(Super. Ct. No. 05AS00862
The opinion of the court was delivered by: Hoch , J.
Sacramento Municpal Utility Dist. v. FCC Corp. CA3
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
FCC Corporation, formerly named Fru-Con Construction Corporation (Fru-Con),*fn1 appeals from a judgment that awards approximately $54 million to the Sacramento Municipal Utility District (SMUD) for damages arising from the construction of the Cosumnes Power Plant. SMUD sought to build the power plant on a fast-track schedule after experiencing a critical shortage of electricity in 2000. SMUD retained Utility Engineering Corporation (Utility Engineering) to provide the engineering design and Fru-Con to build the power plant.
Construction difficulties plagued the project, and Fru-Con missed a sufficient number of intermediate construction milestones to trigger the maximum liquidated damages rate of $25,000 per day. SMUD terminated Fru-Con's right to proceed with any further work after Fru-Con expressly refused to remove deficient concrete in the foundation for the power plant's cooling tower. By terminating Fru-Con's right to proceed, the practical effect of SMUD's action was to terminate the construction contract with Fru-Con.
Litigation ensued in state and federal court. In Sacramento County Superior Court, SMUD filed an action for declaratory relief, breach of contract, and statutory penalties under the False Claims Act (Gov. Code, § 12650 et seq.) against Fru-Con. Fru-Con filed a cross-complaint asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of the implied warranty of correctness of plans and specifications, and breach of the statutory duty to make prompt payment.
The Sacramento County Superior Court granted SMUD's motion for summary adjudication, determining that Fru-Con had been properly terminated under the construction contract. A jury trial culminated in an award to SMUD of more than $35 million in damages for the excess cost of the work above the contract price, nearly $6.6 million in liquidated damages for delay, and $10,000 in statutory penalties under the False Claims Act. The trial court awarded SMUD slightly more than $13 million in prejudgment interest and determined that Fru-Con was entitled to approximately $1.1 million in credits to avoid double counting of damages. The court denied SMUD's motion for contractual attorney fees on grounds that the construction contract did not include a fee-shifting clause.
On appeal, Fru-Con presents multiple arguments as to every component of the judgment against it.
The summary adjudication granted by the trial court is attacked by Fru-Con on grounds that (1) the entire construction contract could not be terminated for failure to perform a separable part, i.e., construction of section C of the cooling tower foundation, (2) triable issues of material fact existed regarding whether the section C concrete deficiency affected the power plant's final completion date, whether SMUD waived its right to terminate Fru-Con for the refusal to replace deficient concrete, and whether Fru-Con refused only to comply with the December 10, 2004, letter from SMUD, (3) the trial court erred in granting declaratory relief for purely retrospective conduct, and (4) summary adjudication improperly resolved only part of SMUD's declaratory relief claim in violation of subdivision (f)(1) of Code of Civil Procedure section 437c (Section 437c).
Fru-Con alleges errors occurring at trial by arguing that (5) the trial court violated section 437c, subdivision (n)(3), by instructing the jury that summary adjudication had already established that Fru-Con breached the construction contract, (6) the court erroneously excluded evidence that SMUD failed to mitigate its damages by disallowing Fru-Con from completing the project, (7) the excess damages award held Fru-Con responsible for project design completeness and accuracy in violation of Public Contract Code section 1104 (Section 1104), (8) the trial court erred in denying Fru-Con's proposed instructions regarding the limited extent of its responsibilities as contractor for the construction project, and (9) insufficient evidence supported the excess cost damages award.
Fru-Con urges us to reverse the liquidated damages award (10) based on its contentions regarding summary adjudication and the applicability of section 1104, and (11) because the award constituted an illegal penalty.
Fru-Con contends the statutory penalty imposed under the False Claims Act must be reversed (12) due to insufficient evidence, and (13) because the trial court's denial of the motion to bifurcate trial on the False Claims Act cause of action prejudiced Fru-Con's right to a fair trial.
Finally, Fru-Con contends SMUD was not entitled to prejudgment interest (14) because damages were not ascertainable prior to trial.
SMUD also appeals, contending that the trial court erred in denying its motion for contractual attorney fees. Specifically, SMUD argues that the construction contract incorporated another related contract's attorney fee provision, and that Fru-Con was bound by its judicial admission that the construction contract allows recovery of attorney fees.
