West Virginia Legislative Claims Commission

Volume Number: 29
Category(s): CONTRACTS
Opinion Issued December 13, 2012
     Charles M. Johnstone II, Attorney at Law, for Claimant.
     Katherine A. Schultz, Senior Deputy Attorney General, for Respondent, Division of Veterans Affairs, and Stacy L. Nowicki, Assistant Attorney
      G.A. Brown & Son Inc. (“Claimant”), a duly licensed contractor operating within the State of West Virginia, brings this claim for damages arising from an alleged breach of contract by the Department of Administration and the Division of Veterans Affairs (collectively the “Respondents,” “DOA” or “WV/VA”), for payments and accrued interest due and owing under a contract involving the construction of a veterans nursing home facility located in Clarksburg, West Virginia. The Respondent denies the allegations in the Claimant’s Notice of Claim and asserts that the claimed funds were denied as work performed outside the scope of the construction contract.
      In 2003, Governor Bob Wise was advised that West Virginia was one of only two states in the nation without a veterans nursing home facility, and believing the absence of such a facility was unacceptable, Governor Wise advised his Secretary of Administration, Tom Susman, and newly-appointed Director of WV/VA, Larry Linch, that acquiring a nursing home facility (“the facility”) for the State would be a top priority for the remainder of his administration. Linch’s office worked tirelessly submitting applications to the United States Department of Veteran’s Affairs (“US/VA”) in order to obtain necessary financial assistance for the facility. The process for obtaining federal funds was complicated. A series of applications was required at specific times, and the qualification process was extremely competitive. The US/VA eventually narrowed applicants down to a list of ten.
      Through the assistance of Senator Rockefeller’s office, WV/VA emerged as the top candidate for construction of a new VA facility. However, the US/VA’s rules and procedures provided that a failure to meet approaching deadlines for document submissions could result in a loss of the first qualified position and an automatic placement at the bottom of the qualification list. One of the documents required by the US/VA was a budget. In order to fairly and properly formulate the budget for the facility, WV/VA initiated the bid-letting process, and on July 9, 2003, bids were solicited for the construction of the facility pursuant to the Request for Quotation (“RFQ”).
      The RFQ required bidders to hold their bids firm for ninety days, or until December 11, 2003. Whiting-Turner Company (“Whiting-Turner”), a Maryland contractor, was the lowest bidder on the project. However, on January 14, 2004, after the expiration of the ninety-day firm bid/offer requirement, Whiting-Turner advised WV/VA that increases in materials costs prevented it from holding its bid price firm, and that to accept the award of the contract, it would need to increase its bid by $450,000.00-$500,000.00. This increase was rejected by the Division of Purchasing who informed Whiting-Turner that West Virginia purchasing laws would not permit them to increase their bid.
      Faced with the dilemma of a rapidly approaching deadline for submitting a budget to the US/VA, and with little time to re-bid the project, WV/VA concentrated all of its efforts on getting the VA project under contract. Being under pressure to have a construction contract in place as soon as possible, the WV/VA and DOA then contacted the Claimant in this action, as the next lowest bidder, to discuss whether, and under what conditions, James Edward Brown, as principal for the Claimant, would consider accepting the project. At a meeting, held after Whiting-Turner revoked its bid, amongst Brown, architect James Kenton Blackwood, and the Respondent agencies, Brown indicated that he would like to help, but advised all parties that the cost of materials had, since the time of the bid, spiraled out of control. Based on market volatility, Brown indicated that he would have to raise the total cost of the project by $500,000.00.
      On February 24, 2004, a meeting was held in Cabinet Secretary Susman’s office, the sole purpose of which was to save the VA project. There were a number of individuals present at this meeting including Linch; Blackwood; Greg Isaacs, Cam Siegrist, and Van Coleman, bond representative and counsel; Heather Connolly, legal counsel for the Respondent; Meg Cianfrocca, a representative from Senator Rockefeller’s office; Cabinet Secretary Susman; and Steve Canterbury, Executive Director of the Regional Jail and Correctional Facility Authority. Canterbury attended this meeting at the personal request of the Governor and the Secretary of Military Affairs and Public Safety, because of his extensive experience with state construction contracts. Brown was not physically present at the meeting, but was later joined by telephone.
