Associated Indem. Corp. v. CAT Contracting, Inc.

• Decision Date: 22 February 1996
• Docket Number: No. 13-93-621-CV,13-93-621-CV
• Citation: 918 S.W.2d 580
• Parties: ASSOCIATED INDEMNITY CORPORATION, and Fireman's Fund Insurance Company, Appellants, v. CAT CONTRACTING, INC., GTS Equipment, Inc., Michigan Sewer Construction Co., Construction Equipment Co., Mario Diponio, Benjamin Diponio, Phyllis Diponio, Guilio Catallo and Rosemary Catallo, Appellees.
• Court: Texas Court of Appeals

Page 580

918 S.W.2d 580

ASSOCIATED INDEMNITY CORPORATION, and Fireman's Fund Insurance Company, Appellants, v. CAT CONTRACTING, INC., GTS Equipment, Inc., Michigan Sewer Construction Co., Construction Equipment Co., Mario Diponio Benjamin Diponio, Phyllis Diponio, Guilio Catallo and Rosemary Catallo, Appellees.

No. 13-93-621-CV.

Court of Appeals of Texas Corpus Christi.

Feb. 22, 1996.

Rehearing Overruled March 28, 1996.

David C. Mattax, Asst. Atty. Gen., Financial Litigation Div., Austin, Christina Stone James A. Knox, D. Bradley Dickinson, Vial, Hamilton, Koch & Knox, Dallas, Kenneth P. Kosut, C.L. Crawley, Evans & Kosut, Houston, Joseph A. Rodriguez, Rodriguez, Colvin & Chaney, Brownsville, Laird E. Lawrence, Vial, Hamilton, Koch & Knox, Houston, for appellants.

Ogden, Lieberman, Gaughan & Stone, Houston, amicus curiae.

Edward A. Stapleton, III, Frank Costilla, Costilla & Stapleton, Brownsville, Tom Lockhart, Juan A. Gonzalez, Roger W. Hughes, Adams & Graham, Harlingen, for appellees.

Before DORSEY, YANEZ and RODRIGUEZ, JJ.

OPINION

YANEZ, Justice.

This appeal involves a dispute between a surety and its principal. Associated Indemnity Corporation ("Associated") issued performance and payment bonds when CAT Contracting and Michigan Sewer entered into a contract with the Cameron County Water District Board (the "District") for construction of eight miles of water pipeline. Associated sued CAT Contracting, Michigan Sewer, GTS Equipment, Construction Equipment, Mario, Phyllis and Benjamin Diponio, and Guilio and Rosemary Catallo (collectively "Joint Venture") after it paid the District an agreed sum under the performance bond. Associated sought recovery from Joint Venture under a general indemnity agreement for $835,300.80.

Joint Venture countersued Associated for breach of contract, breach of fiduciary duties, breach of the duty of good faith, tortious interference with contract, common law fraud, violations of the D.T.P.A., and violations of the Texas Insurance Code. After a bench trial, the trial court entered a judgment in favor of Joint Venture and awarded $425,579.67 in actual damages, $1,676,271.00 in lost profits to CAT Contracting, $2,489,034.00 in lost profits to Michigan Sewer, $700,000 in mental anguish damages, and held that Associated was not entitled to indemnification. By thirty-five points of error, Associated and Fireman's Fund Insurance Company challenge the trial court judgment. Associated asserts that the trial court erred in finding that it owed duties to Joint Venture and that the evidence is legally and factually insufficient to support the judgment. By a single crosspoint, Joint Venture argues that the trial court erred by not applying the mandatory trebling provision of the Texas Insurance Code to the judgment. We reverse and render in part, modify in part, and affirm in part.

BACKGROUND

In 1988, Joint Venture bid on a public works project in Cameron County, Texas. The District accepted their bid, and Joint Venture signed a contract for the construction of eight miles of concrete water pipeline. Joint Venture was required, however, to supply the District with performance and payment bonds associated with their contract. Joint Venture secured the bonds on June 29, 1988. Associated executed the bonds as surety. Joint Venture executed the bonds as the principal and named the District as the obligee or sole beneficiary. To secure the bonds, Associated required Joint Venture to enter into a general indemnity agreement. Under this agreement, Joint Venture promised to indemnify Associated for any loss it sustained due to Joint Venture's performance of the contract with the District. Associated required the five individuals named in this suit to sign the indemnity agreement.

The construction contract provided that Joint Venture was to begin work on August 29, 1988. The project was to be performed within 300 days. Yet, before construction could begin, the District informed Joint Venture that there had been problems with the bidding process and that the contract would have to be put out for re-bid. Sometime following that instruction, however, the District informed Joint Venture that it could proceed with construction.

