Rai Industrial Fabricators, LLC v. Federal Insurance Company
5:16-cv-03674
N.D. Cal.Oct 23, 2018Background
- Sauer contracted with the U.S. Army to design/build a military training complex and subcontracted steel erection to Agate under a December 2014 Erection Subcontract.
- Subcontract contemplated 121 days for Agate’s work; Agate began March 12, 2015, but alleges it worked 422 days due to design changes and nonconforming steel supplied by Sauer.
- Agate claims Sauer directed extra work, withheld change orders and time extensions, supplied nonconforming fabricated pieces and disassembled stair components, and refused payment for extra work.
- Agate’s Second Amended Counterclaim (SAC) asserts breach of contract, delay/disruption, unjust enrichment, a claim labeled “Palpable Unilateral Mistake,” and breach of the implied covenant of good faith and fair dealing.
- Sauer moved to dismiss the “Palpable Unilateral Mistake” claim and the implied covenant claim under Rule 12(b)(6).
- The Court granted dismissal of the unilateral mistake claim (without leave to amend) and denied dismissal of the implied covenant claim; Sauer was ordered to answer by November 6, 2018.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of "Palpable Unilateral Mistake" claim / rescission | Agate alleges Sauer knew Agate’s bid was substantially lower and failed to notify Agate of an obvious mistake, so no contract formed | Sauer argues the claim is procedurally improper (no leave to add new claim) and "palpable unilateral mistake" is not a recognized standalone cause of action; Agate did not plead facts showing Agate made a mistake | Dismissed: claim improper as new claim and, on merits, not a cognizable independent theory; rescission elements not pleaded; dismissal without leave to amend |
| Breach of implied covenant of good faith and fair dealing | Sauer refused to issue change orders, denied time extensions, withheld payment and thereby frustrated Agate’s contractual benefits | Sauer contends the implied covenant claim merely duplicates breach of contract and must allege conduct beyond a contractual breach | Denied: SAC alleges conduct (refusal to approve change orders/time extensions, forcing Agate to finance extra work) that could show interference with Agate’s rights and expectations; claim is sufficiently pleaded to proceed |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard: plausible claim required)
- Donovan v. RRL Corp., 26 Cal.4th 261 (elements for rescission based on mistake)
- M.F. Kemper Constr. Co. v. City of Los Angeles, 37 Cal.2d 696 (discussion of unilateral mistake and rescission)
- Careau & Co. v. Security Pacific Business Credit, Inc., 222 Cal. App. 3d 1371 (implied covenant requires conduct beyond mere contract breach)
- Metcalf Const. Co., Inc. v. United States, 742 F.3d 984 (duty not to hinder and duty to cooperate as aspects of implied covenant)