KGM Contractors, Inc., Respondent, vs. Cass County, Minnesota, Defendant, City of Longville, Minnesota, Appellant.

Annotate this Case
KGM Contractors, Inc., Respondent, vs. Cass County, Minnesota, Defendant, City of Longville, Minnesota, Appellant. A05-1649, Court of Appeals Unpublished, June 13, 2006.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A05-1649

 

KGM Contractors, Inc.,

Respondent,

 

vs.

 

Cass County, Minnesota,

Defendant,

 

City of Longville, Minnesota,

Appellant.

 

Filed June 13, 2006

Affirmed as modified; motion denied

Harten, Judge*

 

Cass County District Court

File No. C7-03-907

 

Thomas R. Olson, Brian J. Wisdorf, 220 Exchange Building, 26 E. Exchange Street, St. Paul, MN  55101 (for respondent)

 

George C. Hoff, Kimberly B. Kozar, Hoff, Barry & Kuderer, P.A., 775 Prairie Center Drive, 160 Flagship Corporate Center, Eden Prairie, MN  55344 (for appellant)

 

Holly J. Newman, Mackall, Crounse & Moore, P.L.C., 1400 AT & T Tower, 901 Marquette Avenue, Minneapolis, MN  55402 (for amici American Council of Eng'g Cos., et al.)

 

            Considered and decided by Stoneburner, Presiding Judge, Dietzen, Judge, and Harten, Judge.

U N P U B L I S H E D   O P I N I O N

HARTEN, Judge

            Appellant City of Longville (the city) challenges the district court's judgment in this breach of contract action, alleging that the district court erred by concluding that (1) respondent KGM Contractors, Inc. was entitled to additional compensation under the contract between the parties; (2) KGM had complied with the contractual claims process; (3) KGM had no duty to mitigate its damages by refusing to proceed with the contract; (4) KGM's damages were properly calculated using the total cost method; and (5) KGM was entitled to interest on the judgment from the date of substantial completion of the project.

            Because the district court's findings and conclusions are supported by the record and are not clearly erroneous, we affirm, but we modify the assessment of interest on damages to begin from 1 March 2004, when KGM's claim was presented to the city.

FACTS

            KGM was the winning bidder on a two-part project for sanitary sewer/storm sewer replacement and construction undertaken by the city and the defendant Cass County (the county).  The city hired engineering firm Widseth, Smith, and Nolting (WSN) to prepare plans and specifications, evaluate bids, and supervise construction.  WSN assigned two engineers to the project, one to the city section of the project, and one to the county section.  Tim Houle, the WSN engineer assigned to the county project, contacted Gopher One, the state-authorized utility location service, to obtain underground utility information; this information was included on the county bid documents.  Dan Viau, the WSN engineer on the city part of the project, did not contact Gopher One and no underground utility information, except that provided by the county, was included on the city bid documents.

            Before submitting a bid, KGM's experienced estimator, Mark Abramson, visited the site three times.  The project was located in a populated area with homes and businesses lining the road; it is common to encounter utilities within the road right-of-way where the construction was to take place.  Abramson noted the presence of the above-ground utility boxes, overhead power lines, poles, and utility pedestals, but because there was no indication of underground facilities on the city bid documents, he did not consider the presence of underground utilities within the construction area when preparing the bid.  An experienced KGM foreman, Scott Jandry, attended an optional pre-bid meeting with WSN personnel.  WSN did not further disclose the presence of underground utilities, except to remind attendees that the winning bidder would be responsible for contacting utility owners during construction.  No other bidders considered the underground utilities, or if they did, the other bidders did not ask the engineer if there were unmarked underground utilities in the specifications.   

            Abramson prepared his bid based on the belief that KGM would encounter very few underground utilities; this would allow the sewer work to be done quickly and efficiently because KGM could use mechanical equipment.  WSN reviewed KGM's bid and found it reasonable except for one item, dewatering, but KGM adjusted its bid in a manner that satisfied WSN. 

            KGM arranged for Gopher One to mark the utilities 48 hours before beginning the project.  It was at this point that KGM discovered that underground utilities permeated the entire length of the project.  Construction began on 19 June 2002, and it was immediately apparent that KGM would have to adjust its construction methods.  Instead of using machines, much of the excavation had to be done with human labor and shovels to avoid damaging utilities or endangering workers.  Dewatering became a more serious concern because excavation proceeded so slowly permitting water to percolate into excavated areas. 

            On 19 June, the first day of construction, KGM contacted WSN to advise that:  (1) it had encountered underground utilities not marked on the plans; (2) this would entail huge extra costs; (3) it would make a claim for additional compensation; and (4) WSN should document the additional costs in accordance with Section 4.04(A) of the contract.  KGM proceeded to file a claim for additional compensation based on changed conditions.  On 21 June, WSN denied the request for a change order.

