US Fidelity & Guar. Co. v. Ernest Const. Co.

• Decision Date: 20 June 1994
• Docket Number: 88-239-Civ-T-99.,No. 88-1633-Civ-T-99,88-1633-Civ-T-99
• Citation: 854 F. Supp. 1545
• Parties: UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff, v. ERNEST CONSTRUCTION COMPANY, Defendant. ERNEST CONSTRUCTION COMPANY, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant.
• Court: U.S. District Court — Middle District of Florida

854 F. Supp. 1545

UNITED STATES FIDELITY & GUARANTY COMPANY, Plaintiff, v. ERNEST CONSTRUCTION COMPANY, Defendant.

ERNEST CONSTRUCTION COMPANY, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY, Defendant.

Nos. 88-1633-Civ-T-99, 88-239-Civ-T-99.

United States District Court, M.D. Florida, Tampa Division.

June 20, 1994.

COPYRIGHT MATERIAL OMITTED

Harry L. Griffin, Jr., W. Henry Parkman, Atlanta, GA, for Ernest Const.

Ron Yarbrough, Jackson, MS, for USF & G.

ORDER

SCHLESINGER, District Judge.

This cause is before the Court on cross-motions for summary judgment filed by United States Fidelity & Guaranty (Doc. No. 45) in Case No. 88-1633-Civ-T-99 and by Ernest Construction Company (Doc. No. 48) in Case No. 88-239-Civ-T-99. Also, Ernest filed a Motion to Amend the Complaint and Counterclaim (Doc. No. 70). Both parties filed responses in opposition to all pending motions. The Court conducted oral argument on the motions; and upon reviewing the affidavits, exhibits, and memoranda, makes the following findings.

A. FACTS

Murray Walter ("Walter") was a general contractor. On December 11, 1978, Walter contracted with the United States to construct Phase I of the Bay Pines, Florida, Veterans Administration Center, a 520-bed Replacement Hospital. Before Walter could begin construction on the hospital, Walter secured a $2.5 million dollar payment bond and a $14 million dollar performance bond as required by the Miller Act. See 40 U.S.C. § 270a. Walter purchased these necessary bonds from United States Fidelity and Guaranty Company ("USF & G"), the surety and a party to this litigation.

After securing the necessary bonds, Walter contracted with various materialmen to begin construction of Bay Pines, and formed a subcontract with Ernest Construction Company ("Ernest"). Ernest agreed to perform foundation work, which consisted of furnishing and installing pre-stressed concrete piles. As Ernest began to install the concrete piles, Ernest encountered a problem: the subsurface material in which to drill through and drive piles was significantly more difficult than anticipated. Ernest had encountered a differing site condition, a condition materially different from that which the VA had represented to Walter, and that which Walter subsequently presented to Ernest.

Ernest, although believing that a differing site condition existed, continued to work on the project and sent a letter to Walter on February 13, 1979, requesting additional compensation. Ernest Exhibit 1. After reviewing the letter, Walter conducted an investigation to determine if the complaint was indeed correct. Walter tested a sample of soil taken from test pile No. 18, and that test demonstrated "a change in site conditions beyond a shadow of doubt by identifying the material as `dolomite' (limestone) with no evidence of phosphate." Id. Walter communicated this finding to Mr. William Herndon, a senior resident engineer with the Veterans Administration. Walter again communicated to Herndon the problem encountered by Ernest in a letter dated April 4, 1979, and stated that a final claim would be forwarded once a determination was made.

Upon receiving notice from Walter, the VA requested that a complete claim be filed on or before July 6, 1979. Thus, Ernest and Walter submitted a claims packet to Herndon, which included: (1) Walter's claim estimate (2 pages); (2) Ernest's request for equitable adjustment (108 pages); (3) Southern Earth Sciences, Inc.'s Investigation of Subsurface Conditions and Pile Installation Problems (16 pages); and (4) Ernest's Analysis of Additional Cost Due to Differing Site Conditions (15 pages). Ernest's claim was submitted by Walter on behalf of Ernest and several other subcontractors.¹

While Ernest's claim was pending, the overall project fell behind. Phase I was scheduled to be completed by February 1980. By May 1980, Walter had fallen three months behind schedule for which it became liable for liquidated damages at the rate of $9,000.00 per day. On May 5, 1980, Walter wrote to James Lawson ("Lawson"), the acting contracting officer, and asserted the changed site condition as the reason for the delay. If the VA were to impose liquidated damages in excess of 15% of the entire contract price in addition to the additional costs already incurred by the differing site condition, Walter contended that the job — and the company — would collapse. Clearly, Walter's demise would have adversely affected the VA as well as the surety USF & G.

