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Federal Circuit Court of Appeals Holds Contractor Was Entitled To Rely On Soil Boring Logs and Design Features in Contract Documents, Even Though General Description of Site Stated that Boulders Were Present.
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Kit-San-Azusa v. United States,
1996 U.S. App. LEXIS 10370 (Fed. Cir. Ct. App., May 7, 1996).
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| Government contractor's differing site conditions claim based on the discovery of unanticipated boulders during excavation was upheld even though the Government's general description of the site stated that cobbles and boulders were present at site; the contractor properly considered the Government-provided soil borings, which did not indicate the presence of boulders, to be more probative than the Government's general description.
Kit-San-Azusa ("Contractor") was awarded a $15 million contract for the construction of an irrigation system. As part of the system, the Contractor was required to construct a pumping plant. The excavation for the pumping plant was to be performed by installing a cofferdam around the plant perimeter. When the Contractor began driving the required sheet piling for the cofferdam, it encountered boulders so large as to destroy the driving ends of the sheet piles. The Contractor even hit a boulder the size and shape of a Volkswagen.
The Government provided the Contractor with extensive data obtained by testing the geological nature of the pumping plant site. The geological survey performed by the Government included soil boring or drill logs which indicated the presence of cobbles (rocks 3 to 12 inches in diameter), but not boulders (rocks 12 inches or more in diameter). The Government also provided a general description of the pumping plant which stated that cobbles and boulders were present throughout the site.
The Court noted that to succeed on its differing site conditions claim, the Contractor had to establish that the conditions indicated in the contract differed materially from those encountered during contract performance. The Government argued that the Contractor failed to carry its burden because the Contractor was on notice of the presence of boulders as a result of the Government's express statements about boulders in the general description of the site.
The Court, however, rejected this argument and noted that although the Contractor had some notice of the presence of boulders based on the generalized description of the site, the Contractor was entitled to rely on the more specific soil borings or drill logs which showed no boulders. The Court also held, "We take [the Government's] insistence that sheet pile be used to construct the cofferdam as a reinforcement of the drill logs' conclusions that boulders and large amounts of cobbles would not be present in the soil to hinder the pile driving." |
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Kentucky and Ohio Courts Hold That Damages Arising From A Subcontractor's Defective Work Are Covered Under Prime Contractor's CGL Insurance Policy With Broad Form Endorsement.
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Grange Mutual Casualty Co. v. Robert Locker Builder, Inc.; Panzica Constr. Co. v. Ohio Ins. Casualty
1996 Ky. App. LEXIS 8 (Ky. Ct. App., Jan. 19, 1996); 1996 Ohio App. LEXIS 1975 (Ohio Ct. App., May 1
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| Provision in the standard broad form endorsement to comprehensive general liability insurance policy, which excludes coverage for the "work performed" by the insured general contractor, does not apply to the property damage was caused by a subcontractor's defective work.
Recently, courts in Kentucky and Ohio (and also Georgia, as noted in the May 1996 Construction Law Review) have held that property damage caused by a subcontractor's defective work are covered by a general contractor's comprehensive general liability ("CGL") insurance policy which contains a broad form endorsement.
In the Kentucky case, Robert Locker Builder, Inc. ("Contractor") built a house for Mr. and Mrs. Scates ("Owner") and subcontracted with Dave Smith Excavating ("Subcontractor") to dig and compact the footings. After the house was completed, certain walls cracked. An investigation revealed that the house had settled as a result of the consolidation of uncompacted fill at the footings. The Contractor notified Grange Mutual Casualty Company ("Insurer") that it believed the damage was covered under its comprehensive general liability policy, which included a broad form endorsement. The Insurer denied coverage because on the basis that the policy did not cover damage to "work performed" by the Contractor.
