August 17, 2016
In the recent Watson decision involving a construction contract dispute, the California Court of Appeal noted an award of prejudgment interest may depend on the parties’ litigation strategy. This alert discusses the two important lessons every owner, contractor, and supplier involved in California construction projects needs to know.
Prejudgment interest is generally only available to prevailing parties in California cases when damages are certain, or are capable of being made certain by calculation. In giving clarity to the contours of the general rule, a recent California Court of Appeal decision, Watson Bowman Acme Corporation v. RGW Construction Inc. also warns that “the manner in which a case is litigated can affect the ultimate resolution of the certainty question.”
As Watson illustrates, the availability of prejudgment interest may turn upon whether the dispute primarily consists of legal questions of liability and contract interpretation, or factual questions regarding the nature and amount of damages. Thus, the California Court of Appeal noted that an award of prejudgment interest may depend on the parties’ litigation strategy.
Watson involved a contract dispute between a public works general contractor, RGW Construction Inc. (“RGW”) and its materials supplier, Watson Bowman Acme Corporation (“Watson”), over the compensation owed to Watson for expansion joints Watson supplied to the project to construct an overpass on Highway 99 near Merced for the project’s owner, the California Department of Transportation. Watson argued that the goods supplied varied from the original purchase order and thus necessitated a price adjustment. RGW maintained that the goods supplied merely satisfied Watson’s obligations under the purchase order and refused to pay a higher price. Ultimately, the trial court determined that the purchase order was ambiguous, and the jury awarded Watson $383,032 in damages. RGW appealed from the damages award; Watson cross-appealed from the trial court’s denial of its request for prejudgment interest.
On appeal, the Fifth District affirmed the trial court’s ruling in favor of Watson and granted Watson’s cross-appeal for prejudgment interest. The Fifth District held that because the dispute focused on liability, not on the amount of damages, Watson’s damages were sufficiently certain to warrant an award of prejudgment interest. This suggests that for parties seeking prejudgment interest, it is important to eliminate factual disputes over the amount of alleged damages. Conversely, parties hoping to avoid the imposition of prejudgment interest should strongly challenge the amount of damages owed.
California Civil Code section 3287(a) provides that “[a] 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 the person upon a particular day, is entitled also to recover interest thereon from that day….”
In order to establish the requisite certainty, the party moving for prejudgment interest must prove either that “the defendant actually knew the amount owed” or the defendant could calculate the amount owed “from reasonably available information.” Generally, certainty “is absent when the amounts due turn on disputed facts, but not when the dispute is confined to the rules governing liability.”
Here, the dispute over compensation arose from ambiguity as to which model of sealed expansion joints were specified in the purchase order. Watson originally provided RGW with a quote for four-cell expansion joints. At RGW’s request, Watson subsequently provided a quote for two-cell expansion joints, at a lower price. According to Watson, it advised RGW that the cheaper, two-cell expansion joints might not meet the owner’s specifications. Nevertheless, RGW and Watson executed a purchase order for 146 expansion joints at the lower price. When the owner did, in fact, reject the two-cell expansion joints, RGW demanded delivery of the four-cell expansion joints at the lower price. RGW asserted that delivery of the four-cell expansion joints was required by the purchase order, because the purchase order provided that the expansion joints would conform to the owner’s specifications. Watson delivered the four-cell expansion joints as requested and filed suit for the difference in price. Watson argued the change to four-cell expansion joints constituted a change order that required an adjustment of the contract price.
Watson prevailed at the trial court, in part because the purchase order was ambiguous. On appeal, the Fifth District affirmed the trial court’s decision and held that Watson was entitled to prejudgment interest because Watson’s damages were sufficiently certain. RGW was in possession of the quotes for both models, and therefore, RGW could have determined the amount owed by subtracting the lower quote from the higher quote for the joints that were actually delivered.
RGW claimed on appeal that the damages were uncertain but neither introduced evidence contradicting Watson’s damage calculations nor provided evidence that was not already within its possession at the time Watson delivered the joints. Thus, because “the case involved a dispute over liability and not a dispute about the amount owed,” the Fifth District determined that the amount of damages was sufficiently certain.
The Fifth District further noted that prejudgment interest can be awarded even when there have been changes to the construction contract. Both cost-plus formulas and agreements by the parties can create the requisite certainty for prejudgment interest. Additionally, set-offs, counterclaims, and cross claims will not, by themselves, prevent the award of prejudgment interest on the balance due to the prevailing party.
The Watson decision highlights two important lessons for owners, contractors, and suppliers involved in California construction projects. First, it is advisable to maintain clarity to the greatest extent possible in construction contract negotiating and drafting. Disputes can often be avoided altogether, or potential liability greatly mitigated, by erring on the side of specificity at the outset. Second, as the California Court of Appeal expressly noted, the availability of prejudgment interest may depend on how the parties frame the issues in litigation. Prejudgment interest will be awarded to the prevailing party if the losing party cannot establish a dispute regarding the amount of damages, or a lack of ability to calculate those damages to a reasonable certainty. In other words, disputes regarding contract interpretation and liability alone will not suffice to render damages uncertain, and the losing party must anticipate being required to pay prejudgment interest on the amount of damages ultimately awarded.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.