Sutton Corporation vs. Metropolitan District Commission.

LYNCH, J. Sutton Corporation (Sutton) brought this action against the Metropolitan District Commission (MDC) in April, 1982, for damages relating to site preparation work done on the replacement of the General Lawrence Bridge (bridge) in Medford. [Note 1] A master was appointed under Mass. R. Civ. P. 53, as amended, 386 Mass. 1237 (1982), who issued a report containing extensive findings of fact and rulings of law. A Superior Court judge adopted the master's report in its entirety and awarded Sutton $255,504.61 plus $346,903.72 in interest. The MDC appealed from the judgment; Sutton cross appealed. The Appeals Court reversed the decision of the Superior Court. Sutton Corp. v. Metropolitan Dist. Comm'n, 38 Mass. App. Ct. 764 (1995). We granted Sutton's application for further appellate review and now affirm the decision of the Superior Court. [Note 2]

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A. Facts. We recite the significant facts as found by the master. [Note 3] Sutton bid for and was awarded a contract with the MDC to conduct site preparation as part of the replacement of the bridge. As part of its contract, Sutton was responsible for the installation of sand drains on the site of the bridge. Sutton contracted with Vibroflotation Foundation Company for the use of Vibroflotation's patented system of sand drain installation utilizing the "Dutch Bailor" method, which was one of the methods sanctioned in the contract specifications. [Note 4]

Sutton agreed to charge $3 per linear foot for a total of 141,362 linear feet of sand drains. Sutton estimated that it would take approximately twenty minutes to install each of 1,570 sand drains over a period of thirty-five working days for a total cost of $424,086.

Sutton began installing trial sand drains on April 13, 1981, and immediately encountered a multitude of problems. Use of the "Dutch Bailor" method, as designed, resulted in sand drains that did not meet contract specifications. In attempts to explain these problems, on-site observers hypothesized that either the clay material in one of the layers of the soil was overcompacted or the clay in another layer contained more gravel than anticipated. Everyone agreed that the conditions at the site were unusual and that the resulting sand drains were unacceptable. On April 24, 1981, after two weeks of

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failed attempts to improve the situation, Sutton stopped installing sand drains. [Note 5]

By a letter dated April 27, 1981, Sutton advised the MDC that it had encountered a "changed condition" within the scope of G. L. c. 30, s. 39N (1994 ed.), and requested permission to use a substitute system for compacting the soil. Sutton conducted some successful tests of the substitute "wick drain" system (which were paid for by the MDC), but ultimately the MDC declined to authorize its use. [Note 6] Eventually, Sutton resumed work using a highly-modified Dutch Bailor system. With the new system, Sutton was able to install sand drains acceptable to the MDC, but only at much greater cost and time than anticipated. [Note 7]

As a result of the sand drain installation, a significant amount of "spoils material" accumulated on the site. [Note 8] Because the spoils material did not meet contract specifications for ground cover, the MDC required Sutton either to mix it with other material to bring it within contract specifications or to move the material offsite anti replace it with soil that complied with the contract. Sutton asked instead to move the material to the preload area, another portion of the construction site. The MDC declined. Sutton then chose to remove the spoils material and replace it with "gravel borrow," for a total cost of $153,094.

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B. Changed condition. Sutton first argues that it is entitled to an equitable adjustment under the changed conditions provision of the contract. The Superior Court judge adopted the master's rulings that: (1) there was a "changed condition" within the meaning of G. L. c. 30, s. 39N; and (2) Sutton satisfied the procedural requirements for an equitable adjustment claim under the "changed conditions" provision of the contract. [Note 9] The MDC argues, first, that there was no changed condition. In the alternative it argues that, even if there was a changed condition, Sutton's claims are barred because they fall under the purview of the "extra work" provision of the contract (Article XVIII) and Sutton failed to follow the detailed procedural prerequisites for such a claim. [Note 10] It was on this latter ground that the Appeals Court reversed the deci-

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sion of the Superior Court and ruled in the MDC's favor. 38 Mass. App. Ct. at 760.

We begin with the general rule that "contractor's invocation of remedies available under either the contract or applicable statutes such as G. L. c. 30, s. 39N, must be addressed by the public agency in good faith. Glynn v. Gloucester, 9 Mass. App. Ct. [454, 460-461 (1980) (Glynn I)]. Glynn v. Gloucester, 21 Mass. App. Ct. 390, 397 (1986) (Glynn II). Here, Sutton followed the procedures set out in s. 39N (and incorporated in the contract as part of Article XIX); once Sutton discovered what it believed to be a changed condition, it ceased operations and notified the MDC by letter seeking an equitable adjustment. The MDC does not dispute that Sutton fulfilled the procedural prerequisites of s. 39N.