Similarly, in the Ohio case, Panzica Construction Co. ("Contractor") was hired as the general contractor to build several schools in Cleveland. The bulk of the work was performed by subcontractors, with the Contractor performing only some carpentry work. The school district made several claims against the Contractor for property damage to the schools. The Contractor's Insurers ultimately refused to provide a defense and denied coverage on the basis that coverage was excluded under a provision which states that the insurance does not cover damage "work performed" by the Contractor.
In both cases, the Contractor argued that because the property damage was caused by the defective work of a subcontractor, the exclusion did not apply. The courts agreed with the Contractors and were persuaded by the reasoning of Fireguard Sprinkler Systems v. Scottsdale Ins. Co., 864 F.2d 648 (9th Cir. 1988). The courts noted that although the basic policy excluded coverage for the work performed "by or on behalf of" the named insured, but the broad form endorsement excluded coverage only for the work performed "by" the named insured. The courts interpreted the phrase "or on behalf of" to refer to the work performed by the named insured's subcontractors. Because the broad form endorsement did not exclude coverage for damage to the work performed "on behalf of the" named insured, the courts held that damage to the work performed by subcontractors was covered under the liability policy. |
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Georgia Court Reverses Summary Judgment Against Contractor On Delay Damage Claim.
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APAC-Georgia, Inc. v. Department of Transportation,
1996 Ga. App. LEXIS 503 (Ga. Ct. App. May 13, 1996).
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Contract provision requiring notice for claims based on extra work did not require such notice for delay claims based on failure to coordinate; issue of fact existed as to whether separate notice requirement had been complied with and/or waived; provision precluding recovery of damages for design errors and omissions did not preclude recovery of damages for failure to coordinate response of multiple primes to design changes.
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| Plaintiff APAC-Georgia, Inc. ("APAC") was one of the prime contractors on a multiple prime project to construct Atlanta's "downtown connector." APAC brought various delay claims against the owner Department of Transportation ("DOT"). On summary judgment, the lower court held that APAC's claim was barred in part by reason of APAC's failure to comply with contractual notice provisions and that APAC could not recover damages from DOT for delays caused by design errors and omissions.
The Georgia Court of Appeals reversed and remanded. First, the court held that the lower court had misinterpreted a contractual clause which provided that APAC was precluded from claiming additional compensation for extra work unless it gave DOT notice and received written authorization before beginning the work. The appellate court held that this provision was intended to apply to compensation for unforeseen change orders, and did not preclude APAC's claim for delay damages based on DOT's alleged failure to coordinate the work. The court noted that under the trial court's interpretation of the clause, APAC's failure to give the required notice would result in a forfeiture of its claim for damages caused by DOT's breach of its duty to coordinate the project. The court found that forfeitures are disfavored and that ambiguities in a contract should be resolved against creating a forfeiture provision. Accordingly, the court held that the proper construction of the clause was to limit it to claims for extra work, because such an "alternate legitimate construction" would prevent forfeiture in accordance with Georgia's public policy. Thus, the clause was held not to bar APAC's claims.
Second, the court agreed with the lower court that a different provision of the contract required APAC to give written notice of delays as a prerequisite to any extension of the time for completion. However, the court found that disputed issues of fact required reversal of the lower court's holding that APAC had failed to comply with this notice provision. The appellate court noted there was evidence that APAC had written numerous letters to the DOT giving notice of delays and the need for extensions. The court rejected the DOT's argument that the failure of these letters to make specific mention of 90 individual items of work precluded APAC from raising claims based on those items. The court pointed out that the letters had informed DOT that specified delays could have a domino effect and extend the final completion date, that APAC had written monthly updates showing delays and the amounts of delays, that APAC had received extensions of time beyond the completion date, and that no liquidated damages had been assessed against APAC.
Holding that only reasonable compliance with the notice provision was required and that the "key issue" was whether the DOT had actual notice of the delays, the court found that APAC had raised questions of fact on these issues, as well as the issue of whether strict compliance with the provision had been waived. Accordingly, the appellate court reversed the grant of summary judgment.
