Aetna Insurance Co. v. Hellmuth, Obata & Kassabaum, Inc.

• Decision Date: 07 May 1968
• Docket Number: No. 18875.,18875.
• Citation: 392 F.2d 472
• Parties: AETNA INSURANCE COMPANY, a Corporation, Appellant, v. HELLMUTH, OBATA & KASSABAUM, INC., a Corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

392 F.2d 472 (1968)

AETNA INSURANCE COMPANY, a Corporation, Appellant, v. HELLMUTH, OBATA & KASSABAUM, INC., a Corporation, Appellee.

No. 18875.

United States Court of Appeals Eighth Circuit.

April 4, 1968.

Rehearing Denied May 7, 1968.

Richard M. Stout, St. Louis, Mo., for appellant; Thomas M. Richards, St. Louis, Mo., on the brief.

Donald L. James, of Moser, Marsalek, Carpenter, Cleary & Jaeckel, St. Louis, Mo., for appellee; F. X. Cleary, St. Louis, on the brief.

Before BLACKMUN, GIBSON and HEANEY, Circuit Judges.

GIBSON, Circuit Judge.

This case concerns the alleged negligence of an architect in supervising the construction of a project. The appellant Aetna Insurance Company, a Corporation, (Aetna) sued Hellmuth, Obata & Kassabaum, Inc., hereafter referred to as "Architect," for damages occasioned by the alleged negligent failure of the Architect in supervising the construction of a Terminal Plaza at Lambert-St. Louis Airport.

The jury awarded Aetna damages of $15,000 but the District Court (E.D.Mo.) sustained the Architect's Motion for Judgment in Accordance with its Motion for a Directed Verdict (n. o. v.) and alternatively awarded a new trial on all issues. Aetna appeals from the judgment entered n. o. v. and asks a remand for a new trial. The alternative new trial was awarded on the basis of inadequacies and errors in the instructions and these issues are not presented on this appeal. We reverse and remand for a new trial.

Factually: Westerhold Construction, Inc. entered into a contract with the City of St. Louis, Missouri, for the construction of a Plaza at Lambert-St. Louis Municipal Airport. Aetna signed this contract as surety for Westerhold guaranteeing Westerhold's performance. The Architect, in addition to designing the plans and providing the specifications, agreed to supervise the construction and, as listed in its written contract with the City, undertook "to perform professional services in the preparation of drawings and specifications and supervision of construction" and "general supervisory services and advice during the construction period." Aetna knew in undertaking to guarantee the performance of Westerhold that the Architect was the "engineer or architect in charge of work." The contract of employment of the Architect, however, does not define the terms "supervision of construction" or "general supervisory services."

The construction project met with many difficulties and delays. The Westerhold firm was in financial difficulties from the start and was unable to complete the project without financial assistance from Aetna. Apparently Westerhold used funds from this project to pay judgments resulting from the operation of other projects. Bills on this project, therefore, were left unpaid, though that phase of the work had been completed and Westerhold paid on the Architect's certification. Aetna asserts that the Architect was negligent in not making any effort at any time to ascertain to what use funds were being put, even after receiving reports that subcontractors and others were not being paid.

Aetna also alleges substandard performance by Westerhold in carrying out the construction project which necessitated increased costs and some duplication of the work. In particular: (1) A concrete retaining wall bulged noticeably, apparently due to deficiencies in the forms used and the failure to properly tie in the forms; part of this work had to be redone. An employee of the Architect noticed the misaligned forms and testified he spoke to Westerhold about it, but neither he nor anyone else with the Architect went back to check to see whether this situation was corrected before the concrete was poured; (2) The project included a sewer ditch that was 15 to 20 feet deep at its deepest point. The contractor excavated the ditch with mechanical equipment but left it open and unfilled for a period from two to three weeks, in which time the ditch eroded or sloughed (became V-shaped). The single-strength vitrified clay pipe, called for by the specifications, was unable to withstand the added pressure caused by the increased weight, due to the widening of the ditch (by erosion and sloughing), and the matter had to be corrected by redigging the deep ditch and replacing the sewer with double-strength pipe. There were also deficiencies alleged in the collapse of the vertical inlets to the sewer pipe, in the actual laying of the pipe, and the failure to backfill the ditch in accordance with good construction practices. The specifications provided for the contractor Westerhold to make tests of the backfilling in the presence of the Architect. However, no such tests were required or performed, nor had the Architect given the contractor any instructions with reference to the procedure to be followed on account of the sloughing condition. Because of this, some pavement had to be replaced on account of a settlement condition; (3) In addition to the repaving necessary by reason of the settlement condition of the sewer, some pavement had to be replaced because its appearance was not in accordance with specifications. Also, as an alleged result of the Architect's failure to properly supervise, the project was delayed beyond its completion date, causing additional expense in the performance of the contract.

