Clack v. State, Dept. of Public Works, Division of Highways

• Decision Date: 20 August 1969
• Citation: 275 Cal.App.2d 743,80 Cal.Rptr. 274
• Court: California Court of Appeals Court of Appeals
• Parties: James B. CLACK, as assignee of Rice Brothers, Inc., Plaintiff and Appellant, v. STATE of California, DEPARTMENT OF PUBLIC WORKS, DIVISION OF HIGHWAYS, Defendant and Respondent, The County of Butte, Intervenor and Respondent. Civ. 11948.

Page 274

80 Cal.Rptr. 274

275 Cal.App.2d 743

James B. CLACK, as assignee of Rice Brothers, Inc., Plaintiff and Appellant, v. STATE of California, DEPARTMENT OF PUBLIC WORKS, DIVISION OF HIGHWAYS, Defendant and Respondent, The County of Butte, Intervenor and Respondent.

Civ. 11948.

Court of Appeal, Third District, California.

Aug. 20, 1969.

As Modified Aug. 26, 1969.

Dinkelspiel & Dinkelspiel, San Francisco, Diepenbrock, Wulff & Plant, Sacramento, by Gary J. Shapiro, San Francisco, for plaintiff-appellant.

Harry S. Fenton, Benjamin Hagan, Jr., John D. Reynen, Sacramento, for defendant-respondent.

George P. Kading, County Counsel, Oroville, for intervenor-respondent.

FRIEDMAN, Acting Presiding Justice.

This is a breach of contract action against the state growing out of disputes over performance of a highway construction project. Plaintiff sues both as a subcontractor and as assignee of the general contractor. The trial court denied plaintiff's motion for leave to amend his complaint and granted the state's motion for judgment on the pleadings. Plaintiff appeals from the ensuing judgment.

The complaint seeks damages for alleged breach of an implied warranty of correctness of the plans and specifications, for misrepresentation of project conditions and for unjustified change orders. The complaint alleges that plaintiff gave notice of his claim as required by the state 'and said claim was denied by defendant (state) in its entirety.'

The state's motion for judgment on the pleadings was aimed primarily at the last quoted allegation. In support of its motion the state relied upon section 9(f) of the Standard Specifications of the State Division of Highways, a part of the contract. Section 9(f) provides for the administrative settlement of disputed contract items by the state highway engineer, whose determination shall be 'conclusive and binding * * * except in the case of gross error.' The state pointed out that the complaint failed to allege facts constituting gross error.

Plaintiff then countered with notice of a motion for leave to amend his complaint by adding the following allegation: 'The denial of said claim by defendant's State Highway Engineer was the result of gross error insofar as said claim related to plaintiff's performance of the contract, the amount of work done thereunder, and plaintiff's just compensation therefor, in that said denial was arbitrary and contrary to the weight of the evidence.'

The trial court entered a written order granting the state's motion and denying plaintiff's, for the reason that the complaint and the proposed amendment failed to plead 'gross error' in the sense of fraud, constructive fraud or bad faith. Plaintiff had conceded that it could not prove fraud or bad faith on the part of the State Highway Engineer.

Although plaintiff had not pleaded section 9(f) of the state's general specifications, it is deemed a judicially noticed part of the pleadings. (E. H. Morrill Co. v. State of California (1967) 65 Cal.2d 787, 794--795, 56 Cal.Rptr. 479, 423 P.2d 551; A. Teichert & Son, Inc. v. State (1965) 238 Cal.App.2d 736, 742, 48 Cal.Rptr. 225.)

This court considered this precise provision of the state's highway contracts in A. Teichert & Son, Inc. v. State of California, supra. ¹ We held that section 9(f) establishes a nonjudicial remedy for the settlement of disputed contract claims; that this remedy must be pursued to completion before recourse to the courts; that the provision has an impact on the scope of judicial inquiry. (238 Cal.App.2d at pp. 744--747, 753, 48 Cal.Rptr. 225.) Although eschewing any attempt at a comprehensive delineation of the gross error concept, we called attention to decisions equating it with fraud, constructive fraud, bad faith or failure to exercise honest judgment, as well as decisions rejecting the administrative determination when it was arbitrary. (238 Cal.App.2d at pp. 754--757, 48 Cal.Rptr. 225.)

A similar provision in nonhighway construction contracts of the state was construed in Macomber v. State (1967) 250 Cal.App.2d 391, 58 Cal.Rptr. 393. There the court referred to Teichert and other cases equating gross error with fraud or bad faith, then stated (250 Cal.App.2d at p. 397, 58 Cal.Rptr. at p. 398): 'Fraud in this connection has a broader connotation than is ordinarily implied. In addition to its ordinary significance, in construction contracts it includes arbitrary action and gross mistake (13 Am.Jur.2d, Building and Construction Contracts, § 34; Restatement of the Law, Contracts, § 303, subd. (f).)'

