Rai Indus. Fabricators, LLC v. Fed. Ins. Co.

• Decision Date: 23 October 2018
• Docket Number: Case No. 5:16-cv-03674-EJD
• Parties: RAI INDUSTRIAL FABRICATORS, LLC, et al., Plaintiffs, v. FEDERAL INSURANCE COMPANY, et al., Defendants.
• Court: U.S. District Court — Northern District of California

RAI INDUSTRIAL FABRICATORS, LLC, et al., Plaintiffs, v. FEDERAL INSURANCE COMPANY, et al., Defendants.

Case No. 5:16-cv-03674-EJD

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

October 23, 2018

ORDER GRANTING IN PART SAUER'S MOTION TO DISMISS

Re: Dkt. No. 100

I. INTRODUCTION

This is one of several lawsuits pending in this district that arises out of the construction of the Operational Readiness Training Complex at Fort Hunter Liggett, United States Army Combat Support Training Center, located in Monterey County, California ("Project"). The Army Corp of Engineers awarded a contract to Sauer, Inc. ("Sauer") to design and build the Project. Sauer entered into a subcontract with Agate Steel, Inc. ("Agate") to erect structural and miscellaneous steel for the Project. In a Second Amended Counterclaim ("SAC"), Agate alleges, among other things, that Sauer directed Agate to perform work beyond what was stated in the subcontract and that Sauer owes Agate at least $649,739 for the extra work and materials. Sauer moves to dismiss Agate's fourth claim for "Palpable Unilateral Mistake" and fifth claim for breach of the implied covenant of good faith and fair dealing pursuant to Rule 12(b)(6), Fed.R.Civ.P. The Court finds it appropriate to take the motion under submission for decision without oral argument pursuant to Civil Local Rule 7-1(b). For the reasons set forth below, Sauer's motion to dismiss is granted as to the claim for "Palpable Unilateral Mistake," and denied as to the claim for breach of the implied covenant of good faith and fair dealing.

II. BACKGROUND¹

Sauer entered into an agreement with the U.S. Army Engineer District, Louisville to design and construct the Project. SAC ¶ 12. In December of 2014, Sauer entered into a Subcontract Agreement with Agate for erection of structural and miscellaneous steel for the Project (the "Erection Subcontract" or "Subcontract"). Id. ¶ 16. The steel materials and fabrication of the steel for the Project were to be provided by Sauer and Sauer's other subcontractors. Id.

In the Erection Subcontract, the parties contemplated that Agate would perform its work consistent with the contract documents; the duration of the Project would be 121 days; Sauer and its fabrication subcontractor would provide structural steel consistent with the Project drawings enumerated in Schedule B; the contract drawings would be reasonably accurate and complete; the steel stairs would be provided by Sauer and its subcontractors pre-assembled and ready for installation; and Sauer would grant extensions of time for Agate's performance consistent with the Erection Subcontract. Id. ¶¶ 17-22. Agate began work on the Project on March 12, 2015. Id. ¶ 23.

"In sharp contrast to the reasonable contemplation of the Parties upon execution of the Erection Subcontract, the Project drawings were significantly changed by Sauer requiring material changes to structural steel fabrication and erection"; Agate was required to labor on the Project for 422 days; Sauer's fabrication subcontract provided hundreds of nonconforming steel pieces to the Project, requiring Agate to field modify the nonconforming steel at Sauer's request; the Contract Drawings dramatically understated the number of steel clips required for the Project; the steel stairs were provided to Agate in multiple steel pieces that required onsite assembly; and Sauer failed and refused to grant any time extensions to Agate for the delay and extra work required of Agate. Id. ¶¶ 24-29.

Agate asserts claims for (1) breach of the Subcontract predicated upon Sauer's alleged failure and refusal to pay Agate for its work on the Project and Sauer's alleged failure to executechange orders; (2) breach of contract for delay and disruption; (3) unjust enrichment; (4) "Palpable Unilateral Mistake"; and (5) breach of the covenant of good faith and fair dealing.

III. STANDARDS

Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed if it fails to state a claim upon which relief can be granted. In considering a motion pursuant to Rule 12(b)(6), the court must accept as true all "well-pleaded factual allegations." Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1950 (2009). The court must also construe the alleged facts in the light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1989). "[T]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, 'to state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (internal citations omitted); see also Fed. R. Civ. P. 8(a).

