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Homer Electric Assoc. v. Geolar, Inc. and Gilbert/Commonwealth Inc. (5/27/94), 874 P 2d 937
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Notice: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
GEOLAR, INC., an Alaska )
Corporation, and HOMER ) Supreme Court No. S-5126
ELECTRIC ASSOCIATION, an )
Alaska Corporation, ) Superior Court No.
) 3AN-89-2275 CI
Appellants, )
) O P I N I O N
v. )
) [No. 4087 - May 27, 1994]
GILBERT/COMMONWEALTH INC. )
of MICHIGAN, a Michigan )
Corporation, )
)
Appellee. )
______________________________)
HOMER ELECTRIC ASSOCIATION, )
INC., an Alaska Corporation, ) Supreme Court No. S-5222
)
Appellant, )
)
v. )
)
GEOLAR, INC., an Alaska )
Corporation, )
)
Appellee. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Anchorage,
Peter A. Michalski,
Judge.
Appearances: Richard H. Friedman,
Friedman, Rubin & White, and William G.
Royce, Anchorage, for Geolar, Inc. Gary M.
Guarino, Atkinson, Conway & Gagnon,
Anchorage, for Gilbert/Commonwealth Inc. of
Michigan. Paul L. Davis, Law Offices of Paul
L. Davis & Associates, Anchorage, for Homer
Electric Association.
Before: Moore, Chief Justice,
Rabinowitz, Matthews and Compton, Justices.
[Burke, Justice, not participating.]
MATTHEWS, Justice.
I. FACTUAL AND PROCEDURAL BACKGROUND
In the mid 1980's, Homer Electric Association (Homer
Electric) decided to construct an electric transmission line from
Homer to Soldotna. Homer Electric hired Gilbert/Commonwealth,
Inc. (Gilbert) to provide engineering and management services for
the project.1 About sixty miles of forest had to be cleared to
provide a right-of-way for the line. The sixty-mile section was
divided into three segments, and each segment was bid out
separately. Sections two and three were completed first by
contractors other than Geolar.
After sections two and three were complete, the
contract for clearing section one was let out for bids. Geolar
submitted the low bid and was awarded the contract.2 The
contract, drafted by Gilbert, was virtually identical to the
contracts for sections two and three except that the disposal of
spruce trees was modified. The contracts for sections two and
three required that all spruce be cut into twenty-four inch
segments, while all other species of trees only needed be cut
into ten to fifteen foot lengths.3 In Geolar's contract,
however, Gilbert changed the specifications so that only white
spruce was required to be cut into twenty-four inch segments.
This modification is at the heart of the dispute in these cases.
Gilbert modified the spruce requirement in response to
state and federal officials informing it that there was a distinc
tion between black and white spruce. Black spruce was not
affected by bark beetle, and therefore only white spruce needed
to be cut into the smaller sections. Upon receiving the
specifications for bid preparation, Geolar determined that the
majority of spruce present in section one were either black
spruce or Lutz spruce, a hybrid of Sitka and white spruce.
Geolar prepared its bid based on a determination that the hybrid
Lutz spruce fell under the category of "other species,"not under
"white spruce,"and needed only to be cut into ten to fifteen
foot lengths. This assumption accounted for Geolar's low bid.
Geolar's interpretation of the contract was not known
to Homer Electric or Gilbert until the parties met for a pre-
construction meeting in January 1987. Homer Electric and Gilbert
indicated that they disagreed with Geolar's interpretation, but
agreed to investigate the matter. The parties dispute the
results of the investigation. Geolar claims that Dr. John Alden,
a research forest geneticist with the U.S. Department of
Agriculture, informed Gilbert that Lutz spruce did predominate in
the area and could be visually differentiated from white spruce.
Gilbert and Homer Electric claim that forest service experts
informed them that chemical analysis was the only way to
distinguish the two trees, and thus considered the Lutz spruce to
be covered by the contract term "white spruce."
The disagreement over the spruce requirement was never
resolved by the parties.4 Geolar claims that, rather than admit
its mistake in changing the specifications without researching
the species of trees present, Gilbert decided to make performance
of the contract unreasonably difficult in the hopes that Geolar
would back down on the spruce issue. If, instead, Geolar was
forced out of business by Gilbert's actions, the breach of
contract could be blamed on Geolar, and Geolar's bonding company
would be forced to pay to cut the Lutz spruce.
After completing about half of the clearing required by
the contract, Geolar left the job in June of 1987, claiming that
Gilbert's onerous administration of the contract had dramatically
increased Geolar's costs and made it impossible for Geolar to
proceed further. Homer Electric then made a claim against
Geolar's performance bond issued by Balboa Insurance Company
(Balboa). Balboa paid approximately $389,000 to have the
contract completed. In March 1989 Geolar filed suit
against Homer Electric and Gilbert, alleging a variety of claims.
