Coleman Engineering Co. v. North American Aviation, Inc. ( 1966 )

PETERS, J.

Defendant, North American Aviation, Inc.,

appeals from a judgment awarding plaintiff, Coleman Engineering Company, Inc., damages in the amount of $289,615.89 plus interest at the rate of 7 percent per annum from December 10, 1959. Defendant also appeals from the order denying its motion to vacate the judgment and to enter a new and different judgment.

In January 1959, defendant invited bids for the engineering and manufacturing of 32 positioning or lift trailers and 7 transportation trailers to accommodate its Hound Dog Missile. With the invitation to bid, defendant submitted its basic equipment specifications. Section 3.2.2.9 of the specifications contained a description of the “configuration of the payload,” namely, “a 36.5 inch dia. cylindrical payload configuration, the longitudinal centerline of which shall coincide with the trailer centerline in the plane of the rail top surfaces.” Eeferences to configuration of the payload are also found in other specifications, namely, a provision dealing with load rails refers to “payloads of various configurations,” the intended use provision refers to “missiles or special payloads for aircraft and missiles” and a provision designated loaded stability states that part of the payload is “at a point 46 inches above the rail top surfaces.”

The configuration of the payload is important in the light of the following fundamental engineering principle: The center of gravity “of an object generally stated is its balance point. It may be considered in three planes—vertical, lateral, and fore and aft. Its location depends generally upon the weight, material and configuration of the object. Its location will vary among objects of the same weight and material if these configurations are different. All these principles are elementary among design engineers. ’ ’

All of the engineers testified that, if there were no other specification relating to configuration, an engineer could reasonably interpret specification section 3.2.2.9 as locating the vertical payload center of gravity at rail height. However the expert witnesses of the parties differed as to the effect to be given to the other provisions mentioned relating to configuration of payload. Plaintiff’s experts testified in effect that section 3.2.2.9 established the center of gravity at rail height and the further provisions did not establish any other center of gravity. Defendant’s experts claimed that the inclusion of the further provisions compelled the conclusion that section 3.2.2.9 does not state the center of gravity, and that instead the specifications must be understood as not stating any vertical location for the center of gravity of the payload.

In February plaintiff submitted its bid to defendant. With the bid, plaintiff transmitted a preliminary stress analysis report which interpreted defendant’s specifications as locating the vertical center of gravity of the payload in the plane of the rail top surfaces. This was filed by defendant’s engineers but they did not read it.

On June 23, 1959, defendant sent plaintiff five “go ahead” telegrams, informing it that it was the successful bidder.¹ Plaintiff then started the design and engineering of the trailers. On July 6 defendant delivered to plaintiff a series of purchase orders, which, according to the pleadings of both parties, constitute the contract between them. The purchase orders state a total price of $527,632 and provide for delivery of trailers to commence on September 15 and contain the same equipment specifications with regard to configuration of the payload as found in the equipment specifications in the invitation to bid. The purchase orders provided for “a binding contract on the terms set forth herein when it is accepted either by acknowledgment or delivery. ’ ’

The purchase orders also state in paragraph 9, captioned “Changes,” that “Buyer reserves the right at any time to make changes in drawings and specifications, in methods of shipment and packaging, in schedules, and the place of delivery as to any material and/or work covered by this order. In such event there will be made an equitable adjustment in price and time of performance mutually satisfactory to Buyer and Seller, but any claim by Seller for an adjustment must be made within thirty (30) days of the receipt of such changes.” Each purchase order also states that it is the entire contract, that no changes are binding on buyer unless evidenced by a duly executed purchase order, and that buyer may terminate at any time in accordance with section 8-706 of the Armed Services Procurement Regulation. The regulation provides, as applicable here, for payment of expenses and a certain profit to the subcontractor upon such termination.

