E. C. Ernst, Inc. v. Manhattan Const. Co. of Texas

• Decision Date: 09 May 1977
• Docket Number: No. 75-1794,75-1794
• Parties: 21 UCC Rep.Serv. 1061 E. C. ERNST, INC., Plaintiff-Appellant Appellee, v. MANHATTAN CONSTRUCTION COMPANY OF TEXAS, Providence Hospital, Fairbanks-Morse, Inc., Charles H. McCauley Associates, Inc., Defendants-Appellees Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1026

551 F.2d 1026

21 UCC Rep.Serv. 1061

E. C. ERNST, INC., Plaintiff-Appellant Appellee, v. MANHATTAN CONSTRUCTION COMPANY OF TEXAS, Providence

Hospital, Fairbanks-Morse, Inc., Charles H.

McCauley Associates, Inc.,

Defendants-Appellees Appellants.

No. 75-1794.

United States Court of Appeals, Fifth Circuit.

May 9, 1977.

Edward S. Sledge, Mobile, Ala., Glower W. Jones, Atlanta, Ga., Arthur Friedman, New York City, for E. C. Ernst, Inc.

Willis C. Darby, Jr., Mobile, Ala., for Providence Hospital.

Louis E. Braswell, Mobile, Ala., for Fairbanks-Morse, Inc.

Clarence L. McDorman, Jr., Birmingham, Ala., for Charles H. McCauley Associates, Inc.

David M. Thornton, Tulsa, Okl., for Manhattan Const. Co.

Appeals from the United States District Court for the Southern District of Alabama.

Before GODBOLD, McCREE ^* and TJOFLAT, Circuit Judges.

GODBOLD, Circuit Judge:

This complex diversity case arises from a series of disputes concerning difficulties encountered during construction and renovation of a hospital at Mobile, Alabama. The parties are Ernst, an electrical subcontractor on the project; Providence Hospital, the owner; McCauley, the architect; Manhattan, the general contractor; and Fairbanks-Morse, Ernst's electrical supplier. After more than four years of proceedings and a 40-day bench trial, the district court entered its lengthy opinion, 387 F.Supp. 1001 (S.D.Ala.1974).

I. Ernst's claim for damages

Ernst's principal ground for appeal is the refusal of the district court to award it damages for delays on the job caused by the other four parties' breaches of their respective duties to Ernst. These other parties have paid Providence for delays. But they have not paid damages claimed by Ernst.

A. Ernst's claims against Manhattan

The district court held that Manhattan's failure properly to coordinate and supervise the activities on the jobsite violated paragraph 21(c) of the general conditions of its contract with Providence, that Manhattan assumed the responsibility for delays by other subcontractors (as well as its own) under paragraph 21(b) of the general conditions, that it failed to schedule double shifts once delay had set in and thereby breached the "general requirements" of that contract, and that it failed to schedule work properly, also in violation of the general requirements.

Ernst claims that it is entitled to damages for these delays caused by Manhattan. Manhattan points to the following provision of its contract with Ernst:

An extension of time for the completion of this contract is hereby granted to (Ernst) for a period equal to any delay caused by MANHATTAN CONSTRUCTION COMPANY. Such extension of time shall be in lieu of and in full satisfaction of any and all claims whatsoever of (Ernst) against the MANHATTAN CONSTRUCTION COMPANY.

This is a reformulation of the common "no damage" clause in construction contracts whereby one party contractually limits its own liability for delay damages. Although the Alabama ¹ courts have not ruled on the validity of such provisions, their validity is now well established. See generally Peter Kiewit Sons' Co. v. Iowa Southern Utilities Co., 355 F.Supp. 376, 396-401 (S.D.Iowa 1973). ² Given their harsh effect, courts will strictly construe such provisions but generally enforce them absent delay (1) not contemplated by the parties under the provision, (2) amounting to an abandonment of the contract, (3) caused by bad faith, or (4) amounting to active interference. Id. at 397. Ernst claims none of these exceptions, and the delay by Manhattan does not fit any of them.

