods, labor disputes, epidemics, abnormal weather conditions or acts of God."

The court issued a written ruling after a bench trial. It awarded the city $54,000 plus interest for lateness and $3,266 for repair of construction defects. It found that the city rightly withheld $43,546 for two stop notices, and that Opinski "failed to meet its burden of proof that it bonded around the two ... stop notices ...." It further found that the city's decision to withhold over $164,000 of the contract price was "not unreasonable" because, under Public Contract Code section 7107, subdivision (c),*fn3 the city was entitled to withhold up to 150 percent of the amount in dispute. The amount in dispute was $54,000, plus $43,546, plus a then-unknown amount for defects. The ruling rejected Opinski's claims for unpaid change orders, stating that Opinski failed to submit them within 30 days as required by the contract. Finally, the ruling directed the city to prepare a proposed statement of decision and judgment.

The ruling did not state that either Opinski or the city was required to pay any of the withheld money to subcontractors and did not state that the contract price was reduced by the amount of the notices or any other amount. It did not include any statement about the disposal of the money in the escrow account.

These omissions led to a dispute over the contents of the proposed statement of decision and judgment. Opinski submitted a request for a statement of decision asking for, among other things, rulings on whether the city was required to release the funds in escrow and whether Opinski was entitled to a judgment in the amount of the difference between the escrow balance and the judgment in favor of the city.

The city prepared, and the court signed and filed, a statement of decision that included a set of responses to the issues raised in Opinski's request. The responses included a determination that there was no need to answer Opinski's requests for findings about the causes of the delay in completion. It was "not necessary to separately respond to each of these requests" because, under the circumstances, the terms of the contract made the answers irrelevant. To alter the contract time--regardless of the reason--the contract required the party seeking the alteration to obtain a change order either by mutual agreement or by submitting a claim to the engineer with a request for a formal decision in writing. Neither procedure was used, the court reasoned, so the time was not extended, regardless of which party was to blame for the late completion.

The responses to Opinski's requests also included the following three reasons why Opinski was not entitled to a judgment for the difference between the escrow balance and the judgment for the city and why no order for the disposition of the escrow funds was called for:

"First, these requests assume that the City is unilaterally withholding and can unilaterally release $164,839 in retention funds. In fact, the money representing the retention funds is deposited and held pursuant to an escrow agreement .... The money held in escrow can only be released with the consent of both parties. It cannot be ... unilaterally released, or accessed, by either party. The court's finding is that since the City could 'retrieve up to 150% per PCC §7107,' ... the 'retention is not unreasonable.' That the principal sum of the judgment to be entered is less than the amount now held in the escrow account provides no legal or factual basis for an entry of judgment in favor of [Opinski or the surety]. Any issues that remain between the parties following entry of judgment in this action, which is premised solely upon alleged breaches of the construction agreement, are not within the subject matter of the issues framed by the pleadings in this case.

"Second, a judgment in favor of Opinski or its surety would necessarily need to be premised upon a breach of the construction contract by the City. Here, the court has found no such breach by the City but has determined that there is a breach of the contract by Opinski.... Thus, there is no legal or factual basis that could support the entry of any judgment in favor of either Opinski or its surety.

"Finally, and as noted, the City is entitled to effectively stop payment of 150% of the amount in dispute under PCC §7107. The presumptive reason for the legislative right to maintain a retention in that amount in the event of a dispute necessarily contemplates, as [do] the terms of the construction agreement, that the City will recover costs and attorneys fees in connection with any dispute arising out of the construction agreement. Accordingly, the court concludes that the City of Oakdale is not required to release for payment to Opinski [the amount of the difference between the escrow balance and the amount of the judgment for the city]; that Opinski is not entitled to a judgment on its cross-complaint in that amount or in any amount; and is not entitled to a net judgment in that amount, or any amount."

The court entered judgment for the city and against Opinski and the surety on February 3, 2010, stating that attorneys' fees would be determined later by motion. A motion for a new trial and a number of other motions were denied. In its order denying the new trial motion, the court stated that it was "retaining jurisdiction over the issue of the amount of retention funds that are being retained and to which Opinski is entitled to until that amount is finally determined." Opinski and the surety filed a notice of appeal, initiating the first of the two appeals (No. F060219) now before us.

The city filed its motion for attorneys' fees. Relying on article XIII of the parties' contract, the city requested $104,478.67 in attorneys' fees. On June 28, 2010, the court awarded $97,775 in fees against Opinski and ruled that no fees could be awarded against the surety. The combined amount of the damages judgment, interest, and fees now exceeded the amount of the funds retained in the escrow account. The court ruled that all the money in the escrow account would be used to satisfy a portion of the judgment. The order awarding fees stated:

"During the hearing, [Opinski] asked the Court about the status of the retention monies that are still held in escrow for this Project. After hearing from both counsel on the subject matter of the retention monies, the Court directed [city's counsel] to write to the bank holding the monies and request the release of the retention monies to the [city]. Any such monies paid to the [city] from the retention account shall, to that extent, satisfy the judgment of the [city] against [Opinski] in this action."

Opinski and the surety filed the second appeal, No. F060727.

DISCUSSION

I. Liquidated damages for late completion

A. Court's reliance on contractual requirements for extension

Opinski argues that it was error to award liquidated damages for lateness on the ground that if no extension was requested or granted through the required procedures, then it did not matter which party, if either, was to blame for the delays, since the contract barred extensions of time for any reason except pursuant to those procedures. Relying on Peter Kiewit, supra, 59 Cal.2d 241 and on Civil Code section 1511, Opinski contends that liquidated damages could not be awarded for any portion of the delay that was caused by the city, even if Opinski failed to use the contract's procedures for obtaining an extension. Opinski says its timely performance was impossible because of the city-caused delays.

In Peter Kiewit, the California Supreme Court rejected an analysis like the one the trial court employed here. The contract at issue had ...


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