The president of plaintiff did not sign and return the copies of the purchase orders to defendant until July 15, 1959. Meanwhile, at a meeting of engineers of plaintiff and defendant on July 7, the engineers of defendant stated that it desired the trailers to be designed to accommodate a payload center of gravity 35 inches above the rail top surfaces. When the engineers of plaintiff stated that it had bid on the contract on the basis that the specification placed the center of gravity at rail height and had so indicated in its stress report attached to its bid, defendant’s engineers admitted that they had not read that report. Plaintiff’s engineers also stated at that time that their work had been based on the assumption of a vertical center of gravity at rail height, that the changing of the center of gravity would entail an increase in costs and a delay in schedule, and that plaintiff desired a change in specifications defining the location of the center of gravity if defendant wanted it at a place other than the top of the load rails. The engineer in charge for defendant requested that work continue on the trailers and stated that changes in the specifications would be forthcoming.

Several meetings were thereafter held between engineers of the parties, and several proposed changes in specifications were prepared. On October 5, 1959, defendant supplied plaintiff with a telegraphic change in specifications wherein the center of gravity was located at 35 inches above rail height.

The change in specifications caused a significant change in the engineering, design and cost of construction; the increase in costs was at least $257,000. Upon receipt of the telegraphic change of October 5, plaintiff requested an adjustment in price and time for performance before continuing performance. Plaintiff sought recovery of costs expended to the date of the receipt of the telegraphic change and the reasonable expenses of constructing the trailers in accordance with the changed specifications. Plaintiff first sought to raise the contract price to over a million dollars, and also offered as an alternative to change the contractual arrangement from “fixed-price to fixed-price with redetermination or to a cost-plus-a-fixed-fee at a point to be agreed upon.” Plaintiff urged that repricing of the contract was essential because of the long delays while waiting for the change order and the numerous starts and stops caused thereby, interim price increases by vendors, changes in the anticipated number of units to be ordered, and the many conferences as to the changes. During these negotiations the position of defendant was that plaintiff had made a mistake by underbidding and was looking to defendant to “bail” it out. Defendant refused to pay more than a 10 percent increase in the contract price, an increase of approximately $52,000 which would have raised the contract price to approximately $580,000.

Plaintiff in a letter to defendant took the position that continuation of the contract without obtaining its price for the changes could mean financial disaster to it and that unless a settlement could be reached on the bases it had suggested it would have to stop work on November 5, 1959, and it then would seek recovery under the provision of the contract providing for ‘ ‘ Termination for Convenience. ’ ’

Defendant replied that under the purchase orders plaintiff was entitled only to the costs of the changes and that if plaintiff terminated work, the termination would not constitute a termination for convenience but a breach. As a result of subsequent conferences, plaintiff did not stop work on November 5, but instead submitted a new cost breakdown of the contract as changed. In a letter accompanying this breakdown dated November 10, 1959, plaintiff took the position that it would not agree to arriving at a price on the theory of a comparison between the cost breakdown of every item before the change as compared to a cost breakdown of every item after the change.

The letter explained this position as follows: As to engineering costs, it had from the beginning recognized that a change was necessary and approached the problem of design from that viewpoint, but the exact details of the change were unknown. Because of the necessary stoppages and reanalyzation costs increased, and after the change was made the engineers were required to reanalyze every part going into the trailer to determine whether it had to be changed. As to manufacturing, plaintiff took the position that in making its bid it had obtained price estimates from its vendors, that the bid was based upon these quotations, that because of the impending change order and to save money it was unable to place its orders with its vendors until the change was decided upon, and that in the interim there were changes in prices on a number of articles, including some that were not affected by the change orders.

In this letter plaintiff also offered to permit a government audit office to examine the costs and to abide by its decision. The letter also states that plaintiff will continue its engineering work to completion but will otherwise stop work.

Defendant rejected plaintiff’s price breakdown as inadequate and stated that it was willing to negotiate further but that unless plaintiff resumed work by November 18, it would be compelled to conclude that plaintiff had breached the contract and would seek procurement of the trailers elsewhere. After plaintiff refused to continue further without determination of the price for the change order, defendant on November 19 wired that it considered the work stoppage a breach and would seek to procure the trailers elsewhere.

On December 1 and 4, plaintiff made further offers substantially reducing the price based on lower cost estimates and some changes in the design of the trailers. Defendant replied on December 8, that it had placed contracts at another source for the delivery of the trailers and could not consider those offers.