Third and finally, the court agreed with the lower court's holding that under the terms of the contract, DOT could not be held responsible for delays caused by design errors and omissions. However, the court noted that such delays were to be distinguished from delays caused by DOT's failure properly to coordinate the work of the various primes that was required in order to respond to a design change, for which DOT could be held responsible. Accordingly, the court remanded for a determination of whether the specific delays alleged by APAC were compensable or not under the contract. |
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Texas Court Holds That Subcontractor Has No Independent Tort Cause Of Action For General Contractor's Breach of Duty of Good Faith And Fair Dealing.
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Electro Assocs., Inc. v. Harrop Constr. Co., Inc.,
908 S.W.2d 21 1995 Tex. App. LEXIS 1968 (Tex. Ct. App. August 24, 1995).
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Because the contractor-subcontractor relationship is not a "special relationship" giving rise to common law duty to act in good faith, subcontractor's suit against general contractor for breach of duty sounds in contract only, not in tort.
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| Defendant Harrop Construction Co., Inc. ("Harrop") was the general contractor for the construction of a "boot camp" probation facility for Harris County, Texas. Harrop subcontracted the electrical work for the project to plaintiff Electro Associates, Inc. ("Electro").
Harrop's contract with the County provided that, by court mandate, the facility was to be ready for occupancy on April 20, 1991. As the project progressed, the work was delayed for a variety of reasons, and it became apparent that construction could not be completed by the court-mandated deadline. Harrop reached a revised agreement with the County whereby liquidated damages would not be assessed if certain portions of the project were finished by April 30, 1991. The subcontractors, including Electro, worked overtime and met the new deadline. The County then gave Harrop an extension of time for completion of the remainder of the project, and Harrop passed this extension along to Electro.
At the end of the Project, Harrop and Electro could not reach a settlement of various backcharges for work Harrop claimed it had done on Electro's behalf. Harrop placed the funds due Electro in a separate account pending resolution of the dispute, and this suit followed, alleging breach of contract, quantum meruit, misapplication of construction trust funds, conversion, fraud and breach of the duty of good faith and fair dealing. After a jury trial, the trial court entered judgment in favor of Electro on all counts except the breach of the duty of good faith and fair dealing, which the court had refused to submit to the jury.
On appeal, Electro claimed that the trial court had erred by refusing to submit to the jury its tort claim for breach of the duty of good faith and fair dealing. The Texas Court of Appeals noted that a breach of the duty will give rise to a tort cause of action only where a "special relationship" exists between the parties to a contract. It held that "[a]bsent a 'special relationship`, the duty to act in good faith is contractual in nature, and its breach does not amount to an independent tort."
Electro argued that the subcontractor-contractor relationship is a "special relationship" because the subcontractor's contract prohibits it from dealing directly with the owner, therefore placing the subcontractor in an inferior bargaining position because it must rely on the contractor to represent its interests to the project owner.
The Texas Court of Appeals rejected Electro's argument that a subcontractor's dependence on the general creates a 'special relationship`, stating that "[a] business entity's trust of another and its reliance on the other's contractual promise to perform the contract do not, of themselves, engender a special relationship." Accordingly, the court upheld the trial court's refusal to submit the breach of the duty of good faith and fair dealing to the jury as a separate tort claim. It held that the relationship between Electro and Harrop was an "ordinary commercial contractual relationship."
In support of this holding, the court noted that while the Texas Supreme Court had recognized a special relationship in the context of a contract between an insurance company and its insured, Texas courts had held that the duty of good faith did not apply in the following contexts: employer-employee, employment-at-will, creditor-guarantor, lender-borrower, supplier-distributor, insurance company-third party claimant and franchisee-franchisor.
In separate, unpublished sections of the opinion, the court also held that Electro could not recover duplicative amounts awarded by the jury under different legal theories. The court first eliminated the damages awarded under Electro's quantum meruit theory as duplicative of the damages awarded under its contract theory. It then found that the damages awarded for conversion and misapplication of the funds Harrop had placed into a segregated account were also duplicative of the breach of contract award. The court found that the money in the segregated account was merely a part of the sum owed under the breach of contract claim.