Homer Electric counterclaimed for breach of contract. In
November 1991 Homer Electric and Gilbert filed motions for
summary judgment and dismissal of claims. In response, Geolar
dropped all claims except (1) breach of contract against Homer
Electric and (2) intentional interference with contract against
Gilbert. The superior court granted summary judgment for Gilbert
and dismissed Geolar's claim for intentional interference with
contract. The breach of contract claim against Homer Electric
went to trial and a jury verdict was returned in Geolar's favor
for $981,952. Homer Electric's counterclaim was rejected.
Geolar appeals the summary judgment in Gilbert's favor, and Homer
Electric appeals the jury verdict in Geolar's favor.
II. DISCUSSION
A. Geolar's Intentional Interference with Contractual
Relations Claim5
In order to decide whether the superior court
erroneously granted Gilbert's motion for summary judgment, we
must decide two issues: (1) when, if ever, can an agent be held
liable for interfering with a contract between its principal and
a third party; and (2) if an agent can be held so liable, are
there genuine issues of material fact in this case concerning
whether Gilbert tortiously interfered with the contract.
We have defined the elements of the tort of intentional
interference with contractual relations to be
proof that (1) a contract existed, (2)
the defendant . . . knew of the contract and
intended to induce a breach, (3) the contract
was breached, (4) defendant's wrongful
conduct engendered the breach, (5) the breach
caused the plaintiff's damages, and (6) the
defendant's conduct was not privileged or
justified.
RAN Corp. v. Hudesman, 823 P.2d 646, 648 (Alaska 1991) (quoting
Knight v. American Guard & Alert, Inc., 714 P.2d 788, 793 (Alaska
1986)). The dispute in this case centers on the sixth element:
whether Gilbert's conduct was privileged or justified.
The specific question of whether an agent can be liable
for intentionally interfering with a contract between its
principal and a third party is one of first impression in this
court. We have, however, dealt with the issue of privilege to
interfere in other business relations. In Bendix Corp. v. Adams,
610 P.2d 24, 31 (Alaska 1980), we recognized that a parent
corporation may have a privilege to interfere in contractual
relations between its subsidiary and a third party. We also
recognized the right of a landlord to interfere with his tenant's
lease assignment contract in RAN, 823 P.2d at 649. In both cases
we focused on the fact that the interfering party had a direct
financial interest in the contract at issue. Bendix, 610 P.2d at
31; RAN, 823 P.2d at 649. Once we determined that the
interfering party possesses a direct financial interest in the
contract
the essential question in determining if
interference is justified is whether the
person's conduct is motivated by a desire to
protect his economic interest, or whether it
is motivated by spite, malice, or some other
improper objective.
Bendix, 610 P.2d at 31, quoted in RAN, 823 P.2d at 649-50.
A different, but related, test applies in determining
whether an agent is privileged to interfere with a contract
between its principal and a third party. Restatement (Second) of
Torts 770 (1979) provides:
One who, charged with responsibility for
the welfare of a third person, intentionally
causes that person not to perform a contract
or enter into a prospective contractual
relation with another, does not interfere
improperly with the other's relation if the
actor
(a) does not employ
wrongful means and
(b) acts to protect the
welfare of the third person.
The commentary to section 770 states that it is applicable "in
the case of agents acting for the protection of their
principals." Id. 770 cmt. b. An agent's own financial
interest, as distinct from that of its principal, is not a basis
for privileged interference unless the financial interest is in
the nature of an investment in the principal. Restatement
(Second) of Torts 769 cmt. c. As Homer Electric's agent,
Gilbert was privileged to interfere with Homer Electric's
contract with Geolar only if it acted to protect Homer Electric's
best interests. The essential question, therefore, is whether
Gilbert's actions were predominately motivated by a desire to
protect Homer Electric's interests or by spite, malice, or some
other improper objective. See Waldinger Corp. v. CRS Group
Eng'rs, Inc., 775 F.2d 781, 790 (7th Cir. 1985) ("Where a
conditional privilege exists, the plaintiff to succeed on a claim
of tortious interference with contract, must allege and prove
that the agent's intentional acts were not taken to further its
principal's best interests, but to further its personal goals or
to injure the other party to the contract.").
We have clearly stated that "[t]he question of justifi
cation for invading the contractual interest of another is
normally one for the trier of fact, particularly when the
evidence is in conflict." Alyeska Pipeline Serv. Co. v. Aurora
Air Serv., Inc., 604 P.2d 1090, 1094 (Alaska 1979).6 In the case
at bar, Geolar argues that Gilbert's motive for onerously
enforcing the contract was not a desire to protect Homer
Electric's economic interests. Rather, Gilbert was motivated by
an improper objective: to force Geolar to breach the contract,
thereby masking Gilbert's mistake in modifying the spruce cutting
requirement. There is evidence in the record to support Geolar's
contention, and reasonable jurors could disagree over Gilbert's
predominant motive. As all reasonable inferences must be drawn
in Geolar's favor as the non-moving party, Hatten v. Union Oil
Co., 778 P.2d 1150, 1153 (Alaska 1989), the question of whether
Gilbert's conduct was predominately motivated by a desire to
protect Homer Electric's interest was one for the jury, and
summary judgment was improperly granted.
