## Facts

- A prime contractor entered a federal construction project and subcontracted part of the work to a subcontractor for a price later adjusted to $235,137.
- The subcontractor began performance but materially breached after partial completion.
- The trial court found the subcontractor conferred goods and services worth $204,845.26 and had been paid $114,758.98.
- To finish the subcontractor’s scope, the prime contractor spent $126,673.56.
- The prime contractor’s total outlay (payments plus completion costs) was $241,432.54, exceeding the subcontract price by $6,295.54, plus prejudgment interest.
- Despite finding the prime contractor suffered these damages, the trial court awarded the breaching subcontractor a net recovery of $82,321.86 plus attorneys’ fees under a restitution/quasi-contract theory.
- The prime contractor and its surety appealed.

## Issues

1. Whether a subcontractor who materially breached may recover in restitution/quantum meruit from the non-breaching prime contractor when the recovery would require the prime contractor to pay more than the subcontract price.
2. Whether a court may award a net monetary recovery and attorneys’ fees to a breaching subcontractor where the result leaves the non-breaching contractor worse off than full performance would have.

## Decision

- The appellate court reversed.
- It held the trial court erred by awarding the breaching subcontractor restitution that effectively required the non-breaching contractor to pay more than the agreed contract price.
- The court rejected a remedy that compelled the innocent party to make additional payments to the party that breached, including attorneys’ fees.
- Under the court’s approach, the non-breaching contractor is entitled to its proven excess completion damages (plus prejudgment interest), and the breaching subcontractor is not entitled to additional payment beyond amounts already received.

## Legal Principles

- A material breacher generally cannot enforce the contract to obtain expectation-based recovery against the innocent party.
- Restitution/quantum meruit may be available to a breaching party only within strict limits that prevent the innocent party from paying more than the contract price.
- Restitution cannot be used to place the non-breaching party in a worse position than it would have occupied had the contract been fully performed.
- A remedy that improves the breaching party’s position or penalizes the innocent party conflicts with core contract principles and is not permitted.

## Conclusion

The court reversed an award that granted a breaching subcontractor restitution and attorneys’ fees where the result forced the non-breaching contractor to pay more than the subcontract price; restitution for a breacher, if available at all, is capped so the innocent party is not worse off than full performance.


United States ex rel. Palmer Construction, Inc. v. Cal State Electric, Inc., 940 F.2d 1260 (9th Cir. 1991)