Finally, the court found that Electro could not recover on its fraud claim because there was no evidence of "an injury proximately resulting from the alleged fraud apart from the damages flowing from the breach of contract." The court found that this absence of a separate injury also precluded the jury's punitive damage award on the fraud claim because "punitive damages are not recoverable for a breach of contract absent an independent tort with accompanying actual damages."
In the last part of its holding, the court excluded the jury's award of delay damages, finding that a no-damage-for-delay clause in Electro's contract limited its remedy to an extension of time. |
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Appellate Court of Illinois Holds Engineer's Decision Is Reviewable in Cases of Clear Mistake Notwithstanding Provision That Engineer's Decision is Final.
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R.W. Dunteman Company v. The Village of Lombard,
1996 Ill. App. LEXIS 375.
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| R.W. Dunteman Co. (Dunteman), entered into a construction contract with the Village of Lombard (Village), including the terms that Dunteman would remove and replace some road-way within the Village. The contract provided two different rates potentially applicable for the removal of pavement: a) pavement removal rate and b) special excavation rate, which was the lower rate of the two. A dispute arose over the rate at which Dunteman should be paid. The engineer in charge determined the lower rate applied.
The trial court held the determination of the engineer as to payment rate was not binding upon the parties, and that Dunteman was entitled to be paid at the higher rate.
On appeal, the Village contended that the trial court erred in determining that the engineer's decision was not binding.
The issue of the engineer's decision was examined by the appellate court. The parties had not disputed that article 105.01 of the Standard Specifications for Road and Bridge Construction, Illinois Dept of Transportation (1988) was incorporated into the contract. This article provided"[the] Engineer's decision shall be final and shall be a condition precedent to the right of the Contractor to receive money due to the Contractor under the contract."
The courts held that provisions which give the engineer authority to make final decisions are enforceable, if so intended by the parties, except where his actions are fraudulent, collusive, unreasonable, made in bad faith, or contain evident mistake. The appellate court held that there was a clear mistake by the engineer when he determined that the "special excavation" rate applied to the removal work because, although it applied generally to the work, the pavement removal rate was more specific in its application. |
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Federal Claims Court Holds Contractor Required to Proceed with Disputed Corrective Work under Disputes Clause; Contractor Not Entitled to Advance Judicial Determination of Propriety of Directive under Federal Courts Administration Act of 1992.
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Valley View Enterprises, Inc. v. United States,
35 Fed. Cl. 378 (1996).
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| On September 22,1992, the Department of the Army awarded plaintiff Valley View Enterprises, Inc. ("Valley View") a contract to replace seventeen steam lines located at the United States Military Academy in West Point, New York in connection with the installation of an underground, insulated heat distribution system. As of October 1993, Valley View had completed 95% of its work and the system was in use. By letter dated November 29, 1993, the contracting officer advised Valley View that an inspection revealed numerous deficiencies in welds as well as the existence of materials not in compliance with contract specifications. On April 12, 1994, the contracting officer advised Valley View that two independent inspections revealed that all twenty-three randomly selected welds failed to meet contract specifications. The letter further required Valley View to submit, within twenty days, a plan concerning how it intended to correct the deficiencies in its contract work.
In response, Valley View stated that it considered the contracting officer's letter to be a directive to "perform work clearly beyond the scope of [its] contract," and that such work would be encompassed by the Changes Clause of the contract. The letter also included a schedule with procedures for additional testing and replacement of the work in question. Lastly, the letter included a request for a contracting officer's final decision.
On July 12, 1994, Valley View filed a Complaint, citing the Contract Disputes Act for the Court's jurisdiction. After Valley View was suspended by the Government for "suspected fraud in the performance of [its] contract," it filed a claim with the ASBCA on January 30, 1995.
