Barlovento, LLC v. AUI, Inc.

• Decision Date: 13 November 2020
• Docket Number: Civ. No. 18-1112 GJF/JHR
• Parties: BARLOVENTO, LLC, Plaintiff/Counter-Defendant, v. AUI, INC., Defendant/Counterclaimant, and WESTERN SURETY COMPANY, Defendant.
• Court: U.S. District Court — District of New Mexico

BARLOVENTO, LLC, Plaintiff/Counter-Defendant, v. AUI, INC., Defendant/Counterclaimant, andWESTERN SURETY COMPANY, Defendant.

Civ. No. 18-1112 GJF/JHR

UNITED STATES DISTRICT COURT DISTRICT OF NEW MEXICO

November 13, 2020

ORDER ON BARLOVENTO'S MOTION IN LIMINE # 5 (OBTAINING CONSENT OF A SURETY UNDER FAR 28.106-5)

THIS MATTER is before the Court on the above-captioned motion in limine [ECF 137] ("Motion"). The Motion is fully briefed.¹ The Court held oral argument on October 1, 2020. See ECF 205 (transcript or argument) at 105-10. Because the Court concludes that Western Surety waived its right to receive advance notice of, and provide consent to, even a material change to its principal's Subcontract, the Court will GRANT the Motion.

I. BACKGROUND

On March 24, 2017, one week after Barlovento hired Defendant AUI, Inc. under a $3.7 million Subcontract to replace a 2,225-foot taxiway at Kirtland Air Force Base, AUI entered into a "Performance Bond" contract with Western Surety. See ECFs 85 at 3; 85-1; 88-1 at 9. The parties acknowledge that this Performance Bond "incorporated the Subcontract by reference." ECFs 98 at 8, 16; 110 at 2, 10-11; 137 at 10; 209 at 2; see also ECF 85-1 (Performance Bond making the Subcontract "a part hereof"). The bond's incorporation of the Subcontract was withoutobjection or exception. Its wholesale adoption is crucial, for the Subcontract expressly permits Barlovento—without discharging Western Surety or incurring any obligation to notify Western Surety—to change the work that AUI must perform. See Subcontract ¶ 9.2 (providing that Barlovento may "direct [AUI] by written order and without notice to [Western Surety] to make changes in the Subcontract Work" and that Barlovento may do so "without invalidating ... any bond given" under the Subcontract), ¶ 11.4.4 (providing that "[n]o ... change in the Subcontract Work ... shall release or discharge to any extent whatsoever [Western Surety], nor shall [Barlovento] have any duty to notify [Western Surety]"); see also Subcontract, articles 1 ("Scope of Work"), 9 ("Changes").

After the construction project began, the Air Force answered Barlovento's formal "Request for Information" by stating that "[t]he pavement thickness is changed [from 12] to 16 inches." See ECFs 85 at ¶ 3; 98 at ¶ 3; 85-2 at 2. Although the parties dispute whether Barlovento ordered AUI to do so, it appears that Barlovento at least "sincerely urge[d]" AUI to place test lanes at this new thickness—even though the contract modification between the Air Force and Barlovento ("Mod 2") was not formally executed until after AUI was terminated. See ECFs 85 at ¶ 4; 98 at ¶ 4; 85-3 at 1; 88-1 at ¶ 47; 102 at ¶ 47; 98-3 at 1-2. AUI eventually placed three such test lanes, on September 19, September 21, and October 13, 2017, respectively, but none of these test lanes met the required specifications. ECFs 85 at ¶ 7; 98 at ¶ 7; 85-8 at 1; 88-37 at 1; 88-39 at 1. Consequently, when Barlovento issued its "Letter of Cure" to AUI on October 31, 2017, Barlovento specifically listed "fail[ing] at three attempts for placing concrete" as one of three "deficiencies" that could result in AUI's termination (if the deficiency was not remedied as Barlovento required). ECFs 93-12 at 1; 93-14 at 2; Subcontract ¶ 8.1.²

It appears that AUI, at a minimum through a November 9, 2017 letter, made Western Surety aware of this increase in concrete thickness (or at least of the "Mod 2" that was to include this change)—and AUI's belief that its scope of work "had completely changed" due to the two contract modifications.³ The record before the Court does not show that Western Surety ever objected to any of these actual or forthcoming modifications, particularly the increase in concrete thickness. See, e.g., ECF 85s at 1-7; 98-11 at 2-4. On December 5, 2017, upon being informed of AUI's impending termination for failing to "provide an[] acceptable base mix design," Western Surety offered, albeit unsuccessfully, to "tender a completion contractor to [Barlovento]" once Barlovento "obtain[ed] a few competitive bids for completion of AUI's contract." ECF 85-22. Western Surety later claimed that its Performance Bond obligations were discharged because this four-inch increase in concrete thickness "materially" changed the Subcontract without Western Surety's "knowledge or consent." ECF 85 at 2, 7-11 (citing Nat'l Sur. Corp. v. United States, 118 F.3d 1542, 1546 (Fed. Cir. 1997)).