We affirm the judgment against Fru-Con. As we explain below, the trial court did not err in concluding that SMUD properly terminated Fru-Con for its refusal to remove and replace the deficient concrete in the cooling tower's foundation. Nonetheless, we conclude that the trial court erred in granting summary adjudication on the declaratory relief claim because the amount of damages could not be resolved as a matter of law. On this record, however, the error was harmless because Fru-Con's undisputed and unequivocal refusal to remove and replace the deficient concrete left no triable issue of fact regarding whether Fru-Con breached the construction contract.
Contrary to Fru-Con's claim, the evidence adduced during the three-month trial amply supports the jury's awards for excess cost damages, liquidated damages, and statutory penalties under the False Claims Act. We find no error in the challenged rulings by the trial court on evidentiary objections, refusal to give Fru-Con's proposed jury instructions, or denial of the motion to bifurcate trial on the False Claims Act cause of action. We conclude that prejudgment interest was warranted because damages were readily calculable prior to trial.
As to SMUD's cross-appeal, we affirm the order denying SMUD's motion for contractual attorney fees. As SMUD's own pleadings established, the construction contract does not provide for attorney fees. And, the express language of the surety bond contract's fee-shifting provision renders it inapplicable to actions on the construction contract.
Impetus for the Cosumnes Power Plant
The evidence at trial shows that, in 2001, SMUD decided to build a new power plant after it had "just come out of the energy crisis time when . . . there was a whole lot of upheaval . . . in the electricity markets." SMUD's long-term power purchase agreements that had been signed when the nuclear power plant at Rancho Seco closed in 1999 were beginning to expire. SMUD determined that it needed to have the new power plant become operational by the summer of 2005. The timing of the power plant's completion was "[v]ery" important to SMUD.
SMUD's supervisor of engineering for power generation, Christopher Moffitt, testified: "It was of the utmost importance for SMUD to get this power plant built. When we are able to make power from our own resources, we are not subject to the market volatility. In peak summer, the price that we would pay to make our own power is a fraction of what the peaking price is out on the market." Thus, the Cosumnes Power Plant was to be built on a fast-track schedule. SMUD's power plant construction expert, Robert Zanetti, testified that "a fast track [project] is generally a project that tries to get off on a quick start and generally you start construction when the engineering is not a hundred percent complete."
To comply with California clean air regulations, SMUD settled on an efficient combined-cycle natural gas power plant. A combined-cycle power plant generates electricity in each of two stages. The first, is "essentially just a jet engine coupled with a generator." In the second stage, the exhaust heat is captured and used to boil water for a steam turbine generator.
For the Cosumnes Power Plant, SMUD selected a site near its decommissioned Rancho Seco nuclear power plant and hired Utility Engineering to provide the engineering design work. While Utility Engineering worked on the engineering design for the power plant, SMUD began to secure the required governmental permits.
In November 2002, SMUD issued a request for proposal for the "civil and underground" portion of the power plant. In issuing a request for proposal, SMUD opted not to use an invitation for bid process.
With an invitation for bid, a public agency typically prepares a bid package containing all of the contract terms and conditions, with price as the only variable. Prospective contractors have no opportunity to negotiate over the scope of work or contract terms. By contrast, a request for proposal invites contractors to submit a proposal for which price is only one of the variables. Thus, "the proposer is allowed to take exception to terms and conditions, contract terms and conditions, to suggest alternatives to those contract terms and conditions and negotiate."
SMUD's initial request for proposal was later combined with a separate request for proposal to complete the remainder of the power plant project. The combined request for proposal consisted of "thousands and thousands" of pages. Prospective proposers were informed that the engineering design of the plant was only "approximately 85% complete." Thus, companies interested in submitting proposals were asked to "use your past experience and clearly state you[r] assumptions" in formulating a proposal to build the power plant.
At the time SMUD solicited proposals for the Cosumnes Power Plant, Fru-Con was wholly owned by Fru-Con Holding Corporation, which in turn was one of several hundred subsidiaries of Bilfinger Berger (Bilfinger), a stock-listed company in Germany. In March 2003, Fru-Con sought and obtained the approval from its parent company to propose to build the power plant on a 24-month time schedule with a total price of $150 million. The "very detailed estimate" provided to Fru-Con's parent company anticipated a profit of $15 million from the project.