The District Court in sustaining the Architect's "Motion for Judgment in Accordance with its Motion for a Directed Verdict" (n. o. v.) stated, "Plaintiff failed to demonstrate by substantial evidence that defendant breached any duty owed to plaintiff which would create liability on defendant." The appellee Architect contends that its duty under the contract ran only to the owner (City) and since there was no privity between Aetna and it, no cause of action was stated; and further points out that the construction job was completed in accordance with the plans and specifications.

This case in its present posture presents the question of whether a surety on a contractor's performance bond has a right of action for loss occasioned by an architect's negligence in supervision of the construction project. The parties for the most part rely on the same cases but place a different interpretation on the holding and rationale of these cases. This is a diversity case, in a proper jurisdictional amount, and Missouri law controls.

We think the Missouri law allows a recovery to a surety for loss occasioned by an architect's negligence in failing to properly supervise a construction project where the architect is obligated by the contract or agreement to supervise the construction, regardless of the lack of privity.

The Missouri Supreme Court in Westerhold v. Carroll, 419 S.W.2d 73 (1967) held that privity of contract was not required in the case of a surety on a performance bond seeking recovery against an architect who was negligent in incorrectly certifying the amount of work completed and material furnished. That Court held the surety had a right to rely on the provisions of the construction contract between the owner and the architect, and to appreciate the fact that its risk would be less hazardous with the assurance of inspection and supervision than where there were no safeguards; and approved this Court's statement in Hall v. Union Indemnity Co., 61 F.2d 85, 88 (8 Cir. 1932) "* * * such provisions in a contract are as much for the protection of the surety as of the owner."¹

Westerhold held that the architect was under a legal duty to the surety to exercise ordinary care in executing the certificates called for in the construction contract. The Missouri Supreme Court in a scholarly and extensive discussion of the law of privity and its erosion through the years, said the relaxing of the rule requiring privity "* * * should be done on a case-to-case basis, with a careful definition of the limits of liability, depending upon the differing conditions and circumstances to be found in individual cases" and that the rule requiring privity would no longer be followed blindly, and that unless the two reasons advanced in Winterbottom v. Wright, an old English case, 10 M. & W. 109, 152 Eng.Rep. 402 (1842) for the rule of privity "unlimited liability to an unlimited number of persons" and "that the parties to contracts would be deprived of control over their contracts" are present, that the rule would not be followed. 419 S.W.2d 77-79. In a case of this type there is no unlimited liability to an unlimited number of persons; and on the latter reason the Missouri Court held it non-existent because if the parties to the contract mutually agreed to change the provisions of the contract which inures to the benefit of the surety and the change results in increasing the risk of the surety, the surety is discharged from his liability either wholly or to the extent of his increased risk.

In approving our Hall, supra, decision the Missouri Court stated 419 S.W.2d at p. 79:

"* * * In this case, as in Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275, 23 A.L.R. 1425, the person not in strict privity of contract who would be injured by defendant\'s negligence was known, and the `end and aim\' of the provision of the contract with respect to payments was for the benefit of the surety, as well as for the owner. Also, to forego the requirement of privity of contract could not lead to excessive and unlimited liability or lead to endless complications in following out cause and effect. * * * No exposure to liability to an unlimited number, or to an indeterminate class, of potential claimants is involved."²

In a similar factual situation the U.S. D.C. for Minnesota in Peerless Insurance Company v. Cerny & Associates, Inc., 199 F.Supp. 951 (1961) held an architect liable for negligent certification of work performed by the contractor and for negligently failing to require the contractor to submit satisfactory proof that all bills and invoices had been paid. Privity was not required, the Court stating at p. 955: "Nor is privity...