II. PARTIES' PRIMARY ARGUMENTS

Barlovento contends that Western Surety's Performance Bond obligations were not discharged because, inter alia, Western Surety consented to (i.e., waived) any such change. SeeECFs 98 at 16-18, 20; 137 at 10; 207 at 1-4. Consequently, Barlovento asserts, "any alleged contractual obligations or duties ... that stem from [Federal Acquisition Regulation ("FAR") 28.106-5 - Consent of Surety] [are] irrelevant"—and thus cannot impose upon Barlovento a duty to obtain consent from, or even provide notice to, Western Surety for material changes to the Subcontract. ECF 137 at 1-11 (emphasis added); see FAR 28.106-5 (establishing the conditions for when a government contracting officer must obtain a surety's consent). Barlovento therefore seeks to exclude "evidence, testimony, and argument relating to alleged contractual obligations and duties arising under [FAR] 28.106-5." ECFs 137 at 10; 207 at 1-2, 5-6.

Defendants, on the other hand, have affirmed that "[t]he FAR is not something that will be included in [their] evidence, testimony or argument"—but argue that this FAR provision is "appropriate as part of a jury instruction." ECF 154 at 3-6.

III. LAW

A. Applicable Contract Law

"In cases arising under diversity jurisdiction, the federal court's task is . . . simply to 'ascertain and apply the state law.'" Wade v. EMCASCO Ins. Co., 483 F.3d 657, 665 (10th Cir. 2007) (quoting Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir. 2003)) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)). Specifically, the federal court must "apply the substantive laws of the forum state," New York Life Ins. Co. v. K N Energy, Inc., 80 F.3d 405, 409 (10th Cir. 1996), by "follow[ing] the most recent decisions of the state's highest court." Wade, 483 F.3d at 665-66 (citing Wankier, 353 F.3d at 866). And "[w]here no controlling state decision exists, the federal court must attempt to predict what the state's highest court would do." Id. at 666 (quoting Wankier, 353 F.3d at 866).

The New Mexico Supreme Court requires courts to "interpret the meaning [of a contract] as a matter of law when the evidence presented is so plain that it is only reasonably open to one interpretation." ConocoPhillips Co. v. Lyons, 299 P.3d 844, 849 (N.M. 2012) (internal quotations omitted).⁴ In addition, under New Mexico Law, a surety is "entitled to a strict construction of his agreement, and 'his liability is not to be extended by implication beyond the express limits or terms of the instrument, or its plain intent.'" Levenson v. Haynes, 934 P.2d 300, 306 (N.M. Ct. App. 1997) (quoting Shirley v. Venaglia, 527 P.2d 316, 319 (N.M. 1974)) (citing Federal Deposit Ins. Corp. v. Moore, 879 P.2d 78, 82 (N.M. 1994)). Lastly, the New Mexico Supreme Court has emphasized that "New Mexico respects party autonomy" and that "the law to be applied to a particular dispute may be chosen by the parties through a contractual choice-of-law provision." Strausberg v. Laurel Healthcare Providers, LLC, 304 P.3d 409, 416 (N.M. 2013) (quoting Fiser v. Dell Comput. Corp., 188 P.3d 1215, 1218 (N.M. 2008)).

The Subcontract in the instant case provides that its "validity, interpretation and performance . . . shall be governed in accordance with the federal law of government contracts including, but not limited to, decisions enunciated by federal judicial bodies, boards of contract appeals and quasi-judicial agencies of the federal government." ECF 88-3 at 22 (also stating that "[t]o the extent that the federal law of government contracts is not dispositive, the laws of the State of New Mexico shall apply"). Under the federal law of government contracts,⁵ "[c]ontractinterpretation begins with the plain language of the written agreement," and "the plain and unambiguous meaning of a written agreement controls." Hercules Inc. v. United States, 292 F.3d 1378, 1380 (Fed. Cir. 2002) (citations and internal quotation marks omitted). In addition, "[t]he contract must be construed to effectuate its spirit and purpose giving reasonable meaning to all parts of the contract." Id. (citation omitted). Finally, "[c]ontract interpretation is a question of law." Teg-Paradigm Envtl., Inc. v. United States, 465 F.3d 1329, 1336 (Fed. Cir. 2006).

B. Discharge of a Surety

Under the federal law of government contracts,⁶ "[w]here, without the surety's consent, the principal and the [obligee] modify their contract otherwise than by extension of time for payment . . . . [the] surety is (i) discharged if the modification materially increases his risk, and (ii) not discharged if the risk is not materially increased, but his obligation is reduced to the extent of loss due to the modification." Nat'l Sur. Corp., 118 F.3d at 1544 (quoting Gritz Harvestore, Inc. v. A.O. Smith Harvestore Prods., Inc., 769 F.2d 1225, 1230 n.7 (7th Cir. 1985)) (citing Restatement (First) of Security § 128 (1941)). But "[t]he [surety] is not discharged ... to the extent that, in the contract creating the [suretyship], the [surety] consents to acts that would otherwise be the basis of the discharge, agrees that such discharges are unavailable to the [surety], or waives such discharges." Restatement (Third) of Suretyship & Guaranty § 48 (1996) (also observing that "[s]uch consent, agreement, or waiver, if express, may be effectuated by specific language or bygeneral language indicating that the [surety] waives defenses based on suretyship"). "Consent may be express or implied from the circumstances." Id.; see also Hartford Fire Ins. Co. v...