Granite Computer Leasing Corp. v. Travelers Indem. Co.

• Decision Date: 22 January 1990
• Docket Number: D,No. 1136,1136
• Citation: 894 F.2d 547
• Parties: GRANITE COMPUTER LEASING CORP., Plaintiff-Appellee, v. The TRAVELERS INDEMNITY COMPANY, Defendant-Appellant. ocket 89-7141.
• Court: U.S. Court of Appeals — Second Circuit

Page 547

894 F.2d 547

GRANITE COMPUTER LEASING CORP., Plaintiff-Appellee, v. The TRAVELERS INDEMNITY COMPANY, Defendant-Appellant.

No. 1136, Docket 89-7141.

United States Court of Appeals, Second Circuit.

Argued May 11, 1989.

Decided Jan. 22, 1990.

Lauren J. Wachtler, New York City (Shea & Gould, New York City, of counsel), for plaintiff-appellee.

Peter N. Wang, New York City (Freidman, Wang & Bleiberg, New York City, James H. Reily, Max E. Greenberg, Cantor, Trager & Toplitz, New York City, of counsel), for defendant-appellant.

Before KEARSE, CARDAMONE, and PIERCE, Circuit Judges.

PIERCE, Circuit Judge:

The Travelers Indemnity Company ("Travelers") appeals from a judgment of the United States District Court for the Southern District of New York (Motley, Judge) granting the motion of Granite Computer Leasing Corp. ("Granite") for a directed verdict following a jury trial. We believe that the evidence presented raised questions of fact for the jury and thus that Granite was not entitled to prevail as a matter of law. Therefore, we vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

I.

In March 1973, Community Science Technology, Inc. and Community Science Technology Development Corp. (together "Community"), were awarded a contract by the United States Government for the manufacture and installation of prefabricated modular housing units at seven Air Force bases. In April 1973, Community entered into a subcontract with National Modular Systems Corp. ("National") for National to supply 330 such units for three of the Air Force bases for a total fixed price of $3,347,180. Pursuant to the terms of the subcontract, National obtained a surety bond from Travelers, which named National as the principal and Community as the obligee.

From the outset, the project experienced significant delays. According to Travelers, the delays resulted, inter alia, from the government's failure to approve National's design drawings for the housing units. In June 1973, Community submitted National's detailed drawings of the housing units to the government, which drawings the government had approximately thirty days to review as provided in its notice to proceed. According to David Solomon, a former vice-president of National, the government never formally approved any of National's designs for the housing units. Solomon testified that National eventually decided to commence limited production of the units based on the government's review of a prototype.

In addition, testimony was presented that delays resulted from the government's deficient specifications and from the government's failure to timely approve National's use of alternate sources of materials used to construct the modules. However, other evidence suggested that National's own failure to meet certain specifications for the acoustical requirements of the modules also contributed to the delays.

According to Solomon, the government's delays had a severe financial impact on National, in part due to National's assembly-line method of producing the housing units. Its plant in Chester, New York contained two assembly lines, each with various stations at which components of the housing units were manufactured. Delays at any one station held up the next sequential stage of construction. As a result of the various delays, National claimed to have had increased labor costs due to 1) a rise in wages which occurred after the date on which National had estimated completion of its work and 2) the loss of its "previously experienced learning curve, since many of its more capable employees found other employment during [several lay-offs necessitated by the delays], and other employees lost their previously-developed degree of proficiency." National also claimed to have experienced increased costs for materials.

According to the record evidence, on several occasions National warned Community and the government that the delays were causing it serious financial hardship, threatening its ability to continue production. National wrote Community on April 5, 1974 and again on May 20, 1974 seeking an increase in the subcontract price. National warned that it might "be forced in the very near future to cease its performance under the supply contract and to close its doors unless it receive[d] a significant cash infusion from [Community] or the Government prior to final resolution of National's claim." Pursuant to the terms of the subcontract, ¹ Community promptly transmitted National's claim to the government for review by the government's contracting officer. ²

On June 21, 1974, two and a half months after its first written complaint to Community, and while National's claim for an adjustment of the contract price still was pending, National, apparently due to its financial plight, ceased operations at its production plant. Upon learning of the plant closing, the government threatened to terminate Community from the prime contract if National did not resume production by July 8, 1974 (later extended to July 15, 1974). At a June 25, 1974 meeting between representatives of Community and the government, the government rejected Community's request to expedite National's claim.

