U.S. for Use of Palmer Const., Inc. v. Cal State Elec., Inc.

• Decision Date: 31 July 1991
• Docket Number: No. 90-55575,90-55575
• Citation: 940 F.2d 1260
• Parties: 37 Cont.Cas.Fed. (CCH) 76,175 UNITED STATES for the Use of PALMER CONSTRUCTION, INC., Plaintiff-Appellee, v. CAL STATE ELECTRIC, INC.; United Pacific Reliance Insurance Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1260

940 F.2d 1260

37 Cont.Cas.Fed. (CCH) 76,175

UNITED STATES for the Use of PALMER CONSTRUCTION, INC. Plaintiff-Appellee, v. CAL STATE ELECTRIC, INC.; United Pacific Reliance Insurance Company, Defendants-Appellants.

No. 90-55575.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 10, 1991.

Decided July 31, 1991.

Howard A. Allen, Evelyn R. Wiggins, Deb C. Pedersdotter, Hillyer & Irwin, San Diego, Cal., for defendants-appellants.

Irwin E. Sandler, Sandler & Breier, Los Angeles, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Central District of California.

Before REINHARDT and FERNANDEZ, Circuit Judges, and CROCKER, ^* District Judge.

FERNANDEZ, Circuit Judge:

This case presents a clash of principles at the interface between the law of expressed contracts and the law of quasi contracts. Here, Cal State Electric, Inc. (CSE) entered into a contract with Palmer Construction, Inc. (Palmer). Palmer breached its contract, and after a trial the district court found that CSE should pay damages and attorneys fees to Palmer. CSE appealed ¹ the final judgment arising out of that somewhat jarring result. We agree that the judgment is in error and reverse.

BACKGROUND FACTS

CSE entered into a prime contract with the U.S. Army Corps of Engineers to construct the STS Power Plant at Vandenburg Air Force Base in California. CSE then entered into a contract with Palmer in which a portion of the work was subcontracted to the latter entity. The contract price for Palmer's work was to be $220,162. Due to agreed extra work, an additional $14,975 was added to the contract price for a total of $235,137.

Palmer commenced work but, after completing a portion of the job, Palmer breached. There is no doubt about that. By the time of the breach Palmer had supplied some goods and services which the district court found to have a value of $204,845.26. Against the sum, CSE had already paid Palmer a total of $114,758.98, and after Palmer's breach CSE was required to expend the further sum of $126,673.56 in order to complete the work that Palmer had contracted to do.

CSE had, thus, paid out a total of $241,432.54 in order to obtain a job that it had contracted to get from Palmer at a price of $235,137. Therefore, CSE had suffered damages in the amount of $6,295.54. The district court so found.

However, rather than leaving matters where they stood, the district court went on to reflect on the fact that since the value of Palmer's work was $204,845.26 and it had only received $114,758.98, it was entitled to reimbursement for the rest of those services, less the "damage" done to CSE. The result of that calculation, after also giving CSE prejudgment interest of $1,468.88, was a net sum due to Palmer of $82,321.86 plus attorneys fees.

Not surprisingly, CSE, the innocent party, expressed its chagrin at a result that required it to pay additional sums to Palmer plus attorneys fees. It argues that this was caused by a misapplication of legal principles. We agree.

JURISDICTION AND STANDARDS OF REVIEW

This is a Miller Act case over which the district court had jurisdiction pursuant to 40 U.S.C. Sec. 270b. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291.

"[S]tate law controls the interpretation of Miller Act subcontracts to which the United States is not a party." United States ex rel. Leno v. Summit Constr. Co., 892 F.2d 788, 792 (9th Cir.1989) (citations omitted). Here the contract should be interpreted under the law of California. The district court's computation of the damage award is a finding of fact reviewable under the clearly erroneous standard except to the extent that the legal principles have been misapplied, in which event the issue is reviewed de novo. United States ex rel. Morgan & Son Earth Moving, Inc. v. Timberland Paving & Constr. Co., 745 F.2d 595, 599 (9th Cir.1984).

Identification of the prevailing party for purposes of California Civ.Code Sec. 1717 is an issue that we review for abuse of discretion. Krueger v. Bank of America, 145 Cal.App.3d 204, 217, 193 Cal.Rptr. 322 (1983).