            On 25 June 2002, KGM appealed the denial of its claim.  WSN advised KGM that it would review the unmarked utilities claim for a possible change order, but it was unable to do so without additional information.  KGM advised that it would supply documentation for the additional costs when all information was compiled.  WSN did not demand immediate documentation.  Although the project was substantially completed on 15 October 2002 and finally completed on 2 September 2003, KGM did not present the city attorney with the documentation supporting its claim for additional compensation until March 2004.

            The district court concluded that: (1) the city was responsible for providing complete plans and failed to do so; (2) KGM justifiably relied on the city's plans in making its bid; (3) KGM made a timely claim for additional costs; (4) KGM's method of calculating damagesby subtracting the bid from the total costwas appropriate; 5) KGM's claim should be reduced by $80,000 for underbidding on dewatering and $7,770.29 for damage to a utility line; and (6) KGM was entitled to damages of $329,243.28, plus interest at 12% from 15 October 2002, the date of substantial completion.  In its supplemental order, the court concluded that KGM was not entitled to attorney or consultant fees, because such fees were not permitted by contract or statute, and the judgment had to be reduced by $7,303.75, representing consultant fees, to $321,939.53.

D E C I S I O N

            Contract construction is a question of law that we review de novo.  Travertine Corp. v. Lexington-Silverwood, 683 N.W.2d 267, 271 (Minn. 2004).  "The primary goal of contract interpretation is to determine and enforce the intent of the parties."  Id.  The intent of the parties is determined from the plain language of the contract; if the contract is clear and unambiguous, the reviewing court may not rewrite, modify, or otherwise limit the effect of the agreement.  Id.  We review the district court's factual findings for clear error.  Minn. R. Civ. P. 52.01.

1.         Additional Compensation Under the Contract.

            The contract between the parties contained specific provisions regarding underground utilities.  In section 4.04(A) of the contract, the city stated that: (1) underground utilities had been indicated on the bid documents based on information provided by the utility owners; (2) the city would not be responsible for the accuracy or completeness of that information; and (3) KGM was responsible for locating the underground utilities, coordinating excavation with the utility owners, protecting the utilities, and repairing any damage resulting from the excavation.

            Section 4.04(B) required KGM to inform the city if it encountered an underground utility, "which was not shown or indicated, or not shown or indicated with reasonable accuracy in the Contract Documents."  An adjustment in contract price or schedule could be made if the city engineer determined that KGM faced increased cost or time attributable to an underground utility "not shown or indicated or not shown or indicated with reasonable accuracy in the Contract Documents and that [KGM] did not know of and could not reasonably have been expected to be aware of or to have anticipated" the presence of the underground utility. 

            There is no dispute that the contract documents failed to disclose the extensive presence of underground utilities and that KGM experienced delays and increased costs because of the unknown utilities.  The question here is whether KGM could reasonably have been expected to be aware of or anticipate the presence of the unknown utilities.

            Although the district court found that "the utilities should have been obvious and a reasonable person might have concluded that utilities existed in addition to those disclosed in the project plans," the district court nonetheless also found that: (1) no other bidder had considered the existence of unmarked utilities; (2) it was standard practice in the construction industry to mark all utility lines on project plans and for bidders to rely on the plans; and (3) it would place an undue burden on bidders if they were required to anticipate undisclosed utilities during the "detailed and involved" bidding process.  These findings are not clearly erroneous and reasonably support the district court's conclusion that KGM was "justified in relying on the plans in making its bid."

            This conclusion is supported by caselaw interpreting contracts that include detailed specifications.  In United States v. Spearin, 248 U.S. 132, 136, 39 S. Ct. 59, 61 (1918), the United States Supreme Court stated in regard to such contracts:

Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered. . . . But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.  This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work[.]

 

            The Court reasoned that a contractor who is required to comply with an owner's plans and specifications receives an implied warranty that the specifications furnished will permit the contractor to perform a job adequate under the contract.  Id. at 137, 39 S. Ct. at 61.  Failure to honor this implied warranty is a breach of the contract, which makes the owner liable for damages resulting from the breach.  Id. at 138, 39 S. Ct. at 62.  Minnesota law has adopted these principles.  See, e.g., Alley Const. Co. v. State, 300 Minn. 346, 350, 219 N.W.2d 922, 925 (1974); McCree & Co. v. State, 253 Minn. 295, 309, 91 N.W.2d 713, 722 (1958). 

