Assessing Damages for Breach of Contract

By: Cordell Parvin

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.