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Pennsylvania Superior Court Clarifies Criteria for Unjust Enrichment Recovery by Subcontractor
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Northeast Fence & Iron Works, Inc. v. Murphy Quigley Co.
933 A.2d 664, 2007 Pa. Super. LEXIS 3092 (Pa. Super. Ct. Sept. 18, 2007)
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| The Pennsylvania Superior Court held that a subcontractor could recover on a theory of unjust enrichment against a contractor where the subcontractor proved that it performed work for which it was not paid and that this work satisfied the contractor’s obligations to a third party. The Subcontractor was not required to prove payment to the Contractor by the Owner.
The case arose out of a contract between Murphy Quigley Co. (the “Contractor”) and the Bucks County Correctional Facility for the modifications to perimeter security through the installation of perimeter fencing, creation of seven fence-enclosed recreational yards, demolition work, and the upgrading of some aspects of the existing security system (the “Contract”). The perimeter fencing and the enclosed recreational yards comprised a significant amount of the Project. The Contract was valued at $713,000. The Contractor originally entered into a subcontract with Eagle Fence for the fencing work. Eagle Fence, however, left the worksite after approximately ten to fifteen percent of the work was complete, apparently due to nonpayment. The Contractor obtained estimates to complete Eagle Fence’s work for both completion and repair of some of Eagle Fence’s work. Northeast Fence & Iron Works (the “Subcontractor”) was contacted to obtain a quote and was hired to complete the Project.
The Contractor and Subcontractor agreed that the perimeter fencing work would be completed for a lump sum of $26,500. The parties differed, however, as to the agreed price for the installation of the fencing surrounding the recreational yards. The Contractor’s project manager testified that the proposal for the seven recreational yards was $3,500 per day for two iron workers, two laborers, and two trucks, with four to five days estimated per yard. Although the project manager believed the estimate was excessive, the project manager testified that he accepted it as the maximum for each yard would be only $17,500 and overall $122,500. The project manager testified that the subcontract would be limited to $149,000 for the perimeter fencing and recreational yards.
The owner of the Subcontractor testified that the contract was an emergency contract due to Eagle Fence’s abandonment. The owner testified that when he visited the Project site, it was in disarray and muddy, therefore preventing him from determining the exact amount of work needed to complete the recreational yards. He testified that he presented a $3,500 per diem proposal with no maximum and that this proposal was accepted by the Contractor.
The trial court concluded that based upon the discrepancy over the contract pricing for the recreational yards, there was no meeting of the minds and thus no contract. The trial court did, however, find for the Subcontractor on an unjust enrichment cause of action and awarded the Subcontractor $114,264.06 in damages.
The Subcontractor presented evidence of $134,428.30 of outstanding invoices and testimony that the Contractor’s project manager promised to pay the Subcontractor and never raised any issues about the quality of work pr the credentials of the Subcontractor’s workers. The Contractor offered competing evidence that some of the invoices were not paid because the Subcontractor was using nonunion workers in violation of the Contractor’s contract with the prison. The Contractor also offered evidence that it had to expend $26,220 to correct defective work and $52,014.22 to complete the job after the Subcontractor left. The trial court did not accept the Contractor’s evidence citing that the defenses “appeared to be created solely for litigation.” The trial court calculated the value of the Subcontractor’s unpaid work at $114,246.06, which represented $134,428.30, the amount owed on the invoices, less fifteen percent that Eagle Fence had performed on the Project.
The Contractor then filed an appeal before the Superior Court arguing that the Subcontractor did not plead “quantum meruit” and thus could not recover under that theory. The Superior Court held that the Subcontractor pled “unjust enrichment,” which is a synonym for quantum meruit and thus rejected the Contractor’s appeal on this grounds.
The Contractor also appealed its denial of a request for judgment notwithstanding the verdict. The Superior Court first held that the Subcontractor properly asserted a cause of action for unjust enrichment as there was no express contract between the parties because there was a dispute over the contract price, an essential term of the contract. Citing several prior Pennsylvania appellate cases, the Contractor attempted to maintain on appeal that the Subcontractor was required not just to produce invoices to show the value of the work, but rather to show that the Contractor was paid by the landowner for the work.
