Assessing Damages for Breach of Contract

Article December 28, 2000
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After eight and a half years of wrangling with the Pennsylvania
Department of Transportation (PennDOT), James D. Morrissey, Inc.
(Morrissey) and its subcontractor, W.P. Dickerson and Sons, Inc.
(Dickerson), were awarded damages for a 1988 change directive
and associated delay on a 4.4-mile section of I-476.

The
project, which included bridges, culverts and retaining walls,
was bid in December 1987. Among the retaining walls were 14
R-walls of various dimensions. The original special provisions
for the R-walls provided alternatives including a reinforced
earth wall, a retained earth wall, a proprietary Doublewal, or a
proprietary experimental Evergreen wall. During bidding, PennDOT
issued three addenda related to the R-walls. Addendum No. 2
provided a detailed five-page technical description of the
Evergreen walls permitted under the contract. Addendum No. 3
added reinforced earth to the list of proprietary wall types
permitted under the contract. Addendum No. 4 did not delete any
of the references to Evergreen walls in the specifications, but
did delete Evergreen walls from the list of types of walls
permitted under a note in the plan sheets.

Morrissey
successfully bid $88,432,273.27 for the work on the project,
incorporating Dickerson's subcontract bid of $32,885,297.52 for
the R-wall work. Dickerson's price was based on using the
Evergreen wall system, which was $825,000 less expensive than
the Doublewal. After receiving Addendum No. 4, Dickerson or its
representatives held 10 to 15 conversations with four or five
different responsible parties at PennDOT to make sure the
Evergreen walls were still permissible. The Evergreen wall
supplier also had several conversations with PennDOT
representatives, both pre and post-bid. In all of the contacts,
the PennDOT representatives never indicated that Evergreen walls
could not be used. In late January, after award, PennDOT for the
first time advised that the Evergreen walls could not be used on
the project.

Sole-source snag

Following denial of its
claim by the PennDOT District Claims Review Committee, Dickerson
contacted the only manufacturer of Doublewal units (Atlantic
Pipe Corp.) and ordered the required quantity. As a sole-source
supplier, Atlantic refused to guarantee timely delivery and
demanded that the purchase order provide that no back charges
would be honored for delays in delivery, regardless of cause.

Not surprisingly, Atlantic delivered the first Doublewal
units three and a half months late and completed delivery of the
units almost one year later than originally scheduled. As a
result, despite Dickerson's best efforts, the project's R-wall
erection operation was inefficient and costly.

Morrissey and
Dickerson filed a claim against PennDOT in the amount of
$1,523,124, of which $825,000 represented the increased direct
costs of changing from Evergreen to Doublewal units. The balance
covered the increased costs caused by Atlantic's late delivery.
The Board of Claims found that PennDOT had breached its contract
with Morrissey when it disallowed use of the Evergreen product.
However, it only awarded Morrissey $825,000 based on the
estimated difference in cost of the units. The board refused to
award the balance based on its finding that Atlantic's inability
to supply its product in a timely fashion was not reasonably
foreseeable or within the contemplation of the parties at the
time of contract.

The court's modification

In its Aug.
8, 1996 decision, Pennsylvania Dep't of Trans. v. James D.
Morrissey, Inc., 682 A.2d 9 (Pa.Cmwlth. 1996), the Commonwealth
Court of Pennsylvania modified the board's award to the full
$1,523,124 requested. According to the court, "in the law of
contracts, remedies for breach of contract are designed to
protect either a party's: (1) expectation interest, by
attempting to put him in as good a position as he would have
been had there been no breach; (2) reliance interest, by
attempting to put him back in the position in which he would
have been had the contract not been made; or (3) restitution
interest, by requiring the other party to disgorge the benefit
he received by returning it to the party who conferred it." The
court then determined that to satisfy Dickerson's expectation
interest, award of the full amount of damages was required.

The court specifically rejected the board's finding that the
fabrication delays would have occurred even if the contract
clearly specified use of the Doublewal system, finding that had
Dickerson known at the time of bid that it would be forced to
deal with a single-source supplier, it could have put
appropriate contingencies into its bid amount. Furthermore, the
court found that delivery delays might not have occurred had
Dickerson based its bid on use of the Doublewal system, because
it could have begun dealing with Atlantic much sooner and could
have obtained a more favorable window in Atlantic's fabrication
schedule.

The Morrissey case provides an excellent
discussion of the various theories of contract damages, with the
recognition that such damages should put the contractor in the
same position it would have been had there been no breach. For
DOTs, the case underscores the importance of coordinating the
plans and special provisions, and the importance of speaking
with one voice during the bidding process.

Parvin is a
shareholder in the law firm of Jenkens & Gilchrist, which has
offices in Austin, Dallas, Houston, and San Antonio, Texas, and
Washington, D.C. You may write him in care of the editor.

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