APPEAL FROM THE CIRCUIT COURT OF THE SIXTH JUDICIAL CIRCUIT STANLEY COUNTY, SOUTH DAKOTA HONORABLE KATHLEEN F. TRANDAHL Judge
The opinion of the court was delivered by: Konenkamp, Justice
[¶1.] In this breach of contract action against the South Dakota Department of Transportation (DOT), the circuit court ruled in favor of Morris, Inc. after a nine- day bench trial. The court awarded Morris $1,528,887 in damages, with $771,238.30 in prejudgment interest, and $20,035.47 in disbursements. The DOT appeals, challenging the basis for the court's conclusion that it breached any contractual obligations to Morris. The DOT further disputes the calculation of the court's damages award, and prejudgment interest. On notice of review, Morris asserts that the court erred when it failed to include expert witness fees as disbursements.
[¶2.] In October 2004, Border States Paving, Inc. was awarded the prime contract by the DOT for a road project on U.S. Highway 83 in Lyman and Stanley Counties, South Dakota. The total contract was for $13,614,621.22. On November 24, 2004, Border States entered into a subcontract with Morris, Inc. for aggregates and work on the project for $2,923,317.99. Three asphalt mixes were to be used: base course, Superpave, and Class S. Border States scheduled the project so that all asphalt paving operations would be completed by September 15, 2005, which coincided with the end of the Class S seasonal deadline.
[¶3.] The relationship between Border States and the DOT was circumscribed by multiple documents. These documents, among other things, prescribed the parties' obligations with respect to the aggregates. Thus, although Morris subcontracted to produce and procure for Border States the necessary aggregates, Border States, as the prime contractor, was the responsible party under the contract. The subcontract agreement provided that Morris's work was subject to inspection and acceptance by the DOT. Morris's actions are primarily at issue here.*fn1
[¶4.] On December 9, 2004, the DOT held a preconstruction meeting, at which Morris informed the DOT that it intended to provide materials for the project from the Durkin/LBT Pit, Mahutga Pit, and Richards Pit. And all Class S materials would come from the Durkin Pit. Morris was aware that regardless of where the materials came from, those materials had to meet the requirements of the controlling agreements.
[¶5.] As to the Class S materials, a major controlling document was the Standard Specifications for Roads and Bridges (Standard Specifications).
Specification 325 provided that all Class S materials "shall conform to Section 320.2." Section 320.2, entitled "Materials," included a subheading, "Aggregates," which must conform to Section 880. Standard Specifications 320.2B. Specification 880.2A provided a table listing what requirements the Class S mineral aggregate must conform to in regard to certain tests. For the sodium sulfate soundness test, the table set a maximum limit of 12% for both the plus and minus four. Specification 880.3 provided that a sodium sulfate soundness test would be conducted under the SD220, five cycles. For lightweight particles, the table allowed a maximum of one percent loss for the plus and minus four. Id. at 880.2A. Finally, the table provided the required mineral aggregate gradations. But the parties' contract contained a specific provision overriding Specification 880.2A as it related to gradations. See Contract Plan Sheet F-3.
[¶6.] On March 11, 2005, Morris started crushing for the Superpave paving.
Morris knew the contract required it to submit the proposed Superpave mix design at least fifteen working days before the scheduled paving start date. Morris and Border States were also aware that the contractor (Border States) must perform certain tests and submit certain test results when providing the DOT with materials to test. See Standard Specification 320(C)(2). Border States did not have its own testing lab, and therefore, hired Aaron Swan & Associates (Swan) to do all the necessary testing for the Superpave and Class S paving on the project. On June 13, 2005, Morris submitted a mix design to the DOT for the Superpave. Morris reported a sodium sulfate soundness result from Swan at 6.6% on the plus four and 6.1% on the minus four (passing, as the DOT sets a maximum of 15% on the plus and minus four). The DOT then tested the materials using its SD220 testing protocol and issued the results of its sodium sulfate soundness test on June 16, 2005. The submitted Superpave materials passed with a 15% on the plus four and 12% on the minus four.
[¶7.] While the Superpave material passed the DOT's test, Morris was concerned with the results because the plus four was borderline failing, and the DOT runs sodium sulfate soundness testing on every 50,000 tons of Superpave.
Morris planned on using similar materials for the Class S paving, which had a lower soundness requirement of 12% on the plus four. As a result of these concerns, Morris communicated with DOT personnel and questioned the DOT's sodium sulfate soundness testing. According to Morris, this occurred around June 16, 2005, but the DOT contended that Morris did not complain until July 2005. Nonetheless, the DOT, Milt Morris, Chad Hicks (Morris's in-house testing person), and Howard Schill of Swan met and discussed Morris's concerns. They agreed to conduct a round robin sulfate soundness test on the plus four aggregates, using split samples from the Durkin Pit. They also agreed to depart from the SD220 and run the soundness test with a redrain/repour method. See Bowes Const., Inc. v. S.D. Dept. of Transp., 2010 S.D. 99, ¶¶ 19-24, 793 N.W.2d 36, 43-44 (discussing the SD220 and the double pour/repour method).
