McCarty Corp. v. Pullman-Kellogg, Div. of Pullman, Inc.

• Decision Date: 28 January 1985
• Docket Number: PULLMAN-KELLOG,No. 83-3504,DIVISION,83-3504
• Citation: 751 F.2d 750
• Parties: The McCARTY CORPORATION, Plaintiff-Appellant Cross-Appellee, v.OF PULLMAN, INC., Defendant-Appellee Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 750

751 F.2d 750

The McCARTY CORPORATION, Plaintiff-Appellant Cross-Appellee, v. PULLMAN-KELLOGG, DIVISION OF PULLMAN, INC. Defendant-Appellee Cross-Appellant.

No. 83-3504.

United States Court of Appeals Fifth Circuit.

Jan. 28, 1985.

Schwab & Walter, Gerald L. Walter, Jr., Baton Rouge, La., John B. Tieder, Jr., Garry R. Boehlert, Washington, D.C., for plaintiff-appellant cross-appellee.

Montgomery, Barnett, Brown & Read, Daniel Lund, New Orleans, La., for defendant-appellee cross-appellant.

Appeals from the United States District Court for the Middle District of Louisiana.

Before THORNBERRY, GARWOOD and HILL, Circuit Judges.

THORNBERRY, Circuit Judge:

This is an appeal and cross-appeal from a final judgment in a diversity case in the United States District Court for the Middle District of Louisiana. The district court, applying Louisiana law, annulled a contract between the McCarty Corporation and Pullman-Kellogg and awarded McCarty recovery of $490,497.92 plus interest from the date of judicial demand. McCarty Corp. v. Pullman-Kellogg, 571 F.Supp. 1341 (M.D.La.1983). McCarty, the plaintiff in the district court, appeals, claiming that the court erred in failing to award McCarty recovery for amounts attributable to overhead and profit. Pullman-Kellogg, the defendant in the district court, cross-appeals, challenging the annulment of the contract, the amount of the award, and the award of prejudgment interest. We affirm the district court's annulment of the contract, we reverse the award of prejudgment interest, and we remand the case to the district court for further evidence and findings on the issue of the amount of the award.

I. THE FACTS

The plaintiff, McCarty Corporation ("McCarty"), is a Louisiana corporation with its principal place of business in Port Allen, Louisiana. McCarty is engaged in the commercial and industrial insulation business. The defendant, Pullman-Kellogg ("Pullman"), is a Delaware corporation with its principal place of business in Houston, Texas. Pullman is in the business, inter alia, of engineering and constructing industrial plants, including oil refineries.

Pursuant to a contract between Pullman and Shell Oil Co., Pullman was the prime contractor in an expansion of Shell's Norco refinery complex. Pullman subcontracted out much of the work, including the insulation work. This case involves the insulation subcontract between Pullman and McCarty. The primary controversy in this case concerns the fact that McCarty's bid was based on a mistaken understanding regarding the type and scope of the insulation work to be done. The issue is whether, under the particular circumstances of this case, McCarty's misunderstanding constituted error in the principal cause of the contract sufficient to justify annulment of the contract.

On September 6, 1978, Pullman sent a telex message to prospective insulation subcontractors requesting background information. The telex stated that the "preliminary cost estimates indicate overall project scope to be in excess of fifteen million dollars and in excess of one half million man hours required." Pullman also stated in the telex that it anticipated obtaining bids for the complete project but that the insulation work might be divided among two or three insulation applicators, in which event the subcontract packages "could possibly average four to six million dollars each and approximately two hundred thousand man hours each." McCarty received one of these telexes.

On October 9, 1978, Pullman sent to McCarty and others an Invitation to Bid. The Invitation stated that the insulation work consisted of one large unit, referred to as the "01" unit, and three smaller units, referred to as the "02," "03," and "04" units. Part IV, paragraph 7.1 of the Invitation to Bid stated that it was Pullman's preference to award all of the insulation work to one contractor; however, it was reserving the option to divide the work into three parts. The three parts were denominated as Plots A, B, and C. Plots A and B would each be contracts for approximately 35% of the work on the 01 unit. Plot C would be a contract that included the common offsite work on the 01 unit (amounting to approximately 30% of the total work to be done on the 01 unit) and would also include all of the work on the three smaller units. Common offsite piping is the piping that inter-connects the vessels and towers. The district court found that the term "common offsite piping" as used in Paragraph 7.1 of Part IV of the Invitation to Bid, is generally understood to be long straight sections of pipe twenty to twenty-five feet off the ground.