The Contractor relied on D.A. Hill Co. v. Clevetrust Realty Investors, 524 Pa. 425 (1990). In D.A. Hill, unpaid subcontractors instituted an unjust enrichment cause of action against a lender claiming that the lender should pay them for work performed and invoiced, but not paid by the owner. The lender defended on the grounds that it had not been enriched as it had paid the developer various amounts. The Supreme Court held that the invoices did not establish the value of the benefit conferred to the lender as the subcontractors failed to prove that the value of the improved property at the time of foreclosure exceeded amounts already advanced by the lender on the construction loan. In another case Meehan v. Cheltenham Township, 410 Pa. 446 (1963), the Supreme Court similarly declined to award under a theory of unjust enrichment to a subcontractor finding that the subcontractor had failed to prove that the benefit that it provided exceeded the cost to the township of maintaining the project (in this case, roads). The Court stressed that there was no evidence that the township had misled the subcontractor into making the improvements. Finally in Ravin, Inc. v. First City Co., 692 A.2d 577 (Pa. Super. Ct. 1997), the Superior Court prevented a plaintiff from recovering against a building owner where the owner made no request for the plaintiff’s services and had not misled the plaintiff.
The Superior Court found that the trial court appropriately awarded the Subcontractor recovery under a theory of unjust enrichment. The Superior Court stressed that unlike the landowners or lender in D.A. Hill, Meehan, or Ravin, the Contractor was the general contractor for the construction project. Thus, the Subcontractor’s work “clearly benefited” the Contractor as it satisfied the Contractor’s contractual obligations to the prison. The Superior Court held that the Subcontractor did not need to prove that the Contractor was paid by the prison as the benefit to the Contractor was the aforementioned satisfaction of its contractual obligations. The Superior Court noted that while the Subcontractor could not recover its labor and costs against the landowner, it was not precluded under D.A. Hill from recovering for unjust enrichment against the general contractor.
The Superior Court thus affirmed the judgment of the trial court finding for the Subcontractor on the theory of unjust enrichment.
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Pennsylvania Commonwealth Court Holds Written Notice of Claim Requirement Excused And Accepts “Measured Mile” Method Of Proving Inefficiency Damages
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James Corp. v. North Allegheny School District
No. 1268 C.D., 2007 Pa. Commw. LEXIS 636 (Pa. Commw. Ct. Nov. 30, 2007)
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| The Pennsylvania Commonwealth Court held that the “measured mile” method of proving damages for an acceleration claim was legally sufficient to establish the extent of the contractor’s damages. The Court also held the contractor’s failure to provide notice in accordance with the contract was not fatal to the claim, and that attorney fees and expenses under the Prompt Payment Act must be apportioned to those fees and expenses associated with recovering payment’s due under the contract.
Plaintiff James Construction (“Contractor”) entered into a contract with Defendant North Allegheny School District (“Owner”) for renovations to the Hosack Elementary School (“Project”). The Owner also hired a construction manager to oversee the Project and administer the Project’s schedule. The project was afflicted with several Owner caused delays.
Accordingly, the construction manager recommended that the Owner grant an extension of time for the Contract to complete the Project. The Owner refused to grant an extension of time and terminated the construction manager. The replacement construction manager informed the Contractor that it was to complete the Project in accordance with the original schedule. Despite the delays to the Project, the Contractor finished the Project in accordance with the original completion date. In the end, the owner terminated the Contractor for alleged failure to perform certain punch list work.
The Contractor initiated suit against the Owner seeking to recover acceleration damages it incurred due to the Owner’s refusal to recognize construction delays and adjust the Project completion date accordingly. The Contractor alleged that it had accelerated to achieve the Project completion date. The Contractor also sought damages under Pennsylvania’s Prompt Payment Act, 62 Pa. C.S. 3902, et seq., claiming that Owner withheld payments under the contract in bad faith.
