Agreement Authorizing Party’s Own Engineer to Determine Substantial Compliance Found Binding on Adverse Party

When it comes to resolving construction disputes, it’s a bit like the “31 Flavors” of Baskin Robbins: There’s a flavor for nearly everyone, whether it’s mediation, arbitration, litigation, dispute resolution boards (DRBs), or the architect as the “initial decision maker” under the AIA form contracts. When deciding on a dispute resolution procedures, however, make sure it’s one you can live with, because once a dispute arises it is often too late to go back to the  proverbial drawing board to reconsider how you would like a dispute resolved as one party discovered in Coral Farms, L.P. v. Mahony, 63 Cal.App.5th 719 (2021).

The Coral Farms Case

In December 2010, a mudslide impacted three properties in San Juan Capistrano, California. One of the properties was owned by Coral Farms, L.P., another by Paul and Susan Mikos, and the third by Thomas and Sonya Mahony.

Between April 2011 and August 2012, a complaint and various cross-complaints were filed between the parties, in which each alleged that the others were responsible for the mudslide and resulting damage.

In October 2013, the parties settled with one another and, as part of the settlement, agreed to undertake certain protective measures to avoid the risk of further mudslides. Specifically, the settlement agreement signed by the parties provided that, upon completion of the agreed upon protective measures, each party was to obtain a written report from a design engineer or geologist certifying that the work performed was in conformance with what was agreed to:

Upon completion of the work, each party shall obtain a written report by the design engineer or geologist that the work is in substantial compliance with the Parties’ plan as set forth in Exhibits A, B and C, respectively, and will provide a copy to all other Parties within 30 days of completion.

Thereafter, pursuant to the terms of the settlement agreement, each party obtained a report from their respective design engineers and/or geologists stating that the work performed by each party was in substantial compliance with the plans they each agreed to.

However, in October 2017, Coral Farms and the Mikoses filed a complaint against the Mahonys for breach of the settlement agreement and false promise claiming that the work performed by the Mahonys was “dramatically and substantively different than what was required under the Settlement Agreement” and that when “the Mahonys entered into the Settlement Agreement, they had no intention of ever performing the obligations under that agreement.”

In June 2019, the parties presented their cases in a bench trial. In its statement of decision, the trial court found in favor of the Mahonys finding that “the myriad of issues raised by [Coral Farms] are irrelevant and immaterial to the legal basis for the decision.” 

Coral Farms appealed.

The Appeal

On appeal, the 4th District Court of Appeal explained that “[a]bsent a finding of bad faith, fraud, or gross negligence,” “when a contract designates a third person to certify performance under a contract, that third person’s decision is generally conclusive, and the parties may not look behind the decision, even if the third person was appointed by one of the parties.” 

And here, held the Court of Appeal, Coral Farms expressly agreed in the settlement agreement to accept the report of the Mahonys’ design engineer that the work performed by the Mahonys was in substantial compliance with their obligations under the settlement agreement.

In response to Coral Farms’ argument that, because the parties were adverse to one another and had in fact sued one another, that it would be “absurd” for Coral Farms to agree to the conclusiveness of the Mahony’s design engineer carte blanch, the Court of Appeals “respectfully” concluded that “if Coral Farms intended a different result, then perhaps it should have negotiated and/or drafted a different contract.”

The Court of Appeals also shot down Coral Farm’s argument that nowhere in the settlement agreement does it provide that a party’s design engineer or geologist’s report is “valid” or “conclusive” or “binding.” While true, explained the Court of Appeals, the import of the plain language of the settlement agreement, which gives conclusive effect to the design engineer’s report, is that the design engineer’s report is both conclusive and binding on the parties.  

Finally, the Court of Appeal disagreed with Coral Farms’ argument that the design engineer’s report was merely intended to act as a notice of completion and not as a certificate of compliance or even substantial compliance with the terms of the settlement agreement. Coral Farm’s subjective interpretation or intent , held the Court of Appeals, is irrelevant as well as contrary to the settlement agreement’s plain language.

Conclusion

To me, the Coral Farms case involved a pretty straightforward application of California’s well-established principles governing contract interpretation. In short, if a contract is clear and unambiguous, the contract will be interpreted according to its plain and ordinary meaning. But don’t let the simplicity of the Coral Farms decision fool you. I’ve seen many a construction contract, in particular, public works contracts, in which an agency’s “Engineer” is the final arbiter of a contractor’s compliance with the contract documents. Contractors signing such agreements should be aware of the Coral Farms decision because it may mean that, even if a contractor does not agree with the decision of an agency’s “Engineer,” it may just be interpreted as final.