Valley View moved for summary judgment, seeking to have the Court determine that: 1) the contracting officer's failure to issue a decision constituted a deemed denial of Valley View's claim, 2) the contracting officer's direction to the Valley View on April 12, 1994 was a directive to perform out of scope work, 3) Valley View was not obligated to perform such work at no cost to the government, 4) Valley View was not obligated to perform the work except by a modification issued under the contract's Changes clause, and 5) that Valley View had complied with the contract.
In its opinion, the Court focused on a contractor's duty to proceed in government contracts. The Disputes Clause provided, "the Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the contracting officer." FAR 52-233-1(h). In explaining this duty, the Court cited the CDA's legislative history:
"the rights of Government contractors . . . are unique since they have been required by the language of the contract, for example, . . . the disputes article, to perform the work as directed by the Government without stopping to litigate. Thus, Government contractors must perform and then argue about the amount of the equitable adjustment at some later time."
The Court further noted that the duty to proceed exists regardless of whose interpretation of the contract is deemed to be ultimately correct, and the purpose of this covenant is to prevent an interruption of the work. Hence, the changes doctrine is fundamentally linked to the contractor's continued performance while the dispute is pending.
Applying these principles to the facts, the Court held that Valley View's attempt to link its obligation to perform to a change order to be fatal to its claim. The Court explained: "the Disputes clause requires that work be done despite a disagreement as to liability, leaving the determination of liability for a later date." Thus, allowing a plaintiff to demand a judicial determination prior to the work being performed would result in precisely the harm the duty to proceed is designed to prevent -- delay.
The Court also rejected Valley View's argument the Federal Courts Administration Act of 1992 (the "1992 Act) conferred jurisdiction over the dispute. Although the 1992 Act expanded the Court's jurisdiction to include nonmonetary claims, the Court found that Congress gave no intention of a desire to relinquish the Government's contractual right to have the contractor perform pending resolution of a dispute. |
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Federal Claims Court Holds That A Variance In Estimated Quantities Clause Affords A Contractor Relief Only To The Extent That The Contractor Can Prove An Increase In Unit Costs Due Solely To Increased Quantities.
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Thermocor, Inc. v. United States,
1996 U.S. Claims LEXIS 68 (Cl. Ct. 1996).
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| On October 16, 1989, the United States Army Corps of Engineers ("Corps") awarded ThermoCor, Inc. ("ThermoCor") a contract in the amount of $15,500,000 to excavate and treat soils contaminated with polychlorinated biphenyls ("PCB's") in Erie County, New York. In part, the contract provided for estimated quantities, from which ThermoCor submitted a unit price bid. The contract also provided a Variance in Estimated Quantity Clause ("VEQ"), which provided, in pertinent part:
If the quantity of a unit-priced item in this contract is an estimated quantity and the actual quantity of the unit-priced item varies more than 15 percent above or below the estimated quantity, an equitable adjustment in the contract price shall be made upon demand of either party. The equitable adjustment shall be based upon any increase or decrease in costs due solely to the variation above 115 percent or below 85 percent of the estimated quantity. 48 C.F.R. [[section]] 52.212-11 (1989) (emphasis supplied).
A year into the project, ThermoCor anticipated increases in quantities under two bid items, and sent a letter to the Corps requesting an equitable price adjustment pursuant to the VEQ clause. The Corps directed ThermoCor to continue its performance. After the two parties were unable to reach agreement on ThermoCor's request, ThermoCor filed its complaint with the Court of Federal Claims, requesting damages for additional time and expenses allegedly due to, inter alia: (1) differing site conditions; (2) changes, delays and additional requirements by the contracting officer; (3) misleading and defective contract specifications causing plaintiff to process waste water offsite and to pay royalties for technology required by the contract; and (4) the need to process and transport additional quantities of soil.
The motions before the Court addressed, inter alia, entitlement for performance of work on unit-priced bid items in excess of the quantities which were estimated in the contract. After laying out the appropriate standards of review for cross-motions for partial summary judgment, the Court examined the meaning of the VEQ clause.