At trial, the Contractor used the “measured mile” method to calculate its damages resulting from accelerated efforts to achieve the Project completion date. Under this approach, the Contractor compared the cost of performing work not subject to delay or acceleration with the cost of performing work during the period of impact, the difference representing the measure of damages. The Contractor’s claim expert divided the Project into two time periods comparing the percentage of work completed in each time period to the number of labor hours utilized. The claims expert derived an efficiency factor from this comparison, which was used to compute the number of inefficient hours incurred during the impacted period, which were multiplied by the applicable hourly rates. On appeal, the Court determined that this method was legally sufficient. The Court held that damages need not be calculated with mathematical precision, but there only need be a reasonable basis for the calculation. The Court noted that although this was the first Pennsylvania appellate case considering the measured mile approach, the approach had been considered in the Pennsylvania Board of Claims.
The Court also considered the Owner’s argument that the claim should have been barred Contractor did not provide formal written notice of its claim within 21 days as required by the contract. The Court concluded that formal notice was not required. First, the Contractor would not have been able to accurately assess the damages associated with inefficient labor until after Project completion. Additionally, the Owner had actual notice of the circumstances giving rise to the claim. The Court concluded that these factors satisfied the contract, albeit informally. Further, the Court considered it significant that the Owner failed to demonstrate that any prejudice from the Contractor’s failure to submit a written claim. The Court also held that because the Owner had interfered with the Contractor’s performance, and because it was clear it would not have granted an extension, a “no damage for delay” clause did not bar the acceleration claim.
Finally, the Court also reviewed the award of attorney fees and expenses under the Prompt Payment Act. The Court accepted the Owner’s argument that Act supported recovery only of attorney fees and expenses the extent they were expended in pursuit of payments due under the contract as opposed to the acceleration damages. It held that the trial court had properly allocated the attorneys fees, and held that it was not objectionable that the fees exceeded the amount recovered. However, the Court refused to allow the recovery of expert fees because the expert’s testimony pertained only to damages due for the Contractor’s acceleration efforts.
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Florida Court Holds Notice of Default to Surety Not Required Where Subcontract Provision as to Rights On Default Was Incorporated In Bond
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Dooley & Mack Constructors, Inc., v. Developers Surety & Indemnity Company
2007 Fla. App. LEXIS 17769 (Fla. Ct. App. Nov. 7, 2007)
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| Dooley & Mack Constructors, Inc. (“Contractor”), the general contractor on a Miami-Dade Community College project, was the obligee on a performance bond issued by Developers Surety and Indemnity Company (“Surety”), on behalf of Buildtec Construction Group, Inc., the masonry subcontractor (“Subcontractor”). After Subcontractor defaulted by abandoning the job, Contractor completed the masonry work itself and sued the Surety for the resulting damages.
The trial court granted summary judgment for the Surety on the ground that Contractor did not formally notify Surety of the default or provide it an opportunity to cure. Under a typical surety bond, such a failure would result in a discharge of Surety's obligations. The Court of Appeals of Florida held that that the usual rule did not apply in this matter, however, because the subcontract agreement, which was incorporated by reference in the bond, contained a provision which specifically permitted Contractor to proceed as it did. Article 5(d) of the subcontract, which was expressly made a part of the entire agreement, included the following language:
“…. Contractor has the option, but not the obligation, to notify the Subcontractor that upon its failure to satisfactorily improve the rate of progress after forty-eight (48) hours notice, Contractor shall have the right to declare the Subcontract breached and take charge of and complete the performance of the WORK with such persons, firms, or corporations as Contractor shall deem necessary. In the event the cost to complete Subcontractor's contract exceeds the original contract price, Subcontractor shall be liable for all such extra costs and damages. The Subcontractor, its surety, and any bond shall be liable to all losses, damages, and expenses, including attorneys' fees and costs incurred in the prosecution or defense of any action, suit, or arbitration incurred by or resulting to the Contractor on the above account.”
Reading all portions of the documents together, the court held that, Contractor was expressly granted the option to either call upon Surety to perform, or, as it did, to cure Subcontractor's default itself and thereafter hold the "surety, and [the] bond . . . liable to all losses, damages, and expenses," without notifying Surety, because Article 5(d) of the subcontract did not impose such a requirement.