Defendant contracted with another firm for construction of the trailers at a cost of over $800,000, some $28,000 more than the amount of plaintiff’s last offer. On March 29, 1960, plaintiff submitted to defendant its termination claim of $296,783.03 for expenses incurred in performing the contract.

The trial court determined that the contract was entered into on July 6, 1959, when defendant delivered the purchase orders to plaintiff, that the specifications of the contract place the center of gravity of the payload at rail height, that the engineers of defendant after the conference on July 7 requested plaintiff to continue work and said change orders would be forthcoming, that the change in specifications caused a significant change in the engineering, design and construction of the trailer units which cost at least $257,000, that plaintiff after receipt of the change acted in good faith in seeking an adjustment in the contract price before proceeding further in performance of the contract, that in the circumstances of this case the covenant providing for changes and adjustment of price was not an independent covenant but had to be complied with by the parties before defendant could require plaintiff to proceed with the contract, that the change because of its nature, magnitude and effect, ran to the entire consideration of the contract, that defendant knew that plaintiff ’s request for an adjustment in price was not unreasonable, that plaintiff and not defendant acted fairly in the negotiations after the change order, that any mistake made during the execution of the contract was a mistake caused by defendant not plaintiff, that plaintiff did not underbid in its initial bid, and that plaintiff suffered damages in the amount of $289,615.89. The court denied recovery on a counterclaim by defendant in which it had sought to recover the difference between the contract price with plaintiff and the cost of obtaining the trailers elsewhere, $381,109.74.

Defendant attacks the determination of the trial court that the contract as originally entered into placed the vertical center of gravity of the payload at rail height. It is also contended that the trial court’s finding that the contract came into existence on July 6, 1959, is not supported by the evidence, and that the undisputed evidence establishes that the contract did not come into existence until July 15, which was after defendant’s engineers notified plaintiff that the center of gravity would be at a point some 35 inches above the rail height.

It is unnecessary to discuss in detail these contentions because, first, other facts found by the trial court and supported by the evidence require a conclusion that the contract as originally entered into did not provide for a vertical center of gravity at a point 35 inches above rail height, and, second, it is immaterial whether the contract came into existence on July 6 or July 15.

A contractor who, acting reasonably, is misled by incorrect plans and specifications issued by another contracting party as the basis for bids and who, as a result, submits a bid which is lower than he would otherwise have made may recover in a contract action for extra work necessitated by the incorrect plans and specifications. (Cf. Souza & McCue Constr. Co. v. Superior Court, 57 Cal.2d 508, 510 [20 Cal. Rptr. 634, 370 P.2d 338] ; MacIsaac & Menke Co. v. Cardox Corp., 193 Cal.App.2d 661, 669 [14 Cal.Rptr. 523].)

There is nothing in the written specifications or contract which could be reasonably interpreted to require the vertical center of gravity at 35 inches above the rail height, and defendant does not urge that the specifications or written contract so require, but merely claims that the specifications viewed as a whole are ambiguous. Furthermore, even assuming that the inspection of the missile by engineers of plaintiff might indicate that the vertical center of gravity of the payload was not at rail height, the inspection could not be held to require plaintiff, in the absence of further information, to locate the center of gravity at a point 35 inches above the rails or any substantial distance above the rails.

There was no understanding reached by the parties prior to July 15 fixing the vertical center of gravity of the payload at a point 35 inches above the rail height. At the meeting on July 7, defendant made clear its position that it desired such a location, and plaintiff made clear its position that its bid had been based on a vertical center of gravity at rail height, that its stress analysis report had so indicated, that the work so far done had been based on a vertical center of gravity at rail height, and that adjustment to a different height would require substantial changes.

The court found, and the finding is supported by the evidence, that after the July 7 meeting “defendant requested plaintiff to continue working on the project, the subject matter of the contract, and stated that changed specifications would be forthcoming from defendant to plaintiff.” It is clear that after the so-called mistake was discovered defendant did not seek to withdraw its purchase orders but to the contrary took the position that performance should continue and that changes would be made in the specifications. The purchase orders, as we have seen, permitted defendant to require changes with a mutually satisfactory adjustment in price and time for performance, and under the circumstances it must be concluded that the contract entered into by the parties did not provide for a vertical center of gravity 35 inches above the rails and that the fixing of the vertical center of gravity at a location satisfactory to defendant was to be accomplished by a change in specifications.