      Those present at the meeting discussed problems relating to the project, and ideas were presented concerning how to assure Brown that his company would be adequately compensated for entering into the contract. The unrebutted testimony is that Canterbury informed those in attendance at the meeting that price increases in the cost of materials could be reimbursed through the submission of change orders. Therefore, according to Canterbury, price increases could be paid without including an escalation clause in the contract. Architect Blackwood also informed Canterbury that he would be willing to do all that he could personally to lower the cost of the total project. This meant that Blackwood would engage in value engineering to reduce costs in key facets of the construction. Value engineering, in the opinion of Architect Blackwood, should account for approximately half of the anticipated change orders likely to be submitted by Brown throughout the course of construction. Thus, Blackwood and Canterbury agreed that through the use of value engineering, and by the payment of change orders for the increased cost of materials, Brown could be assured of not losing money on the project.
      On the same date and with this new plan and contract proposal at issue, the uncontradicted testimony was that Secretary Susman suggested that Linch, Architect Blackwood, Canterbury, and Ciancfrocca enter an adjoining office to place a call to Brown concerning the new proposal. During the telephone conversation, Canterbury told Brown that legitimate material price increases could be processed as change orders under the contract and paid through the Respondent. Canterbury also informed Brown that Blackwood would engage in value engineering to assist in reducing costs where feasible.
      Based on these representations, Brown agreed to enter into a contract with Respondent WV/VA for the construction of the project. Canterbury testified that, although Brown was hesitant to agree to enter into the contract, Canterbury believed that Brown felt assured that while he may not make as much money as he would have prior to the expected escalation in material costs, he would not lose money on the project. Following the conversation with Brown, the WV/VA contacted the Division of Purchasing and requested that the contract for the construction of the project be issued to the Claimant. Thus, by Purchase Order dated March 3, 2004, the Respondent, the Claimant, and Architect Blackwood respectively became parties to a contract for the construction as Owner, Contractor, and Architect. The entire contract included general, supplementary, and other conditions to the contract; drawings; manuals; and specifications. Reaching an agreement with the Claimant allowed the Respondent to comply with all of the critical deadlines necessary to receive funding from the US/VA and preserve the project.
      During the course of construction, which spanned approximately four years, ten change orders were submitted by Claimant to the Respondent, which contained either a cost increase or an extension of the completion date. These change orders were promptly approved and paid, and two change orders alone included cost increases totaling more than $200,000.00. All change orders were approved and paid while David Tincher, Director of the Division of Purchasing, was employed in his capacity as Director.
      Upon the completion of the project, the Claimant submitted a final change order (“Change Order #11") dated September 23, 2008, which reflected increased costs for steel and other materials in the amount of $582,677.32. Change Order #11 was then submitted to WV/VA. Change Order #11 was approved consistent with the AIA format and promptly sent to the Division of Purchasing for final approval. Director Tincher, however, refused to approve payment of Change Order #11 for what he found were cost increases outside the scope of the contract.
      The Claimant now petitions this Court alleging that failure to pay Change Order #11 was a breach of contract entitling the Claimant to compensatory damages and accrued interest on that amount since the date of the alleged breach. The Claimant maintains that the agreement reached at the February 24, 2004, meeting is part of the integrated contract, and that a failure to pay Change Order #11 was a breach of an express term of that agreement. Conversely, Respondents argue that the parol evidence rule bars reliance on an oral agreement made prior to or contemporaneous with the final written agreement. Also, Respondents maintain that the West Virginia Code gives discretion to the Director of the Division of Purchasing to make final decisions regarding the approval and payment of such change orders. Based on a full and complete review of the record, the Court is of the opinion to award the Claimant’s claim, in part, and deny, in part, for the reasons more fully stated below. The Court will attempt to address all of the issues raised by the parties in their pleadings and testimony separately.