B. Geolar's Breach of Contract Claim7
Homer Electric's arguments on appeal boil down to
essentially two issues: (1) Geolar did not provide sufficient
evidence to prove Homer Electric breached the contract; and (2)
Geolar did not prove damages with reasonable certainty. Homer
Electric advances these arguments in the context of the trial
court's denial of Homer Electric's motions for summary judgment,
directed verdict, J.N.O.V, and a new trial. We address these
issues in turn in the context of the applicable standards of
review.8
1. Breach of Contract Claim
At trial, Geolar claimed Homer Electric breached its
contract by (1) failing to make timely payments; (2) requiring
work not reasonably called for in the contract; and (3) breaching
the implied covenant of good faith and fair dealing. The jury
specifically found that Homer Electric breached the contract in
these three ways. We address each in turn.
a. Failure to make timely payments
Homer Electric discusses only two incidents of a
"failure to pay." In both cases, Homer Electric claims that
payments were not made because work units were incomplete or not
completed according to the approved construction schedule.
Geolar presented extensive testimony from George Thomas, Geolar's
vice-president and field supervisor, and Larry Lockyer, co-owner
of Geolar and a civil engineer who, in the performance of his
consulting duties for Geolar, was involved in the monitoring of
construction activities, disputes and claims.
Both men testified to various instances where Homer
Electric refused to physically accept legitimate pay requests,
delayed payments owed, and refused pay requests for previously
approved work unless further work was first completed. Lockyer
also testified to a letter conditioning payment owed to Geolar on
release by Geolar "of all claims by Geolar, both known and
unknown, pertaining to this project."
b. Requiring performance not
reasonably called for in the contract
Homer Electric argues that the work Geolar was required
to do was specifically set out in the contract, and it therefore
had a right to require such performance. Geolar presented
testimony and evidence concerning four virtually identical
contracts: the two contracts for clearing sections two and
three, Geolar's contract, and the contract of the company that
replaced Geolar. The testimony indicated that the specifications
in the contracts were enforced rigidly against Geolar, but not
against any of the other three contractors.9 Geolar also
presented objective evidence to the jury consisting of
photographs and videotape of the completed work in the three
sections.10
c. Failing to deal fairly and in
good faith
The trial court's instruction on the issue of good
faith and fair dealing stated that the duty can be violated by
dishonest conduct, such as conjuring up
a pretended dispute, or by asserting an
interpretation of the contract contrary to
one's own understanding. . . . or abusing
the power to determine contract compliance or
to specify terms of performance.
Homer Electric does not claim the instruction was erroneous, but
argues that the evidence Geolar presented was insufficient to
show bad faith on Homer Electric's part.11 As set out above,
Geolar presented evidence that the pay disputes and
interpretation and enforcement of the contract terms fit this
description. This was sufficient evidence for the jury to find
bad faith on Homer Electric's part.
d. Conclusion
On each of the theories supporting its claim of breach
of contract, the evidence Geolar presented was sufficient to
support the jury's finding that Homer Electric breached its
contract. Therefore we affirm the trial court's denial of Homer
Electric's motions for summary judgment, directed verdict,
J.N.O.V., and a new trial.12
2. Award of Damages
a. Geolar's increased cost of performance
The jury awarded Geolar $118,964.00 for "increased
costs of performance resulting from being required to perform
work not reasonably required by the contract, or as a result of
delays in payment." Homer Electric argues that Geolar failed to
prove that Homer Electric's breaches caused Geolar's damages;
failed to prove the amount of these damages with sufficient
specificity; and improperly relied on the total cost method of
calculating damages, which this court views with disfavor. See
Conam Alaska v. Bell Lavalin, Inc., 842 P.2d 148, 155 (Alaska
1992); Anchorage v. Frank Coluccio Constr. Co., 826 P.2d 316, 325
(Alaska 1992); Fairbanks North Star Borough v. Kandik Constr.,
795 P.2d 793, 798-99 (Alaska 1990), reh'g granted on other
grounds, 823 P.2d 632 (Alaska 1991). Geolar responds that the
method it employed was not a total cost method, and that, even if
it was, the jury's award should be affirmed as the jury's verdict
was in Coluccio Constr., 826 P.2d at 327-28.
We must first decide whether Geolar's method of
calculating its damages for increased costs of performance is
equivalent to a total cost method. The total cost method
calculates damages by determining the difference between the
actual costs incurred on a project, plus a reasonable amount for
profit, and the contract price. See Kandik Constr., 795 P.2d at
798. Geolar's witnesses did not employ this exact formula to
calculate Geolar's damages. Instead, Geolar's estimates of its
damages contained three elements: direct costs, loss of
efficiency costs, and delay costs. The direct costs component
contained actual additional expenses that Geolar claimed to have
suffered on account of Homer Electric's breach. These fixed
costs resemble a partial "actual costs"damage calculation. This
court has expressed a preference for the "actual costs" method,
even where this method might not identify all losses. Coluccio
Constr., 826 P.2d at 325, 326. The remaining two elements of
Geolar's calculations -- loss of efficiency and delay costs --
involved estimating how long Geolar should have taken to complete
a given amount of work under its original estimates; comparing
this amount of time to the amount of time the work actually took
to complete; and multiplying the difference by the cost of labor,
equipment, supervision, and overhead per unit of time. Upon
analysis, we find that these elements of Geolar's claim are
essentially modified expressions of the total cost method.