The next question is whether plaintiff was entitled to stop work until an agreement was reached on the price to be charged because of the change order. This question primarily involves the effect to be given to the provisions of section 9 of the purchase orders that defendant may make changes in the specifications and that in “such event there will be made an equitable adjustment in price and time of performance mutually satisfactory to Buyer and Seller.” (Italics added.)

The general rule is that if an “essential element” of a promise is reserved for the future agreement of both parties, the promise gives rise to no legal obligation until such future agreement is made. (Ablett v. Clauson, 43 Cal.2d 280, 284-285 [272 P.2d 753]; City of Los Angeles v. Superior Court, 51 Cal.2d 423, 433 [333 P.2d 745].) “The enforceability of a contract containing a promise to agree depends upon the relative importance and the severability of the matter left to the future; it is a question of degree and may be settled by determining whether the indefinite promise is so essential to the bargain that inability to enforce that promise strictly according to its terms would make unfair the enforcement of the remainder of the agreement. [Citations.] Where the matters left for future agreement are unessential, each party will be forced to accept a reasonable determination of the unsettled point or if possible the unsettled point may be left unperformed and the remainder of the contract be enforced. [Citations.] ” (City of Los Angeles v. Superior Court, supra, 51 Cal.2d 423, 433; Metropolitan Water Dist. v. Marquardt, 59 Cal.2d 159,194 [28 Cal.Rptr. 724, 379 P.2d 28].)

Application of these rules to provisions governing change orders in a building contract where the price for the changes is subject to mutual satisfaction is difficult because ordinarily it cannot be determined at the time of entry into the agreement or until change orders are sought whether the provisions governing change orders are or are not an “essential element” of the agreement. It is undesirable to hold the entire contract unenforceable when there may be no need for change orders or the change orders are insubstantial in relation to the balance of the agreement. On the other hand, where the change orders are substantial in relation to the remainder of the agreement so that the provision for change orders becomes an “essential element” of the contract, it is often unfair to require a party to perform while awaiting a reasonable determination as to price. The change orders may require matters which the contractor may not be equipped to produce except at an unreasonable cost or may require such an increase in costs that progress payments may be essential for the protection of the contractor. The last alternative suggested above, leaving the unsettled point unperformed and enforcing the balance of the contract, would obviously result in unfairness to a contractor where he is compelled to incur substantial expenses as a result of change orders and denied any payment.

Because the relative importance of the change provision of the agreement cannot be Imown until changes are sought, we are satisfied that the effect to be given to the provision for adjustment of price to the mutual satisfaction of the parties should not be determined merely from the written agreement itself but should depend upon the changes requested. Accordingly, where a provision for changes contains an agreement to agree in the future as to price, the contract is not invalid from the outset, and the validity of the provision for changes depends upon subsequent events. Undoubtedly, if the subsequent changes are minor or of not great magnitude the contractor must perform and obtain a subsequent judicial determination as to the price of the changes. However, where the changes are of great magnitude in relation to the entire contract, the contractor must negotiate in good faith to settle the price (cf. Comunale v. Traders & General Ins. Co., 50 Cal.2d 654, 658 [328 P.2d 198] [there is an implied covenant of good faith and fair dealing in every contract]), and where he has done so, he is not required to continue performance in the absence of an agreement as to the price.

Cases relied upon by defendant, such as Snow Mountain W. & P. Co. v. Kraner, 191 Cal. 312, 316-318 [216 P. 589], are not controlling because change order clauses therein either did not contain a provision that the price of the change would be fixed to the mutual satisfaction of the parties but instead contained a formula for determination of the price (cost plus a percentage of cost) or, if the price was to be fixed by future agreement, there was also an express provision to continue performance in the absence of the agreement.