Therefore, the court reversed the trial court and directed that summary judgment should be entered for Contractor on liability.
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Pennsylvania Superior Court Affirms Award to Subcontractor of Penalty Interest and Attorneys Fees Under the Pennsylvania Prompt Payment Act
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Imperial Excavating & Paving, LLC v. Rizzetto Construction Management, Inc.
2007 PA Super 318, 2007 Pa. Super LEXIS 3540 (Pa. Super. Ct.. Oct. 23, 2007)
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| General contractor Rizzetto entered into a contract to perform extensive work for the Southern Lehigh School District, including work on the two high school soccer fields. Rizzetto contracted with subcontractor Imperial to perform earthwork on the fields including the removal of topsoil, grading and compacting of the subsoil. After Imperial’s earthwork on the fields had been completed, Rizzetto had been paid by the school less retainage and Rizzetto had paid Imperial, Rizzetto hired a landscaper to perform additional work on the fields including correction of irregularities in soil structuring, tilling and seeding, and the addition of six inches of topsoil.
After allowing the fields to remain fallow for a period of two years, the school began using the fields and experienced problems related to inadequate topsoil, improper drainage, excess rocks and inconsistent grass growth. Testing revealed that the fields did not have an even six inches of topsoil and that the topsoil was compacted, having not been culled and tilled properly. As a result, the school rejected the soccer fields and withheld $120,000 from a payment to Rizzetto for other services. In turn, Rizzetto alleged that Imperial had performed its work on the fields improperly and withheld $262,330 from payment on other work performed by Imperial. Imperial sued Rizzetto for nonpayment and Rizzetto counterclaimed, alleging that Imperial’s work on the fields had not met its contractual obligations. Judgment was rendered for Imperial, including counsel fees, penalties and interest under the Prompt Payment Act, 73 PA. STAT. §§ 501-516, and Rizzetto appealed.
The Superior Court addressed three issues: (1) whether there had been adequate evidence in the lower court to support the finding that Imperial had satisfactorily performed under the subcontract and that Rizzetto had accepted that performance, (2) whether the findings of fact that Imperial had satisfactorily performed and that Rizzetto had accepted the work were against the weight of the evidence, and (3) whether the trial court erred in awarding penalty interest and attorneys fees on the judgment. The Court found that the was sufficient to support a finding that Imperial had satisfactorily performed. The landscaper’s subcontract, not that of Imperial, required the application of six inches of topsoil and finish grading and Imperial’s work had been approved by the architect as in accordance with the project documents. Further, Rizzetto had certified in its payment application to the school district that the work had been performed in accordance with the contract documents. The Court also determined that the trial court’s findings were not against the weight of the evidence.
In addressing the final issue of whether the trial court erred in awarding attorneys’ fees and penalty interest under the Pennsylvania Prompt Payment Act, the Court commented that the purpose of the Act is to protect contractors and subcontractors by providing guidelines for prompt payment and “protects subcontractors from specious deficiency claims by contractors” by providing for interest on payment unreasonably withheld and a penalty on amounts found to have been withheld in bad faith. The Court first reviewed whether the record supported the trial court’s finding that Rizzetto had improperly withheld payment. Withholding is only proper where the amount withheld “bears a reasonable relation to the value of any claim held in good faith.” The Court found that the trial court reasoning that the $262,330 withheld from Imperial by Rizzetto did not bear a reasonable relation to the $120,000 withheld by the school district was proper and supported its decision to award penalties and interest. Next, in reviewing whether the subcontractor had properly been found to be the “substantially prevailing party” under the Act, the Court found that based on the undisputed fact that the subcontractor had commenced the suit for the purpose of recovering unpaid monies, and that the trial court had entered a judgment for such monies, that the record fully supported the trial court’s finding that there was “no question about whether Plaintiff may be considered to have substantially prevailed on these facts.” Consequently, an award of attorneys fees was not only appropriate, but required.
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Pennsylvania Superior Court Holds Gas Utility Company Not Subject to Negligent Misrepresentation Claim For Improperly Marking Underground Lines Under "One Call" Act
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Excavation Technologies, Inc. v. Columbia Gas Co.