On June 27, 1974, Community's general counsel spoke with representatives of Travelers, the surety for National, in an effort to secure additional financing for National. Travelers, however, refused to provide funding, claiming that National was not at fault in ceasing operations. Subsequently, on June 28, 1974, Community sent National a written notice of breach with fifteen days to cure, as provided in the subcontract.

Eventually, Community agreed to advance National up to $350,000 (later increased to $2,500,000) so that National could reopen its plant. The terms of the advance were contained in a financing agreement between Community and National dated July 8, 1974. The agreement explicitly withdrew the June 28 notice of breach. Thereafter, National reopened its plant and completed production in September 1975, eighteen months beyond National's original estimated date for completion.

In December 1980, Community and the government reached a settlement for the additional expenses incurred by Community and its subcontractors for government-caused delays. Under this agreement, the total prime contract price was increased by approximately $2.8 million, of which $743,000 was allocated to National's claims. Subsequent demands upon National and Travelers for repayment of the funds for which Community was not reimbursed by the government were rejected.

Community assigned its claim against National under the July 8, 1974 financing agreement to Great American Insurance Company, which in turn assigned the claim to Granite. In 1981, Granite filed suit in the district court under diversity jurisdiction to recover the balance due on the funds advanced by Community to National. ³ Granite maintained that National's 1974 plant closure constituted a default under the subcontract, thereby triggering Travelers' obligations as surety to provide financing for National or to ensure National's performance. Granite's complaint also sought an award of prejudgment interest, costs, and punitive damages for Travelers' alleged bad faith.

In 1984, the district court granted summary judgment in favor of Travelers. Granite Computer Leasing Corp. v. Travelers Indem. Co. ("Granite I"), 582 F.Supp. 1279 (S.D.N.Y.1984). Upon appeal by Granite, we vacated the judgment and remanded. Granite Computer Leasing Corp. v. Travelers Indem. Co. ("Granite II"), 751 F.2d 543 (2d Cir.1984). Subsequently, a series of hearings and conferences was conducted by the district court in an attempt to narrow the issues for trial.

The case proceeded to trial before a jury, and, after all the evidence had been presented, each side moved for a directed verdict. The district court granted Granite's motion for a directed verdict as to Travelers' liability under the bond. Granite Computer Leasing Corp. v. Travelers Indem. Co. ("Granite III"), 702 F.Supp. 415, 423 (S.D.N.Y.1988). The claims for punitive damages and attorneys' fees went to the jury and an award was returned in favor of Granite. The total judgment, including prejudgment interest, was for $3,595,795.29. This appeal followed.

II.

We first address Travelers' challenge to the district court's pretrial ruling that the disputes clause of the prime contract was applicable to National. ⁴ The disputes clause provided that, in the event of a dispute arising under the prime contract, the contractor (Community) was to proceed diligently with performance of the contract pending resolution of the dispute by the government's contracting officer. ⁵ We agree with the district court that this clause also was applicable to National since the subcontract's detailed provisions for submission of excusable delay claims to the government evidenced the parties' intent to incorporate the disputes clause into the subcontract. See, e.g., supra n. 1. Thus, National was obligated to submit its claim for additional compensation and time extensions to Community, who then was required to pass it on to the government. Subject to the limitations discussed below, we believe that National did have a duty to continue its performance under the contract pending resolution of its claim.

III.

We next turn to the district court's grant of a directed verdict. "A directed verdict is proper only if 'the evidence is such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable [persons] could have reached.' " Fiacco v. City of Rensselaer, 783 F.2d 319, 329 (2d Cir.1986) (quoting Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir.1970)), cert. denied, 480 U.S. 922, 107 S.Ct. 1384, 94 L.Ed.2d 698 (1987). In applying this standard, the district court's task is not to try issues of fact, but...