City of Boston v. McGovern

Decision Date25 July 1923
Docket Number1587.
Citation292 F. 705
PartiesCITY OF BOSTON v. McGOVERN et al.
CourtU.S. Court of Appeals — First Circuit

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E. Mark Sullivan, Corp. Counsel, of Boston, Mass. (Samuel Silverman Asst. Corp. Counsel, of Boston, Mass., on the brief), for appellant.

John F Cronan, of Boston, Mass. (Clarence J. Smerdon, of Boston, Mass., on the brief), for appellees.

Before BROWN, MORRIS, and PETERS, District Judges, sitting as Circuit judges.

BROWN District Judge.

This appeal by the city of Boston relates to proceedings in the District Court for the District of Massachusetts, upon a bill in equity by a firm of contractors, P. McGovern & Co., for the cancellation of a contract made December 16, 1914, with that firm by the city of Boston, acting by the Boston Transit Commission, a statutory commission, for the construction of Section E of the Dorchester Tunnel, upon the ground that they were induced to make their bid and to enter into the contract by misrepresentations as to the nature of the materials to be excavated. Cancellation was prayed on the ground of fraud, or in the alternative of mutual mistake of facts.

At the outset we are met by the fact that the judgment of the District Court sustaining the right to cancellation and to recovery from the city of Boston, is in direct conflict with a decision of the Supreme Judicial Court of the State of Massachusetts, made before the filing of this bill, in a case between the same parties and upon the same issues at law, relating to the right of the plaintiffs to an accounting from the city of Boston, and to cancellation of the contract on the ground of fraud. McGovern v. Boston, 229 Mass. 394, 118 N.E. 667. The plaintiff lost in the state court by a decision on legal issues on demurrer, but prevailed in the District Court upon the ground of fraud. Although the construction of the tunnel had been fully completed, with a profit to the contractors of $408,020.85, measured by the difference between the actual cost, $1,806,903.38, and the contract price, $2,214,924.33, the District Court found that plaintiffs were entitled to cancellation, that a profit of $543,096.82 was a fair profit, and that a fair price for the work was $2,350,000; and by final decree ordered payment by the city of Boston in accordance with that finding.

The result of canceling the contract was to relieve the contractor from certain provisions of the contract that were favorable to the city of Boston; for example:

'Item (b). For rock excavation the sum of six dollars and fifty cents ($6.50) per cubic yard.'
'Item (k). For all maintaining and protecting of the buildings and structures on the line of work, for all excavation made and concrete placed outside of the limits defined in the specifications or on the contract plans, and for all other work and risks included in this contract not covered by other items, the gross sum of five thousand ($5,000) dollars.'
'Item (w). For furnishing, installing, operating and maintaining in repair a complete compressed air plant, including airlocks, bulkheads, air compressors, piping, and all other necessary apparatus; for all additional risks involved by doing the work in compressed air which are not covered by the other items of the bid, the gross sum of thirty-five thousand ($35,000) dollars.
'Item (x). For extra work, done by written order of the engineer, approved by the Commission, not similar in character to the foregoing items, and for which no price is set in the said written order, its direct (not including consequential) cost to the contractor, as determined by the engineer, and not exceeding what the engineer deems reasonable, plus 10 per cent. of said cost.'

Without cancellation of the contract, the plaintiffs as claimants for extra compensation above that determined by the contract would have had to meet defenses based upon protective clauses in the contract, limiting compensation for extra work or unforeseen risks.

The substance of the plaintiffs' claim was not that they had been fraudulently induced to enter into an unprofitable contract to their damage, but that they had been defrauded of a larger profit, to which they would have been entitled had they been informed that test borings made by the Commission indicated the existence of ledge, which was unexpectedly encountered in the progress of the work.