IV. DISCUSSION

A. Fourth Claim: Palpable Unilateral Mistake

Agate's fourth claim is entitled "Palpable Unilateral Mistake." In brief, Agate alleges on information and belief that in reviewing bids, Sauer determined that Agate's bid was substantially lower than the bids from other erection subcontractors; Sauer knew or shown have known that there was a mistake in Agate's bid; Sauer had a duty to notify Agate of the mistake and invite Agate to confirm its bid, but failed to do so; Sauer used the mistake to its advantage; and as a result of this "palpable unilateral mistake," no contract between Agate and Sauer was formed. SAC ¶¶ 81-91.

As a preliminary matter, the claim for "Palpable Unilateral Mistake" is improper because it was filed without leave of court. The May 2, 2018 Order Granting In Part And Denying In Part Sauer's Motion To Dismiss Agate Steel's First Amended Counterclaim; Denying Sauer's Motion To Strike Allegations ("Order") specified that Agate was granted leave to amend its claim for breach of the covenant of good faith and fair dealing. The Order did not authorize the filing of any new claims. On this basis alone, the claim for "Palpable Unilateral Mistake" is subject to dismissal.

On the merits, Sauer contends that the claim for "Palpable Unilateral Mistake" should be dismissed because it is not a cognizable legal theory. The Court agrees. In M.F. Kemper Constr. Co. v. City of Los Angeles, 37 Cal.2d 696 (1951), the California Supreme Court used the term "palpable" in its discussion of rescission based upon unilateral mistake. The case does not, however, recognize a claim for "palpable unilateral mistake." Nor do the majority of cases cited by Agate. The cases relied upon by Agate state the general proposition that rescission is a legally recognized remedy when a contract is the result of a unilateral mistake. See Moore v. Copp, 119 Cal. 429 (1897) (in an action for quiet title, plaintiff's contract with defendant for the purchase of land was void due to plaintiff's unilateral mistake); Brunzell Const. Co. v. G. J. Weisbrod, Inc., 134 Cal. App. 2d. 278 (1955) (rescission applied as a defense against a claim to enforce construction subcontract); Elsinore Union Elementary School Dist. of Riverside County v. Kastorff, 54 Cal.2d 380 (1960) (in suit alleging damages resulting from the defendant contractor's refusal to execute a building contract pursuant to the contractor's bid, defendant entitled to rescission).

The only case that lends support to Agate's argument is Paul Hardeman, Inc. v. Arkansas Power and Light Co., 380 F. Supp. 298 (E.D. Ark. 1974). In Hardeman, the plaintiff seeking rescission did not point to any specific calculation error, omission, or mistake. Instead, the plaintiff made a generalized assertion that the mistake for which it sought rescission of a construction contract was an inadequately underpriced bid. Id. at 309. The Hardeman court engaged in an extensive analysis of the facts and law, recognized "palpable unilateral mistake" as a basis for rescission under Arkansas law, but ultimately held that plaintiff was not entitled to relief on the basis of a "palpable unilateral mistake" because the purported mistake was caused by the negligence of plaintiff's estimators. Id. 330.

It is unclear what applicability, if any, a 1974 district court decision from Arkansas applying Arkansas law has on the instant action. In any event, as stated previously, the Hardeman court did not award plaintiff any relief based upon a "palpable unilateral mistake." Instead, the Hardeman court found that the defendant contractor affirmatively misled the plaintiff intobelieving that plaintiff's bid was competitive and feasible even though the contractor knew it was not. The Hardeman court also found that the contractor wrongfully and in bad faith terminated the parties' contract. No such similar facts are alleged in this case.

Setting aside the label "Palpable Unilateral Mistake," Agate next contends that the SAC satisfactorily pleads a basis for rescission under California law. Dkt. No. 101, p. 15. A party must establish the following elements to obtain rescission of a contract: "(1) the defendant made a mistake regarding a basic assumption upon which the defendant made the contract; (2) the mistake has a material effect upon the agreed exchange of performances that is adverse to the defendant; (3) the defendant does not bear the risk of the mistake; and (4) the effect of the mistake is such that enforcement of the contract would be unconscionable." Donovan v. RRL Corp., 26 Cal.4th 261, 282 (2001) (mistake in advertised price of automobile precluded existence of a contract).

Here, Agate fails to allege any facts that satisfy these elements. Agate does not allege that it made a mistake in the bid it submitted to Sauer, much less that the mistake was regarding a basic assumption upon which the contract was made. Instead, Agate alleges on information and belief that Sauer determined Agate's bid was substantially lower than Sauer's cost estimates and the next lowest bid. Notably absent from the SAC is any allegation that Agate's substantially lower bid was the result of a mistake, which makes this case distinguishable from all of the cases relied upon by Agate except Hardeman, supra. See M.F. Kemper Constr. Co. v. City of Los Angeles, 37 Cal. 2d 696 (19...