Six Companies of California v. Joint Highway District No. 13

Background

A California contractor, Six Companies of California, stopped work and sought to rescind a highway-construction contract after alleging the owner breached the agreement. The owner, Joint Highway District No. 13, answered and filed a cross-complaint claiming damages, including $142,000 in liquidated damages at $500 per day for delay. The trial court ruled for the owner, and the federal Circuit Court of Appeals affirmed. The contractor argued that under California law a liquidated damages clause should not apply to delays that happen after the contractor abandons the job.

Reasoning

The narrow question the Court reviewed was whether California law allows an owner to collect liquidated damages for delay that occurs after the contractor unjustifiably abandons the work. The Supreme Court examined an earlier California intermediate appellate decision, Sinnott v. Schumacher, which held the liquidated damage clause inapplicable after abandonment, and found no contrary ruling by the California Supreme Court. The Court explained that the federal appeals court should have followed the state appellate court’s statement of California law and therefore erred in applying the contract’s liquidated damage clause to post-abandonment delay.

Real world impact

The Supreme Court reversed the federal appellate judgment and sent the case back for further proceedings consistent with the state-law rule. The decision limits owners’ ability in California to collect contractual daily penalties for delays that come after an unjustified abandonment. It also reinforces that federal courts must follow state appellate courts’ interpretations of state law when those interpretations stand unchallenged by the state’s highest court.