The central aspect of both the total cost method and
Geolar's loss of efficiency and delay claims is a comparison
between the contractor's initial estimates and the actual cost of
performing the contract. In the traditional total cost method,
the contractor's initial estimates are represented by its bid
price, and reasonable profit is added to the actual costs
incurred to reflect the fact that the bid price itself most
likely included some margin of profit. Geolar's method merely
substitutes actual time for actual cost, and uses its expected
rate of production rather than its bid price to represent its
initial estimates. Theoretically, at least, Geolar's method and
the total cost method should reach the same result, if properly
applied.13
In addition, Geolar's method does not alleviate any of
the problems that cause us to disfavor the total cost approach.
We have stated that the flaw in the total cost method is that "it
assumes that the defendant's breach was the cause of all of the
extra cost." Kandik Constr., 795 P.2d at 798 (quoting U.S.
Indus. v. Blake Constr. Co., 671 F.2d 539, 547 (D.C. Cir. 1982)).
This may be broken down further. The total cost method "assumes
plaintiff's costs were reasonable[,] . . . that plaintiff was not
responsible for any increases in cost, and . . . [that]
plaintiff's bid was accurately computed. . . ." Id. (quoting
F.H. McGraw & Co. v. United States, 130 F. Supp 394, 400 (Ct. Cl.
1955)). Any or all of these assumptions may be wrong in a given
case. Like the total cost method, Geolar's method assumes that
all deviations from the expected course of performance resulted
from the defendant's breach. Therefore, Geolar's method of
calculating damages must be at least as disfavored as the total
cost approach.14
Although we disfavor the total cost method, we have not
absolutely prohibited its use.15 We must therefore decide whether
the use of a method akin to the total cost method, such as
Geolar's approach, was appropriate, and correctly applied, in
this case.
We have previously indicated that a four-part test must
be met before the total cost method may be used to prove a
contractor's damages:
The acceptability of the method hinges
on proof that (1) the nature of the
particular losses make it impossible or
highly impracticable to determine them with a
reasonable degree of accuracy; (2) the
plaintiff's bid or estimate was realistic;
(3) its actual costs were reasonable; and (4)
it was not responsible for the added
expenses.
Coluccio Constr., 826 P.2d at 325 (citations omitted). "The
burden of proving that each prong is met is on the contractor."
Id. (citing New Pueblo Constructors, Inc. v. State, 696 P.2d 185,
196 (Ariz. 1985)). This test governs both the admissibility of
evidence of total cost calculations and the application of the
total cost method by the finder of fact. See Nebraska Pub. Power
Dist. v. Austin Power, Inc., 773 F.2d 960, 968 (8th Cir. 1985).
The question of admissibility is for the court. Alaska
R. Evid. 104. Therefore, the trial court bears the initial
responsibility of determining whether there is sufficient
evidence to create a question of fact regarding whether the
requirements of this test could be satisfied. Id. In making
this determination, the trial court should closely examine the
proffered evidence to insure that each element of the test can be
satisfied. The total cost method remains in disfavor and is
properly used "only as a last resort method." New Pueblo
Constructors, 696 P.2d at 194. In addition, the first element of
the test -- the impossibility or impracticability of other means
of calculating losses -- raises, in part, the legal question of
what measure of damages is appropriate. Even after the trial
court makes the initial determination to admit evidence of the
total cost method, it must carefully control the use of that
evidence. As the Supreme Court of Arizona has stated:
The trial judge must play an active role
in this fact-bound inquiry in determining
that the measure of damages is appropriate to
the nature of the harm involved and that the
specific estimates have been appropriately
adjusted to avoid recovery of unrelated costs
by the contractor.
Id. at 195.
In the present case the trial court's obligation to
determine the suitability and admissibility of Geolar's damage
calculations arose on Homer Electric's motions for summary
judgment on the issue of damages and, in the alternative, for a
protective order preventing Geolar from introducing its total
cost evidence at trial. On review, we conclude that the trial
court correctly denied these motions. First, no means other than
the total cost method for measuring Geolar's damages for having
to perform additional work "not reasonably called for in the
contract" has been identified.16 Second, drawing all inferences
of fact in its favor, Geolar submitted evidence which, if
accepted, was sufficient to prove that Geolar's estimate was
realistic, that its actual costs were reasonable, and that it was
not responsible for the additional costs it sought to charge to
Homer Electric. Thus, the total cost method appears to be the
only reasonable means of calculating Geolar's damages and there
are genuine issues of material fact concerning the final three
elements of the four-part test. The trial court properly denied
Homer Electric's motions against Geolar's use of a total cost
method.