Fru-Con ultimately submitted to SMUD a proposal to build the power plant for $99.95 million with a scheduled completion within 17 months. This proposal received SMUD's highest overall evaluation based on all categories of consideration but the lowest technical evaluation based on Fru-Con's ability to construct the power plant. As part of its proposal, Fru-Con stated that its project director shall provide "Constructability Review: Evaluation of the means, methods, and sequence of construction intended to reduce the erection and installation times. The obvious outcome of this review is the reduction of construction costs and optimizing the construction schedule." Fru-Con also planned to provide "Claims Prevention Review" to "[d]evelop conceptual language designed to eliminate misunderstandings. Review designs and specifications to determine actual versus intended design." And, the proposal set forth a plan for "Quality Control" that promised: "[c]ontinuous inspections are conducted throughout construction with the results and required actions published. Work that is not in compliance with the contract specifications or quality assurance program is not accepted or included as work of earned value. All nonconforming work is corrected at the earliest appropriate time and with no additional cost to the owner. Fru-Con will deliver a quality product." (Italics added.)
SMUD reiterated that the engineering design for the power plant was not yet complete. Colin Taylor, SMUD's project director for the Cosumnes Power Plant construction project, testified about the disclosure to Fru-Con regarding the completeness of the engineering design at the request for proposal stage:
"Q Mr. Taylor, did [SMUD] tell Fru-Con outright the engineering design is not yet complete on this project?
"A Absolutely. [Fru-Con] thoroughly understood that and this first section here explains it. It is understood the project design is not complete and therefore subject to further change by the parties. They understood full well."
After several rounds of negotiations, SMUD reached an agreement that Fru-Con would build the power plant for $106.8 million and a 19-month construction schedule. At the time of the agreement, the engineering design was 90 percent complete for the power plant. SMUD's construction expert testified that, with 90 percent engineering design completion at the outset of power plant construction, "[t]his is a very unusual case of having engineering way out ahead of construction. I mean the engineering on this project is done to a much higher degree than on most projects. [¶] I've seen projects that have been in construction for a year and are only 60 or 70 percent complete in engineering. So this project had an immense amount of engineering done way ahead of time." In 40 years of working in power plant engineering and construction, SMUD's expert had never come across a combined-cycle power plant that began construction with 100 percent complete engineering design.
With all incorporated attachments, the construction contract for the power plant comprises thousands of pages. However, the negotiated terms and conditions are primarily contained in the 57 "General Conditions" and 51 "Special Conditions" of the construction contract. Five of the general and special conditions are particularly pertinent to this case.
General Condition 24 of the construction contract is entitled, "Inspection," and provides in relevant part: "The Engineer or the Field Representative of the Engineer have the right to reject defective material and work. Rejected work shall be corrected and rejected material shall be replaced with proper material, to the satisfaction of the Engineer and without charge to [SMUD]. The Contractor shall promptly segregate and remove rejected material from the jobsite. If the Contractor fails to proceed at once with the replacement of rejected material or the correction of defective work [SMUD] may, by contract or otherwise, replace such material or correct such work and charge the cost thereof to the Contractor. Otherwise, [SMUD] may exercise the remedies set forth under [General Condition] 36 [SMUD]'S RIGHT TO TERMINATE RIGHT TO PROCEED."
General Condition 32 of the contract is entitled, "Procedure for Protest" and provides: "If the Contractor considers any work demanded of it to be outside of the requirements of the Contract, or if Contractor considers any instruction, ruling, or decision of the Engineer, or Engineer's authorized representative, to be incorrect, Contractor shall within 10 calendar days after any such demand, instruction, ruling or decision is given, file a written protest with the Engineer. The written protest shall clearly state, in detail, Contractor's objections and reasons therefore. [¶] The Contractor shall make a reasonable attempt to resolve the protest with the Engineer. If the Engineer and Contractor are unable to resolve the protest, the Engineer will forward the protest to the Contracting Officer for a final decision. Pending such final decision, the Contractor shall proceed with the work in accordance with the determination or instructions of the Engineer. The Contracting Officer shall notify the Contractor of the decision in writing. The Contractor shall promptly comply with the decision, but shall retain the right to have the dispute resolved by a court of competent jurisdiction. [¶] Unless protests are made in the manner and within the time stated above, the Contractor shall be deemed to have waived all claims for extra work, damages, and extensions of time on account of demands, instructions, rulings, and decisions of [SMUD]." (Italics added.)