2007 PA Super 327; 2007 Pa. Super LEXIS 3845 ( Super. Ct., Nov. 7, 2007)
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| The Pennsylvania Superior Court held that a public utility asked under the Pennsylvania "One-Call" Act to mark the location of its underground gas lines in the vicinity of a work site could not be sued for economic losses suffered by an excavation contractor which struck gas lines which it had erroneously failed to mark or mismarked.
Excavation Technologies, Inc. (ETI) was hired to perform excavation work for a the extension of a waterline. Pursuant to Pennsylvania’s "One Call" Act, ETI requested Columbia Gas, a public utility company, to mark any gas lines near the work sites. ETI alleged that Columbia improperly marked some and altogether failed to mark others. As a result, ETI struck eleven lines, and incurred $74,502.06 in damages for manpower and equipment downtime.
ETI sued Columbia Gas for negligence and breach of contract. Columbia filed preliminary objections, which were sustained by the trial court. The trial court held that ETI's claim could not be maintained because its losses were solely economic in nature.
On appeal, ETI argued that it had stated a cause of action against Columbia based on a negligent misrepresentation theory under Section 552 of the Restatement (Second) of Torts. ETI argued that it fell into the Bilt-Rite exception adopted by the Pennsylvania Supreme Court for economic loss under Section 552. In Bilt-Rite, an architectural firm that negligently supplied information to a contractor was held subject to suit for purely economic losses in the nature of cost overruns. Columbia Gas countered by arguing that it could not be equated to a design professional – it was not in the business of furnishing information to contractors, but rather was in the business of supplying utility services to its customers. It further argued that to impose liability on a utility company for purely economic loss would be contrary to the policy of the One Call Act.
Following a review of the Court's reasoning in the Bilt-Rite decision, the Court affirmed the dismissal of the Complaint. Critical to the Court's decision not to extend Bilt-Rite was the fact that the Columbia Gas was a public utility company that was statutorily bound to provide information. It was in the business of providing public utility gas service, not a professional as in Bilt-Rite providing information in a professional capacity. The relationship of ETI, a contractor, and Columbia Gas, a public utility company, bore no resemblance to that of an architect and contractor.
As the court stated, "[a] utility responding pursuant to its obligations under the One Call Act stands on a completely different footing than that of an architect, or other design professional, as its only contractual relationship with any party to the project is to supply gas to its customers, not information for the guidance of others in their business."
The Court went on to further state that the "One Call" Act neither permits recovery for economic damages nor would the Court expand permissible recovery beyond the statute without the express direction of the legislature. It was not the purpose of One Call Act to protect against economic loss. Rather, the purpose of the "One Call" Act is to have a centralized notification system that prevents immediate harms to the public. Private contractors will not receive protection in the form of an extension of Bilt-Rite at the expense of public utilities.
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Colorado Appeals Court Holds that AIA Contract Waiver of Subrogation Extends to “Non-Work” As Well As “Work”
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Copper Mountain, Inc. v. Industrial Systems, Inc.
2007 Colo. App. LEXIS 2298 (Colo. App. Ct. Nov. 29, 2007)
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| Copper Mountain, Inc. hired Amako Resort Construction, Inc. as the general contractor to renovate and expand a mountain resort lodge. Amako subcontracted with Industrial to build the steel framework for the project. The parties signed a standard American Institute of Architects (AIA A201) contracts, which required Copper to obtain property insurance to cover damages for the work. To comply with this requirement, Copper relied on its all-purpose insurance policy that provided coverage for all of Copper Mountain, including the work and adjacent properties, instead of purchasing separate insurance policy, which would cover only theexpansion and renovation work.
In addition, the AIA contract included standard waiver of liability provisions. Specifically, the waiver of subrogation provision provided that “[Copper] and [Amako] waive[d] all rights against each other and any of their subcontractors…for damages caused by fire…to the extent covered by property insurance obtained pursuant to [the contract] or other property insurance applicable to the Work.”