The master, and the District Court, found that the plaintiffs were induced to make their bid and sign the contract by concealment and misrepresentation on the part of the Commission (the Boston Transit Commission) and its engineers, in respect to the character of the soil indicated by test borings made by them, and expressly found them 'guilty of fraud in fact.' The master also found:

'That the plaintiffs would not have made the bid and contract in question had they known the truth about said borings, and that the rock or mixed face excavated by the plaintiffs increased very materially the time necessary to complete the tunnel, and the costs and risks involved.'

Mr. McGovern testified:

'Q. Would you prefer the profit on the job, or not have the job at all?

'A. No; I would rather have the job.'

Mr. Perrin, one of the partners, testified:

'Q. If you had been told that you could do this job and have all the costs paid, and be paid $200,000 as a profit, would you have been glad to get it?

'A. With every risk removed and an absolute guaranty of that profit, it would have been equivalent to an approximate profit of 10 per cent. I think; yes.'

The defendant contended that upon the evidence the additional cost by reason of encountering ledge was $19,170, or but 1.06 per cent. of the total cost of the tunnel.

In view of the fact that, though the lowest bidder for the job, the plaintiffs named a price which covered all contingencies incidental to a work of that character, and also the unexpected contingency which is the plaintiffs' ground of complaint, by the large margin of $408,000, we find difficulty in agreeing with the master's conclusion that the plaintiffs would not have made the bid had they then known what they afterwards discovered.

If there was fraud, it was found by the District Court to be the fraud of the 'Commission and its engineers.' Could this fraud be attributed to the city of Boston, so as to deprive it of all the protection of the contract made in its behalf by a statutory commission (the Boston Transit Commission) and also of the protection of a statute defining the mode in which a contractual obligation might be imposed upon the municipality? The plaintiffs have not been damaged unless it appears that but for the fraud of which they complain they would have made a profit exceeding the sum of $408,000.

It seems to be necessary in order to support the judgment of the District Court to find that had the plaintiffs known what they say was concealed (i.e., that borings indicated the presence of ledge), they would not have made this contract; and, furthermore, that they would have had a contract upon broader terms and at better prices, for the excavation of rock, ledge, or 'mixed face,' i.e., ledge and earth in combination.

That the plaintiffs in their bid made a large allowance for error in estimates of cost is apparent. To what extent, in a competition for a job to be awarded to the lowest bidder, they would have increased their bid had the borings been described on the plans as stopping at 'rock' or 'ledge,' instead of at 'hardpan,' the term used on the plans, is speculative. In attempting to determine what would have been a fair bid, or a fair price for the entire work, had the plans disclosed borings terminating in rock, elements of uncertainty and speculation were introduced into the case which greatly prolonged the hearings. Doubt is suggested whether, upon such a supposititious bid, the plaintiffs would have been the lowest bidder, and whether they would have gained the profits which they did make. It should be noted, however, that the plaintiffs desired to limit the case to the question of what should be paid as a fair price, in addition to prices named in the contract, for excavating ledge and earth in combination. The defendant, however, insisted that if there was to be cancellation it was entitled to have the fair value of the entire work determined on the basis of cost, with a reasonable percentage of profit, and that upon this theory the plaintiffs already had received full compensation.

Expert testimony was offered as to what would have been a fair bid had ledge been indicated on the plans, and as to what percentage should have been added to such bids in order to provide for risks and profit. The master's report does not state the additional cost to the contractor by reason of excavating ledge, nor show what amount would compensate the contractor for any loss of profit, or for extra work on the contract, but proceeds to estimate the fair value of the whole work, and apparently gives great weight to the argument that the additional risks gave a right to a larger percentage of profit.

The plaintiffs, being overruled in their attempt to limit the scope of the hearings before the master, then proceeded upon the theory that they were entitled to show what would have been a fair bid for a contractor to make, had the plans indicated that the excavation of 'mixed face,' composed of ledge and earth in combination, was a necessary part of the construction of the tunnel.

Were we to go into the details of the many questions raised by the defendant's 118 assignments of error, we should be required to resolve many serious doubts upon the question of the right of the plaintiffs to full cancellation of the contract, and upon the method of computing the amount of monetary...

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