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US District Court in Texas Denies Summary Judgment to Contractor on Theory That Owner Waived Defect Claim, But Enforces Limitation of Consequential Damages
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South Texas Electric Cooperative v. Dresser-Rand Company
2007 U.S. Dist. Lexis 66345 (S.D. Tex. Sept. 7, 2007)
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| Plaintiff, South Texas Electric Cooperative (“STEC”) contracted with Defendant, Dresser-Rand Company (“Dresser”) for the design and construction of a steam turbine unit. As part of the contract, Dresser was required to provide equipment, materials and field services free from defects in material and workmanship. Moreover, the equipment had to meet certain performance specifications.
When the steam turbine unit began operation, it immediately experienced excessive vibrations above specified levels. STEC contacted Dresser regarding the problems, seeking analysis and repair. Discussions between the parties lasted several years. STEC became dissatisfied that Dresser did not promptly fix the problem or provide an analytical report. As a result, STEC, with Dressers knowledge, retained another company to conduct a vibration analysis. STEC sent the vibration analysis report to Dresser, seeking comment and an action plan to remedy the problem. After two months, Dresser submitted an action plan to resolve the vibration issue. However, the problems were not corrected. Nevertheless, the parties proceeded to closeout the contract requirements. Almost a year later, Dresser sent STEC an end of warranty letter indicating when the warranty would expire as well as an email stating that Dresser was aware that there were still several outstanding issues that Dresser was addressing under the warranty. However, although Dresser had not corrected the problems, STEC made final payment.
More time passed without resolution of the problems. Approximately three years after the problems arose, STEC filed suit. Dresser moved for summary judgment on several grounds, which included contentions that (1) STEC waived its breach of contract and warranty claims because it accepted the steam turbine by making final payment, (2) STEC waived its claims by failing to demand repair or reimbursement for remedying the defects during the warranty, and (3) STEC did not comply with the contract’s notice requirements.
Examining the contract language, the Court determined that STEC did not intentionally or implicitly waive its claims by making final payment. Both the contract and the parties’ communications indicated that final payment did not constitute a waiver of claims with respect to defects. Likewise, in analyzing the issue of a potential waiver by failure to demand repair during the warranty period, the Court held that STEC’s initial notice and demand of repair to Dresser was sufficient to avoid any waiver. With respect to STEC’s failure to comply with the notice requirements of the contract in order to obtain reimbursement for cost of repairing the defective work, the Court held a genuine issue of material fact existed. While the Court denied summary judgment on these three issues, it granted partial summary judgment in Dresser’s favor on the basis of STEC’s contractual waiver of consequential damages.
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California Court Upholds Recovery of Lost Profits Due To Impaired Bonding Capacity
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BEGL Construction Company, Inc. et al. v. Los Angeles Unified School District and Star Insurance Com
154 Cal.App.4th 970; 2007 Cal.App. LEXIS 1432 (2007)
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| In August 2000, the Los Angeles Unified School District (the “District”) entered into a public works construction contract with BEGL Construction Company, Inc. (“BEGL”) for a seismic retrofit of the Science Building at its Los Angles Center for Enriched Studies (“LACES”) and demolition and reconstruction of the LACES West Arcade. Because the project was a public work, BEGL was required to post a performance bond and a payment bond. Subsequently, after BEGL commenced performing work, the West Arcade was removed from the scope of the contract.
The District terminated BEGL in January 2002 and filed a bond claim with BEGL’s surety, Fidelity, for completion of the LACES project. The District and Fidelity entered into a takeover agreement, and Fidelity hired another contractor to finish the Project. Fidelity subsequently sued BEGL and later settled.
BEGL then filed suit against the District for, inter alia, breach of contract and the District counter-sued, for inter alia, breach of contract. At trial, BEGL argued that as a result of the District’s breach of contract, its bonding capacity was diminished and caused BEGL to lose over a half-million dollars in profits. During the LACES project, BEGL was bonded by Fidelity. During the project, BEGL moved bonding companies, first to CNA and then to INSCO/DICO. BEGL’S bonding capacity at the time was $3 to $4 million per job and $6 to $7 million in the aggregate for all the work in progress. Once INSCO/DICO learned of the dispute between Fidelity and BEGL regarding the LACES project, it stopped bonding BEGL. BEGL’s bonding agent tried unsuccessfully to place it with another surety because sureties would not bond BEGL due to the dispute between Fidelity and BEGL. Eventually BEGL was bonded for a fraction of its previous bonding capacity, at $500,000 per job and $500,000 in the aggregate. A jury found that both parties breached the contract, awarding BEGL approximately $950,000 and awarding the District $1.
