Donald B. Murphy Contractors, Inc. v. State

Citations: 696 P.2d 1270; 40 Wash. App. 98Docket: 6440-5-II

Court: Court of Appeals of Washington; March 14, 1985; Washington; State Appellate Court

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Donald B. Murphy Contractors, Inc. (DBM) appeals a judgment from the Washington Court of Appeals, which ruled the State of Washington is not liable for "impact costs" related to repairs and delays from two highway construction projects affected by flooding. The court addresses several key issues on appeal: 

1. Whether the State's culvert designs breached an implied warranty of design due to their failure to handle excess water flow.
2. The applicability of the contracts' "changed conditions" clause, which allows for equitable adjustments in response to unforeseen site conditions, to unusual weather events.
3. Determination of whether the flood-damaged project components were considered temporary work, thereby placing the risk of loss on DBM rather than the State.
4. DBM's entitlement to indirect or impact damages resulting from delays due to change orders and stop work orders issued by the State.
5. The appropriateness of excluding certain statements from State employees as hearsay under ER 801(d)(2).

The court affirms the lower court's ruling. In 1975, DBM contracted with the State for two highway projects, which included significant alterations to East Issaquah Creek’s flow through 96-inch steel culverts. Heavy rain caused flooding that resulted in the failure of these culverts. Although the State compensated DBM for direct costs related to repairs and some change orders, DBM's claim for $662,192 in indirect impact costs due to delays was not upheld.

DBM argued that the State was legally liable for breaching its implied warranty of design due to the inadequacy of specified culverts in managing floodwaters experienced on December 2 and 3, 1975. Under the contract's "changed conditions" clause, DBM claimed entitlement to equitable adjustments for unforeseen site conditions, and under the "changes" clause, sought compensation for costs resulting from the State’s change and stop work orders. The trial court found that the culvert designs met reasonable standards and failed only due to an unprecedented flood, ruling that the State did not breach its implied warranty of design. DBM did not adequately challenge the court's findings, leading them to be accepted as true on appeal. DBM's assertion that the failure of the culverts constituted a legal breach of the implied warranty and imposed strict liability on the State was rejected. Washington law requires designs to be sufficient for their intended purpose rather than perfect, and the trial court concluded that the culvert design was reasonable and adequate based on historical expectations. The excerpt further clarifies that neither U.C.C. implied warranties nor products liability impose strict liability standards, emphasizing that the law demands adequacy rather than perfection in design.

DBM argued that the trial court incorrectly ruled that the heavy rains of December 2 and 3, 1975, did not represent a "changed condition" under the contract, which entitles them to an equitable adjustment in price for such conditions. The contract's "changed conditions" provision allows for recovery when unforeseen circumstances arise. DBM contended that if the flooding was not reasonably anticipated by the State regarding the implied warranty of design, then a "changed condition" should be recognized, citing Bignold v. King County. However, established legal precedent indicates that weather-related changes occurring after project initiation generally do not qualify as "changed conditions." 

DBM further argued that the combination of heavy rainfall and inadequate culverts constituted a changed condition, referencing Phillips Constr. Co. v. United States, where recovery was allowed due to a government drainage system's inadequacy. In contrast, the trial court found that the culverts exceeded reasonable design standards and were adequate for normal rainfall. Additionally, in a similar case, Praxis-Assurance Venture, it was determined that the heavy rainfall was an act of God, but the drainage was sufficient for normal conditions. 

The trial court concluded that flooding from exceptionally heavy rain does not constitute a changed condition, as the culverts were designed for anticipated conditions. Regarding the classification of damaged work, the court determined it was temporary, meaning DBM bore the risk of loss under the contract. Although the State assumed liability for damage to permanent work from floods or acts of God, DBM retained the risk for temporary work, in accordance with standard principles of construction contract liability.

DBM argues that the interpretation of section 1-07.13 undermines the State's implied warranty of design, asserting liability for damage to temporary work, even if caused by a breach of the warranty by the State. This argument is dismissed, as the trial court found no breach of the warranty. DBM further contends that the culverts are permanent due to their intended long-term use, referencing Knickerbocker Co. v. Seattle. However, the court clarifies that the State intended the culverts as temporary detours during the construction of permanent sections of the I-90 freeway. DBM also claims that damage to permanent work downstream from the culverts' failure entitles them to compensation. The court rejects this assertion, noting that DBM has already been compensated for direct repair costs and that the contract states the State is not liable for damages to temporary work or resulting delays. Additionally, DBM's argument that the State's provision of plans for the temporary culverts renders them permanent is seen as a reiteration of its earlier claims regarding the implied warranty. The trial court's factual determination that the culverts are temporary is upheld. DBM's claims for damages related to change orders and stop work orders are also contested; while direct costs were covered, DBM seeks compensation for indirect costs and argues that the trial court did not address the State's liability under these orders. DBM further challenges the State's reliance on the "no damage for delay" clause and the defense of accord and satisfaction, but the court disagrees with all these contentions.

Under section 1-07.13, DBM retains the risk of loss on the project until the State's acceptance, except for damage from acts of God affecting completed work. The contract stipulates that neither party is liable for delays solely due to adverse weather, with the sole remedy for DBM being a time extension for such weather-related delays as outlined in section 1-08.8. The absence of a "no damage for delay" clause does not alter this outcome; the contract implies that a time extension is the exclusive remedy for foreseeable delays caused by State-issued change or stop work orders.

The trial court ruled that the State had fulfilled its contractual obligations and found no liability for DBM’s claims related to these orders. DBM argued against the exclusion of testimony from its principals regarding alleged admissions of liability by State agents, claiming the statements were not hearsay and should qualify as admissions under ER 801(d)(2). The court excluded the testimony, determining the statements were hearsay and that the agents were not "speaking agents." DBM's attempt to prove that State employees promised payment for flood-related costs was rejected due to insufficient evidence of authority, and the claim of a verbal contract modification contradicted the parol evidence rule, as any changes to the contract were required to be documented in a written change order.

The written change orders represent the parties' agreement on additional compensation, emphasizing that the agreement itself is paramount, rather than the subjective intent of the parties (citing Barclay v. Spokane). DBM acknowledged that the change orders only covered direct repair costs, excluding any indirect costs from delays caused by the orders. DBM could not demonstrate that the state employees had the actual or apparent authority to commit the State to pay for these indirect costs. For a third-party statement to qualify as an exception to the hearsay rule under ER 801(d)(2), it must be proven that the statement was made by someone authorized to speak on the subject or by an agent acting within their authority. Conflicting evidence regarding DBM's awareness of the state employees' lack of authority to admit liability was presented. Apparent authority must arise from the principal’s conduct, not the agent’s, and DBM's reliance on the agents’ conduct was insufficient. Consequently, the court properly excluded testimony regarding alleged admissions of liability, and the judgment was affirmed. The Supreme Court denied review on May 24, 1985. The case was bifurcated to address only liability, leaving damages for a subsequent consideration.