ThermoCor contended that it was entitled to an equitable adjustment for all actual costs plus a reasonable profit for overruns in excess of the estimated quantity, regardless of whether the unit costs had changed. By contrast, the Corps asserted that an equitable adjustment was due only when the increase in quantity causes a change in unit cost. Thus, while the two parties acknowledged that they were locked into the contract unit price for quantities up to 115 percent of those estimated in the contract, they disagreed on the interpretation of the VEQ clauses' language "due solely to the variation." Citing the interpretations afforded the VEQ clause by different courts, ThermoCor then argued that the VEQ clause was ambiguous, and therefore it should be interpreted against the drafter, i.e., the government.
Relying upon a recent Federal Circuit case, Foley Co. v. United States, 26 Cl. Ct. 296 (1992), aff'd, 11 F.3d 1032 (Fed. Cir. 1993), the Court found the clause not to be ambiguous and held that an equitable adjustment under the VEQ clause requires proof of an actual increase or decrease in unit costs due solely to the quantity variation. In Foley, the Federal Circuit held that nothing in the clause's legislative history indicates that an equitable adjustment should be based on actual costs plus profit. To the contrary, an equitable adjustment is warranted only when there has been a showing of the realization of cost economies or increased costs attributable to the excess volume.
Applying this test to ThermoCor's claim, the Court found that ThermoCor would be entitled to an equitable adjustment if it could prove that the unit costs associated with the overrun were greater than the unit costs associated with the base contract quantity. However, because the Court did not have evidence of such material facts, it was precluded from entering summary judgment on the claim. |
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District of Columbia Court of Appeals Holds Prime Contractor Cannot Rely on "Pay-if-paid" Clause If it Fails to Protect Subcontractor's Interest in Settlement with General Contractor.
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Urban Masonry Corporation, Appellant, N&N Contractors, Inc., Appellee,
676 A.2d 26 (D.C. App. 1996)
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| In November 1990, Urban Masonry Corporation (Urban) subcontracted with N&N Contractors, Inc., (N&N) to install concrete panels on a major construction project in the District of Columbia. Urban was the subcontractor of the general contractor, Blake Construction Company, and N&N was a subcontractor of Urban. The panels were to be supplied by Blake.
Upon installation of the concrete panels it became obvious that the panels were smaller than anticipated, therefore, additional pieces would be needed to complete the project. Because this was beyond the scope of the original agreement, it was agreed between Urban and N&N, that Urban would pay additional compensation for installing extra panels. In fact, Urban's Project Manager sent a "speed memo" affirming the compensation, and Urban's President sent a letter acknowledging the request for compensation and promised to pass on the claim to the general contractor (Blake). Subsequently, Urban made a settlement with
Blake which did not include compensation for N&N's claims in November 1991.
Urban refused to pay N&N for the extra work, and N&N brought an action for breach of contract. The trial court granted N&N's motion for partial summary judgment on the issue of payment for the additional work, and at a later hearing the trial court awarded damages to N&N.
Urban challenged the partial summary judgment ruling. Urban contended that the grant of summary judgment was improper because the parties had differing interpretations of the clause defining N&N's work, and these contrary interpretations demonstrated that the provision was ambiguous, and that the trial courtshould not have considered extrinsic evidence (i.e., the "speed memo") when deciding a motion for summary judgment. However, the court rejected this contention, stating that parties' differing interpretations of the contract did not establish that an ambiguity existed, and that the trial court in deciding the summary judgment motion properly considered the "speed memo" when resolving the motion.
Finally, Urban challenged the jury award of interest on N&N's claim on the basis that the verdict ignored the "pay if paid" clause of the Urban/N&N subcontract. It maintained that it was relieved of its obligation to pay for the work because it never received payment from Blake.