A fire started while Industrial was welding, damaging portions of the existing lodge. Copper sued Amako for the damages. Amako and Industrial asserted that the waiver of subrogation clause barred Copper’s claim. Copper, however, argued that the waiver provisions did not bar its claims for damages to the non-work portions of the lodge destroyed by the fire. Relying on the contract’s plain language, the court held that the waiver of subrogation provision was not limited to damages to the work, but extended to non-work portions of the lodge as well.
The court provided three reasons for its holding. First, the language of the waiver provision did not define waived claims according to the property that was harmed, but by the policy of insurance “applicable to the Work” that would pay for the damage. Additionally, under the contract, Copper could have purchased an “all risk” policy, which would have limited its protection to the work. Copper, however, chose to rely on its existing insurance policy, which covered the work and adjacent property. Finally, the court noted that other provisions in the contract demonstrated that the parties intended to waive claims for damages beyond those defined by the work. Specifically, another waiver clause provided that if Copper insured property separate from the project that was located “at or adjacent to the site,” claims for damages to that property would also be waived.
Because Copper chose to rely on its existing insurance policy that covered both work and other damaged areas, Copper and its insurer waived the right to sue for damages caused by the fire, including damages to the non-work portions of the lodge. The Court noted that although there was a split of authority on the question, its holding was consistent with the majority of courts which had considered the issue of the scope of the waiver.
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US Court of Appeals for Third Circuit Holds “Subcontractor” Status Under Miller Act Turns on Substantiality and Importance of Relationship With Prime Contractor
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United States ex rel E & H Steel Corp. v. C. Pyramid Enterprises, Inc
Civil Action No. 06-4209, 2007 U.S. App. LEXIS 27347 (3d Cir. Nov. 27, 2007)
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| The Court of Appeals for the Third Circuit reviewed a decision of the United States District Court for the District of New Jersey in which the primary question was whether a particular project participant, responsible for supplying structural steel, was a “subcontractor” for purposes of the Miller Act, 40 U.S.C. § 3131, et seq. Reviewing the Supreme Court interpretations and the intent of the Miller Act, the Third Circuit reversed the District Court’s decision and held that the project participant at issue was a “subcontractor” under the Miller Act, because it had a substantial and important relationship with the prime contractor. Accordingly, a fabricator which had contracted to furnish steel to it could sue on the bond.
The United States Army Corps of Engineers awarded a contract for the design and construction of a maintenance hanger and ancillary facilities at the McGuire Air Force Base to C. Pyramid Enterprises (the “Prime Contractor”). The Prime Contractor in turn contracted with various parties including Havens Design-Build (“Havens”). Havens was hired to prepare certain shop and erection drawings, design steel connectors and assist with material substitution. Havens then contracted with E&H Steel Company (“E&H”). E&H was hired to fabricate the steel and deliver it to the Project site. Thereafter, Havens filed for bankruptcy. At the time of its bankruptcy, Havens still owed E&H more than $565,000 for steel previously delivered to the Project site.
E&H filed suit, seeking to collect on the payment bond furnished by the Prime Contractor in accordance with the Miller Act. Because E&H did not have a direct relationship with the Prime Contractor, in order to successfully collect on the bond, E&H was required to demonstrate that that Havens was a “subcontractor” under the Miller Act. The District Court concluded that Havens was a material supplier and not a “subcontractor” as defined by the Miller Act.
On appeal, the Third Circuit , principally relying on F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116 (1974), held that under the Miller Act, whether one is a subcontractor does not hinge on the customized or unique features of the material being supplied, as had been assumed under the criteria applied by the district court. Rather, the Court held that “subcontractor status applies to one who performs a specific part of the original contract and has a substantial and important relationship with the prime contractor”.
The Third Circuit concluded that Havens was a subcontractor under the Miller Act because it was tasked with the job of providing a specific and crucial part of the work and material which the Prime Contractor was required to perform under its contract with the Owner and because Havens and the Prime Contractor had a substantial and important relationship. Havens arranged for the fabrication and delivery to the site of a substantial amount of structural steel necessary for the skeleton of the hangar building, prepared shop drawings and erection drawings, designed the connectors, and performed some "design-assist engineering." The work and material Havens supplied for the framework required Pyramid to exercise substantial attention and oversight. The shop drawings were submitted to Pyramid for approval and the parties communicated about the connectors design and design-assist work. The steel that Havens supplied had to be carefully manufactured so that Pyramid could efficiently erect the framework. Delivery of the steel to the site had to be arranged to comply with Pyramid's construction schedule. Further, a large number of subcontracts were not awarded and none were as large as that with Havens.