The boundaries of the phrase 'gross error' fix the degree of finality accorded the engineer's administrative decision and correlatively establish the scope of judicial review. To require dishonesty or bad faith as indispensable elements stamps the decision with more finality and constricts judicial review more narrowly than the phrase permits. Both Teichert and Macomber include arbitrariness within the connotation of gross error.

The engineer's decision may entail interpretation of the contract language or specifications; application of a rule of law, or of a contract interpretation, to agreed facts; or a resolution of disputed facts. Whatever his honesty, any of these decisions may be so groundless that no impartial, Reasoning arbiter would agree with it. An action is arbitrary when it is based on no more than the will or desire of the decision-maker and not supported by a fair or substantial reason (Bedford Investment Co. v. Folb (1947) 79 Cal.App.2d 363, 366, 180 P.2d 361; State ex rel. Cosmopolis Consol. School Dist. No. 99, Grays Harbor County v. Bruno (1963) 61 Wash.2d 461, 378 P.2d 691, 696; see Jaffe, Judicial Review Question of Fact, 69 Harv.L.Rev. 1020, 1021 (1956)). In the context of factfinding, arbitrariness characterizes the decision when it lacks substantial support in the evidence. (McDonough v. Goodcell (1939) 13 Cal.2d 741, 749, 91 P.2d 1035, 123 A.L.R. 1205; Riley v. Chambers (1919) 181 Cal. 589, 595, 185 P. 855, 8 A.L.R. 418; Hollon v. Pierce (1967) 257 Cal.App.2d 468, 478, 64 Cal.Rptr. 808). Fraud or bad faith, as morally reprehensible qualities, are not necessary attributes of arbitrariness, hence are not indispensable ingredients of gross error.

United States v. Wunderlich (1951) 342 U.S. 98, 99, 72 S.Ct. 154, 96 L.Ed. 113, involved a federal public works contract which gave finality to the engineer's decision without any express exceptions for fraud or gross error. The court read into the contract an exception for fraud in the sense of an intention to cheat, but refused to reexamine the engineer's decision for arbitrariness. A few years later Congress supplanted the Supreme Court's decision by adoption of the Wunderlich Act (68 Stat. 81 (1954) 41 U.S.C.A. § 321), giving finality to the administrative decision 'unless the same is fraudulent (sic) or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence.'

The California courts have not had occasion to consider the Wunderlich Act's criteria of finality as judicially declared doctrine. Although the act applies only to federal contracts, Professor Arthur Corbin has suggested: '* * * the rule that it lays down should be applied in all contract cases alike as a rule of the common law, including equity. The court should not overlook their powers as successors of the Court of Chancery.' (3A Corbin on Contracts (1960) § 652, p. 129.) The federal statutory criteria are consistent with the Teichert and Macomber decisions, which recognize arbitrariness as a variety of gross error, and with other California decisions, supra, recognizing lack of substantial evidentiary support as one kind of arbitrariness. ²

The substantial evidence rule, moreover, has been highly developed and refined as a standard of appellate review of trial court findings ³ and of judicial review of the findings of administrative agencies. ⁴ Thus absorbing it as one kind of gross error which permits review of the administrative settlement of public contract disputes is eminently practical.

Although the trial court erred in requiring allegations of fraud or bad faith, there is still a question as to the adequacy of plaintiff's proposed amendments. Where a condition precedent to contractual recovery is an event, as distinguished from an act to be performed by the plaintiff, the complaint must specifically allege the event. (Byrne v. Harvey (1962) 211 Cal.App.2d 92, 113, 27 Cal.Rptr. 110, quoting Witkin, Cal. Procedure, Pleading, § 261, p. 1237.) Where a fact is pleaded in general or conclusionary terms, followed by an inconsistent specific allegation, the latter controls. (Stowe v. Fritzie Hotels, Inc. (1955) 44 Cal.2d 416, 422, 282 P.2d 890.)

Plaintiff's proposed amendment declared that the State Highway Engineer's denial of the claims 'was the result of gross error * * * in that said denial was arbitrary and contrary to the weight of the evidence.' Gross error and arbitrariness fall into the class of allegations which combine factual connotations and legal implications. They are relatively large and vague terms, quite inadequate to inform the opposite party of the actual deficiency which may be urged at the trial. Thus, for pleading purposes, gross error and arbitrariness should be classed as legal conclusions, inadequate to support the pleadings unless accompanied by more specific averments. (1 Chadbourn, Grossman, & Van Alstyne, California Pleading, §§ 866, 867.) ⁵

Plaintiff's conclusionary allegations of gross error and arbitrariness were not supported, indeed were contradicted, by his specific averment of an engineer's decision contrary to the weight of the evidence. Judicial review which extends to reweighing the evidence denotes the reviewing tribunal's power to try the entire controversy De novo, to exercise its independent judgment on the evidence. (Nardoni v. McConnell (1957) 48 Cal.2d 500, 503, 310...