The court rejected this contention because the condition precedent, if it was met, was satisfied in November 1991 when Urban settled with Blake. Moreover, if the settlement did not satisfy the condition precedent of the "pay-if-paid" clause, then the condition did not apply because Urban had breached the contract by failing to protect N&N's interest in the settlement agreement. |
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Supreme Court of Virginia Decides Issues Relating to Arbitrability and Res Judicata Effect of Arbitration Awards.
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Waterfront Marine Construction, Inc. v. North End 49ers Sandbridge Bulkhead Groups A, B and C,
251 Va. 417; 468 S.E.2d; 1996 Va.
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| In 1988, the North End 49ers Sandbridge Bulkhead Group (49ers) entered into a contract with Waterfront Marine Construction, Inc. (WMC) after accepting its bid to construct a bulkhead. The agreement included a provision providing for arbitration of any controversy or claim "arising out of or relating to the Contract or the breach thereof."
An engineering firm in 1989 inspected the installed bulkhead and pronounced it to be defective, whereupon the 49ers filed a demand for arbitration with the American Arbitration Association (AAA) seeking damages, and WMC filed a demand seeking to recover the unpaid balance of the construction price. In 1991, following a hearing, the AAA panel entered an award denying the 49ers' claim and granting the WMC's claim, conditional that WMC perform certain work within a certain time limit to the satisfaction of an independent engineer. Unable to agree on the independent engineer, WMC did not perform the specified work and later on that year severe storms hit the bulkhead, causing damage.
The 49ers filed a second demand with the AAA claiming it to be "a continuation of the previous arbitration case." WMC filed a motion in the trial court seeking a declaratory judgment that the 49ers' second demand was barred by collateral estoppel and res judicata. The court, however, referred the matter to arbitration.
The arbitration panel determined that the dispute was arbitrable and entered an award requiring the 49ers to pay the unpaid balance, and WMC to pay $491,795 for the cost of repair and replacement of the bulkhead. The 49ers filed a motion to confirm this award, and WMC filed a motion to vacate it. These motions were heard in 1995 and WMC's motion to vacate was denied.
On appeal, the Virginia Supreme Court held: (1) that the issue of arbitrability was to be determined by the court rather than the arbitrators; (2) that the claim based upon WMC's alleged noncompliance with the initial arbitration award was not arbitrable; and (3) that the claim for breach of warranty brought by the 49ers in the second proceeding was barred by the doctrine of res judicata notwithstanding that the damages may have increased between the first and second proceeding.
The Court held that, although the Uniform Arbitration Act permits parties to specify that the issue of arbitrability is to be determined by the arbitrators, in the absence of such a specification, the issue is to be determined judicially. Addressing the issue itself, therefore, the court observed that while the contract included a broad arbitration clause, providing for the arbitration of any controversy or claim "arising out of or relating to the contract or the breach thereof," it did not apply to a controversy relating solely to the terms of an arbitration award which did not require reference to the terms of the contract to resolve. Accordingly the claims relating to noncompliance with the award were not arbitrable.
Next the court was required to address issues relating to whether the 49ers claims for breach of warranty relating to the damage to the bulkhead were foreclosed by the doctrine of res judicata. Initially, the court considered whether the res judicata issue was to be determined in arbitration or judicially. The Court held that the res judicata issue was to be judicially determined, noting that the dispute over the plea of res judicata was related to the applicability of the elements of the common law doctrine, rather than a controversy "arising from" or "relating to the contract." The Court held that the doctrine of res judicata should apply to unconfirmed as well as judicially confirmed arbitration awards, and then held that the breach of warranty claim asserted in the second demand was no different than the breach of contract claim asserted in the first proceeding even though that damages suffered as a result of the alleged defects may have increased between the two proceedings. The court also noted that although the description of the defects differed in the two proceedings, the doctrine of res judicata applied to all claims which might have been brought, because doctrine restricts a party from splitting its cause of action. |
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United States Court of Appeals for the Fourth Circuit Holds Recovery on Contractor's Claim for Wrongful Termination Limited by Provisions of Termination for Convenience Clause; Contractor's Suit Dismissed Because Claim Was Subject to Contractually Prescribed Disputes Procedures.