The District appealed, arguing the lower court abused its discretion in admitting the evidence of lost profits due to its impaired bonding capacity because it was not foreseeable at the time it contracted with BEGL that BEGL would lose profits as a result of the District’s breach, and therefore, the damages were improper as a matter of law and the evidence should not have been admitted.
Whether potential profits on unearned future construction projects due to impaired bonding capacity are recoverable depends on whether the special or particular circumstances from which they arise were actually communicated to or known by the breaching party or were matters of which the breaching party should have been aware at the time of contracting. In the instant matter, the court found that because the evidence (evidence of industry custom as to the impact of a dispute between a surety and contractor on ability to secure bonding) was sufficient for the court to reasonably find that BEGL’s lost profits due to impaired bonding capacity resulting from the District’s breach were foreseeable to the District at the time of contracting, the court did not abuse its discretion in admitting evidence of lost profits. The District also argued that because there was no evidence of record regarding any projects that BEGL would likely have won as the low bidder or any sum flowing from a project, the lost profits damages were uncertain. The court held that lost anticipated profits cannot be recovered if it is uncertain whether any profit would have been derived at all from the proposed undertaking. However, lost prospective net profits may be recovered if the evidence shows, with reasonable certainty, both their occurrence and extent. Mathematical precision is not required to recover. BEGL wasw not required to present evidence of specific projects or sums lost as a result of its impaired bonding capacity, but because it presented other evidence of lost profits (comparison of its profits prior to loss of bonding to absence of profit in the period following).
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Federal Circuit Court Of Appeals Upholds Claim For Differing Site Conditions
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ACE Constructors, Inc. v. U.S.
2007 U.S. App. Lexis 22309 (Fed. Cir. September 19, 2007)
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| The US Court of Appeals for the Federal Circuit upheld a contractor’s claim for additional compensation due to differing site conditions.
ACE Constructors, Inc. (“Contractor”) entered into a contract with the United States Army Corps of Engineers (“Government”) to build a structure designated as the Ammo Hot-Load Facility, at Biggs Army Airfield at Fort Bliss in El Paso, Texas. The project included construction of a loading area for cargo planes, various roadways, buildings, a storage pad, a loading apron, and a taxiway for airplanes. The site contained hills and other terrain that needed to be excavated, leveled, and filled. The bid solicitation materials included architectural drawings and engineering specifications prepared for the government by the engineering firm of Crawford, Murphy & Tilly, Inc., which plans were incorporated into the contract.
During performance Contractor encountered numerous difficulties. Contractor was required to alter its construction procedures due to actual conditions encountered, and experienced significant additional costs. The project was ultimately completed to Government's satisfaction, and Contractor filed several claims for its additional costs based on the unforeseen conditions and defective specifications. The contracting officer granted some of Contractor's claims and denied others.
Contractor appealed to the Court of Federal Claims, as provided by the Contract Disputes Act, 41 U.S.C. §605. After a five-day trial, the Court of Federal Claims decided several issues in favor of Contractor, awarded damages in the amount of $1,383,009 and ordered the return of liquidated delay damages in the amount of $246,130. Government appealed the decision of the Court of Federal Claims on several issues; the method for measuring concrete smoothness specified within the contract, concrete paving and a differing site conditions “earthwork” claim.
The trial court found that Contractor encountered a Type I differing site condition in that "[r]ather than being a balanced project as indicated by the cut-and-fill schematics, the site required approximately 129,000 additional cubic yards of soil." A "balanced project" is one where the amount of dirt excavated from a site is roughly equivalent to what is needed for fill-ins and to meet embankment requirements. The government did not dispute that this discrepancy was the result of a defective specification, and that 129,000 additional cubic yards of fill were required.
The trial court found that the conditions were reasonably unforeseeable by Contractor, and awarded Contractor a total of $501,012.49, calculated as $462,745.76 for direct costs on the differing site condition and additional costs due to constructive acceleration.
