Midwest Dredging Co. v. McAninch Corp.

• Decision Date: 11 May 1988
• Docket Number: No. 85-1063,85-1063
• Citation: 424 N.W.2d 216
• Parties: MIDWEST DREDGING COMPANY, Appellee, v. McANINCH CORPORATION, Defendant, and Iowa State Department of Transportation, Appellant.
• Court: Iowa Supreme Court

Page 216

424 N.W.2d 216

MIDWEST DREDGING COMPANY, Appellee, v. McANINCH CORPORATION, Defendant and Iowa State Department of Transportation, Appellant.

No. 85-1063.

Supreme Court of Iowa.

May 11, 1988.

Thomas J. Miller, Atty. Gen., and Mark Hunacek, Asst. Atty. Gen., for appellant.

Patrick M. Roby and Diane Kutzko of Shuttleworth & Ingersoll, P.C., Cedar Rapids, for appellee.

Considered by McGIVERIN, C.J., and LARSON, SCHULTZ, LAVORATO and ANDREASEN, JJ.

McGIVERIN, Chief Justice.

Defendant, Iowa Department of Transportation (DOT), appeals three of the trial court's conclusions in this non-jury law action. The trial court ruled (1) that DOT did not enjoy sovereign immunity under Iowa Code section 613.11 (1979) from the suit brought by plaintiff-subcontractor Midwest Dredging Co. (Midwest); (2) that Midwest was an intended third-party beneficiary of the contract between DOT and the codefendant-contractor McAninch Corporation; and (3) that DOT breached an implied warranty of the accuracy of its plans and specifications incorporated into the DOT-McAninch contract for dirt removal and transfer in a road construction project. DOT asserts error in each of these conclusions. Midwest cross-appeals, asserting error in the court's denial of Midwest's claim for lost future profits. As to both appeals, we affirm.

I. Background facts and proceedings. This case arose out of a highway construction project. McAninch Corporation, a large construction contractor, submitted the winning bid in 1979 on a contract offered by DOT to grade and construct a portion of interstate highway 380 in Cedar Rapids, Iowa. The contract incorporated numerous project plans compiled by DOT's engineers and a 661-page DOT publication entitled "Standard Specifications for Highway and Bridge Construction."

The relevant provision of the contract for the purpose of this appeal is contained in an addendum to the standard specifications. The addendum, entitled Special Provision 244 (SP-244), required that the embankment material to be used as support under the pavement of the highway be taken from the "Ross Borrow site," also referred to in the DOT plans as borrow C. The city of Cedar Rapids preferred that the DOT not haul the materials over the city streets and risk breaking pipes under the streets. Special Provision 244 therefore required that the material from borrow C be hydraulically dredged at the borrow site and pumped approximately 7000 feet to the construction site through a pipe while the material was still mixed with water. The requirements in SP-244, by express language, were to prevail over the standard specifications.

Before opening the contract to bids, DOT took twenty-one test borings to determine the subsurface conditions in borrow C. Only six of those borings were taken within the actual mapped boundaries of the borrow site. The results of one of those six borings indicated the presence of rock or small "boulders." The remaining borings indicated only sand and small gravel.

Based upon these test results, DOT determined that hydraulic dredging and hydraulic transportation of the embankment material was feasible, and estimated the total contract cost based upon this assumption. DOT also made its test results available to contract bidders for use in calculating their bids. Unknown to those bidders, however, DOT only considered bids within seven percent of its cost estimate.

Although DOT relied on its boring tests to prepare construction plans and to estimate the construction costs, on appeal DOT points to several standard specifications incorporated into the contract which disclaim any guaranty of accuracy in their plans. Standard specification 1104.01 reads:

For the purpose of design and the preparation of the engineer's estimate, the contracting authority or its representatives may perform a reasonable amount of exploratory work to gain information relative to surface and subsurface conditions relating to types of soil, moisture content, and types and extent of rock strata. This information, when shown on the plans, represents a summary of conditions as of the date the survey was made; it is only an approximate estimation of the site conditions made merely to be suggestive to the contracting authority of construction conditions and quantities and classes of work. The bidder may use this information as he sees fit. The appearance of this information on the plans will not constitute a guarantee that conditions other than those indicated will not be encountered at the time of construction. The bidder is advised that all information concerning the project, compiled by the contracting authority preceding the design is available for his examination at the contracting authority's headquarters.