The trial court erred, however, in admitting total cost
evidence without subjecting it to controls to prevent it from
being misused. If the jury is allowed to hear evidence of
damages calculated under a total cost method, then it must be
instructed not to apply the method unless all four factors are
established. See Coluccio Constr., 826 P.2d at 328 (approving
instructions which specifically instructed jury not to apply the
total cost theory unless four factor test was met). In addition,
because the basic flaw with the use of the total cost method is
that it assumes causation, we also require that the jury be
instructed not to award damages unless the plaintiff proves that
the defendant's breach caused them. Id.; Kandik Constr., 795
P.2d at 799. Regardless of whether Geolar's version of the total
cost method satisfied this test in the present case, the trial
court erred in failing to instruct the jury on the proper use of
this evidence after allowing the evidence to be heard. Remand
for a new trial on the issue of damages is therefore necessary.17
b. Lost profits on the uncompleted portion
The jury awarded Geolar $44,400 for loss of profits on
the uncompleted portion of the contract. Homer Electric contends
that the award was speculative as there was insufficient evidence
from which the jury could arrive at this amount. We agree.
"In order to recover lost profits in a breach of
contract action, the plaintiff must present to the jury evidence
sufficient to calculate the amount of the loss caused by the
breach." City of Palmer v. Anderson, 603 P.2d 495, 500 (Alaska
1979). The only testimony concerning lost profits for the
unfinished portion of the contract was presented by Dave
Pennington, Geolar's expert. He testified that to calculate lost
profits, he simply determined the value of the work to be done in
the second half of the project and from that the total contract
earnings for that portion of the contract. From these figures he
was able to determine the mark-up on the balance of the contract.
At no time did Pennington provide any figures for the
calculations he made. He concluded by testifying that the lost
profits for the second half of the contract were $87,000.
Considering Lockyer's testimony that he estimated gross
profits for the entire project to be $100,000 to $150,000,
Pennington's estimate of $87,000 in net profits from only half
the contract is suspect. The jury's decision to award $44,400,
or only slightly more than fifty percent of Pennington's
estimate, does not remedy the problems with this award. Geolar's
evidence is too speculative to support an award of lost profits.
"[L]ost profits must be proven with reasonable certainty." Guard
v. P & R Enters., Inc., 631 P.2d 1068, 1072 (Alaska 1981).
Because Geolar had no prior experience with contracts of this
size and complexity, its own estimates, offered without proof of
how they were reached, are unreliable. "The evidence must afford
sufficient data from which the court or jury may properly
estimate the amount of damages, which data shall be established
by facts rather than by mere conclusions of witnesses." City of
Whittier v. Whittier Fuel & Marine Corp., 577 P.2d 216, 223
(Alaska 1978) (quoting Levene v. City of Salem, 229 P.2d 255, 263
(Or. 1951)), disapproved on other grounds in Native Alaskan
Reclamation & Pest Control v. United Bank of Alaska, 685 P.2d
1211, 1219 (Alaska 1984).
Geolar offered no evidence of its own profit margins on
other projects, nor did it offer evidence of the profits obtained
by other contractors performing similar jobs, such as the
replacement contractors. See Guard, 631 P.2d at 1072-73 (noting
that a business without an established profit history might rely
on its principals' profit history on similar jobs or on the
profit history of others similarly situated).18
In addition, the great difference between Geolar's bid
and the other bids submitted on this contract19 underlines the
need for reliable evidence concerning lost profits. While we
recognize that Geolar's bid was apparently based, in part, on a
substantially different interpretation of the white spruce
bucking requirement, the spruce issue was never resolved;
therefore Geolar still bore the risk that the issue would be
resolved in Homer Electric's favor. Under the circumstances of
this case, Geolar's estimates of its expected profits are
entirely too speculative to support an award of lost profits.
c. Loss of value of business as a going concern
The jury awarded Geolar $400,000 for the loss of value
of Geolar as an operating business. In order to award damages
for the loss of the business, the jury was instructed that it
first must find that Homer Electric had reason to foresee the
loss as a probable result of the breach at the time that the
contract was made. See Native Alaskan Reclamation & Pest
Control, 685 P.2d at 1219. Homer Electric argues that the award
was not a foreseeable loss and, in the alternative, that the
verdict was not supported by sufficient evidence.
As a result of the bid process, Homer Electric was
aware of Geolar's financial status. Paul Taylor, Geolar's
economist, testified that with this knowledge, Homer Electric
clearly had notice that if it breached the contract in a material
way, Geolar would go out of business. It was also foreseeable
that a claim would be made against Geolar's bonding company,
resulting in a suit brought by the bonding company against Geolar
and Geolar's inability to conduct business as a construction
company. Sufficient evidence was provided to support the jury's
determination that the loss was foreseeable.