General Condition 36 of the contract is entitled, "District's Right to Terminate Right to Proceed" and provides: "If the Contractor refuses or fails to prosecute the work, or any separable part thereof, with such diligence as will insure its completion within the time specified in this Contract, or any extension thereof, or fails to complete said work within such time, the Contracting Officer may, by written notice to the Contractor, terminate Contractor's right to proceed with the work or such part of the work to which there has been delay. In such event, [SMUD] may take over the work and prosecute the same to completion, by contract or otherwise, and the Contractor and Contractor's sureties shall be liable to [SMUD] for any excess cost occasioned [SMUD] thereby, and for liquidated damages for delay, as fixed in the Contract, until such reasonable time as may be required for the final completion of the work. If the Contractor's right to proceed is so terminated, [SMUD] may take possession of and utilize in completing the work, such materials, equipment, and plant as may be on the jobsite and necessary therefore."
General Condition 39, entitled, "Liquidated Damages," provides in pertinent part: "If the work under this Contract is not completed within the time set forth in SPECIAL CONDITIONS and any approved time extension thereof, damages will be sustained by [SMUD]. Since it is impractical to ascertain and determine the actual damages [SMUD] will sustain by reason of such delay, the Contractor will pay to [SMUD] as fixed, agreed, and liquidated damages, and not as a penalty, the dollar amounts set forth in the SPECIAL CONDITIONS, per item, per day for every calendar day's delay in completing the work." The special conditions identified 15 construction milestones with a liquidated damages provision ranging from $5,000 to $10,000 per day of delay. Liquidated damages were capped at a cumulative maximum of $25,000 per calendar day.
Special Condition 35 provides, in pertinent part: "No deviations from the Design Engineer's drawings or specifications shall be made without prior approval from the Design Engineer or [SMUD]'s Project Director."
SMUD's construction contract with Fru-Con incorporated a performance bond. Fru-Con and Travelers Casualty and Surety Company of America (Travelers) signed a performance bond in favor of SMUD on the same day that Fru-Con signed the underlying construction contract for the power plant. The surety bond contained the following fee-shifting clause:
"Whenever Contractor shall be, and declared by Obligee [SMUD] to be in default under the Contract, the Owner having performed the Owner's obligations thereunder, the Surety may promptly remedy the default in any manner acceptable to the Obligee. In the event suit is brought upon this bond by the Obligee and judgment is recovered, the Surety shall pay all costs incurred by the Obligee in such suit, including a reasonable attorney's fee to be fixed by the Court."
Under the construction contract, substantial completion of the power plant was to occur 573 days after SMUD issued full notice to proceed. On October 8, 2003, SMUD gave Fru-Con full notice to proceed. Thus, timely completion of the project should have occurred on May 3, 2005, and would have met SMUD's plan to have a new power generation plant online by summer 2005. Last-minute negotiations before the start of the project resulted in an adjusted contract price of $108,136,825.
Construction Progress Between October 2003 and September 2004
Construction problems plagued the project. Fru-Con encountered difficulties with foundation piles that were to provide the support for large pipe racks, leading to two months' delay in installation. The parties argued about problems with construction of the engineered pipe supports and standard pipe supports. Fru-Con also struggled in installing high energy piping and supports.
Fru-Con sought additional compensation for construction of pipe supports because it believed they were not within the scope of the construction contract. Fru-Con introduced testimony that approximately 5,200 engineering design drawings existed at the time it entered into the construction contract. During construction, Fru-Con received approximately 40,000 drawings that had not been listed or included in SMUD's initial request for proposal documents. In particular, none of the engineered pipe support drawings existed at the time the parties entered into their contract. During construction, some drawings went through as many as eight revisions by Utility Engineering, and Fru-Con was never certain when it had received the final version. In some instances, the design "changed drastically." Fru-Con also complained of defective construction materials received from SMUD.
Approximately 6,242 cubic yards of concrete -- more than a third of all the concrete poured by Fru-Con -- failed to meet contract specifications. The large amount of deficient concrete frustrated SMUD's supervisor of engineering, but SMUD eventually accepted most of the deficient concrete.
Despite the problems, Fru-Con consistently issued monthly updates to SMUD, assuring it that construction was on track for completion on May 3, 2005. Fru-Con's construction team issued similar reports to its own executive management. Fru-Con's internal monthly assessments stated that the project was still profitable -- albeit not to the extent anticipated at the outset.
The cooling tower is a major component of the power plant, and consists of seven major segments and a pump pit. Portions of the concrete foundation are two and one-half feet thick. The seven sections of the cooling tower are labeled A through G. Compressive strength testing of the concrete installed by Fru-Con in section C repeatedly showed that it failed to meet the technical specifications for the foundation.