Additionally, standard specification 1102.09 contains this general disclaimer requiring the contractor to investigate the plans and work site:

It is the responsibility of the bidder to examine the plans, proposal form, specifications, supplemental specifications, special provisions, the site of the work, and the state of the work of other contracts on the project to assure that all requirements of the contract and the plans are fully understood. It is the bidder's responsibility to satisfy himself as to the nature of the work and all reasonably ascertainable conditions which may affect his performance under the contract.

(Emphasis added.)

Despite this general disclaimer, the trial court found that the borrow site was covered with a deep layer of silt that was too soft to support equipment with which a bidder could make its own deeper borings and learn the true subsurface conditions.

McAninch, having no dredging equipment or experience, bid on the DOT contract intending to sublet the dredging work. DOT was also aware that the dredging work might be sublet. At a prebid conference held by DOT, Donald Lind, the president of Midwest, representatives of McAninch, and several other contractors and subcontractors were present to discuss the problem of hydraulic dredging and transportation of the borrow pit contents. Under the contract terms specified by DOT, the contractor could sublet only up to fifty percent of the total work to be done. Any work designated as a "specialty item," however, could be sublet without counting against the fifty percent limit with the DOT's written consent. The dredging required in SP-244 was a specialty item.

McAninch won the contract on April 18, 1979, and then sublet the dredging work to Midwest on April 26 with DOT's written approval. The subcontract required Midwest to abide by the hydraulic dredging specifications of the DOT contract.

After the silt layer was removed from the borrow, Midwest began dredging operations in September 1979, using equipment of its own design, built in accordance with the information provided by DOT. Almost immediately, Midwest's pump began to encounter problems with rocks too large to fit through the twenty-two inch transfer pipe. Clearing the blockage was time consuming, and each time the pipe was cleared, rocks would block the pipe again a short time later.

After being informed of Midwest's problems, DOT undertook eleven new borings. All but one showed subsurface rock formations extending into the borrow site. DOT recommended dredging at another location within the borrow. At considerable expense, Midwest moved its equipment to the new location, but hydraulic dredging attempts there also proved fruitless. Nevertheless, DOT refused Midwest's subsequent suggestion to haul material by truck to the construction site.

Fifteen additional borings were taken by a soil testing service hired by McAninch the next month and all but one encountered large rocks or "boulders" big enough to disrupt dredging and piping operations.

At the end of November, Midwest presented DOT with a report that borrow C was not hydraulically dredgeable. Various alternative procedures were discussed by DOT and Midwest, but all were rejected by DOT. The trial court found as a fact that Midwest did not fail to perform any economically practicable act to hydraulically dredge the borrow site.

The chief executive officer for McAninch then approached DOT in January 1980 offering his opinion that borrow C could not be hydraulically dredged. DOT continued to disagree. After commissioning the excavation of three more test holes, all of which yielded boulders, DOT executed a change order in March, requiring the embankment material to be hauled by truck.

The next month, Midwest declared itself to be insolvent and unable to complete the DOT contract.

Alleging that losses on this job contributed significantly to its financial problems, Midwest brought suit against DOT and McAninch. ¹ The suit alleged (1) that DOT impliedly warranted the accuracy of the plans and specifications contained in its contract with McAninch and that the Ross Borrow pit was hydraulically dredgeable; (2) that Midwest was an intended third-party beneficiary of that contract; and (3) that the State waived sovereign immunity, see Iowa Code section 613.11, by virtue of the plans and specifications included in the contract and the work performed in drilling test holes. Finally, the petition sought damages on several theories including loss of future earnings. The future earnings damages were attributable to DOT, Midwest argued, because of the DOT's breach of this contract, which led to Midwest's insolvency.

Based upon its findings of fact, the trial court concluded that Midwest was correct on the first three issues and awarded damages against DOT for certain losses sustained by Midwest, but concluded that losses from this contract were not responsible for Midwest's insolvency. DOT appeals the trial court's judgment on the implied warranty, third-party beneficiary, and sovereign immunity issues. DOT does not challenge the amount of the judgment. Midwest cross-appeals on the issue of lost future earnings resulting from its insolvency.

II. Sovereign...