Six Companies of Cal. v. Joint Highway Dist. No. 13 of Cal.

Background

A construction firm hired by a public highway district stopped work and said the owner breached the contract, then sought payment for materials and labor. The district counterclaimed for damages and relied on a contract clause that charged $500 per working day for delay in completion. The trial court awarded the district damages, including $142,000 as liquidated damages, and the federal appeals court affirmed that award.

Reasoning

The main question was whether California law allows an owner to collect a fixed daily penalty for delay after a contractor has unjustifiably abandoned the work. The Court examined an earlier California intermediate appellate decision (Sinnott v. Schumacher) that held a liquidated-damages clause does not apply when the contractor abandons the contract without sufficient cause. The Supreme Court concluded that the federal appeals court should have followed the state appellate court’s ruling, found no controlling contrary decision from the state’s highest court, and treated the Sinnott ruling as the state law to be applied.

Real world impact

The Court reversed the federal appeals court’s judgment and sent the case back for further proceedings consistent with California law. Practically, owners may be prevented from collecting agreed daily penalties for delay that occur after a contractor unjustifiably quits. Federal courts must respect state appellate court statements of state law when no contrary state high-court decision exists.