Moffitt testified that the section C concrete "failed to measure up to the compressor strength requirements by a wide margin, and it had problems with the air entraining value." Moffitt further explained:
"Q Was that of significance given the use to which that foundation would be put?
"A Yes. My greatest concern was that this concrete would prematurely fail and create problems for the power plant over its life of thirty-five or more years. I was concerned that if we did not have better concrete in this section C, that it would be the beginnings or the source of failure of this foundation.
"Q Mr. Moffitt, can the [power plant] operate without the cooling tower?
"Q And can the cooling tower operate without the cooling tower foundation?
Fru-Con refused to replace the section C concrete and urged SMUD to accept the spreading of an epoxy sealant over the deficient concrete. SMUD's engineer determined that the epoxy proposal would require SMUD to engage in a costly reapplication process every three to five years and that it would not retard cracks as effectively as the concrete specified for the section.
Utility Engineering informed SMUD: "Due to the type of service placed on the cooling tower basins, Utility Engineering specified Type V Cement along with a 28 day strength of 5,000 psi. [¶] The higher strength requirement is used to increase the durability and chemical resistance of the concrete. An additional benefit of higher strength requirement is a reduction of crack widths. This improves the water tightness of the basin. [¶] All cylinders broke from the section C pour average 1100 psi below the required strength. Missing the minimum strength requirement by 25% reduces the durability and chemical resistance of the concrete. Granted there are excellent coatings available, [but] their useful life is substantially less than the life of the cooling tower basin. The coating would have to be replaced somewhere around every three to five years at a significant cost to SMUD. [¶] Due to the limited life of any coating and having every break come out 25% low, I recommend the section be removed and replaced."
In a letter dated September 9, 2004, SMUD directed Fru-Con to submit a plan to replace the deficient concrete in section C. Fru-Con did not provide SMUD with a plan to replace the section C concrete.
Fru-Con Realizes its Problems with Project Profitability and Expected Completion Date
Peter Ophoven, a representative from Bilfinger, visited the construction site in September 2004. On September 28, 2004, Ophoven issued a report to Bilfinger headquarters that contained several sobering assessments. Ophoven anticipated that the completion date would be delayed by at least two months and that work "[s]lippages" were increasing. The report concluded that "[i]t is obvious that the slippage will continue to grow. . . . [¶] We think it is high time to develop, for internal purposes and as a basis to deal with the consequences of the delays, a realistic version of the program. It seems that completion will be late by a minimum of 2 if not by 4 months. Talking to the person in charge of the piping works[,] even this seems to be far too optimistic. [¶] We think the situation is very serious."
In the section entitled, "Design," Ophoven noted: "With the exception of some cable routing, FruCon [sic] has no design responsibility. All design is done by Utility Engineering on behalf of SMUD."
Rather than netting a $10 million profit as originally anticipated, Ophoven concluded that Fru-Con should expect a $6 million loss. He foresaw the possibility of even larger losses. Ophoven's report noted, "there are a number of items where half of the activity is completed but a tiny portion only of the budget is left to be spent. Other cases still are under the threshold for the linear projection but clearly show major overruns to come." "In view of the considerable cost risks which we see and in view of the potential delays[,] we must expect the cash flow to rapidly deteriorate and turn negative." Ophoven also acknowledged, "Another problem is the quality of work. Up to a quarter of the welds fail."
Ophoven blamed some of the delays on severely adverse weather. Other evidence showed that SMUD did not grant any extensions of time to complete the project.
On October 7, 2004, Fru-Con's construction team informed SMUD for the first time that it was behind schedule in construction. That day, Fru-Con revised the anticipated completion date from May 3, 2005, to sometime between October 3, 2005, and December 23, 2005.
In December 2004, Fru-Con issued an internal report calculating that it would cost a total of $145 million to complete the power plant. A month later, Fru-Con calculated that it would cost approximately $138 million to complete the power plant. Fru-Con originally budgeted a $10 million profit into its contract price for the power plant project. By January 30, 2005, Fru-Con would again revise its estimated completion date to August 10, 2005.
Termination of Fru-Con's Right to Proceed under the
In a letter dated December 22, 2004, Fru-Con informed SMUD: "Fru-Con will not remove section C of the cooling tower foundation as directed by your above referenced letter [dated December 10, 2004]. Such directive is inconsistent with the prior course of conduct between the parties, commercially unreasonable and motivated by claims made by Fru-Con against SMUD." Fru-Con asserted that "[t]here are viable alternatives to removal are [sic] available to SMUD." Fru-Con relied on the statement of its civil engineer that "there are remedial measures available to provide SMUD an 'or equal' from a durability perspective."