The Government did not contest its liability, but disputed the quantum of compensation, arguing that despite the defective specifications provided by Government, there was evidence that Contractor "knew better" concerning the conditions of the site. On appeal Government contended that Contractor should have foreseen this error in the specifications, and bid accordingly. The Court of Appeals found that the record showed that before Contractor bid on the project, it retained an expert consultant, Dirt-Tek, Inc., who analyzed the project based on the plans provided by Government and concluded, based on those plans, that the project would be relatively balanced, in that an approximately equal amount of dirt would be excavated as needed for fill. The trial court found that Contractor acted reasonably in concluding that it would not need a significant amount of additional fill, and calculated its bid accordingly.
On appeal, Government also argued that the court should have taken into account that Contractor expected to achieve savings through excess fill or a "balanced project" -- although it turned out to have been seriously unbalanced -- and that Government should be credited with Contractor's expected albeit unrealized savings. The Court of Appeals found that argument devoid of merit because it was not presented to the contracting officer and was not discussed in the decision of the Court of Federal Claims. Holding that the amount of fill used and the costs incurred were not disputed, the Court of Appeals affirmed the judgment of the Court of Federal Claims.
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Federal District Court in NY Orders Owner to “Re-Do” Electronic Production of Email Including Corresponding Attachments at Its Own Expense
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PSEG Power New York, Inc. v. Alberici Constructors, Inc.
2007 U.S. Dist. LEXIS 66767 (N.D. NY. September 7, 2007)
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| During the course of litigation arising out of a contract for the construction of a combined-cycle power plant between the principal contractor Alberici and PSEG, an e-discovery dispute arose around the production of email. In response to Alberici’s request for documents including email and any email attachments, PSEG produced over 211,000 pages and a disc containing email, but not the email attachments. Later it was discovered that during the process in which PSEG’s vendor downloaded the emails for production, the tie between the email and its corresponding attachments was broken, making it very difficult to determine which attachment belonged to which email. However, the raw data remained intact. Around the same time, and before the close of discovery, PSEG moved for summary judgment. The District Judge struck the motion sua sponte, stating that the motion was to be renewed after discovery had been completed and the parties had consulted with the magistrate judge.
After the parties made several unsuccessful attempts to match the separated components, PSEG proposed that Alberici identify the number of emails that were missing attachments so that PSEG could estimate the approximate cost of producing the set. PSEG’s estimate for retrieval of the emails and their attachments was $206,000. It proposed that Alberici could either pay this cost, or that Alberici could identify a subset of emails necessary to a claim or defense and PSEG would provide this subset at its own cost. Alberici’s estimate to retrieve the emails through its own vendor was significantly less, at $37,500. However, PSEG did not want to permit Alberici’s consultant unfettered access to its electronic database, even with a protective order.
The parties then sought Court intervention, Alberici seeking to compel PSEG to produce its email along with its corresponding attachments at PSEG’s cost and arguing that dispositive motions should be postponed until after the completion of discovery, and PSEG arguing that it should not be compelled to produce the emails with its attachments which had become separated during the production process and that it should not be required to wait to pursue dispositive motions.
The District Court identified three issues: (1) Is Alberici entitled to received the emails together with their corresponding attachments, as opposed to in the uncoordinated state in which they were provides? (2) Even though PSEG has provided the emails and their attachments in hard copy, although not coordinated with each other, is PSEG obligated to provide them in their original format? (3) If it is determined that the emails and their corresponding attachments must be produced again, which party must bear the cost?
Although the Federal Rules of Civil Procedure have been amended to address electronic discovery, the amendments took effect after the initiation of the case. The Court noted, however, that the rules had not changed materially. Even before the amendments, a party had been required by Federal Rule of Civil Procedure 34 to produce records “as they are kept in the usual course of business” or to organize and label them according to correspond with the categories of the request. Because one would expect that in the ordinary course of business, an email and its attachment would ordinarily be kept together, the Court held their production must be likewise. PSEG’s original production of the emails had been made in contravention of Rule 34’s mandate. The Court rejected PSEG’s suggestion that Alberici identify a limited subset of emails and attachments, pointing out that in addition to such an exercise being impractical and time-consuming, that it could also lend an unfair advantage to PSEG by revealing some of Alberici’s impressions, strategy and thinking. The Court also noted that PSEG’s position regarding the relevancy of the emails was inconsistent. On the one hand PSEG argued that it would “re-do” the production at Alberici’s expense, but on the other that it was likely that a significant portion of the emails and their attachments were irrelevant. However, relevancy does not turn on admissibility at trial, but rather on whether the disclosed item is reasonably calculated to lead to the discovery of admissible evidence. The Court held that Alberici had met its burden of establishing good cause and re-production of the emails and their attachments was warranted.