The Invitation to Bid asked for a lump sum bid on the insulation of equipment--vessels and towers--and for unit price bids on piping and instrument insulation. Each bidder was to express the unit prices as "x" number of dollars per lineal foot of the various sizes of piping insulation. The Invitation called for unit price bids because the specifications for the piping and instruments had not been completed at that time. The Invitation also contained the following provisions in Section III:

Par. 1.3. Oral explanations and interpretations made prior to the bid opening shall not be binding.

Par. 1.4. Should a bidder find discrepancies in or omissions from, the drawings or specifications, or be in doubt as to their meaning, he should at once notify the Contractor in writing who will send instructions to all on record as having drawings and specifications. The Contractor will not be responsible for any oral instructions.

Par. 1.7. Any estimate of volume of work set forth on drawings and/or specifications is not binding upon Contractor and is offered as an indication of scope of work only.

Sometime in September or October of 1978 Pullman representatives W.T. Smith and Duncan Kinchen held a pre-bid meeting in Houston. Mr. Smith was the official Pullman spokesman for bidding matters and Mr. Kinchen was Pullman's senior insulation engineer and in-house expert on insulation matters. Mr. M.R. McCarty, president of McCarty Corp., attended the meeting. Smith and Kinchen told Mr. McCarty that the insulation work would total between eighteen and twenty million dollars and that the work was divided into three parts of approximately equal value. They also told Mr. McCarty that the work would probably be awarded to two contractors, in which case the work would be split on a two-thirds--one-third basis. Mr. Kinchen told Mr. McCarty that Pullman felt only one of the bidders was capable of performing as much as two-thirds of the work.

Using the information furnished by Pullman, specifically including the telex, Part IV, par. 7.1 of the Invitation to Bid, and the representations made by Smith and Kinchen, McCarty prepared its bid. On the basis of what Mr. Kinchen had told Mr. McCarty, McCarty concluded that it would receive one-third of the project or none at all, and given the company's capabilities, it would probably receive the work denominated as Plot C which consisted of the common offsite work and units 02, 03, and 04. Although McCarty bid on the entire project, it tailored the bid towards Plot C. McCarty first prepared its lump sum bid for the equipment insulation and then calculated the unit price for piping and instrument insulation. Based on the estimates of the total value of the work to be done in Plot C and the percentage of the work that was common offsite piping, McCarty calculated that the common offsite work would run about three and one half to four million dollars, or over 50% of the total amount of the work in Plot C. The common offsite work represented over 70% of the work in Plot C that was to be bid in unit prices. Insulation of common offsite piping is relatively easy work and requires less labor per unit than do other types of insulation work. McCarty concluded that the vast amount of common offsite piping would enable it to reduce its labor costs; therefore, in calculating its unit price bid, it reduced its weighted average unit prices for labor by approximately 20%.

On November 17, 1978, McCarty submitted its bid to Pullman. McCarty was the low bidder on the project, but Pullman decided that because of the size of the project McCarty did not have the capacity to do all of the work. Therefore, Pullman split the job for award to two insulation subcontractors. Pullman awarded two thirds of the work, Plots A and B, to Anco Insulation and awarded Plot C to McCarty. On April 26, 1979, McCarty and Pullman entered into a contract which formally awarded Plot C of the insulation work to McCarty. The total firm lump sum cost of the work was set at $1,472,587.00. The unit prices on piping and instrument insulation that McCarty submitted in its bid were incorporated into the contract for the purpose of pricing the work as it was released by Pullman for insulation. The contract also contained the following provision:

SUBCONTRACT INCLUDES ENTIRE AGREEMENT:

This Subcontract embodies the entire agreement between Contractor and Subcontractor. Subcontractor represents that in entering into this Subcontract it does not rely on any previous oral or implied representation, inducement, or understanding of any kind. Any changes in the provisions of this Subcontract, or in the attachments hereto made subsequent to the execution hereof, shall be made in writing and executed in the same manner as this Subcontract.

McCarty started work under the contract on March 15, 1979. After the contract for Plot C was awarded to McCarty, Pullman substantially reduced its estimates of the number of man hours and the cost of the work in Plot C. Pullman did not inform McCarty of the reduction. After all of the work was released, the actual amount of work in Plot C was approximately 2.75 million dollars rather than the estimated four to six million dollars. The amount of common offsite work actually totalled only $330,000.00 rather than the estimated 3.5 to 4 million dollars....