The amount of the jury's verdict, however, is not
supported by sufficient evidence. Taylor testified at length as
to the valuation of Geolar as an operating business. Ultimately,
he concluded that the business had a value of between $271,000
and $451,000. Geolar failed to prove, however, that it lost what
Taylor valued. Taylor's value range represented an estimate of
what a willing buyer might be expected to pay for Geolar in an
asset sale transaction -- that is, to purchase all of Geolar's
productive assets, including equipment and intangibles, without
assuming any of its liabilities. In order for Taylor's valuation
to accurately reflect Geolar's loss, Geolar needed to prove that
it lost, without receiving any value in exchange, all that it
would have given up in such an asset sale, including its
equipment and intangibles. Geolar did not establish these
losses. In particular, Geolar failed to establish that it lost
any equipment. The equipment carried a book value of $307,000,
which George Thomas testified was a conservative estimate. In
the absence of proof that this equipment was lost as a result of
Homer Electric's breach, Taylor's testimony cannot support a
damage award for the loss of Geolar's ability to function as an
operating concern.
We also note that Taylor's valuation method is not the
proper means of measuring the losses sustained when a company is
forced out of business. Geolar's true loss, if any, is the
difference between its net value when it was in operation and its
net value after ceasing operation. Taylor valued only part of
one half of this calculation, and therefore his testimony is not
sufficient to support an award for the loss in value of Geolar.
The award of damages for the loss of the value of the business is
reversed.
d. Damages for judgment owed to Balboa
After Geolar left the job in June 1987, Homer Electric
filed a claim with Geolar's bonding company, Balboa. Homer
Electric collected $389,000 from Balboa, which was used to pay
another contractor to complete the project. Balboa subsequently
sued Geolar for this sum plus interest and attorney's fees. As
the principal on the bond, Geolar was liable to its surety,
Balboa, for the amount paid. Before the suit went to trial,
Balboa and Geolar entered into a settlement agreement whereby
Geolar agreed to pay Balboa $400,000. Geolar was to pay Balboa
out of one-third of any recovery in the suit against Homer
Electric.
The jury awarded Geolar $400,000 for the judgment owed
to Balboa. Homer Electric argues that the damage claim against
Homer Electric for the $400,000 should not have been considered
by the jury because (1) the settlement did not create an actual
liability on the part of Geolar; and (2) inclusion of the claim
was prejudicial to Homer Electric.20
Under the terms of the bond and the indemnity agreement
between Geolar and Balboa, Geolar was obligated to indemnify
Balboa for all claims which Balboa, in its sole discretion, paid.
The settlement agreement, which compromised Balboa's right to
this payment and determined the manner in which Balboa would be
paid, is a valid and enforceable agreement. In Bohna v. Hughes,
Thorsness, Gantz, Powell & Brundin, 828 P.2d 745, 763 (Alaska
1992), an injured plaintiff entered into a covenant not to
execute on a judgment against the defendant pending the
defendant's suit against a third party. We rejected an argument
by the third party that, because of the covenant not to execute,
the defendant had not suffered a loss and therefore could not
bring a suit for damages. Id. We noted that a failure by the
defendant to pursue the litigation against the third party
diligently would be a material breach of the agreement with the
injured plaintiff, in which case the plaintiff could execute on
the judgment. Id. Similarly, Geolar agreed to pursue its claim
against Homer Electric, and any failure to do so would be a
material breach of the agreement with Balboa. Thus Geolar has
suffered a loss it may pursue against Homer Electric.
Homer Electric waived its argument that the inclusion
of the Balboa claim was prejudicial as it informed the jury of
third party claims and thus encouraged the jury to increase the
damage award. Not only did Homer Electric not object to this
evidence at trial, Homer Electric's counsel was the one who
initially brought up the settlement agreement in cross-
examination of Lockyer. Counsel's argument that "admission of
the settlement documents improperly allowed the jury to consider
Geolar's attorneys' fees and costs, and Geolar's outstanding SBA
loan, in calculating damages"is groundless considering he moved
for admission of the documents. Thus the jury award for the
judgment in favor of Balboa should be affirmed.21
e. Conclusion22
We reverse the damage awards for lost profits for the
unfinished portion of the contract, for loss of the value of
Geolar as a going concern, and for the increased costs of
performance. The damage awards for the judgment due the bonding
company and retainage are affirmed.
III. CONCLUSION
An agent has a qualified privilege to interfere with a
contract between his principal and a third party as long as he is
predominantly motivated by a desire to protect his principal's
economic interest. Whether Gilbert was so motivated is a factual
question for a jury. Thus we REVERSE the trial court's grant of
summary judgment for Gilbert.
We AFFIRM the trial court's denial of Homer Electric's
motions for summary judgment, directed verdict, J.N.O.V. and a
new trial. The damages awarded for retainage and the judgment in
favor of the bonding company are AFFIRMED. The damages awarded
for lost profits for the unfinished portion of the contract, for
the loss of Geolar as an operating business, and for Geolar's
increased cost of performance are REVERSED. This case is
REMANDED for further proceedings consistent with this opinion.
