## Facts

- Owners and subdividers hired a licensed grading and engineering contractor to perform excavation/grading and later street improvements (paving, curbs, gutters) for a subdivision of 89 lots.
- The agreement used separate pricing structures: a lump-sum price for grading/excavation (Exhibit A) and unit prices for street-improvement items (Exhibit B), with Exhibit B excluding grading/excavation.
- The owners required separate performance bonds: one covering the grading work (matching the grading lump sum) and a later bond for the street-improvement work.
- The contractor completed about 98% of the grading work; the remaining grading could be completed for \$1,470.
- Plan changes by the owners required additional grading work; the trial court found this extra work was authorized and reasonably worth \$7,200.
- A payment dispute arose over the \$7,200 for the extra grading; the contractor stopped work after the owners refused to pay.
- The owners promptly hired others to perform the street-improvement phase and sued the contractor and the surety for breach.
- The contractor cross-complained for breach and compensation for work performed.
- The trial court found the owners breached by failing to pay amounts due for grading and by assigning the street-improvement work to others, excusing further performance by the contractor.
- Judgment was entered against the owners on their complaint; the contractor recovered \$17,836.50 in damages for grading work and \$4,000 in contractual attorney’s fees, but no lost profits for the unperformed street-improvement work.

## Issues

1. Whether the contract was divisible into separate grading and street-improvement obligations.
2. Whether the doctrine of substantial performance applied to permit recovery for the grading phase despite noncompletion of the street-improvement phase.
3. Whether the owners’ nonpayment and reassignment of the street work excused the contractor’s further performance and defeated the owners’ claim against the contractor and surety.

## Decision

- The California Supreme Court affirmed the judgment for the contractor and the surety.
- The Court held the contract was divisible between grading and street improvements.
- The Court held the contractor substantially performed the grading phase and could recover for that phase, including the reasonable value of authorized extra grading caused by plan changes.
- The Court accepted the trial court’s finding that the owners’ breach excused the contractor’s noncompletion of the street-improvement phase.
- The Court left intact the limitation of recovery to grading-related damages and contractual attorney’s fees, denying recovery for profits on the unperformed street-improvement work.

## Legal Principles

- A construction contract may be divisible when the parties’ arrangement separates work into distinct phases with separate pricing and related security, indicating an intent to treat performance and payment for each phase independently.
- Under substantial performance, a party who has essentially completed a divisible portion may recover compensation for that portion, with appropriate allowance for incomplete items.
- When an owner materially breaches by withholding payments due and transferring contracted work to others, the contractor’s further performance may be excused, and the contractor may still recover for work properly performed.
- Recovery may be confined to the substantially performed portion of a divisible contract; anticipated profits for an unperformed portion may be denied where that portion was not completed.

## Conclusion

The court treated the grading and street-improvement obligations as severable, applied substantial performance to the largely completed grading phase, and upheld the contractor’s recovery (and the surety’s nonliability on the owners’ claim) because the owners’ nonpayment and reassignment of work excused further performance.


Lowy v. United Pac. Ins. Co., 67 Cal. 2d 87 (Cal. 1967)