Finally, the Court turned to the issue of cost. PSEG argued that it should not be required to pay for the re-production, invoking Federal Rule of Civil Procedure 26(b)(2)(B) that a “party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.” The Court rejected PSEG’s argument, finding that, that the information was accessible as it was safely preserved in the raw data, and that the potential benefit of the discovery outweighed the cost of re-production. Accordingly, the Court ordered that PSEG re-produce its email with its corresponding attachments, at its own cost and that no dispositive motions should take place until discovery was entirely completed.
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Massachusetts Court Holds Owner’s Oral Promise to Pay Subcontractor Enforceable Under Main Purpose Exception to Statute of Frauds
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Central Ceilings, Inc. v. Nat’l Amusements, Inc.,
70 Mass. App. Ct. 172, 873 N.E.3d 754 (Sept. 18, 2007)
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| National Amusements, Inc., entered into a contract with Old Colony Construction Corporation for the construction of National’s cinema theater complex. Old Colony subsequently entered into a subcontract with the plaintiff, Central Ceilings, Inc., for a portion of the construction of the Project. Although delays made meeting the original completion date next to impossible, National stressed to Central its strong desire to have the theatre complex open for the Labor Day weekend. In response, Central made it clear to National that meeting such an aggressive completion date would require it to accelerate the work schedule. In addition, since Old Colony was experiencing cash flow problems and owed Central a substantial sum of money for work already completed, Central demanded assurances from National that it would be paid for its work before it would continue with the accelerated work on the Project. As a result, one of National’s agents orally agreed to pay Old Colony’s obligations to Central. Thereafter, Central completed its work and achieved substantial completion by August 25.
When National refused to pay Central its unpaid balance from Old Colony, Central brought an action against National for breach of its oral agreement. A jury found that Central was entitled to receive the unpaid balance from National under its oral agreement. National appealed. The main issue on appeal was whether National’s oral promise to pay Central was enforceable under the Statute of Frauds.
Under the Massachusetts’ Statute of Frauds (and that of many other states), a promise to pay the debt of another (usually called a guarantee) must be in writing to be enforceable. However, there is a well recognized exception to this rule known as the “leading object” or “main purpose” exception. This exception applies when an oral agreement is made to pay the debt of a third party and the promise to pay is made primarily or solely to serve the promisor’s own interests. Additionally, the exception applies even where the promise to pay does not extinguish the third party’s liability.
The Massachusetts Court of Appeals held the National’s promise was enforceable under the leading object exception based on the following evidence: (1) National wanted to finish the project by a certain date for business reasons; (2) the work had to be completed in a “tight time frame”; (3) Central was a “core” subcontractor and was responsible for significant portions of the work; (4) Central completed its preliminary work; and (5) Central was one of the few subcontractors in the state capable of delivering the necessary work in the desired time frame. The court held that this evidence was sufficient to warrant a finding that National’s promise was given to secure Central’s continued and expedited performance at the Project and that the satisfaction of any obligation on the part of Old Colony was merely incidental to that promise.
The court dismissed National’s argument that Central’s performance, including compliance with all schedule changes, was a benefit to which National was already entitled. The court noted that National had failed to demonstrate that such contractual obligations ran in favor of National rather than Old Colony.
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Pennsylvania Supreme Court Reverses Commonwealth Court Ruling Barring Use of RFP Process for Procurement of Construction Work
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Pa. Associated Builders and Contractors, Inc. v. Dep’t of Gen. Servs
2007 Pa. LEXIS 2175 (Oct. 17, 2007)
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| On October 17, 2007 the Pennsylvania Supreme Court ruled that a lower court decision misinterpreted the state’s Procurement Code and that the Commonwealth Department of General Services (DGS) should be allowed to use a sealed proposal process to procure construction contracts.
In April, 2005, DGS initiated the use of the request for proposal (RFP) process to award construction contracts on larger projects (exceeding $5 million). In October 2005, Associated Builders and Contractors (ABC), a trade association of contractors and subcontractors, filed suit in the Commonwealth Court to enjoin DGS from using the RFP process for construction contracts, asserting that by statute construction work could only be awarded by competitive bidding requiring an award to the lowest competitive bidder. The Commonwealth Court held that the Procurement Code does not extend the RFP process to construction contracts, and, accordingly, enjoined DGS from utilizing the competitive sealed proposal bidding/RFP process on any future construction project under its policy determination. DGS appealed the Commonwealth Court’s decision.