[¶8.] Sometime after July 22, 2005, Hicks, Swan, and the DOT ran a sodium sulfate soundness test on the plus four materials submitted by Morris as part of the agreed-upon round robin. On August 2, 2005, Jim Costello of the DOT orally advised Hicks that the Class S material passed the plus four soundness test. This, as it turned out, was incorrect. The materials actually failed with a 13.67% loss on the plus four. Costello testified that he told Hicks the results without first submitting them to the Central Lab, although he knew that sodium sulfate soundness test results were supposed to be reported to the DOT area engineer at the Central Lab. Costello explained that he told Hicks the results because he was trying to help speed up the process, knowing that the Class S submissions were behind schedule.
[¶9.] The error was ultimately discovered by Rick Rowen of the DOT on August 10, 2005. Costello was on vacation and Rowen was in charge of testing. Rowen reviewed the calculations from the DOT and Swan on the materials submitted for the round robin and discovered the error. After recalculating the soundness loss, the DOT's sodium sulfate test result showed a failing loss at 13.67%, Swan a failing result at 14.36%, and Morris's in-house test result passing at an 8.88% loss. Rowen reported the calculation error to his supervisor, Tom Grannes, who reported it to his supervisor, Joe Feller. Border States and Morris, however, were not informed of the error and ultimate failed test until August 16 or 18, 2005.
[¶10.] After informing Border States and Morris of the failed soundness test, the DOT directed Morris to submit a new mix design. On August 18, 2005, Morris submitted a new mix design, which contained 3/8" crushed chips from the Richards pit, and new bin splits to run a new sodium sulfate soundness test for the Class S mix design. The DOT worked through the weekend to run the necessary tests. The aggregates and bin splits failed with an 18% loss on the plus four and 13% loss on the minus four.
[¶11.] After its August 18 failed test, Morris did not submit any additional materials to the DOT for some time. Instead, Border States worked directly with the DOT. On August 23 and 24, Border States submitted new Class S bin splits, which included 5% Spencer quarry rock and 3/8" Richards chips from Morris's August 18th submission. On August 26, 2005, the DOT issued Border States a completed mix design, using the materials and bin splits submitted to the DOT by Border States on August 24, 2005. A completed mix design means, among other things, that the aggregate materials passed the DOT's sodium sulfate soundness testing. The DOT was able to hand calculate the sodium sulfate soundness test by using soundness results of prior DOT testing because Border States had submitted materials (Spencer quarry rock) familiar to the DOT on August 23 and 24.
[¶12.] On August 27, 2005, Border States prepared for Class S paving. But between August 27 and August 29, 2005, Border States failed the first six asphalt plant calibrations. While the materials passed the DOT's sodium sulfate soundness testing, there are other tests the DOT runs. Border States failed the asphalt plant calibrations because the composite was not within specifications for lightweight particles and gradations. Therefore, on August 29, 2005, Border States, with the assistance of Morris, submitted another set of Class S bin splits to the DOT. These submissions eliminated certain Durkin material because of excessive lightweight particles. That same day the DOT issued Border States a completed mix design using the materials and bin splits submitted. On August 30, 2005, however, Border States failed its asphalt plant calibration because the aggregate composite was not within lightweight particle and gradation requirements. On August 30, 2005, Border States submitted to the DOT two more sets of Class S bin splits, which further reduced the amount of Durkin material and increased the amount of 3/8" Richards chips. On August 30 and 31, 2005, Border States failed the next three plant calibration tests because of lightweight particles and gradation.
[¶13.] Border States continued to submit materials to the DOT in an attempt to meet its September 15, 2005 deadline. On September 1, 2005, Border States submitted two more sets of Class S bin splits, which further reduced the amount of Durkin material because of excessive lightweight particles. On September 2, 2005, the DOT submitted a completed mix design to Border States, using the materials submitted and suggested by Border States. That same day, however, Border States and Morris submitted new proposed bin splits to the DOT, which proposed 7% Spencer quarry rock and the remainder Morris materials. Ultimately, Border States could not use the mix design proposed by Morris in the field because it called for 7% Durkin dust, and the Durkin dust would not work.
[¶14.] On September 2, 2005, Border States decided to leave the project and come back in 2006, because there was not enough time to complete the Class S paving by the September 15, 2005 seasonal deadline. Border States resumed Class S paving on June 14, 2006 and satisfactorily completed the project. In 2006, Morris provided the necessary aggregates and passed all of the DOT's required testing. Upon completion of the project, the DOT paid Border States in full. Border States withheld $756,651.68 from Morris for costs associated with the project in 2005, because it believed Morris defaulted in its contractual obligations under the subcontract.
[¶15.] Through Border States, Morris brought a claim against the DOT in accord with Specification 5.17.*fn2 Under that specification, the DOT requires, among other things, that the contractor give the engineer written notice of a claim for additional compensation. The DOT denied the claim, after which Morris brought suit in circuit court against the DOT. Morris alleged that the DOT "breached its express and implied contractual obligations owed to Morris[.]" It also claimed that the DOT breached its implied contractual obligation of good faith and fair dealing. Morris asserted that the DOT acted arbitrarily, capriciously, and abused its discretion in its application of the sodium sulfate soundness test procedures and ...