Arctic Contractors, Inc. v. State, s. 2595

• Decision Date: 06 May 1977
• Docket Number: Nos. 2595,2657,s. 2595
• Citation: 564 P.2d 30
• Parties: ARCTIC CONTRACTORS, INC., et al., Appellants, v. STATE of Alaska, Appellee. STATE of Alaska, Cross-Appellant, v. ARCTIC CONTRACTORS, INC., et al., Cross-Appellees.
• Court: Alaska Supreme Court

Page 30

564 P.2d 30

ARCTIC CONTRACTORS, INC., et al., Appellants, v. STATE of Alaska, Appellee.

STATE of Alaska, Cross-Appellant, v. ARCTIC CONTRACTORS, INC., et al., Cross-Appellees.

Nos. 2595, 2657.

Supreme Court of Alaska.

May 6, 1977.

James A. Parrish, Fairbanks, for appellant and cross-appellee.

Avrum M. Gross, Atty. Gen., and Robert M. Johnson, Asst. Atty. Gen., Juneau, for appellee and cross-appellant.

Before BOOCHEVER, C. J., and RABINOWITZ, CONNOR, ERWIN and BURKE, JJ.

OPINION

ERWIN, Justice.

This appeal brings before us a complex dispute which arose out of a 1962 highway construction project outside Fairbanks. The parties are the State of Alaska and the now-defunct Arctic Contractors, the original prime contractor on the project. At the heart of the dispute are the State's claim that the project was seriously delayed due to Arctic's mismanagement and financial instability and Arctic's conflicting claim that the State's unreasonable responses to certain problems which arose on the project contributed to the delay and in fact caused Arctic's financial instability

In the Spring of 1962, appellant/cross-appellee Arctic Contractors submitted a bid on a contract for construction of the Farmers by the State's invitation to bid, Arctic by the States invitation to bid, Arctic Contractors submitted a bid bond prepared by James Kirwan as agent for United Benefit Fire Insurance Company. The bond was accpeted and approved by the State of Alaska.

On June 4, 1962, the State of Alaska, appellee/cross-appellant herein, through its Department of Highways, entered into a contract with Arctic for construction of the Farmers Loop Road. The contract called for construction of an 8.9-mile highway within 170 working days. Other specific conditions of the contract were adopted by reference to the 'Plans and Specifications,' a collection of documents which includes the original contract bids, questionnaires, general and special provisions for the Farmers Loop project, addenda, and related materials. The contract also incorporated the laws of the State of Alaska and the rules and regulations of the administering Federal highway agency. The Plans and Specifications contained previsions governing termination for default, damages for delay, time extensions, dispute resolution by the Contract Claims Review Board, payments to contractors, materials and workmanship, and inspection.

At the time of contracting Arctic was duly incorporated and authorized to do business in the State of Alaska. Prior to commencement of work, Arctic provided assurances that it was financially capable of satisfactorily completing the project and that it had obtained through United Benefit Fire Insurance Co. 'bonds in such sums as may be required for the faithful performance on the contract.' As required by the contract, Arctic Contractors provided a payment bond and a performance bond, each in the amount of $656,210.50. These bonds, like the bid bond, were purchased from James Kirwan. At the time, Kirwan was an authorized bail bond agent of United Benefit Fire Insurance Company and was in possession of United Benefit's corporate seal and attorney-in-fact stamp, which he affixed to the bonds. While no limitations pertaining to bail bonds appeared on either the seal or the stamp, State of Alaska records showed that James Kirwan was not authorized by United Benefit to sell payment and performance bonds and was not licensed to sell contract bonds.

On June 13, 1962, the State of Alaska accepted and approved the bonds submitted by Arctic. Further, Arctic was instructed to proceed on the project. Arctic Contractors was not aware of any impropriety in the bonds.

Arctic Contractors began work on the contract on June 18, 1962. Substantial capital investment was committed to the Farmers Loop project.

One of the major provisions of the contract required Arctic Contractors to procure and place over four hundred thousand yards of borrow material for the road bed. One of the borrow sources Arctic intended to use was the Thorgaard Pit, located near the center of the project.

The project's first delay occurred when the State Highway Department disapproved road materials being extracted ('borrowed') from the Thorgaard borrow pit. As noted in the amended contract, the State had previously approved the Thorgaard Pit as a potential source.

While the borrow material in the Thorgaard Pit was within contract specifications for use on the project, approval was required as the extracted material was offered for placement on the road. Arctic had been made aware of this requirement at a pre-construction conference held on June 12, 1962.

