Contractor Not Entitled to Damages Against School District for Lost Profits

Issue

In Lewis Jorge Construction Management, Inc. v. Pomona Unified School District (2004 Daily Journal D.A.R. 15,217, Cal., Dec. 23, 2004), the California Supreme Court considered the issue of whether a construction contractor was entitled to damages for profits which it claimed it lost because its bonding capacity was reduced after a school terminated its contract with the contractor.

Facts

Pomona Unified School District contracted with Lewis Jorge Construction Management, Inc. (Contractor) for school building improvements. When Contractor did not timely complete the improvements, Contractor’s surety, on School District’s demand, hired another contractor to finish the project under the performance bond the surety had provided to Contractor. After this incident, Contractor was unable to get bonds at the same level. Contractor sued School District for breach of contract for terminating the contract. As part of the damages it sought, Contractor claimed the reduced bonding capacity caused him to lose future profits from potential construction contracts. A jury awarded damages (including lost profits) to Contractor for breach of contract, and School District asked the California Supreme Court to review the award of lost profits.

Supreme Court Decision

Damages for breach of contract fall into two categories – general and special damages. The Supreme Court determined that Contractor could not recover either general or special damages for lost profits.

General damages are those damages that are a natural result of a breach. The lost profits that Contractor sought were not general damages because the parties’ bargain did not include potential profits on future construction projects that Contractor had not bid on and been awarded. The lost profits were caused by the bonding company’s decision, not directly or necessarily by School District’s termination of the contract.

Special damages are secondary or derivative losses arising from circumstances that are particular to the contract or the parties. The losses must be actually foreseen or reasonably foreseeable when the contract is made. Here, Contractor did not show that “when the contract was formed the District could have reasonably contemplated that its breach of the contract would probably lead to a reduction of [Contractor’s] bonding capacity by its surety, which in turn would adversely affect [Contractor’s] ability to obtain future contracts.” School District did not know Contractor’s financial condition or its surety’s bonding criteria. Thus, the lost profits claimed by Contractor were not foreseen or reasonably foreseeable.