In the instant case, the court concluded that the change, because of its nature, magnitude, and effect, ran to the entire consideration of the contract (see Medico-Dental etc. Co. v. Horton & Converse, 21 Cal.2d 411, 419 [132 P.2d 457]), and that plaintiff acted fairly in its negotiations after the change order. Both of these determinations are supported by the record. For this reason plaintiff was not required to continue performance in the absence of an agreement as to price.

Defendant makes a number of attacks on the amount of damages awarded. Some of these contentions are based on the claim that plaintiff’s original bid would have resulted in a loss to it. This contention is without merit. The court found that plaintiff did not underbid, and there is substantial evidence that had the original contract been performed without change, plaintiff would have made a substantial profit.

Defendant also urges that the damages awarded violate sub-paragraph (e) of section 8-706 of the Armed Services Procurement Regulation (incorporated by reference into the purchase orders), which limits recovery of the seller to the contract price. It is asserted that the damages awarded with regard to two of the purchase orders exceed the contract price of those orders. However, the conduct of the parties and their pleadings show that the purchase orders did not create severable contracts but constituted only a single contract for $527,632. The damages awarded were well below that figure.

Defendant next attacks the award of interest. Section 3287 of the Civil Code provides that any person who is entitled to recover “ damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day,” is entitled to recover interest thereon.

Aside from any contractual provision, interest is awarded as damages by way of compensation for wrongful detention of money due plaintiff. Of course, the allowance of such interest only occurs when the sum is liquidated within the meaning of section 3287. (Ansco Constr. Co. v. Ocean View Estates, Inc., 169 Cal.App.2d 235, 238 [337 P.2d 146].)

It has been held that in a cost-plus building contract the amount due is capable of ascertainment by calculation so that an award of interest for a period prior to judgment is proper. (Anselmo v. Sebastiani, 219 Cal. 292, 301-303 [26 P.2d 1]; Maurice L. Bein, Inc. v. Housing Authority, 157 Cal.App.2d 670, 686-688 [321 P.2d 753].) As we have seen, section 8-706 provides as applicable here that the subcontractor shall recover his costs and a certain percentage for profit where the contractor terminates under the power it reserved in the contract. The contract thus provides in effect that payment shall be made on a cost-plus basis, and except for the possibility that certain expenses are not subject to calculation, there does not appear to be any reason to refuse to apply here the rule governing cost-plus contracts generally.

MacIsaac & Menke Co. v. Cardox Corp., supra, 193 Cal.App. 2d 661, 673-674, relied upon by defendant, does not establish a contrary rule. The basis of damages in that case was the “value” of extra work done under the peculiar circumstances present, and the court pointed out that such circumstances “precluded ascertainment of the cost of the work by computation. ’ ’

Among the items of expense attacked by defendant are the “Engineering Burden” which is calculated as a percentage of the cost of the engineering labor, the “Material Procurement Burden” which is a percentage of direct materials and outside engineering expense, and the “General and Administrative Expenses” which is a percentage of direct labor and burden. Defendant does not now (and did not at the trial) attack the amounts of these costs or the percentages used. The percentages involved are fixed by government auditors as the share that the project should bear of all of plaintiff’s indirect and overhead costs. These percentages are subject to periodic audit by the government and change from time to time. It is apparent that these items of expense are derived by calculation from costs incurred by plaintiff.

Defendant next urges that interest should not have been awarded because plaintiff’s original demand of damages exceeded the amount awarded. The approximate net amount of the excess was around $7,000. The reasons for this excess were that after the original demand there was a minor adjustment in the engineering burden percentage, a few matters were omitted from the original demand in error, plaintiff was able to settle some claims of its subcontractors for less than the full amount of the claims, and plaintiff was able to salvage some materials. The mere fact that there is a slight difference between the amount of damages claimed and the amount awarded does not preclude an award of prejudgment interest (Koyer v. Detroit Fire & Marine Ins. Co., 9 Cal.2d 336, 345 [70 P.2d 927]), and the erroneous omission of a few matters from the account or erroneous calculation of the costs do not mean that the damages are not capable of being made certain by calculation.