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Hancock Electronics Corp. v. Washington Metropolitan Area Transit Authority,
81 F.3d 451 (4th Cir. 1996).
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| In the spring of 1994, the Washington Metropolitan Area Transit Authority ("WMATA") awarded Hancock Electronics Corporation ("Hancock") a contract to provide replacement braking systems for approximately 300 rail cars. The contract required Hancock to design, manufacture and install the braking systems. The contract further required Hancock to demonstrate its contract performance to WMATA and provide certain technical data about the braking systems.
Because it apparently did not possess the ability to monitor the testing of the brake systems' software, WMATA subcontracted the testing function to a third party. In addition, as part of the testing process, WMATA requested Hancock to provide certain technical documentation, including the brake systems' software. WMATA sought Hancock's permission to provide the technical data to the third party responsible for testing, who had agreed to enter into a lifetime nondisclosure agreement. Hancock refused.
Citing the proprietary nature of its software, Hancock argued that WMATA's insistence on the software constituted a breach of contract. Hancock further claimed that WMATA's breach prevented and excused Hancock's further performance of the contract, and therefore, that Hancock was treating the contract as terminated. Hancock sued WMATA for in excess of $2 million in damages including loss of anticipated profits.
In response, WMATA informed Hancock that it was terminating the contract pursuant to the contract's Default Clause, citing Hancock's cancellation and failure to deliver the technical information. Further, the contracting officer stated that his decision was a "`Final Decision . . . appealable under the Disputes Clause of the contract.'" WMATA also filed a motion to dismiss Hancock's complaint, alleging that Hancock had not exhausted its contractually prescribed administrative remedies. The district court granted WMATA's motion to dismiss, concluding that even if WMATA had breached its contract, the "termination for convenience" clause limited WMATA's liability and required Hancock to avail itself of the specified administrative remedies. Hancock appealed.
The Court of Appeals addressed three clauses to the contract between Hancock and WMATA. First, the Disputes Clause provided "except as otherwise provided . . . any dispute concerning a question of fact arising under This Contract which is not disposed of by agreement shall be decided by the Contracting Officer." The Disputes Clause further provided Hancock the right to appeal the Contracting Officer's final decision to WMATA's Board of Directors or the Army Corps of Engineers Board of Contract Appeals.
Second, the Default Clause permitted WMATA to declare the contractor in default, and set forth the applicable procedures. Significantly, if the parties were unable to resolve their differences, the disagreement would constitute a "dispute concerning a question of fact within the meaning of the Disputes article of this Contract."
Third, the Termination for Convenience Clause provided WMATA the option of terminating the contract "whenever the Contracting Officer shall determine that such termination is in the best interest of [WMATA]." The contractor was to be compensated for already rendered performance on a quantum meruit basis. Again, disputes about a termination for convenience were governed by the Disputes Clause.
Citing "settled law," the Court of Appeals held that even if WMATA breached or wrongfully terminated Hancock's contract, such an event constituted a "constructive termination" and was governed by the Termination for Convenience Clause. Thus, Hancock would be limited to a quantum meruit recovery, and not the anticipated profits sought in its complaint.
Seeking to invoke an exception to above rule, Hancock argued that WMATA's testing requirements constituted a "cardinal change" to the contract. The Court noted that a cardinal change occurs when "the government demands a contractual alteration so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for," and allows the contractor to sue for damages in court.
The Court held that WMATA's demands, even if outside the scope of the contract, did not effect a cardinal change to the contract so as to nullify the contract's dispute resolution mechanism. The Court reasoned that WMATA was entitled to test the replacement brakes, including the electronic aspects. Reduced to its basics, the Court viewed the dispute as whether Hancock was required to release the software that it had already created. Whether the software fell within the contract's requirement of the production of certain technical data was unclear; however, the Court held that WMATA's demand did not amount to a cardinal change to the contract. |
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