The master found that, in the course of the sand drain installation, Sutton had experienced a "Type II" changed condition, because "the site conditions [were] substantially in conformance with the contract documents, but the installation system specified did not perform as anticipated." [Note 11] The Ap-

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peals Court ruled that the master's conclusion was "incorrect as matter of law" because it relied on the failure of the installation system rather than the soil conditions, Sutton Corp. v. Metropolitan Dist. Comm'n, supra at 767 n.2, but went on to conclude that "Sutton experienced a changed condition under s. 39N, since the [master's] subsidiary findings support the conclusion that the actual soil conditions differed radically from those described in the contract plans." Id.

We agree that Sutton experienced a changed condition within the meaning of the statute, but for slightly different reasons than either the master or the Appeals Court. The Appeals Court correctly criticizes the master's report for improperly focusing on the performance of the equipment, not the actual physical conditions, as required by the statute. G. L. c. 30, s. 39N. But the Appeals Court improperly focuses on the description of the conditions set out in the contract plans. Id. Where the actual subsurface conditions differ substantially from those conditions "ordinarily encountered and generally recognized as inherent in work of the character provided for in the plans and contract documents," G. L. c. 30, s. 39N, there is a changed condition under the meaning of the statute, whether or not the conditions differ from the contract specifications. Thus, contrary to the MDC's assertions, the Federal "Type II" changed condition is explicitly part of Massachusetts law, as demonstrated by both the text of the statute and regulations promulgated pursuant to the statute. [Note 12]

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The master's subsidiary findings support the conclusion that subsurface conditions at the construction site differed substantially from those "ordinarily encountered and generally recognized as inherent', in the installation of sand drains by the methods specified in the contract. G. L. c. 30, s. 39N. The difference in the conditions caused "a change in the construction methods required for the performance of the work which result[ed] in an increase . . . in the cost of the work", see id., a conclusion also supported by the master's findings. [Note 13]

The Appeals Court concluded that Sutton forfeited its claim for an equitable adjustment by failing to follow the procedures for an extra work claim under Article XVIII of the contract. We disagree. Section 39N mandates that its provisions be included in public works construction contracts. It provides a specific procedure and remedy for the contractor encountering differing subsurface or latent physical conditions. Article XVIII, on the other hand, applies to "extra work", rather than work required by the contract. The unexpected soil condition encountered by Sutton required it to modify its construction methods and incur significant additional expense in order to complete the contractually required work. Such modifications and additional expense do not constitute "extra work" within the meaning of Article XVIII. Cf. Lawrence-Lynch Corp. v. Department of Envtl. Management, 392 Mass. 681, 682-683 (1984). [Note 14]

The cases cited by the MDC are not to the contrary. It is true that contractors seeking to recover payment in excess of the contract price must follow the procedures set out in the contract. See Lawrence-Lynch Corp. v. Department of Envtl. Management, supra at 684-685, 686; State Line Contractors, Inc. v. Commonwealth, 356 Mass. 306, 317-319 (1969); Marinucci Bros. & Co. v. Commonwealth, 354 Mass. 141, 144-145 (1968); Chiappisi v. Granger Contracting Co., 352 Mass. 174, 177-178 (1967); Lewis v. Commonwealth, 332 Mass. 4, 5-7 (1954); Glynn II, supra at 394-395; Skopek Bros. v. Web-

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ster Hous. Auth., 11 Mass. App. Ct. 947 (1981); D. Federico Co. v. Commonwealth, 11 Mass. App. Ct. 248, 252-253 (1981). In those cases, recovery was denied when the contractor failed to give timely notice of its claim to the public agency. Without such notice, the contracting authority was unable to monitor the additional expenses incurred by the contractor. Here, on the contrary, Sutton met the procedural requirements for a claim under s. 39N: it provided timely written notice of its claim to the MDC. As the master found, the MDC was aware throughout the project of Sutton's additional expense. [Note 15] Furthermore, there was no evidence or finding that the MDC was prejudiced in any way by the lack of an itemized statement of damages. Therefore, we conclude that the MDC's refusal to pay Sutton's additional sand drain installation expenses was improper. [Note 16]

C. Substitution. Sutton argues that the MDC should have approved the use of a substitute method of soil compaction under G. L. c. 30, s. 39M (b) (1994 ed.). [Note 17] The master ruled that "[t]he MDC should have permitted Sutton to substitute the Alidrain or wick system as an 'or equal, system pursuant to Mass. G. L. c. 30, s. 39M and the failure or refusal by the MDC to allow the substitution was a breach of its contract with Sutton."