            We conclude that KGM reasonably relied on the contract documents and industry practice and could not have been expected to anticipate undisclosed utilities.  KGM is therefore entitled to additional compensation under section 4.04(B) of the contract.[1]

2.         Noncompliance with Contract and Claims Process.

            The city argues that KGM should be barred from recovery because it failed to verify utility information, bring an obvious discrepancy in the plans to the attention of the engineer, or comply with the claims process procedure.

            KGM was required to verify utility information before proceeding under section 4.04(A)(1) of the contract.  KGM did this 48 hours prior to excavation, as required by contract and Minn. Stat. § 216D.04, subd. 1 (2004).   The city's allegations here are unsupported by the record.

            KGM was required to notify the engineer of conflicts, errors, ambiguities, or discrepancies in the bid documents prior to submitting a bid.  A bidder must clarify a patent ambiguity to avoid taking advantage of an obvious mistake when submitting a bid.  See S.O.G. v. United States, 546 F.2d 367, 371 (Ct. Cl. 1976).  We conclude that the lack of marked utility information was not a patent ambiguity because both the city and county engineers overlooked the failure to document underground utilities on the city's bid documents.

            The city also argues that KGM failed to comply with the contractual claims procedure.  Under section 4.04(B)(1) of the contract, a contractor who encounters underground facilities not shown or indicated with reasonable accuracy on the bid documents must contact the engineer, who determines whether a change order and adjustment to the time or price of the contract is required.  If the contractor and owner are unable to agree, the contractor must make a claim.   To make a claim, the contractor must file written notice within 30 days after the event and supply supporting data within 60 days, unless the engineer allows additional time.  The engineer must issue a formal decision in writing within 30 days after the last submission. 

            Although the district court made no applicable explicit findings, it is implicit in its findings that KGM had complied with the claims procedure.  The city argues that KGM forfeited its right to make a claim by failing to submit supporting documentation within 60 days, but under the terms of the contract, the engineer may allow additional time, and WSN's 27 November 2002 response indicates that it would allow KGM additional time.  Accordingly, KGM substantially complied with the claims procedure.

3.         Mitigation of Damages.

            The city argues that KGM failed to mitigate its damages because it could have withdrawn from the contract within 24 hours after the bid opening and suffered no damages.  If KGM had withdrawn after that, but before beginning the project, it would have lost only its $57,000 bond.  Instead, by refusing to withdraw, KGM incurred damages in excess of $350,000.

            In Zontelli & Sons, Inc. v. City of Nashwauk, 373 N.W.2d 744 (Minn. 1985), the supreme court concluded that a contractor who makes a bid relying on owner specifications need not mitigate damages by refusing to proceed with a project without evidence that "any reasonably ascertainable amount of damages would have been avoided."  Id. at 754.  Any contractor would have encountered the same problems and additional expenses that plagued KGM on this project.  Moreover, the full extent of the problem was not obvious before KGM had fully embarked on excavation.  We conclude that KGM had no duty to mitigate its damages by withdrawing from the contract.

4.         Damages.

            A reviewing court will not disturb a damages award "unless its failure to do so would be shocking or would result in plain injustice."  Hughes v. Sinclair Mktg., Inc., 389 N.W.2d 194, 199 (Minn. 1986); accord Prichard Bros., Inc. v. Grady Co., 436 N.W.2d 460, 467 (Minn. App. 1989), review denied (Minn. May 2, 1989). 

            The city asserts that the district court erred by employing the "total cost" method of ascertaining damages.  The total cost method calculates damages by measuring the difference between actual costs and the pre-bid estimate.  Prichard Bros., 436 N.W.2d at 467.  This includes actual costs, overhead, and profits.  Id. at 468; accord Layne-Minnesota, Inc. v. Singer Co., 574 F.2d 429, 434 (8th Cir. 1978). 

            Federal courts generally disfavor the total cost method.  See, e.g., Raytheon Co. v. White, 305 F.3d 1354, 1365 (Fed. Cir. 2002) ("The [total cost] method has always been viewed with disfavor"); Servidone Const. Corp. v. United States, 931 F.2d 860, 861 (Fed. Cir. 1991) ("A trial court must use the total cost method with caution and as a last resort"); Moorhead Const. Co. v. City of Grand Forks, 508 F.2d 1008, 1016 (8th Cir. 1975) (referring to total cost method as "not a preferred method for calculating damages").  The total cost method is used in the federal courts when

no other method [is] feasible and . . . the supporting evidence [is] substantial. . . . The acceptability of the (total cost) method hinges on proof that (1) the nature of the particular losses make it impossible or highly impractable to determine them with a reasonable degree of accuracy; (2) the plaintiff's bid or estimate was realistic; (3) its actual costs were reasonable; and (4) it was not responsible for the added expense.