The Sumpreme Court opinion began with an overview of the applicable sections of the Procurement Code and the Separations Act. Section 511 of the Procurement Code requires that all Commonwealth agency contracts be awarded by competitive sealed bidding, except as provided for in specified Code exceptions. Section 513 is one such exception and provides that when competitive sealed bidding is not practicable or advantageous to the Commonwealth, a “contract” may be entered into by competitive sealed proposals. Although Section 513 does not specifically refer to construction contracts, the Code defines the word “contract” to include those for construction. The court reasoned that there was nothing to indicate that the word “contract” as used in Section 513 means something other than its Code definition. Accordingly, the court held that Section 513 encompasses construction contracts.
Next, the court looked at Section 322(6) of the Procurement Code which requires compliance with the Separations Act in procuring “construction contracts,” except for those less than $25,000. The Separations Act requires competitive bidding and separate awards of public contracts to the lowest responsible bidder for certain branches of trade work. Accordingly, the court agreed that under Section 322(6), construction contracts equal to or in excess of $25,000 must be awarded to the lowest responsible bidder, as the Separation Act requires.
Finally, the court recognized that Section 513 and 322(6) conflict in the respective rules that they set for the procurement of construction contracts Specifically, as explained above, Section 322(6) requires construction contracts be awarded to the lowest responsible bidder while Section 513 allows DGS to select a person other than the lowest responsible bidder by using an RFP process to procure construction contracts.
The court found these provisions irreconcilable and relied on the principle that a special provision prevails over a general provision when two statutory provisions conflict. The court found that Section 322(6) is the general provision since it applies to all construction contracts and that Section 513 is the special provision since it applies to only certain construction contracts in specified exceptional circumstances As such, Section 513 prevails and is an exception to Section 322(6). Accordingly, the Court held that contracts for the procurement of construction may be entered into by DGS through the sealed proposal process.
The majority opinion was joined in by three justices, and one justice concurred in the result, while two justices dissented. The concurring justice noted in his separate opinion that the constitutionality of the RFP process would still require examination on remand.
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Federal District Court in PA Holds Contractor’s Use of Subcontractor’s Conditional Bid Proposal in its Bid to Owner Insufficient to Form Enforceable Contract
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Neshaminy Constructors, Inc. v. Concrete Building Systems, Inc.
2007 U.S. Dist. LEXIS 69197, Civil Action No. 06-1489 (E.D. Pa. 2007)
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| The United States District Court for the Eastern District of Pennsylvania conducted a bench trial in which the primary question was whether a contract had been formed between a contractor and subcontractor in connection with a project for which the contractor submitted a bid proposal utilizing, in part, the subcontractor’s bid proposal for calculating the total price for the work. Relying on Pennsylvania common law, the Eastern District held that use of a subcontractor’s bid, by a general contractor in the submission of its own bid to the owner, in and of itself is not sufficient to create a binding contract.
Neshaminy Constructors, Inc. (“Contractor”) sought bid proposals from Concrete Building Systems, Inc. (“Subcontractor”) in connection with a project owned by the Southeastern Pennsylvania Transportation Authority (“SEPTA”) for which Contractor intended to submit a bid proposal to serve as general contractor. Subcontractor submitted a bid proposal (“Proposal”) to Contractor which included a number of contingencies. Among the contingencies were that the Proposal was void if not accepted within 30 days and the Proposal was subject to the availability of Subcontractor’s facilities. Specifically, Subcontractor advised that in order for it to be able to work on this Project, it was necessary for it to commence production of the materials in June. Therefore, Contractor knew that should the SEPTA contract be awarded late, and thus production not capable of commencing in June, that it would need to locate another subcontractor.
In submitting its bid proposal to SEPTA, Contractor utilized $5,500,000 as the amount related to the work Subcontractor was to perform even though Subcontractor’s revised proposal was $5,600,000. Contractor was the only bidder on the Project, yet SEPTA did not award the contract until the end of May, well after the originally expected award date. In the meantime, Contractor requested Subcontractor to provide a revised proposal and cost breakdown for just shop drawing work. Subcontractor refused to provide this information because it would not just do shop drawing work. When the contract was finally awarded to Contractor, Subcontractor was unable to perform work on the Project because it had since committed itself to another Project. Upon learning that Subcontractor would not be performing work on the Project, Contractor retained the services of another subcontractor at a higher price than what Subcontractor had previously quoted. Due to the increase in its projected costs, Contractor sued Subcontractor under theories of breach of contract and promissory estoppel to recoup the difference in the cost.