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The master's ruling was incorrect. The wick drain system is not equivalent to the Dutch Bailor method for purposes of substitution under G. L. c. 30, s. 39M (b). Even if we assume that both systems are "materials" within the meaning of G. L. c. 30, s. 39M (e), a proposition not free from doubt, they. fail at least two of the three requirements for a substitute. First, the wick drain system is not "at least equal" to the Dutch Bailor method in either appearance or design. See G. L. c. 30, s. 39M (h) (1). Sand drains are waterjetted holes filled with sand; wick drains are porous plastic tubes. The two types of drains are installed by substantially different methods. In particular, the master found that the installation of sand drains displaces significantly more material than wick drain installation. Second, despite the master's contrary conclusion, the wick drain system does not meet the statutory requirement that it "conform[ ] substantially, even with deviations, to the detailed requirements for the item in the . . . specifications." G. L. c. 30, s. 39M (b) (3). The master found that the two systems were equal in "quality, durability, strength and design" and that the wick drain system "achieved the intent of the specifications" because it performed the same function as the jetted method. Any difference in appearance was "irrelevent", the master found, "because the system was installed below ground level and not visible." The master's ultimate conclusion on the substitution issue is clearly erroneous as a matter of law in light of the information in the record and mutually inconsistent with his subsidiary findings about the nature of the two drain systems. See Melrose Hous. Auth. v. New Hampshire Ins. Co., 402 Mass. 27, 34 (1988). The record does not support the master's finding that the two systems were equal in design. There are numerous subsidiary findings detailing the differences in design. In fact, the master's implied finding that the two systems differ in appearance itself suggests two different designs. Appearance is a factor set out h the statute and is not irrelevant, even where the system will not be visible once installed. See John F. Miller Co. v. George Fichera Constr. Corp., 7 Mass. App. Ct. 494, 496-497 (1979) (proposed substitute waste piping system in housing construction project was not equal, even though it complied with State plumbing code).

Finally, to the extent that the finding involves the interpretation of a statute, it is a conclusion of law and subject to in-

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dependent judicial review. Pollock v. Marshall, 391 Mass. 543, 555 (1984), and cases cited. The contract specifications detail two permissible methods of soil compaction: jetted sand drains and augered sand drains. Wick drains are not included. The differences between wick drains and the methods in the contract are significantly more than deviations; instead, the wick drain system is a "different animal" entirely. John F. Miller Co. v. George Fichera Constr. Corp., supra at 497.

The Appeals Court cases addressing this issue support our conclusion. In John F. Miller Co. v. George Fichera Constr. Corp. supra at 496-498, for example, a subcontractor attempted to substitute one waste piping system for another. The proposed system would have changed the size, number, and location of fittings, pipes, and vents and the materials out of which they were made. Id. at 496. The court agreed that the proposed system did not meet the requirements of s. 39M (b) and was, in fact, "a fairly fundamental change of the design and system prescribed by the specifications." Id. at 497. [Note 18] See also Acmat Corp. v. Daniel O'Connell & Sons, 17 Mass. App. Ct. 44, 48-49 (1983). Cf. E.A. Berman Co. v. Marlborough 11 Mass. App. Ct. 1009, 1010 (1981). Therefore, we conclude that, while the MDC owes Sutton an equitable adjustment under the "changed conditions" clause, the MDC did not breach its contract with Sutton by failing to approve the use of the substitute wick drain system.

D. Spoils Material. We now address the issues raised by Sutton in its cross appeal. The first issue involves Sutton's extra work claim for the costs of removing and replacing spoils material. The master ruled that, under the contract, the MDC had a right to refuse Sutton's request to move the spoils material to the preload area of the construction site. In addition, the master ruled, the MDC had the right to require Sut-

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ton to remove the spoils material and replace it with conforming material without extra cost to the MDC. [Note 19]

Sutton argues that it is entitled to the additional costs incurred in removing the spoils material because those costs were a direct result of the MDC's failure to allow Sutton to . use the substitute wick drain system, citing White Spot Constr. Corp. v. Jet Spray Cooler Inc. 344 Mass. 632, 635 (1962). Because we have concluded, supra, that the MDC did not breach the contract by failing to approve the wick drain proposal, Sutton is not entitled to damages arising from such a failure. Furthermore, the contract clearly provides that Sutton was not entitled to recover for the cost of removing and replacing the spoils material. See note 19, supra. [Note 20]