      Parol Evidence
      It is well-settled law in West Virginia that “[e]xtrinsic evidence of statements and declarations of the parties to an unambiguous written contract occurring contemporaneously with or prior to its execution is inadmissable to contradict, add to, detract from, vary or explain the terms of such contract . . . .” Syllabus Point 1, Kanawha Banking and Trust Co. v. Gilbert, 131 W. Va. 88, 46 S.E.2d 225 (1947). Therefore, prior statements that contradict clear, unambiguous language contained within a fully integrated contract are inadmissible and “[p]arol evidence may only be admitted to explain uncertain, incomplete or ambiguous terms.” Glenmark Associates, Inc. v. Americare of West Virginia, Inc., 179 W. Va. 632, 371 S.E.2d 353 (1988); Holiday Plaza Inc. v. First Federal Savings and Loan Ass’n of Clarksburg, 168 W. Va. 356, 285 S.E.2d 131 (1981); Mundy v. Arcuri, 165 W. Va. 128, 267 S.E.2d 454 (1980); WV Pub. Employees Ins. Bd. v. Blue Cross Hosp. Serv. Inc., 174 W. Va. 605, 328 S.E.2d 356 (1985).
      In this case, the written contract for this particular project was evidenced by the Purchase Order, manuals, drawings, specifications, numerous conditions, and other contract documents including the West Virginia Purchasing Division Policies and Procedures Handbook. There can be no doubt that these large construction contracts are intimidating, and almost never-ending in sheer volume. This Court is also mindful, however, that these contracts are typical of the type of construction project at issue. As between laymen, this contract fails as a concise, fully-integrated contract. However, as between two sophisticated parties consisting of a contractor with more than thirty years of construction experience and a State agency responsible for procuring bids, it is routine. Therefore, we must proceed with the presumption that the contract at issue was a complete integration, and that it memorialized the intent of both parties to the agreement.
      However, that is not to say that had this been a private parties contract, the agreement reached on February 24, 2004, could not be examined to construe the specific terms of the contract. The Court is of the opinion that Brown acted in reliance, despite his sophistication, to contract terms that were misleading and ambiguous as to the payment of change orders. As stated in Glenmark Associates, Inc., supra, if a contract contains terms that are ambiguous, parol evidence may be used to determine the meaning of those terms. Thus, ambiguity has long been held to be an exception to the otherwise rigid parol evidence rule. The Supreme Court of Appeals of West Virginia has held that
     [w]hile the general rule is that the construction of a writing is for the court; yet where the meaning is uncertain and ambiguous, parol evidence is admissible to show the situation of the parties, the surrounding circumstances when the writing was made, and the practical construction given to the contract by the parties themselves either contemporaneously or subsequently. If the parol evidence be not in conflict, the court must construe the writing; but, if it be conflicting on a material point necessary to interpretation of the writing, then the question of its meaning should be left to the jury under proper hypothetical instructions.
     Syllabus Point 7, Frederick Mgmt. Co., L.L.C. v. City Nat’l Bank, 2010 W. Va. LEXIS 144, 723 S.E.2d 277 (2010).
      Here, based on a plain reading of the contract documents, specifically section 4.3.6 of the AIA A201 document, and Section 1250 of the Project Manual, there are two ambiguous terms relevant to the time of the formation of the contract and the issues before this Court. For example, in section 4.3.6 of the AIA document, Brown was authorized to submit a claim for the architect’s consideration if Brown believed that “additional costs were involved for reasons such as . . . other foreseeable grounds.” Furthermore, Section 1250 of the Project Manual states with regard to contractor-initiated proposals for modification of the contract that “[i]f latent or unforeseen conditions require modification to the Contract, Contractor may propose changes by submitting a request for change.” These provisions make it difficult to determine what circumstances trigger the approval of a change order. The contract uses the terms “foreseeable” and “unforeseen” inconsistently, making every provision allowing for the payment of change orders ambiguous.
      Furthermore, it is difficult to ascertain the parties’ intended meaning from the language contained within these two sections because the language appears to be adopted as “catch-all” language. Moreover, this language could easily have been excluded in the final contract by the use of the Respondents’ Supplementary Conditions to the AIA Document A201-1997 General Conditions of the Contract for Construction, but it was not. The Court can only conclude, therefore, that the Respondent intended for the ambiguous language to remain, and the plain meaning of the language must be used to construe it.
      Here, Brown obviously relied on the representations made by Canterbury at the February 24, 2004 meeting conducted in Cabinet Secretary Susman’s office, and that agreement went beyond a mere “gentlemen’s agreement.” This agreement outlined what constituted other foreseeable grounds–an expected increase in the price of steel. Thus, if an increase in the cost of construction materials was deemed to be foreseeable based on a collateral agreement, then that definition should apply to the term foreseeable contained in the final written contract.