Shortly thereafter, Joint Venture began to excavate the soil where the pipeline was to be placed. Joint Venture then sent a letter to the District's engineer expressing concern that the soil and gravel bedding was too unstable for concrete pipeline. Section 3.03 of the construction contract provided that any design errors in the pipeline plan would be the responsibility of the District. Joint Venture contends that because of the soil's make-up, the joints needed for the concrete pipeline would rupture when the concrete lines settled. Joint Venture claims that the concrete pipe was improper for the soil they encountered and that the bedding design was flawed. The District's engineer, however, ordered Joint Venture to continue with construction despite the possible design error. Joint Venture then experienced several problems with the project which led to delays and extra work. Joint Venture encountered an unidentified resaca ¹ and unmarked underground utilities. Notwithstanding the delays, Joint Venture completed installation of the eight miles of concrete pipeline. Construction was not completed within the original 300 day deadline. Joint Venture argues that they were assured by the District's engineer that extension days would be granted by the District due to weather delays and problems beyond their control.

In July 1990, Joint Venture pressure tested the completed pipeline and fourteen leaks were found. The District demanded that Joint Venture repair them. At this time, Joint Venture had not received payments from the District in eight months and believed that they were owed over $400,000.00 under the contract. Joint Venture also asserted that the leaks were caused by the design failure associated with concrete lines in this type of soil. Thus, Joint Venture sought additional payment for any repairs it made to the pipeline. The District's engineer again disagreed with Joint Venture's contentions and continued to demand that Joint Venture repair the line. Joint Venture asserts that at this time the parties agreed to arbitrate the dispute pursuant to the construction contract.

In spite of that alleged arbitration agreement, on August 13, 1990, the District issued a 10-day cure notice to Joint Venture and Associated. On August 30, 1990, Joint Venture wrote the District's engineer mentioning arbitration, but Joint Venture did not request it. On August 31, 1990, the District issued a "Notice of Default," and demanded that Associated fulfill its statutory obligations under the performance bond. After the notice of default was sent, Associated joined the dispute and began its own investigation. On September 11, Associated met with Joint Venture's officers, and it was at this meeting that Associated allegedly made several misrepresentations to Joint Venture. Joint Venture contends that at the meeting Associated represented that the two were a "team," that Associated would act only in Joint Venture's best interest, and that Associated would keep all of Joint Venture's parties informed.

In order to investigate the pipeline and to minimize liquidated damages under the construction contract, on September 25, 1990, Associated proposed that the leaks be repaired with a full reservation of rights for all parties. Joint Venture offered to make the repairs because its equipment and crews were already in place, but neither Associated nor the District accepted that offer. On October 18, 1990, Associated entered into a time and materials contract with another local contracting company, Mercer & Ussery ("Mercer"), for repair of the leaks. The repair work began in November 1990 and was not completed until February 1991. Mercer sought to charge Associated $242,123.00 for repair of the leaks. Another pressure test was conducted on March 11, 1991. An additional twelve leaks were discovered after Mercer's repairs.

On September 25, 1990, Joint Venture formally demanded arbitration with the District. On October 8, 1990, the District refused to submit to arbitration. The District claimed that Joint Venture had made an untimely demand under the terms provided in the construction contract. Joint Venture made no other attempt to enforce its arbitration rights.

In May 1991, after the Mercer repairs, Associated entered into settlement negotiations with the District. Joint Venture continued to claim that there were design defects in the construction plan, but they failed to show or convince Associated. Associated met with the District to present three settlement alternatives, but did not inform Joint Venture. In July 1991, Associated agreed to pay the District $380,000.00 for a complete release as to all further costs or damages associated with Joint Venture's construction contract; Associated secured a release for itself, but not for Joint Venture. Associated also agreed to allow the District to keep the funds retained under the contract. This "retainage" money was the amount the District had yet to pay Joint Venture for its construction work. It amounted to approximately $425,500.00. Associated contends that the settlement agreement specifically reserved all of Joint Venture's rights against the District. Joint Venture, on the other hand, claims that Associated left it out of the settlement negotiations, failed to secure its arbitration rights, failed to keep it informed, failed to assert its claim of design failure with the District, and failed follow its own internal procedures. The settlement with the District, Joint Venture claims, has adversely affected their ability to secure additional bonds and additional construction work. After settling with the District, Associated demanded indemnity in the amount of $835,000.00 from Joint Venture. This suit followed when Joint Venture...