_______________________________
1 Among other things, the contract required Gilbert to
"provide control and inspection of the project,"and "conduct on-
site inspections of work being performed to verify conformance to
the contract documents."
2 Geolar's bid ($389,000) was substantially lower than
both the second-lowest bid ($576,419) and Gilbert's estimate
($526,700).
3 The reason for cutting spruce into smaller sections was
to hasten the drying process of the wood, thereby hindering the
spread of bark beetle.
4 Geolar offered to cut the Lutz spruce for an additional
$185,000, but this offer was rejected. Even with this additional
cost, Geolar's contract price would still have been the lowest
bid.
5 "In order to be entitled to summary judgment,
the moving party must establish that there
are no genuine issues of material fact and
that it is entitled to judgment as a matter
of law." Whether summary judgment was
warranted is a question of law we will review
de novo. We will review the facts in the
light most favorable to the non-moving party.
Farmer v. State, 788 P.2d 43, 46 n.8 (Alaska 1990) (quoting
Bethel Utils. Corp. v. City of Bethel, 780 P.2d 1018, 1020
(Alaska 1989)) (citations omitted); see also Alaska R. Civ. P.
56(c).
6 See also 45 Am. Jur. Interference 27 (1969) ("It is
generally held that the question whether there was justification
for procuring a breach of contract or interfering with another's
employment is for the jury.").
7 Gilbert argued in the summary judgment context that
Geolar's claims against it should have been dismissed for the
same reasons that Homer Electric now argues. As the arguments
are identical, we address them only in the context of Homer
Electric's appeal.
8 Our role in reviewing a denial of a motion for a
directed verdict and a J.N.O.V. "is to determine whether the
evidence, when viewed in the light most favorable to the non-
moving party, is such that reasonable persons could not differ in
their judgment as to the facts." Mullen v. Christiansen, 642
P.2d 1345, 1348 (Alaska 1982).
"The grant or refusal of a motion for a new trial rests
in the sound discretion of the trial court, and we will not
disturb a trial court's decision on such a motion except in
exceptional circumstances to prevent a miscarriage of justice."
Buoy v. ERA Helicopters, Inc., 771 P.2d 439, 442 (Alaska 1989).
Finally, in reviewing a trial court's denial of a
summary judgment motion, we "determine whether there is a genuine
issue of material fact and whether the moving party deserves
judgment as a matter of law." Criterion Ins. Co. v. Velthouse,
751 P.2d 1, 2 (Alaska 1986).
9 Geolar presented evidence that (1) in previous
contracts "limbing" was interpreted to mean cutting off all
branches sticking up around the trunk of a felled tree (approx
imately 180 degrees around), while Geolar was required to cut 360
degrees around, necessitating the rolling over of each felled
tree; (2) in previous contracts felled trees that were to be left
parallel with the center line were left scattered, while Geolar
was forced to use a compass to measure the angle of the logs to
ensure compliance; (3) the prohibition of stacking logs in the
contract was not enforced at all in sections two and three but
was enforced against Geolar strictly; and (4) a requirement that
stumps be no more than six inches high was enforced strictly
against Geolar while stumps on sections two and three were left
anywhere from eighteen inches to four feet high.
10 Homer Electric also argues that it was error for the
trial court to admit evidence that at a pre-bid meeting, the
contractor who had worked on section two stated in response to a
question regarding the level of performance required that a
review of the work he completed on section two would demonstrate
the level of work required on section one. Homer Electric
objected to this testimony on the basis of hearsay and argues
that the trial court abused its discretion in admitting this
evidence. The court admitted this evidence as relevant to
Geolar's representatives' state of mind. As such, the evidence
was not hearsay because it was not admitted to prove the truth of
the matter asserted. Alaska R. Evid. 801(c). Homer Electric was
entitled to a limiting instruction explaining this to the jury.
Alaska R. Evid. 105. However it did not ask for such an
instruction.
11 In a pre-trial order, the trial judge ruled that Homer
Electric's failure to renegotiate the contract, refusal to submit
to arbitration, and refusal to adopt Geolar's definition of
"white spruce,"could not be construed as independent breaches of
contract. He did rule, however, that "evidence concerning those
actions may be admissible for plaintiff's claim for breach of the
obligation of good faith and fair dealing."
Homer Electric contends that it was error for the trial
court to allow the jury to consider these actions or inactions as
evidence of breach of good faith. Homer Electric does not
indicate what evidence, specifically, it is objecting to. Nor is
there any evidence or claim that Homer Electric objected to the
introduction of such evidence at trial. The issue is thus
waived. Alaska R. Evid. 103(a) ("Error may not be predicated
upon a ruling which admits . . . evidence unless a substantial
right of the party is affected; and . . . a timely objection
. . . appears of record.").