Not only did Fru-Con refuse SMUD's instruction to remove the section C concrete, but it also began construction of the cooling tower on top of the faulty foundation.
Chief executive officer of Fru-Con at the time, Matti Jaekel, testified during his deposition that Fru-Con never wavered from its refusal to replace the section C concrete:
"A We were telling SMUD that Fru-Con will not remove Section C of the cooling tower foundation as directed by their letter and that there were remedial measures available to provide 'or equal' from a durability perspective.
"Q Do you think SMUD, in receiving this letter would have any ambiguity in its mind as to whether or not Fru-Con would remove Section C?
"A I don't know what SMUD has in mind. They can read the language. It's plain English, and they can understand it. [¶] . . . [¶]
"Q To your knowledge, did Fru-Con ever agree to change its position from that stated in this letter of December 22, 2004 . . . ?
"A As far as I know, we did not change our position between December 22nd and February 11th."
Earl Hargrave, Fru-Con's project director, confirmed that "as of February 2nd, 2005, Fru-Con was not offering to remove the concrete in section C of the cooling tower."
Jaekel would later testify in a deposition that "I had considered [having Fru-Con] walking away with outside counsel and then determined that that was not a good option for us." Jaekel understood that Fru-Con faced maximum liquidated damages of $25,000 per day for missing project milestones. When the construction ran into serious difficulty, he had someone estimate the cost of delay to SMUD. According to Fru-Con's internal calculations, SMUD would lose approximately $130,000 each day that the power plant's completion was delayed based on $5.87 million lost in electricity generation every 45 days.
Handwritten notes made by Hargrave, during a meeting in January 2005 with Ophoven and Jaekel, recorded an intent to take several actions, including claims preparation, spending certain reserves, and checking piping codes. The seventh item on the list is: "Work slowly without being TERMINATED." The list continues with notations for "Reduction of work that FRUCON [sic] shouldn't be doing [¶] -- reduction of lab[or]. [¶] redirect staff to Claims." The notes also list the following points: "1) More revenue. [¶] 2) Optimize the cash position. [¶] 3) Extension of time." The last page of the meeting notes reads in pertinent part: "Lawyer: Strategic -- to walk away. [¶] Claims Lawyer: But preparation of these claims. [¶] Delay and Disruption."
SMUD terminated Fru-Con's right to proceed under the construction contract on February 11, 2005. SMUD's letter cited several reasons for the termination, including Fru-Con's refusal to replace the section C concrete.
SMUD hired a replacement contractor to remove and replace the section C concrete at a cost of $1,069,000. SMUD also hired other replacement contractors to complete the construction. The power plant was substantially completed in November 2005, at a total cost of $155,051,000 million to SMUD. The plant began commercial operation in February 2006.
Robert Dieterle, a certified cost engineer, testified on behalf of SMUD regarding the amount of damages (1) for excess costs above Fru-Con's contract price that were incurred to finish Fru-Con's portion of the work on the power plant, (2) the amount of liquidated damages accrued under the construction contract, (3) statutory penalties for Fru-Con's violations of the False Claims Act, and (4) the amount of prejudgment interest to which SMUD believed it was entitled. In ascertaining the amount of damages, Dieterle expended nearly six months of full time effort. In doing so, Dieterle received approximately 500 hours of assistance from another certified cost engineer in his firm.
Dieterle investigated the costs incurred by SMUD to complete Fru-Con's scope of work under the construction contract. SMUD paid Fru-Con a total of $79,283,133. Thus, the unpaid portion of the construction contract amounted to $20,853,000. Dieterle credited this unpaid amount to Fru-Con. He concluded that SMUD incurred $46,914,000 in costs in excess of the amount that was remaining on the construction contract with Fru-Con.
Dieterle investigated whether the excess costs were reasonably necessary to complete Fru-Con's portion of the power plant's construction. He began by using Fru-Con's own internal monthly report from January 2005 in which it estimated that the total cost under the construction contract for the power plant would be $138 million. To this figure, Dieterle added $10 million because Fru-Con's original proposal incorporated an assumption that it would net a $10 million profit on the construction. The resulting $148 million figure -- comprising Fru-Con's job cost estimate plus expected profit margin and indirect overhead -- approximated SMUD's actual expenditure of $155 million to Fru-Con and the replacement contractors for the completed power plant.
