Agreement Authorizing Party’s Own Engineer to Determine Substantial Compliance Found Binding o

When it comes to resolving construction disputes it’s a bit like the “31 Flavors” of Baskin Robins. There’s a flavor for nearly everyone. From mediation, to arbitration, to litigation, to dispute resolution boards (DRBs), to the architect as the “initial decision maker” under AIA contracts, parties and their counsel have developed numerous ways to resolve disputes on construction projects, including by expert review.

But if you’re going to agree to a dispute resolution procedure, make sure it’s one you can live with, because if you don’t, it’s often going to be too late to go back to the proverbial drawing board as the parties in the next case discovered.

The Coral Farms Case

In December 2010, a mudslide impacted three properties in San Juan Capistrano, California. One of the properties was owned by Coral Farms, L.P., another by Paul and Susan Mikos, and the third by Thomas and Sonya Mahony.

Between April 2011 and August 2012, a complaint and various cross-complaints were filed between the parties, in which each alleged that the others were responsible for the mudslide and resulting damage.

In October 2013, the parties settled with each party agreeing to undertake reasonable protective measures to mitigate the risk of damage to the other parties. The settlement agreement set forth specific work each party agreed to undertake and provided that:

Upon completion of the work, each party shall obtain a written report by the design engineer or geologist that the work is in substantial compliance with the Parties’ plan as set forth in Exhibits A, B and C, respectively, and will provide a copy to all other Parties within 30 days of completion

Thereafter, pursuant to the terms of the settlement agreement, each party obtained a report from their respective design engineers and/or geologists stating that the work performed by each party was in substantial compliance with the plans they each agreed to.

In October 2017, Coral Farms and the Mikoses filed a complaint against the Mahonys for breach of the settlement agreement and false promise claiming that the work performed by the Mahonys was “dramatically and substantively different than what was required under the Settlement Agreement” and that when “the Mahonys entered into the Settlement Agreement, they had no intention of ever performing the obligations under that agreement.”

In June 2019, the parties presented their cases in a bench trial. In its statement of decision, the trial court found in favor of the Mahonys finding that “the myriad of issues raised by [Coral Farms] are irrelevant and immaterial to the legal basis for the decision.”

Coral Farms appealed.

The Appeal

On appeal, the 4th District Court of Appeal explained that “[a]bsent a finding of bad faith, fraud, or gross negligence,” “when a contract designates a third person to certify performance under a contract, that third person’s decision is generally conclusive, and the parties may not look behind the decision, even if the this person was appointed by one of the parties.” And here, explained the Court of Appeal, Coral Farms expressly agreed in the settlement agreement to accept the report of the Mahonys’ design engineer that the work performed by the Mahonys was in substantial compliance with their obligations under the settlement agreement.

The Court of Appeals also shot down Coral Farm’s argument that, because the parties were adverse to one another, and had in fact sued one another, that it would be “absurd” for Coral Farms to agree to the conclusiveness of the Mahonys’ design engineer carte blanche. “Respectfully,” responded the Court of Appeals, “if Coral Farms intended a different result, then perhaps it should have negotiated and/or drafted a different contract.”

The Court of Appeals also shot down Coral Farm’s argument that nowhere in the settlement agreement does it provide that a party’s design engineer or geologist’s report is “valid” or “conclusive” or “binding.” While true, explained the Court of Appeals, “the valid, conclusive, and binding nature of the “Final Approval” provision in the settlement agreement is apparent from the contract’s plain language.”

The Court of Appeal also short down Coral Farm’s argument that the “Final Approval” provision of the settlement agreement was intended to act as a “notice of completion” not a certificate of compliance or even substantial compliance. However, the Court of Appeals explained, Coral Farm’s subjective interpretation or intent of the meaning “Final Approval” is irrelevant and contrary to the settlement agreement’s plain language.

Conclusion

The Coral Farms court’s decision involved a pretty straightforward application of California’s well-established principles governing contract interpretation. In short, if a contract is clear and unambiguous, the contract will be interpreted according to its plain and ordinary meaning. But don’t let the simplicity of the Coral Farms decision fool you. I’ve seen many a construction contract, in particular, public works contracts, in which an agency’s “Engineer” is the final arbiter of a contractor’s compliance with the contract documents. Contractors signing such agreements should be aware of the Coral Farms decision because it may mean that, even if a contractor does not agree with the decision of an agency’s “Engineer,” it may just be interpreted as final.

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