With regard to the reduction in damages due to settlement of claims and salvage of materials, it has been held in an analogous situation that offsets of the defendant, even where unliquidated, do not preclude the allowance of interest on the balance of the plaintiff’s claim (Hansen v. Covell, 218 Cal. 622, 629-631 [24 P.2d 772, 89 A.L.R. 670] ; McCowen v. Pew, 18 Cal.App. 482, 483 et seq. [123 P. 354]; see Lineman v. Schmid, 32 Cal.2d 204, 212 [195 P. 408, 4 A.L.R.2d 1380]), and we are satisfied that reductions in damages due to plaintiff’s efforts to mitigate damages should not preclude an award of prejudgment interest. If the rule were otherwise, a plaintiff might be encouraged to forego opportunities to mitigate damages so as not to jeopardize his right to prejudgment interest.

The percentage of profit to be allowed is set forth in section 8-706, and defendant’s contention that the profits to be allowed may not be determined by calculation is also without merit.

Defendant also urges that no interest is recoverable on a termination claim under section 8-706. This contention is based on cases which disallow claims of interest against the government. Obviously defendant is not the government, and so the cited cases are not applicable.

There is merit, however, in defendant’s contention that the court erred insofar as it awarded interest from the date of termination on the portion of the damages, approximately $18,000, attributable to settlement expenses. Although section 8-706 allows recovery of the cost of expenses reasonably necessary to the preparation of settlement claims, these expenses were obviously not incurred until after the date of termination. Interest is not intended to be a windfall. Interest on this portion of the award should date only from the judgment.

Defendant claims that the trial court erred by failing to make findings on 66 matters although requested by defendant to do so. The counterfindings filed by defendant and its objection to the proposed findings total almost 70 pages. In many respects the counterfindings and objections are directly or impliedly contrary to the findings made by the court, relate merely to evidentiary matters, or deal with immaterial matters. At the end of the counterfindings and objections, defendant “requests specific findings of fact and conclusions of law on all of the issues, both of fact and of law, which are raised by and which are the subject of and which are included in the Counter-Findings and Counter-Conclusions set forth herein. ’ ’ No other specification was made as to the issues upon which defendant sought additional findings.

We have examined the findings of the trial court in the light of the criticisms made in defendant’s brief and are satisfied that the findings sufficiently dispose of all of the basic issues raised. The findings proposed by defendant, insofar as they may be deemed additional findings and are not directly contrary to the findings made, deal with evidentiary matters and, even if the matters therein were found in favor of defendant, would not require judgment in its favor. Section 634 of the Code of Civil Procedure does not require that a finding be made as to every minute matter on which evidence is received at the trial, and under the circumstances the refusal of the court to make specific findings on every matter proposed in defendant’s counterfindings does not require a reversal of the judgment.²

The judgment should be modified by eliminating the award of interest prior to judgment on the settlement expenses. The trial court is directed to modify its judgment accordingly, and, as so modified, the judgment and order appealed from are affirmed. Plaintiff to recover its costs on appeal.

McComb, J., Peek, J., Burke, J., and White, J.,^* concurred.

1 These telegrams limited the liability to be incurred by defendant prior to formal acceptance of the bid.

2 Seetion 634 of the Code of Civil Procedure provides:

“In all eases where findings are to be made, a copy of the proposed findings shall be served upon all parties to the action and the court shall not sign any findings therein prior to the expiration of 10 days after such service. The court may direct a party to prepare findings.

“Within 10 days after such service any other party may serve and file objections, counterfindings and requests for special findings.

“If upon appeal or upon a motion under Section 657 or 663 of this code it appears that the court has not made findings as to all facts necessary to support the judgment, or that the findings are ambiguous or conflicting upon a material issue of fact, the court before which such appeal or motion is pending shall not infer that the trial court found in favor of the prevailing party on such issue if it appears that the party attacking the judgment made a written request for a specific finding on such issue either prior to the entry of judgment or in conjunction with a motion under Section 663 of this code. ’ ’

* Retired Associate Justice of the Supreme Court sitting under assignment by the Chairman of the Judicial Council.