March 30, 2017

Notable Case - Storms, Inc. v. Mathy Construction Co., 883 N.W.2d 772 (Minn. 2016)

Storms, Inc. v. Mathy Construction Co., 883 N.W.2d 772 (Minn. 2016)

This is our inaugural Notable Case discussion. While we do not intend to limit our selection to cases where we have represented one of the parties, the Minnesota Supreme Court’s decision last year in Storms, Inc. v. Mathy Construction Co., contains lessons that merit attention—particularly pertaining to the court’s treatment of contract disputes, in this case between two private entities carrying out a public works project.

The Facts

The Minnesota Department of Transportation (MnDOT) contracted with our client, Mathy, to make road repairs on two highways in southeastern Minnesota. Based upon a review of the drawings, MnDOT estimated the amount of specific materials that would be required to complete the contract. The contract was awarded based upon these estimated or plan quantities, which Mathy in turn submitted to subcontractors willing to bid on the work. Mathy entered in to a subcontract with Storms based in part upon Storms’ bid to perform work based upon MnDOT’s estimated quantities. Once Storms began work, it quickly became apparent to all involved that much smaller quantities of material were required than the amounts listed in MnDOT’s Statement of Estimated Quantities. MnDOT concluded that its quantity estimates were incorrect, causing it to recalculate the quantities and issue Mathy a deductive change order reducing the general contract price by $327,064.42. Mathy, in turn, passed on this price reduction by change order to Storms. Storms, however, declined to accept the change order and instead sued Mathy for breach of contract in order to recover the original contract price.

The Dispute

The dispute between Mathy and Storms centered around two MnDOT specifications and a provision of the Mathy/Storms subcontract. Mathy claimed that MnDOT Specification 1901, which allows MnDOT to order a change in material quantities, permitted Mathy to reduce the subcontract price without committing a breach. Storms responded that MnDOT Specification 1402, which requires alterations in the scope of a project to be issued during the course of the work, applied and that, because Mathy sought to reduce the subcontract price after Storms had completed its work, Mathy was in breach of the subcontract. Storms also argued that, even if Mathy were correct about the applicability of Specification 1901, it was of no consequence because the subcontract expressly required any change order be issued before the completion of the subcontractor’s work. The subcontract provision in question stated that MnDOT could make changes to the work “by issuing modifications to the General Contract,” whereupon Mathy must inform Storms if any such modification would affect the subcontractor’s work. If so informed, Storms must not take any actions “inconsistent with the modification to the General Contract.” Storms claimed that this provision implicitly contained a temporal component restricting changes to situations where there was subcontract work yet to be performed.

The Decision Below

The District Court found that Specification 1402 governed the situation, and that Mathy had breached the subcontract by issuing a deductive change order after Storms’ work was complete. In addressing damages, however, the District Court determined that Specification 1901 applied and that Storms was therefore entitled to recover only its uncompensated fixed costs, which Storms had failed to document. Because of the lack of damages, the District Court entered judgment in favor of Mathy.

On appeal, the Minnesota Court of Appeals agreed with the District Court’s holding that Mathy had breached the subcontract, but used a different analysis. The Court of Appeals based its finding of breach on what it characterized as the “plain language” of the subcontract, rather than on Specification 1402. The Court of Appeals reversed the District Court’s finding that Storms was not entitled to damages, and remanded the case to the District Court for further proceedings to address the damages amount.

Petitioning the Minnesota Supreme Court

The Minnesota Supreme Court is a court of limited jurisdiction. In the vast majority of cases, the Minnesota Supreme Court has discretion over whether it will entertain an appeal from a decision rendered by the Court of Appeals. The Court’s website notes that it reviews petitions in approximately 800 cases a year, and accepts review in about one in eight cases. Faegre Baker Daniels did not handle the matter for Mathy in either the District Court or Court of Appeals. Our initial task was to convince the Minnesota Supreme Court to hear the case. The challenge here was to make out a persuasive case in Mathy’s petition that what was at stake was something more than simply a mistaken interpretation of a private agreement between a general contractor and its subcontractor. Because the subcontract incorporated MnDOT specifications that had broad application to public works construction, the Court of Appeals’ decision would have significant consequences on how highway projects are administered in Minnesota. Fortunately for Mathy, the Minnesota Commissioner of Transportation was also of this opinion and filed an amicus petition in favor of review, as did the Associated General Contractors of Minnesota and the Minnesota Asphalt Pavement Association.

The Minnesota Supreme Court’s Decision

The Minnesota Supreme Court reversed the Court of Appeals’ decision. It determined that Specification 1901 “fits the circumstances of this case.” This specification gave the MnDOT engineer express authority to adjust material quantities when MnDOT’s estimate is incorrect. There is no time limit for MnDOT to exercise this power. Specification 1402, on the other hand, did not apply, as the scope of the work was not altered, as the project remained the same. The deductive change order simply conformed the estimated quantities to the actual scope of the work. Moreover, the subcontract did not change this result. The subcontract provision acknowledging that MnDOT may make changes to the work and requiring Mathy to inform Storms of any such modification addressed the process for handling changes to the work, not corrections to the estimated quantities:

We do not read section 10.A and Specification 1901 to be in conflict because they address different situations. Section 10.A describes how to make changes to the scope of the work, whereas Specification 1901 governs the procedure for correcting errors in estimated quantities. The provisions can be read in harmony with one another. Thus, we conclude that Mathy, after receiving the deductive change order from MnDOT, did not breach its subcontract with Storms by issuing a corresponding deductive change order to Storms. The court of appeals' conclusion that the plain language of the subcontract required that any changes be made during the “progress of the work” was incorrect. The phrase “progress of the work” does not appear in the text of the subcontract. Although the phrase is found in Specification 1402, which is incorporated, as we have discussed Specification 1402 is not applicable here.

Lessons Learned

  • In law, as in life, litigants rarely are entitled to a “free lunch.” It was not lost on the Minnesota Supreme Court that Storms was essentially arguing that it was entitled to receive hundreds of thousands of dollars for work that it did not have to perform. However one wishes to characterize this situation, it is hard to disguise that “enforcing” the contract as Storms sought provided a windfall to the subcontractor at the expense of Mathy. While the issue before the Court was one of contract interpretation, courts generally are reluctant to reach an interpretation that is inequitable to one of the parties unless the contract language clearly requires it. The subcontract language in this case did not support Storms’ interpretation.
  • Even private disputes, such as that between Mathy and Storms, can have broader implications, particularly if they are part of a public works project. The burden on a party seeking the discretionary review of a private contract dispute can be difficult to meet. It is important to frame the dispute in the proper context so the court can appreciate the broader consequences of the lower court’s ruling. Again, in law, as in life, it is good to have friends. The more support one receives from those for whom the lower court’s decision presents future challenges, the better one’s chances of having one’s case heard.
  • Contract interpretation disputes rarely are only about the contract. It is important to put the contract in the proper perspective. Courts often look beyond the mere words at the core of the dispute to find the contextual framework in which the dispute plays out. In this case, the facts of the case clearly fit the “correction of estimated quantities” scenario offered by Mathy rather than the “change in the scope of the work” characterization advanced by Storms.

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