In rendering its opinion, the Eastern District first rejected Contractor’s argument that the Uniform Commercial Code (“UCC”) applied. The Court recognized that Pennsylvania courts consistently stated that construction contracts were not sales contracts governed by the UCC. Examining industry practices and common law contract principles, the Eastern District concluded that there was no contract formed between Contractor and Subcontractor. Under Pennsylvania common law, a contract is formed when there is (1) an offer; (2) an acceptance; and (3) consideration. Relying on Bilt-Rite Contractors, Inc. v. Patriot Roofing, Inc., 1999 U.S. Dist. LEXIS 2459, *4 (E.D. Pa. Mar. 4, 1999), the Court upheld the principle that an acceptance must be for the identical terms of an offer and any deviation therefrom will constitute a rejection of the offer and becomes a counteroffer. Applying this basic contract principle to the situation at hand, the Court explained that the bid proposal was an offer which needed to be accepted and did not automatically create a binding contract just because the proposal was utilized by Contractor in its bid to the Owner. The Court further explained that Contractor’s informing Subcontractor that Contractor was the lowest bidder, without more, was not sufficient to create a binding contract.
Of particular interest is the Court’s conclusion that Subcontractor’s acceptance of another job prior to the expiration of the Proposal was not a breach of any promise to Contractor. The Court explained that because Contractor actually made a counteroffer in the form of differing costs, time frame and scope, prior to Subcontractor’s acceptance of the other job, the Proposal was merely an offer by Subcontractor, and the counteroffer served as a rejection of the terms of the Proposal. Consequently, the expiration date of the Proposal no longer had any relevance.
The Eastern District further held that the doctrine of promissory estoppel did not apply in the case at hand. Because a determination in this matter could be made on the basic common law principles of offer and acceptance, Contractor was not entitled to rely on promissory estoppel as an alternate theory of recovery. The Court further stated that even if it could apply promissory estoppel to the case, Contractor would be unsuccessful in such a claim since it was unreasonable for Contractor to rely on Subcontractor’s Proposal given the nature of the contingencies contained therein.
The Eastern District’s ruling confirms for contractors that by soliciting bids from subcontractors for inclusion in an overall bid to an owner they are not automatically bound to a contract with the subcontractors. Rather, an express acceptance of the offer contained in a subcontractor’s bid proposal, without deviation, must be made by the contractor in order to create an enforceable contract, or the contractor’s reliance upon the proposal for purposes of promissory estoppel must be reasonable and consistent with any qualifications in the proposal. Further, if there is a period of time during which the original proposal will remain open, any counteroffer by contractors will be deemed a rejection of the original proposal and render the expiration period inconsequential. contractors must be alert to qualifications in subcontractor proposals.
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Federal Circuit Court of Appeals Holds that a Payment Bond Surety that Discharges a Contractor’s Obligation to Pay a Subcontractor is Equitably Subrogated to the Rights of Both the Contractor and Subcontractor and May Bring Suit Directly Against the United States
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National American Insurance Company v. United States
No. 2007-5016, 2007 U.S. App. LEXIS 20058 (Fed. Cir. August 23, 2007)
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| The US Court of Appeals for the Federal Circuit upheld the lower court’s grant of a motion for summary judgment. The Court held that a payment bond surety is equitably subrogated to the rights of the contractor whose debt it discharges, and thus can pursue a claim directly against the government.
The case arose out of a contract between Innovative PBX Services, Inc. (“Contractor”) and the United States Small Business Administration (the “government”) for the replacement of a telephone system at the Department of Veterans Affairs Medical Center. The Contractor subcontracted part of the work to Nortel Communications Systems, Inc. (“Subcontractor”). As required by the Miller Act, the Contractor executed payment and performance bonds in favor of the government with National American Insurance Company (“Surety”) as the surety. After completion of the contract work, the Subcontractor notified the Surety that it was owed approximately $675,000 for labor and materials that the Contractor had failed to pay for. The Subcontractor then instituted a Miller Act claim under the payment bond against the Surety, which the Surety settled. The Surety also notified the government that no addition payments should be made to the Contractor in light of the Miller Act claim and requested that all remaining contract funds be held for the Surety’s benefit. The government, however, did not follow the Surety’s request and made its final contract payment to the Contractor. As a result, the Surety filed a complaint against he government seeking damages of $280,000.