Dieterle noted that Fru-Con's estimate did not include the cost of mobilizing and demobilizing the replacement contractors or the costs necessary to repair some of Fru-Con's work. The costs of repair and rework were determined only after the replacement contractors began examining the work left to be done during the construction. For example, the rework included the cost necessary to replace the section C concrete -- an amount not included in Fru-Con's estimate because the company did not believe there was any need to replace the concrete.
Fru-Con's estimate also did not include costs caused by the delay of the power plant's estimated completion date of August 2005 to the actual completion date in November 2005. As Dieterle noted, "Everyday on a project a lot of money is being spent just associated with running a project." Fru-Con's own estimate of $50,000 per day for project delay cost was used for the three months that the plant was delayed beyond August 2005. Dieterle also accounted for the extra costs associated with the turbine manufacturer and Utility Engineering being required to be at the construction site during the delay period.
Fru-Con's earned hours report from February 6, 2005, indicated that the company spent 103 percent of the hours allotted for the project to complete only 66.4 percent of the work. Dieterle testified, "that information tells me the project is in serious trouble. More specifically, that would be an indication to me that the project is sustaining up to that point a slightly more than fifty percent overrun on its budget."
In examining the excess costs, Dieterle used a spreadsheet of costs incurred by SMUD prepared by Brinig and Company. The information on the spreadsheet came from SMUD's books and records. Dieterle used the Brinig and Company spreadsheet as a starting point for making adjustments based on individual task orders submitted by the contractors and other project records. Dieterle also reviewed the task order contracts, the breakdown of cost codes, invoices, and "whatever other project record was available." Project records examined by Dieterle included the letters, debit memos, field memos, change order requests, and field directives. Dieterle wanted to ensure that only tasks and work falling within Fru-Con's scope were counted in determining the amount of excess cost damages.
Dieterle also investigated SMUD's cost codes, its system for tracking costs incurred on the construction project.*fn2 Thus, he was able to ascertain the amount of money SMUD paid to each of its contractors, replacement contractors, and vendors. With extensive help from Zanetti, Dieterle identified nine of SMUD's eighty cost codes that described work outside the scope of Fru-Con's obligations under the construction contract. Dieterle explained that he and Zanetti "spread out all the information on a large conference table, drawings, specifications, field memos, field directives and whatever else was available. And we went through each and every change request, field memo and the like, reviewed what was entailed, discussed what was entailed, and came up with a conclusion based on his forty some years of experience and the requirements of this contract, what was in scope, and what was not in scope." By examining the actual invoices, Dieterle and Zanetti were able to correct miscoded costs. Nonetheless, as Dieterle concluded, "[t]his project was very well documented from an engineering standpoint."
As a result of his investigation, Dieterle was able to ascertain the amount due to Fru-Con for work it had performed prior to termination but that exceeded the scope of its duties under the construction contract. This amounted to a credit of $481,865 in Fru-Con's favor.
With the appropriate adjustments, Dieterle concluded that SMUD reasonably spent $155 million to complete the power plant. Dieterle noted that this amount was close to Fru-Con's internal estimate of what it would cost to complete the project. Dieterle testified that the time and materials mark-ups paid to the replacement contractors were "not only reasonable" but "competitive." SMUD's post-termination construction costs were properly incurred to complete the power plant.
Patricia Galloway, Ph.D., a civil engineer and management consultant, testified as an expert about Fru-Con's failure to achieve the intermediate construction milestones for which the construction contract imposed liquidated damages. In reaching her conclusions about Fru-Con's missed intermediate construction milestones, Dr. Galloway and her associates spent thousands of hours reviewing documents from the construction project.
Using Dr. Galloway's timeline of the delays incurred by Fru-Con, Dieterle calculated that SMUD was owed $8,195,000 in liquidated damages under the construction contract. The calculations incorporated the construction contract's cap of liquidated damages at $25,000 per calendar day. Dieterle also factored in time extensions of two days that Dr. Galloway indicated should have been granted to Fru-Con. Dieterle excluded any liquidated damages pertaining to the backfeed/energization milestone that was disputed by the parties. The exclusion resulted in an adjustment in Fru-Con's favor.