12 We judge the denial of Homer Electric's motion for
summary judgment on this issue by the evidence before the
superior court at the time of the motion. The trial court had
before it the affidavits of David Pennington, a professional
engineer, Larry Lockyer, a civil engineer for Geolar, and George
Thomas, vice-president and field supervisor for Geolar. The
facts in these three affidavits, taken in the light most
favorable to Geolar, create genuine issues of material fact as to
all three of Geolar's claims. Thus we affirm the denial of Homer
Electric's motion for summary judgment on this issue.
13 If the cost per unit of time is calculated accurately,
it should be the same for both the estimated time the contract
should have taken absent breach and for the total amount of time
actually taken. Therefore Geolar's method ((actual time -
expected time) x cost per unit of time) may be restated as actual
cost (actual time x cost per unit of time) minus expected cost
(expected time x cost per unit of time). Similarly, if we assume
that the price paid used in calculating damages under the total
cost method equals the expected cost of performance plus the
profit expected, the total cost method (actual cost + reasonable
profit - price paid) may be restated as actual cost plus
reasonable profit minus expected cost minus expected profit.
Assuming the expected profit was reasonable, Geolar's method and
the total cost method are mathematically equivalent.
14 In fact, we find Geolar's method of calculating its
loss of efficiency and delay claims to be less reliable than the
total cost method. Because Geolar's method relies on estimates
both of the expected cost of performing a given amount of work
and of the cost per additional unit of time, instead of the
actual cost and the bid amount, more room for disguised
mathematical error exists. This is evidenced by Geolar's own
presentation, which estimated damages at a minimum of $172,000,
although its actual total costs for the work performed were, at
most, $257,000. If Geolar's damage claim was calculated
correctly, then it only expected to spend $85,000 in order to
earn almost $186,000.
Because additional costs caused by a breach may be
awarded even if a project would not have been profitable to a
contractor had there been no breach, and because lost profit
claims in cases of this nature are closely scrutinized, (see
section II.B.2.b, infra) lost profits should be separately
identified in presenting damage claims to the jury. Similarly,
separately identifying such claims in the jury's verdict through
the use of a special verdict or interrogatories is often useful.
15 In Conam Alaska, 842 P.2d at 154-57, we upheld the
trial court's refusal to submit the plaintiff's claims for
damages from professional negligence to the jury. The plaintiff
had sought to rely on a total cost theory. After stating that
"the policy disfavoring the total cost approach is based on the
lack of proof of proximate cause,"we reviewed the evidence, and
concluded that "cause remained too speculative to submit the
issue of damages . . . to a jury." Id., at 155, 157. In Kandik
Constr., 795 P.2d at 799, we set aside a jury verdict based on
total cost evidence because the trial court erroneously "refused
to give the jury any specific instruction which would have
enabled the jury to limit the award of damages to those
proximately flowing from the . . . breach of contract."
16 On remand, the trial court is free to re-examine this
issue and attempt to identify another means by which Geolar could
reasonably be expected to prove its damages.
17 We recognize that, although Homer Electric consistently
has claimed that Geolar's damage calculations employed the total
cost method, it did not specifically request the additional
instructions we require. Instead, it argued that the total cost
method should be totally rejected. Because we hold that the
total cost method may be submitted to the jury under certain
limited circumstances, we must reject Homer Electric's argument.
Nevertheless, allowing a jury to utilize a version of the total
cost method without requiring it to first find that the four-part
test we adopted in Coluccio Constr. was met causes a substantial
injustice. Remand is therefore required.
We decline to consider whether the jury's award is
supportable as a "jury verdict"in the absence of instructions,
like those given in Coluccio Constr., 826 P.2d at 328, which
properly limit consideration of the total cost method.
18 It is doubtful in the present case whether either
Geolar's own profit history or the profits obtained by other
contractors would have been sufficient indicators of Geolar's
profits on the Homer Electric contract, given Geolar's
inexperience in jobs of this size and the difference in price
between Geolar's bid and the prices charged by the other
contractors.
19 The next lowest bid was $576,419 and the third lowest
bid was $930,000.
20 Homer Electric also argued that there was insufficient
evidence to support the award and that, alternatively, the award
should be reduced to reflect the fact that Balboa is to receive
payment out of one-third of Geolar's recovery. Neither of these
arguments has merit. The settlement agreement was introduced and
there was testimony on the issue. Homer Electric at no time
objected to the insufficiency of the evidence at trial. A
reduction in the award is also not required. Geolar is entitled
to that amount of damages which it owes Balboa, based on the
jury's determination that Homer Electric breached its contract
with Geolar.
21 Homer Electric raises several arguments in its reply
brief that it did not previously discuss. As these issues were
not addressed in either appellant's or appellee's briefs, they
are waived. Alaska R. App. P. 212(c)(3).
22 Homer Electric also argues that the $18,587 Geolar was
awarded for retainage by Homer Electric should be reduced by the
$10,651 Homer Electric paid to repair trails damaged by Geolar.
This argument is without merit. This amount was asserted as a
breach of contract in Homer Electric's counterclaim and was
specifically rejected by the jury.
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