The Court of Federal Claims granted summary judgment in favor of the Surety holding that: (1) as a surety that had made payments on a payment bond and satisfied all outstanding claims, the Surety was equitably subrogated to the rights of the Contractor; (2) the Tucker Act’s waiver of sovereign immunity extended to the Surety as the equitable subrogee of the Contractor; and (3) the government violated its duty as stakeholder in the payment bond by making final payment to the Contractor after being notified that the Surety was asserting its right to the remaining contract funds.
The government appealed to the Federal Circuit arguing that a payment bond surety only stands in the shoes of the subcontractor who it has paid, and thus, under Department of the Army v. Blue Fox, Inc., 525 U.S. 255 (1999), cannot pursue a claim directly against the government. The government relied on a statement in Ins. Co. of the W. v. United States(“ICW”), 243 F.2d 1367, 1370 (Fed. Cir. 2001), that “a surety who discharges a contractor’s obligation to pay subcontractors and is subrogated only to the rights of the subcontractor” and “has no enforceable rights against the government.” The Federal Circuit, however, affirmed the Court of Federal Claims, characterizing the passage in ICW upon which the government relied as dicta (given that the case involved only the consideration of a performance bond surety’s rights).The Court held, consistent with prior precedent such as Balboa Ins. Co.v. United States, 775 F.2d 1367 (Fed. Cir. 2001) that a payment bond surety that discharges a contractor’s obligation to pay a subcontractor is equitably subrogated to the rights of both the contractor (who has privity with the government) and the subcontractor, and may pursue a cause of action directly against the government.
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US Claims Court Explains Limits of Spearin Doctrine – Denies Contractor Recovery Where Testimony Regarding Defective Design Was Conclusory
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Caddell Construction Co., Inc. v. United States
2007 U.S. Claims LEXIS 285, No. 04-461C, (September 7, 2007).
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| The United States District Court of Federal Claims held that the design deficiencies alleged by the plaintiff contractor did not rise to the level of a breach of the implied warranty set forth under the Spearin Doctrine.
Plaintiff Caddell Construction Co. (“Plaintiff”) entered into a contract with the Department of Veteran Affairs (the “Government”) to modernize and strengthen the VA Medical center in Memphis, Tennessee. Plaintiff claimed on behalf of its steel fabrication subcontractor, Steel Service Corporation (“SSC”), that the Government provided structural steel drawings that contained conflicts, errors, omissions, and/or inadequate details which resulted in delay and additional costs to SSC.
Specifically, Plaintiff pled a breach of the implied warranty set forth in United States v. Spearin, 248 U.S. 132 (1918). Under Spearin,
“[I]f the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in plans and specifications. This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work…”
Plaintiff primarily presented three points of evidence to support its claim of a breach of Spearin implied warranty. First, Plaintiff tried to show that the number of RFIs and the short period of time in which they generated indicated the plans were faulty. Second, SSC’s steel detailer testified that the drawings were deficient. Finally, Plaintiff’s expert reviewed the RFIs and the Government’s responses and concluded that the plans were inadequate.
The Court held that a breach of the Spearin implied warranty occurs where the design specification is “so faulty as to prevent or unreasonably delay completion of construction performance.” [citations omitted] The owner’s documents must be “substantially deficient or unworkable” to constitute a breach. [citations omitted] Moreover, if there are many errors or omissions in the documents “the cumulative effect or extent of these errors was either unreasonable or abnormal”. [citations omitted].
Applying these criteria, the Court found that the Plaintiff’s evidence indicated that there were flaws in the plans, but that a defective design under Spearin is far more flawed that the plans in the present case. Specifically, the Court found that the unusually high number of RFIs did not alone evidence inadequate design. Moreover, the Court found the testimony of SSC’s steel detailer and Plaintiff’s expert to be conclusory. SSC ultimately was able to work with the plans. Moreover, if the Government’s answers to the RFIs included major changes to the work that increased SSC’s costs, SSC would have or should have requested a change order. The fact that SSC did not request such a change order was inconsistent with its allegations. To support a breach, the plans would have been largely unworkable and would have required substantial revision.
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