Background
California Water Service Company (Cal Water) hired Black & Veatch Construction, Inc. (B&V) as general contractor to design and build a new pump station and seven miles of underground piping to serve the Palos Verdes Peninsula under an $80 million contract. B&V in turn subcontracted with Steve P. Rados, Inc. (Rados) under a $29.25 million subcontract to perform 85 to 90 percent of the construction work, including trenching, laying, and covering the underground piping and building the pump station.
On October 4, 2019, after approximately 16 months of work, B&V terminated all of Rados’s work on the subcontract, citing Rados’s failure to provide a recovery schedule for the pump station work and failure to provide an adequate safety cure plan under the project’s Loss Control Manual. The termination was effective immediately. Each side sued the other for breach of contract. After a 25-day jury trial, the jury found the termination was without cause and awarded Rados more than $12.2 million in damages. An amended judgment added attorney fees, costs, and prejudgment interest, bringing the total to nearly $19.6 million. Both sides appealed.
Central to the appeal were questions about whether the trial court properly instructed the jury on the meaning of “and” versus “or” in the Loss Control Manual’s termination provisions, and whether the court erred in failing to interpret and instruct the jury on the subcontract’s formula for measuring damages following a termination without cause.
The Court’s Holding
The Court of Appeal affirmed in part and reversed in part. First, the court upheld the jury’s finding that B&V’s termination of Rados was without cause. The Loss Control Manual authorized termination only upon “repeated nonconformance with the Project Loss Control Program and repeated failure to comply with correction directives.” B&V argued “and” should be read as “or,” but the court held that the plain meaning of “and” as a conjunction controlled. The two conditions were interrelated, not independent, and reading them conjunctively was consistent with the severity of the termination remedy.
However, the court found the trial court committed prejudicial error by failing to instruct the jury on the subcontract’s damages formula for a termination without cause. Section 552.24.4 of the subcontract provided the “sole and exclusive remedy” for Rados: recovery of its direct costs for the terminated work satisfactorily performed, plus a reasonable overhead and profit allowance. The trial court had a duty to interpret this contract provision as a matter of law and instruct the jury accordingly. Because the jury awarded damages based on Rados’s pay applications rather than the contractual formula, a new trial on damages was required.
The court also held that B&V was entitled to $2,454,832 in back charges as a matter of law, and that Rados could not recover statutory prompt payment penalties because there was an objectively reasonable “good faith dispute” over the amounts owed, which precluded such penalties regardless of B&V’s subjective motives for the termination.
Key Takeaways
- Under California law, “and” means “and” as a general rule. Courts will not rewrite conjunctive contract terms as disjunctive absent exceptional circumstances, particularly where the linked conditions are interrelated rather than independent.
- When no extrinsic evidence is introduced regarding a contract’s meaning, interpretation is solely a judicial function. A trial court commits reversible error by failing to interpret the contract and instruct the jury on its meaning, especially when the contract provides a specific formula for measuring damages.
- The statutory “good faith dispute” exception to California’s prompt payment penalty statutes is evaluated based on the objective reasonableness of the dispute, not the subjective motive of the party withholding payment. A vigorous, legally tenable dispute over amounts owed precludes prompt payment penalties even if the underlying termination was found to be pretextual.
Why It Matters
This decision provides important guidance for participants in large-scale construction projects in California. It reinforces that sophisticated parties will be held to the specific damages formulas they negotiate in their subcontracts, even when those formulas may limit recovery below what standard pay applications would suggest. The ruling also clarifies that a termination-without-cause provision in a subcontract does not make the general contractor liable for prompt payment penalties simply because a jury later finds the termination was unjustified, so long as there was an objectively reasonable dispute over what was owed.
For sureties and insurers, the case underscores that liability remains derivative of the principal’s obligations. With the damages question remanded for a new trial under the contractual formula, all parties with financial exposure to this project face continued uncertainty, but within a framework now governed by the subcontract’s express terms rather than broad jury discretion.