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Dugan Construction Company, Inc. v. New Jersey Turnpike Authority

398 N.J. Super. 229, 941 A.2d 622 (App. Div. 2008)

CONTRACTS; REFORMATION —Mutual mistake, a unilateral mistake, fraud, and unconscionable conduct are all grounds for reformation of a contract, and this can happen when parties, at the time of contracting, are both mistaken about a huge discrepancy in the amount of work needed to be done under a unit pricing contract.

A construction company was awarded a contract by a state highway authority for the removal of contaminated soil and for remediation of groundwater at a highway rest stop. The contract stated that payment was only to be made for the amount of work that was authorized. The pre-bid material required bidders to examine the bid documents and the field conditions for any errors or ambiguities and to bring them to the attention of the authority’s chief engineer. Another provision of the contract required price renegotiation if the amount of removable materials increased by more than twenty-five percent.

The construction company hired a subcontractor to conduct the groundwater remediation. Both the construction company and the subcontractor became aware that the amount of wastewater to be removed and disposed of was roughly two hundred thousand gallons as opposed to the 55 gallons described in the bid documents. The chief engineer was never informed of the vast increase in the amount of wastewater to be removed and the job proceeded without any price renegotiation. The bid estimate for wastewater removal was under $3,000 based on the 55 gallon figure. At the end of the job, the construction company sued for $9.5 million for the disposal of the two hundred thousand gallons of wastewater. The claim was dismissed by the lower court on summary judgment. The lower court’s finding was based on the doctrine of patent ambiguity. That doctrine is intended to prevent contractors from exploiting ambiguities in public contracts for the purpose of claiming compensation based on a unit price.

On appeal, the Appellate Division agreed with the lower court’s finding that the doctrine of patent ambiguity could have been applicable to the matter, but found the conflict was more so the result of mistake. It found that the construction company’s failure to give notice of the increased amount of wastewater and its subsequent demand for payment of $9.5 million were unconscionable and violated the duty of good faith and fair dealing. The Court pointed out that mutual mistake, unilateral mistake, fraud, and unconscionable conduct were all grounds for reformation of a contract, concluding that the severe financial consequences of enforcing the contract at the stated rate would have been unconscionable and that a reformation of the contract was justified. The Court reformed the contract and remanded the matter to the lower court for an entry of payment to the construction company in the amount of $52,000. Prejudgment interest was not awarded to the construction company based the Court’s finding of inequitable conduct on its part.

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