      Accordingly, the Claimant offered parol evidence of an ambiguous term of the written contract. The Court finds that the collateral agreement entered into between Brown and other attendees of the February 24, 2004 meeting defines foreseeable grounds as well as latent conditions as they apply to the construction contract, and these terms directly addressed the method for payment of price increases due to an unpredictable steel market. Therefore, the Claimant had a reasonable expectation of payment of Change Order #11 based on this ambiguous language.
     Apparent Authority
      It is central to the findings in this case that an agreement was reached at both the meeting on February 24, 2004, and in the construction contract, and that both should be read together in construing the final written contract. However, there is still a question as to whether anyone at the meeting on February 24, 2004, had authority to bind the Respondents. Thus, the answer to the authority question determines whether the collateral agreement upon which the Claimant relies would ordinarily permit the Claimant to construe ambiguous language in the written contract as binding on the Respondents.
      With regard to the doctrine of apparent authority or “ostensible authority,” as it is sometimes referred to, the Supreme Court of Appeals of West Virginia has held that "[o]ne who by his acts or conduct [permits] another to act apparently or ostensibly as his agent, to the injury of a third person who has dealt with the apparent or ostensible agent in good faith and in the exercise of reasonable prudence, is estopped to deny the agency relationship." Syllabus Point 1, Gen. Electric Credit Corp. v. Fields, 148 W. Va. 176, 133 S.E.2d 780 (1963).
      It has become obvious to this Court through the credible testimony of Brown that he did indeed act in good faith, despite what might have been a mistaken factual belief that Canterbury was someone with authority within the DOA. Based on Brown’s testimony and voluminous factual evidence presented, it is understandable why Brown believed that Canterbury was an agent of the DOA–the agency that Brown believed held the ultimate authority to bind the State.
      If this claim were between private parties, then the inquiry would stop here, and a breach of contract would be obvious to this Court. However, there are well-established legal prohibitions that directly address the issues in this case. While it is true that the acts of private agents may bind a principal where they are acting within their apparent scope of authority, this is not so with a public officer because the State is bound only by authority actually vested in the officer, and his powers are limited and defined by its laws. In addition, our law is clear that public officers are not subject to the doctrine of estoppel, which never applies to the State. See generally, Carper v. Cook, 39 W. Va. 346, 19 S.E. 379 (1894); State v. Chilton, 49 W. Va. 453, 39 S.E. 612 (1901); Samsell v. State Line Dev. Co., 154 W. Va. 48, 174 S.E.2d 318 (1970); Western M R.R. v. Goodwin, 167 W. Va. 804, 282 S.E.2d 240 (1981); see also, Kondos v. WV Bd. of Regents, 318 F. Supp. 394 (S.D. W. Va. 1970) aff’d per curiam, 411 F.2d. 1172 (4th Cir. 1971).
      Dawn Warfield, Deputy Attorney General, testified that there are good reasons for the Director of Purchasing to have ultimate authority to negotiate contracts. She stated that “it is necessary to have an objective source and standard to make sure that [contracts] are being awarded in conformity with the statutes and the regulations of West Virginia.” Director Tincher also testified that “[i]f we allowed vendors to increase prices after the bid opening and prior to award, we would never know who the true low bidder is.”
      In this regard, our case law is consistent with the aforementioned testimony and Supreme Court rulings. In Mountain State Consultants, Inc. v. State, 7 W. Va. Ct. Cl. 213 (1969), we held that the authority of a public officer to enter into contracts is defined by law in West Virginia, and “the legislature may not authorize the payment of a claim created against the State under any contract made without the express authority of law.” Our holding was also consistent with the Constitution of West Virginia, specifically Art. VI, Section 38, which prohibits increasing compensation to a contractor beyond an amount set forth in a public contract. The Constitutional prohibitions are specific and designed to prevent inappropriate expenditures of public funds. Specifically, the Constitution states that “[n]o extra compensation shall be granted or allowed to any public . . . contractor after the services shall have been rendered or the contract made; nor shall any legislature authorize the payment of any claim or part thereof, hereafter created against the State, under any agreement or contract made, without express authority of law . . .” Id. Therefore, from a purely legal standpoint, it may appear that this Court is constrained to rule in favor of the State.
