California Court Upholds Recovery of Lost Profits Due to Impaired Bonding Capacity

BEGL Construction Company, Inc. et al. v. Los Angeles Unified School District and Star Insurance Com
154 Cal.App.4th 970; 2007 Cal.App. LEXIS 1432 (2007)

In August 2000, the Los Angeles Unified School District (the “District”) entered into a public works construction contract with BEGL Construction Company, Inc. (“BEGL”) for a seismic retrofit of the Science Building at its Los Angles Center for Enriched Studies (“LACES”) and demolition and reconstruction of the LACES West Arcade. Because the project was a public work, BEGL was required to post a performance bond and a payment bond. Subsequently, after BEGL commenced performing work, the West Arcade was removed from the scope of the contract.

The District terminated BEGL in January 2002 and filed a bond claim with BEGL’s surety, Fidelity, for completion of the LACES project. The District and Fidelity entered into a takeover agreement, and Fidelity hired another contractor to finish the Project. Fidelity subsequently sued BEGL and later settled.

BEGL then filed suit against the District for, inter alia, breach of contract and the District counter-sued, for inter alia, breach of contract. At trial, BEGL argued that as a result of the District’s breach of contract, its bonding capacity was diminished and caused BEGL to lose over a half-million dollars in profits. During the LACES project, BEGL was bonded by Fidelity. During the project, BEGL moved bonding companies, first to CNA and then to INSCO/DICO. BEGL’S bonding capacity at the time was $3 to $4 million per job and $6 to $7 million in the aggregate for all the work in progress. Once INSCO/DICO learned of the dispute between Fidelity and BEGL regarding the LACES project, it stopped bonding BEGL. BEGL’s bonding agent tried unsuccessfully to place it with another surety because sureties would not bond BEGL due to the dispute between Fidelity and BEGL. Eventually BEGL was bonded for a fraction of its previous bonding capacity, at $500,000 per job and $500,000 in the aggregate. A jury found that both parties breached the contract, awarding BEGL approximately $950,000 and awarding the District $1.

The District appealed, arguing the lower court abused its discretion in admitting the evidence of lost profits due to its impaired bonding capacity because it was not foreseeable at the time it contracted with BEGL that BEGL would lose profits as a result of the District’s breach, and therefore, the damages were improper as a matter of law and the evidence should not have been admitted.

Whether potential profits on unearned future construction projects due to impaired bonding capacity are recoverable depends on whether the special or particular circumstances from which they arise were actually communicated to or known by the breaching party or were matters of which the breaching party should have been aware at the time of contracting. In the instant matter, the court found that because the evidence (evidence of industry custom as to the impact of a dispute between a surety and contractor on ability to secure bonding) was sufficient for the court to reasonably find that BEGL’s lost profits due to impaired bonding capacity resulting from the District’s breach were foreseeable to the District at the time of contracting, the court did not abuse its discretion in admitting evidence of lost profits. The District also argued that because there was no evidence of record regarding any projects that BEGL would likely have won as the low bidder or any sum flowing from a project, the lost profits damages were uncertain. The court held that lost anticipated profits cannot be recovered if it is uncertain whether any profit would have been derived at all from the proposed undertaking. However, lost prospective net profits may be recovered if the evidence shows, with reasonable certainty, both their occurrence and extent. Mathematical precision is not required to recover. BEGL was not required to present evidence of specific projects or sums lost as a result of its impaired bonding capacity, but because it presented other evidence of lost profits (comparison of its profits prior to loss of bonding to absence of profit in the period following).

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