The VA agreed to not withhold liquidated damages prior to reviewing Walter's claim. In a letter dated May 27, 1980, Lawson agreed to refrain from withholding liquidated damages until August 1, 1980, providing USF & G would execute a Supplemental Agreement to the Contract agreeing to pay liquidated damages to the Government. Griffin Affidavit, Exhibit A at 2. If at any time prior to August 1, 1980, Walter's efforts to complete the project slowed, the VA would immediately seek liquidated damages. Thereafter, the VA continued to make progress payments to Walter, including a progress payment for the period ending May 2, 1980, even though the contractor had fallen behind on the project.

The work still was not completed by October 1980, and USF & G became increasingly concerned about the project and its liability. Agent Marty Hanafin contacted USF & G Senior Vice President D.H. Meehan seeking advice about "what direction to take regarding Murray's problems with the owner on this job." Ernest Exhibit 5. USF & G considered the problem and wrote an internal memorandum. In that memorandum, USF & G discussed their potential liability to the VA and Ernest. The memorandum described the problem as follows:

There were bad specifications which did not disclose certain soil conditions which resulted in drilling piles instead of driving them. The result has been for our principal to document a 1.7 million dollar claim against the owner for these changed conditions. Presentation of the claim to the contracting officer has met with little success and in fact the owner may assess liquidated damages against our principal. There is supposed to be 2½ million dollars left to bill in the job. Bottom line is that the whole thing may work out to be a wash. i.e., the owner will forget liquidated damages but continue to pay Murray Walter, Inc. until the job is completed.

. . . . .

A meeting between Murray Walter and the VA is scheduled for Friday, October 31, at 10:00 a.m. in Washington, D.C., and the question is whether or not U.S.F. & G. should be represented in this meeting.

Ernest Exhibit 5.

The memorandum summarized the claims filed by Walter and Ernest. It acknowledged that the contractual completion date had passed, and that it appeared the target completion date would now be mid 1981. Equally important, USF & G recognized that liquidated damages assessed against Walter, the principal on the bond, would exceed the amount remaining to be earned on the project. In light of this dilemma, the memorandum discussed alternative courses of action to limit the surety's liability, including Ernest's claim, as follows:

The alternatives would include walking off the job which would be totally unreasonable since this is a Federal contract and must be completed. Both sides have hired experts, done surveys and exchanged information with no resolution of the problem reached as of yet. Mr. Hynes feels that the VA may not have this money available to satisfy the claim. Another alternative would be to buy out the sub's claim or in effect pay off a sum something under $500,000.00 which M.W.I would not get back. This would be an immediate drain on cash flow but could be financed through bank credit or other means. Any way you cut it up it appears that the job will go from a $250,000.00 profit at 6-30-80 to a rather substantial loss if this claim is not resolved in some manner.

Ernest Exhibit 5 (emphasis added).

Walter met with a representative from the VA in November 1980, and following that meeting, the parties agreed to execute a rider to the performance bond. The rider as executed provides in relevant part:

(a) Perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract, including but not limited to any and all obligations of the Principal with respect to assessment of liquidated damages as therein provided during the original term of said contract and any extensions thereof that may be granted by the government, with or without notice to the Surety(ies), and during the life of any guaranty required under the contract, and shall also perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of said contract that may hereafter be made, notice of which modifications to the Surety(ies) being hereby waived;

Griffin Exhibit A (emphasis added).

After the parties negotiated this rider, Walter continued construction on the project. The new completion date was targeted as April 30, 1981, but it appeared in May 1981 to Lefter, contracting officer for the VA, that the project would not be completed on time and that USF & G would become liable for additional liquidated damages. Thus, the VA requested that Walter contact USF & G about the delay and obtain a letter acknowledging the project status and additional delays. USF & G complied with Ernest's request and reaffirmed the amendment to the surety bond. Griffin Exhibit A. Once again, USF & G acknowledged its liability for "any and all obligations of the Principal with respect to assessment of liquidated damages."

Walter eventually completed the project on July 29, 1981,² a date which the VA determined to be 341 days late. Griffin Exhibit A. The VA estimated that USF & G owed liquidated damages in the amount of $2,455,000.00. However during this time, the administrative claims filed by Walter and Ernest were still pending. Lefter allowed USF & G to defer payment of...