     Moral Obligation
      The Court is now faced with evaluating both equity and justice. Relying on cases which specifically address not only the constitutional provisions but also the statutes, the Court must decide what equity and justice requires given the facts in the instant case. It is not an easy decision.
      The Supreme Court of Appeals of West Virginia has held that “[t]he legislature has the power to appropriate public funds in certain cases, classified as moral obligations, which are warranted by simple justice and right without violating the provisions of this section relative to unauthorized contracts.” State ex rel. Vincent v. Gainer, 151 W. Va. 1002, 158 S.E.2d 145 (1967). Thus, this Court is uniquely authorized to make rulings based on conscience. The legislature may adopt our findings, or not, but we will always find in favor of a claimant where to hold the opposite would seem unconscionable. Indeed, we can think of no better set of facts on which to base a moral obligation award. See State ex rel. McLaughlin v. DOT, 209 W. Va. 412, 549 S.E.2d 286 (2001).
      Brown performed a public service when the facts suggest that nobody else would. He did so based on the reasonable assurance that his work would be compensated. While Brown did not expect to earn large profits from his company’s work, he did not expect to lose over $500,000.00. Nor should Brown’s company be expected to incur such a loss where the State is currently benefitting from the only nursing home facility serving the veterans of our State. We see no reason to enter into a lengthy discussion on the principles of unjust enrichment or other equitable doctrines. We find that the Claimant is entitled in equity and good conscience to an award for the additional costs of VA project.
      Having determined that the Claimant is entitled to damages, the remaining question is what constitutes a reasonable calculation of those damages.
      A fundamental tenet of contract law is that damages should be awarded in order to place the non-breaching party in the position it would have been in but for the breach. To achieve this result, actual or compensatory damages are typically awarded. Stated broadly, “the measure of compensatory damages is such sum as will compensate the person injured for the loss sustained, with the least burden to the wrongdoer consistent with the idea of fair compensation.” See Stenger v. Hope Natural Gas Co., 139 W Va. 549, 80 S.E.2d 889 (1954); see also West Virginia Dep’t of Highways v. Roda, 177 W. Va. 383, 388, 352 S.E.2d 134 (1986). In awarding compensatory damages, courts must tailor them to be “proportionate or equal in measure or extent to the injuries . . . .” Yates v. Crozer Coal, etc., Co., 76 W. Va. 50, 84 S.E. 626 (1915).
      In this case, the parties have stipulated that the dollar amount at issue is $582,677.32. This amount represents the change in the contract price indicated on Change Order #11. Since work had already been performed before the submission of the change order (as is typically the case), the Claimant had already expended the funds necessary to complete the project. This being the case, it is clear that the amount of $582,677.32 is a fair and reasonable award in order to compensate the Claimant for its damages and represents the exact amount of cost increases associated with materials.
      The Claimant also contends that it is entitled to the interest on the compensatory award amount that has accrued since the date of submission of Change Order #11. The Claimant uses as support for this argument the subsequently repealed section of the W. Va. Code known as the “Prompt Pay Act.” The Prompt Pay Act was enacted in 1990 so that a vendor supplying services to a State agency could receive prompt payment upon presentation to that agency of a legitimate uncontested invoice. W. Va. Code § 5A-3-54 (repealed 2010). (Emphasis added.) This required payment to be issued to the vendor within sixty days of receiving an invoice, and any check issued after the sixty-day period must include interest at the current rate, as determined by the tax commissioner. Id.
      We do not agree with the Claimant’s argument that this Court is bound by the former Prompt Pay Act to award interest. Furthermore, even if this Court were to be bound by the Prompt Pay Act of 1990, Change Order #11 was not uncontested, a prerequisite required for application of the Prompt Pay Act.
      In accordance with the findings of fact and conclusions of law as stated above, the Court is of the opinion to, and does hereby, award the Claimant damages under our equity jurisdiction. Therefore, the Court finds that the Claimant is entitled to receive, and the State of West Virginia is morally obligated to pay, an award in the amount of $582,677.32, and that such amount is fair and reasonable compensation for damages actually incurred by the Claimant.
      Award of $582,677.32.

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