During that pre-construction conference, Arctic Contractors had been informed by Construction Engineer that the State would Contraction Engineer that the State would determine whether the material from the borrow pit was within the contract specifications and whether the contractor could use material from a particular pit on the road. Nevertheless, Arctic waited until after work on the project had begun to have a test run on a representative sample of material from the Thorgaard Pit. The tests showed that acceptable as well as unacceptable material was available in the Thorgaard Pit. However, Arctic did not return to the Thorgaard Pit to extract the acceptable material, but instead went to more distant sources. Arctic left some 160,000 cubic feet of acceptable material at the Thorgaard Pit.

In the middle of August, 1962, the Thorgaard Pit was again tested and approved for extraction of borrow material. Hauling began from the Thorgaard Pit on August 24, 1962. The project had been delayed 32 days between June 27, 1962, and August 24, 1962.

Work on the project did proceed during the 1962 construction season, although behind schedule. The State did not take steps to terminate Arctic Contractors' right to proceed during that year.

In August, 1962, the State of Alaska received notice from United Benefit Fire Insurance Company that the validity of the Arctic payment and performance bonds was to be denied. This notice came when the State notified the bonding company that Arctic had fallen behind in its construction schedule. After the defect in the bonds was discovered, the State made Progress Payment #2 in the amount of $68,807.53 and Progress Payment #3 in the amount of $64,548.73.

The defect in Arctic's contractually-required bonding affected Arctic's financial standing in two ways. First, additional bonding or surety had to be acquired. Second, the defect caused the State to withhold Progress Payment #4 in order to compel Arctic to acquire bonding.

In November, 1962, Progress Payment #4 (in the amount of $128,000) was due and owing to Arctic Contractors for work completed. By November, 1962, Arctic's financing was precarious. On the due date for Progress Payment #4, Arctic Contractors had only enough money to pay employees and subcontractors for the work they had actually done. However, Arctic Contractors agreed with the Teamsters working the job that they could keep working into November if they would hold their wage claims until Arctic Contractors received Progress Payment #4. Work was to continue on the expectation that wages would be paid when Progress Payment #4 arrived.

Without prior notice to Arctic, the State withheld Progress Payment #4 in order to force Arctic to obtain new payment and performance bonds. Arctic Contractors did not receive notice of this withholding until November 13, 1962.

The project was shut down for the winter on November 7, 1962. The State made no payments to Arctic or to any employees of either Arctic or its subcontractors. In mid-December, 1962, Carl Pederson, one of the principal stockholders of Arctic, obtained a $23,000 mortgage to pay wages owed to men working on the project. During that same winter, Carl Pederson attempted to obtain new bonding through commercial sources. He was unable to do so because the project at that time was behind schedule and Progress Payment #4 was still withheld. Only after Arctic shareholders secured a release of part of Progress Payment #4 through personal guarantees did sufficient money arrive for payment of the aggrieved employees' basic wage.

Arctic's failure to pay standby wages for the late wage payments haunted the project in 1963 and 1964. At the beginning of the 1963 construction season, the Teamsters working the project reiterated their claim for standby wages. They told Arctic that they could not waive their claims to standby pay because they would be fined by the union if they attempted to do so. Nevertheless, the claimants did not close down the project in 1963. By the end of the 1963 season Arctic had finished about 80% of the project.

Going into the third season of construction, 1964, Arctic was well over the 170-day time limit for scheduled completion. Indeed, at the end of the first season, Arctic had been 32 days behind schedule. The 170-day limit had been scheduled to end in mid-season, 1963. Nevertheless, Arctic progressed substantially in 1963 and probably planned to finish work in 1964.

On June 11, 1964, Arctic resumed work on the Farmers Loop project. During the early part of the 1964 construction season a dispute arose between the Teamsters Union and Arctic Contractors over the late payment of wages in 1962, which had been caused by the State's withholding of Progress Payment #4. On June 23, 1964, a work stoppage occurred when the Teamsters Union withdrew its work force pending payment of $1,000 to $1,500 it claimed was due to two of its members. The work stoppage halted all progress on the project. On August 6, 1964, when Arctic was 93 working days over the 170-day contract limit, the State terminated the Farmers Loop contract.

Following notice of termination, Arctic exercised its contractual right of appeal to the Contract Claims Review Board. Arctic based its appeal solely on the work stoppage allegedly caused by failure of the...