E. Damages calculation. The master found that the contract

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limited Sutton's damages to those directly related to the installation of the sand drains under the modified Dutch Bailor method. Consequently, he rejected claims for extended job overhead, delay, and consequential damages. In so doing, the master relied on provisions of the contract relating to payment for extra work, including Article XVIII. [Note 21] Although we have concluded that Article XVIII does not apply to a claim for an equitable adjustment under s. 39N, we do not thereby automatically reject the master's approach. Where, as here, there is no contractual or statutory provision for an appropriate measure of damages after the wrongful denial of an equitable adjustment, it is reasonable to refer to the contractual damages formula concerning payment for extra work. Indeed, the MDC's regulations for settling equitable adjustment claims contain a damages formula nearly identical to the one contained in the contract and used by the master. 350 Code Mass. Regs. s. 13.01 (7) (b) (1993). We therefore uphold the master's calculation of damages as reasonable and in accordance with the appropriate statutory and contractual provisions.

Sutton argues that it is entitled to a greater measure of damages than the contract provides because, by denying the claim for an equitable adjustment, the MDC allegedly com-

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misted a "true breach" of the contract. [Note 22] We disagree. A claim for an equitable adjustment under the changed conditions provision is a claim for relief under the contract, and is not a "true" breach of contract claim. United States v. Utah Constr. & Mining Co., 384 U.S. 394, 404-405 n.6 (1966). Cf. Glynn II, supra at 397-398 (suggesting that, where agency acts in bad faith, unjustified rejection of proper equitable adjustment claim might constitute true breach of contract [dictum]). Sutton's damages, therefore, are limited to those provided by the terms of the contract and the statutes governing public construction projects.

F. Interest. In its original appeal, the MDC protested the Superior Court's application of prejudgment interest at the rate of twelve per cent per annum to Sutton's award. We now examine whether the interest award was proper.

In 1993, the way that interest is calculated in judgments against the Commonwealth in contract actions was changed. G. L. c. 231, s. 6C, as amended through St. 1993, c. 110, s. 224, and s. 6I, inserted by St. 1993, c. 110, s. 225. Passed as outside sections of an appropriations bill such interest is now calculated by reference to the coupon issue yield equivalent of the price for United States treasury bills, capped at ten per cent. The sections were approved July 19, 1993, but, by St. 1993, c. 110, s. 390, were made effective July 1, 1993. The statute did not contain an emergency preamble and did not explicitly state whether it had retroactive effect. The Superior Court clerk entered final judgment in the case on August 16, 1993. Interest was calculated at twelve per cent per annum from the date the complaint was filed (April 20, 1982) until the date of the final judgment.

The MDC argues that the clerk should have applied the new, lower interest rate to the judgment. Sutton responds that, because it was subject to referendum, the amended inter-

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est statute did not take effect until ninety days after its enactment, citing art. 48, The Referendum, I, of the Amendments to the Constitution of the Commonwealth. Because final judgment entered before the effective date, Sutton argues, the amendment does not apply to this action.

We agree with Sutton that the 1993 amendment does not apply because it became effective after final judgment was entered. Laws which are subject to referendum do not take effect until ninety days after passage, unless they are designated as emergency laws. Art. 48, The Referendum, I. See Mirageas v. Massachusetts Bay Transp. Auth., 391 Mass. 815, 819-820 (1984). The MDC argues that this law is not subject to referendum because it "appropriates money for the current or ordinary expenses of the commonwealth," which is an excluded subject under the Constitution. Art. 48, The Referendum, III, s. 2. See Mitchell v. Secretary of Admin., 413 Mass. 330, 337 (1992); Powell v. Cole-Hersee Co., 26 Mass. App. Ct. 532, 535 (1988). In Mirageas v. Massachusetts Bay Transp. Auth., supra at 820, we assumed that, barring an effective emergency preamble, a statute changing the interest rate applied to judgments would be subject to referendum. The only difference between that case and the one before us is that the 1993 amendment was attached to an appropriations bill as an outside section. We have declined to determine the constitutionality of attaching provisions that do not appropriate funds (outside sections) to appropriation bills. Mitchell v. Secretary of Admin., supra, quoting Brookline v. The Governor, 407 Mass. 377, 382, 384 (1990). The practice, even if it is constitutional, would not be effective to insulate a legislative enactment from the operation of art. 48, when that enactment did not pertain to matters excluded from the referendum process by art. 48. Here, the provisions of the bill relating to interest in actions against the Commonwealth are not sufficiently related to appropriations to bring them within the excluded matters provision of art. 48. [Note 23] The clerk's calculation of interest was correct. [Note 24]

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G. Conclusion. Accordingly, we reject both the MDC's appeals and Sutton's cross appeals. We conclude that Sutton is entitled to recover the full amount of the Superior Court judgment. [Note 25]

Judgment affirmed.