Statutory Penalties under the False Claims Act
Dieterle examined whether there was "any reasonable explanation why Fru-Con would submit a certified pay application to a public agency when the work was not actually accomplished, at the time of the submittal of the payment application, if Fru-Con was honest in its billing when submitting an application to a public agency." Dieterle concluded that Fru-Con's billing practices were dishonest. As he explained, Fru-Con billed for work not yet completed and, when challenged by SMUD, had a practice of simply deleting the disputed part of the claim before resubmitting the bill. Dieterle added, "Fru-con never on its own revised a payment application. It did it in a direct response to SMUD." Based on his calculations, Dieterle concluded that SMUD was entitled to $152,879 in statutory damages under the False Claims Act.
Dieterle calculated prejudgment interest in favor of SMUD on the contract damages (which included excess cost and liquidated damages) at 10 percent simple interest. He concluded that SMUD was entitled to $15,732,053 in prejudgment interest through March 31, 2009.
In sum, Dieterle testified that damages due to SMUD from Fru-Con for excess costs, liquidated damages, false claim penalties, and interest totaled $62,843,514.
The jury awarded SMUD $35,558,278 for excess costs that SMUD incurred in completing the power plant. On SMUD's claim for liquidated damages, the jury awarded $6,590,000. The jury also awarded SMUD $10,000 under the False Claims Act. Fru-Con was credited with $1,496,449 for its requests for change orders. The court concluded that SMUD's damage calculation and evidence at trial had already given Fru-Con $333,740 for its request for change orders. To avoid double recovery for Fru-Con, the court reduced Fru-Con's credit for requested change orders to $1,164,709.
Proceedings in Sacramento County Superior Court
On February 28, 2005, SMUD filed a complaint against Fru-Con in Sacramento County Superior Court. The complaint alleged causes of action for declaratory relief, breach of contract, violations of the False Claims Act, and negligence.
Fru-Con filed a cross-complaint asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of the implied warranty of correctness of plans and specifications, and breach of the statutory duty to make prompt payment.
Fru-Con removed the action to federal court on March 29, 2005. On May 26, 2005, the federal court granted SMUD's motion to remand the case back to the Sacramento County Superior Court.
Proceedings in the United States District Court
Fru-Con also filed an action against SMUD in federal court, entitled Fru-Con v. Sacramento Municipal Utility Dist., U.S. District Court (E.D. Cal.) No. Civ. 2:05-CV-00583. SMUD filed a counterclaim in the federal action filed by Fru-Con. The surety on the construction contract, Travelers, filed suit against SMUD concerning the performance bond in the United States District Court for the Eastern District of California. The two federal actions were eventually consolidated and stayed pending the outcome of this case.
In Sacramento County Superior Court, SMUD moved for summary adjudication on its declaratory relief cause of action based on the claim that it had properly terminated Fru-Con's right to proceed with any further work. The trial court granted summary adjudication in favor of SMUD based on Fru-Con's refusal to replace the section C concrete as instructed.
Fru-con filed a petition for writ of mandate in this court, seeking to set aside the summary adjudication ruling. We summarily denied the petition. (Fru-Con Construction Corporation v. Superior Court (Aug. 2, 2007, C055837), review den. Sept. 25, 2007.)
The matter proceeded to a three-month jury trial. At the outset of trial, the court explained to the jury that SMUD properly had terminated Fru-Con's right to proceed with work under the construction contract, and that SMUD was entitled to present evidence of damages as provided in General Condition 36. SMUD was also allowed to introduce evidence to prove that Fru-Con filed false claims. The court further explained that Fru-Con had its own claims that SMUD had breached the contract. Accordingly, Fru-Con was entitled to introduce evidence on that claim and the defense that SMUD had failed to mitigate its damages.
SMUD introduced evidence of damages arising from the need to pay replacement contractors after terminating Fru-Con's right to proceed under the contract, liquidated damages under the contract, statutory penalties under the False Claims Act, and statutory interest on the claimed damages.
Fru-Con adduced evidence in support of its claims for additional compensation due to extra work occasioned by engineering deficiencies and last-minute design changes for which SMUD and Utility Engineering were responsible.
Following the jury's verdict, Fru-Con moved for a new trial and for judgment notwithstanding the verdict. The trial court denied both of Fru-Con's motions. The trial court awarded SMUD $13,048,814.80 in prejudgment interest. However, the court denied SMUD's motion for attorney fees.
On December 7, 2009, judgment in the amount of $54,042,383.80 was entered in favor of SMUD and against Fru-Con.*fn3 Fru-Con filed a notice of appeal on February 5, 2010. On February 25, 2010, SMUD filed its own notice of appeal from the portion of the judgment denying its motion for attorney fees.