 

Id. (quotation omitted).  The federal courts are more approving of the modified total cost method, whereby the court will adjust damages to reflect inaccuracies in a contractor's bidding estimate that would unjustifiably reduce the contractor's costs.  Servidone, 931 F.2d at 861-62.

            Minnesota courts, however, have applied the total cost method to ascertain damages.  See, e.g., Prichard, 436 N.W.2d at 467-48 (approving use of the total cost method as "correct"); see also Metro. Sewerage Comm'n v. R.W. Constr., Inc., 241 N.W.2d 371, 384 (Wisc. 1976) (approving modified total cost method in changed conditions claim).  The federal courts' disapproval of the total cost method is based on the rationale that bidding inaccuracies can reduce a contractor's estimated costs and performance inefficiencies can increase actual expenditures, while failing to distinguish between costs for which the owner is responsible and those that the contractor should bear.  Raytheon, 305 F.3d at 1365.  The district court here applied a modified total cost approach, deducting $80,000 for an improper dewatering bid and $7,700 for repair to a severed line, thus increasing the accuracy of the damage award by including consideration of performance inefficiencies.

            KGM documented its additional costs with daily logs and photographs of the unexpected conditions encountered.  KGM invited the city to take part in this cataloguing of additional costs, but the city declined to do so.  Although the damages are high in light of the original construction bid, they are well documented and justified by the extent of the extra labor and expenses incurred.  We find no error in the district court's calculation of damages.

5.         Interest.

            The city asserts that the district court erred in its award of interest from October 2002.  The district court based its interest award on contractual terms; thus, this question involves construction of a contract, requiring de novo review by this court.  Travertine Corp., 683 N.W.2d at 271.

            Article 7 of the standard contract states that interest at 12% per annum will be paid on any sum remaining unpaid when due under contract terms.  Payments became due after KGM applied for payment and provided supporting documentation.

            Although the project was substantially completed on 15 October 2002, and finally completed on 2 September 2003, KGM did not provide the required documentation to support its claim for additional compensation until March 2004.  Until that documentation was provided, the city was under no obligation to pay.  We conclude, therefore, that the district court erred by ordering interest from 15 October 2002, and we modify the district court's order to allow interest from 1 March 2004, when KGM provided documentation of its claim.

6.         Attorney and Consultant Fees.

            KGM notes review of the district court's 25 July order denying its motion for attorney and consultant fees.  Because the contract contains a provision for costs of special consultants, this involves contract construction, which we review de novo.  Id.

            Generally, attorney fees may not be awarded without a specific contractual basis or statutory authority.  Cherne Indus., Inc. v. Grounds & Assoc., Inc., 278 N.W.2d 81, 96 (Minn. 1979).  The contract here provided that "[c]osts of special consultants (including but not limited to engineers, architects, testing laboratories, surveyors, attorneys, and accountants) employed for services specifically related to the [w]ork" may be included.  "Work" is defined as

[t]he entire construction or the various separately identifiable parts thereof required to be provided under the contract documents.  Work includes and is the result of performing or providing all labor, services, and documentation necessary to produce such construction and furnishing, installing, and incorporating all materials and equipment into such construction, all as required by the Contract Documents.

 

            KGM seeks legal fees for research of its claim for additional compensation, the contract notice requirements, preservation of its claim, preparation of its claim for suit, and trial time.  It seeks consultant fees for a damages consultant who assisted in preparation of the damages claim.  KGM argues that this is "related" to the work in accordance with the terms of the contract. 

            The district court concluded that these services were not related to the workhad they involved preparation of easements, acquisition of property or rights of way, for example, the services would have been compensable under the contract.  We agree.  The services provided by KGM's special consultants did not advance the work of the contract, which was the installation of a sanitary sewer; therefore, KGM is not entitled to reimbursement for these fees under the contract. 

7.         Respondent's Reply Brief.

            KGM moved for permission to file a reply brief in this appeal.  Generally, the only briefs permitted by the civil appellate rules are appellant's brief, respondent's brief, and appellant's reply brief.  Minn. R. Civ. App. P. 128.02, subds. 2, 3.  No other brief is permitted without leave of the court.  Id., subd. 4.  KGM based its motion on Minn. R. Civ. App. P. 102, which permits suspension of the rules for good cause.  We see no reason to grant an exception in this case and thus deny KGM's motion.

            Affirmed as modified; motion denied.


* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

[1] Because we conclude that KGM is entitled to additional compensation under the contract, we do not reach the issue of whether the city had a statutory duty to disclose the underground utilities.