DISCUSSION

A. The Measure and Allocation of Damages.

The question which faces us on this appeal is one of some jurisprudential complexity. It has engaged the attention of commentators for many years. As a matter of pure contract law it is generally true that if two individuals enter into a contract and one breaches, the breaching party cannot obtain a recovery from the innocent party. Rather, if the innocent party has suffered, a recovery against the party in breach is generally accorded. See, e.g., California Civil Code Sec. 3300; Bruckman v. Parliament Escrow Corp., 190 Cal.App.3d 1051, 235 Cal.Rptr. 813 (1987). In building contracts "[t]he measure of damages ... is the reasonable cost ... to finish the work in accordance with the contract." Walker v. Signal Cos., Inc., 84 Cal.App.3d 982, 993, 149 Cal.Rptr. 119 (1978).

On the other hand, if the breaching party has conferred a benefit upon the innocent party rather than a detriment, it would unjustly enrich the innocent party and unduly punish the breaching party if the latter received nothing for its services. Quasi contract principles will supply the remedy for that. See 12 S. Williston, A Treatise on the Law of Contracts Secs. 1479-84 (3rd ed. 1970) (Williston). See also 1 B. Witkin, Summary of California Law (Contracts) Secs. 91-96 (9th ed. 1987); 55 Cal.Jur.3d (Restitution) Sec. 66-67 (1980).

These policies appear to conflict to some extent, so anyone who considers them must reconcile their opposing tendencies. When faced with these propositions, the commentators have resolved them by stating that the breaching party is entitled to the reasonable value of its services less any damages caused by the breach. See 5A A. Corbin, Corbin on Contracts Sec. 1124 (1964). They have added that the breaching party should not, in any event, be able to recover more than the contract price, or perhaps even a ratable part of that contract price. Id. See also, 5 A. Corbin, Corbin on Contracts Sec. 1113 at 606 (1964). Williston puts it as follows:

The true measure of quasi contractual recovery, where the performance is incomplete but readily remediable, is the unpaid contract price less the cost of completion and other additional harm to the defendant except that it must never exceed the benefit actually received by him. This is the net benefit by which the defendant is enriched.

Williston Sec. 1483 at 301.

While this phraseology is somewhat more complex, it can readily be seen that the effect is to preclude a recovery by the breaching party which will cause the innocent party to pay more than the contract price itself. ² The Restatement is in accord with this approach, for while it, too, allows for recovery for part performance, it indicates that the amount of that recovery is not only limited to the extent that the innocent party's gain exceeded its loss, but is also limited to no more than a ratable portion of the total contract price. Restatement (Second) of Contracts Sec. 374 comments a & b (1981).

It is interesting to observe that treatise illustrations of the application of these principles demonstrate that the innocent party never winds up paying a total that is more than the contract price itself. See, e.g., Restatement (Second) of Contracts Sec. 374 comment b, illustrations (1981). That is sensible. Were it otherwise, there would be a powerful inducement to breach rather than complete any contract which did not turn out to be profitable. By doing so, the ultimate loss of the bargain would be shifted from the breaching party to the innocent party, which is precisely what would occur in the case at hand if the district court's judgment stands.

Palmer has referred us to cases from our and other circuits but not one of them stands for the proposition that an innocent party must pay more than the contract price for the goods or services it sought. See United States ex rel. C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533 (10th Cir.1987) (breaching prime contractor had to pay quantum meruit charges to subcontractor); United States ex rel. Coastal Steel Erectors, Inc. v. Algernon Blair, Inc., 479 F.2d 638 (4th Cir.1973) (same); Sicula Oceanica, S.A. v. Wilmar Marine Eng'g & Sales Corp., 413 F.2d 1332 (5th Cir.1969) (actual amount of damages not decided; no suggestion that innocent party must pay more than agreed upon price); American Surety Co. v. United States ex rel. B & B Drilling Co., 368 F.2d 475 (9th Cir.1966) (breaching party could recover for what it did at the contract rate less setoffs for damages incurred on account of the breach).

Moreover, if the breaching party were permitted to recover an amount that leaves the innocent party paying more than the contract price for the goods and services contracted for, that would cause an increase in the loss to the innocent party on account of the breach and would offset the additional amount demanded by the breaching party. However, no such paraphrastic principles are needed if the cost to the innocent party for the goods and services contracted for is limited to the contract price itself. The breaching party would then be required to pay damages for excess costs imposed upon the innocent party.

California law is not to the contrary. In the leading case of Roseleaf Corp. v. Radis, 122 Cal.App.2d 196, 264 P.2d 964 (1953), the court dealt with a situation where a purchaser of property was to obtain a new refinancing loan in an amount not to exceed $75,000. Instead, the purchaser obtained a loan for $125,000. That loan was accepted by the seller. When the purchaser sought credit for the costs of obtaining the loan, the seller claimed that the purchaser had no entitlement whatever because the purchaser had breached. The court disagreed and, instead, awarded the purchaser a credit in the amount of the costs that would have been proper if a $75,000...