The Third Circuit’s holding is significant in that it clarifies which parties are considered “subcontractors” for purposes of the Miller Act. Specifically, in the Third Circuit, the supplier does not need to deal with specialty items in order to obtain subcontractor status. Rather in the Third Circuit, the status of a subcontractor will be determined based up the nature of the relationship with the prime contractor, the significance of the work performed by the subcontractor in connection with the overall work of the prime, and, in part, whether a bond could have been obtained for the “subcontractor.”
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Massachusetts Court Holds Surety Not Responsible For Punitive Damages Assessed Against Its Principal
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C&I Steel, LLC v. Travelers Casualty & Surety Co.
70 Mass. App. Ct. 653, 2007 Mass. App. LEXIS (App. Ct. Nov. 6, 2007)
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| The town of Westford awarded Peabody Construction Company, Inc. (“Peabody”) a contract for construction of a middle school. The project required a payment bond which Peabody obtained from Travelers Casualty and Surety Company (“Travelers”) for the full value of the contract. Peabody, as principal, and Travelers, as surety, jointly and severally bound themselves “to [Westford] to pay for labor, materials and equipment furnished for use in the performance of the [c]onstruction [c]ontract.” The bond set forth that the construction contract incorporated the agreement between Westford and Peabody, including all the contract documents and changes thereto.
Peabody entered into a subcontract with C&I Steel, Inc. (“C&I”) for the structural steel work. The subcontract contained an arbitration provision pursuant to which Peabody and C&I agreed that, at Peabody’s election, all claims, disputes and other matters in question shall be decided in arbitration. Disputes between Peabody and C&I ensued and C&I commenced an action against Peabody, Travelers and the architect (the architect was later dismissed from the action).
Peabody moved to compel arbitration, the court action was stayed and C&I filed a demand for arbitration with the AAA naming Peabody alone as the respondent and asserting only those claims it had against Peabody. C&I’s demand did not name Travelers and Travelers did not seek to participate. The arbitrator issued an award in favor of C&I and against Peabody for compensatory contract damages and punitive damages. C&I moved to confirm the award in the Superior Court, seeking confirmation against Peabody and Travelers. Travelers opposed the motion with respect to the award of punitive damages arguing that a surety is not liable for punitive damages assessed against its principal and that payment for punitive damages is not an obligation it had undertaken in the bond. Travelers also argued that it was not bound by the subcontract’s arbitration provision nor a party to the arbitration proceeding so that the award could not be confirmed as to it. The Superior Court confirmed the award, rejecting Travelers arguments.
Travelers appealed the Superior Court’s decision with respect to punitive damages. (Travelers paid the award’s contract damages during the pendency of the appeal and limited its appeal to the punitive damage issue.) The appellate court held that Travelers was not liable for punitive damages because the terms of the bond did not cover punitive damages, finding that “to conclude that the bond encompassed punitive damages would be to rewrite the agreement Travelers made with Peabody.” The court was clear to note that its finding does not mean that Travelers would be immune from punitive damages for any of its own misdeeds. The court noted that its conclusion was consistent with the Restatement of Suretyship and the holdings of the majority of courts which had considered the issue.
The appellate court also agreed with Travelers position that there was no award against Travelers for the Superior Court to affirm. Travelers was not bound by the subcontract provision providing for arbitration, C&I did not demand arbitration against Travelers nor made claims against Travelers in the arbitration proceedings, and the award said nothing about Travelers. The Court noted that while it had held that in certain circumstances a party may be bound by an award in an arbitration in which it did not participate, that means it is constrained from contesting any issue actually decided in the arbitration, not that an award runs against the nonparticipating party. The appellate court vacated the judgment, remanded to the lower court for modification of the judgment.
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