Manhattan's failure to grant Ernst a time extension was not the breach of a condition precedent to Manhattan's invoking the "no damage" clause. The clause makes no reference to any such requirement for formally granting an extension; the language "an extension of time . . . is hereby granted" seems to suggest the opposite. The purpose for such a provision would be to assure Ernst that Manhattan (or those upstream from Manhattan) would not sue Ernst for Manhattan's own delays. No one in this case has charged Ernst for those delays; Manhattan has already been charged for them under the liquidated damage formula.

Ernst also claims that Manhattan's failure to comply with a separate contractual provision operates to negate the effect of the "no damage" clause. This separate clause appears to be an agreement by Manhattan to assert Ernst's claims for delay damage caused by Providence or any subcontractor, to the extent permissible under Manhattan's contracts with those parties. We are not persuaded that the consequences of breaching this obligation should include a waiver of the "no damage" defense, which concerns damages for Manhattan's delays.

B. Ernst's claims against Providence

Ernst claims damages for the results of several mistakes made by Providence on the job. The district court found that Providence could not recover liquidated damages for the entirety of the delay on the job because Providence had itself created some of the overall delay by an abortive attempt to change to a gravity sewage ejection system after Manhattan had begun work on a pump system (65 days delay) and by a refusal to accept Palco lighting fixtures in violation of federal regulations incorporated into the contract (291/2 days). ³ Ernst seeks to parlay these findings into a recovery for itself against Providence, pointing out that its "follow-on" electrical work was inevitably delayed to its damage by these same actions.

In order to establish that these actions breached some duty to it established by Alabama law, see Twine v. Liberty National Life Insurance Co., 294 Ala. 43, 311 So.2d 299, 302 (1975), Ernst asserts a third-party beneficiary theory, citing cases imposing owner-general contractor duties and general contractor-subcontractor duties. None of these cases imposes a theory of owner-subcontractor duty. We turn elsewhere in the law of Alabama to determine the validity of third-party beneficiary liability on the facts of this case.

The Alabama courts have made it clear that one not a party to a contract cannot generally sue for its breach. Twine, supra; Watson v. Mills, 275 Ala. 176, 153 So.2d 612 (1963); Land Title Guaranty Co. v. Lynchburg Foundry Co., 80 So. 142 (Ala.App.1918). The Alabama Supreme Court has indicated that the well-established judge-made requirement of vertical privity for manufacturers' liability should not be overturned except by legislative act. Compare Harnischfeger Corp. v. Harris, 280 Ala. 93, 190 So.2d 286, 290 (1966), with Bishop v. Faroy Sales, 336 So.2d 1340 (Ala.1976) (Alabama version of UCC 2-318 abolishes vertical privity). ⁴ We think judicial deference is equally applicable in the area of construction contracts.

Third parties may sue on the contract if the provision is intended for their direct, as opposed to incidental, benefit. See, e. g., Anderson v. Howard Hall Co., 278 Ala. 491, 179 So.2d 71 (1965); accord, Burgreen Contracting Co. v. Goodman, 55 Ala.App. 209, 314 So.2d 284, petition for cert. stricken, 294 Ala. 199, 314 So.2d 296 (1975). The duties to Manhattan that Providence breached (the provision for a sewage ejection pump and an agreement to accept electrical wall fixtures "of equal quality" to Sunbeam fixtures) were not intended for the direct benefit of the electrical subcontractor Ernst. In a large construction project each of the individual contracts is inevitably intertwined with many others, all devoted to the general goal of finishing all phases of the project according to the plans and specifications drawn up by the architect and within the time period established under the prime contract. See E. C. Ernst, Inc. v. General Motors Corp., 482 F.2d 1047, 1055 (CA5 1973). But this interrelationship by itself does not justify imposing third-party beneficiary duties, which flow not from the inevitable consequences of a breach but rather from the intent of the contracting parties. ⁵ Here the agreement stated in P 21(a) of the general conditions that "(n)othing contained in the specifications or drawings shall be construed as creating any contractual relationship between any subcontractor and the Owner." See 4 A. Corbin, Contracts § 777, at 25 (1951):

. . . (I)f two contracting parties expressly provide that some third party who will be benefited by performance shall have no legally enforceable right, the courts should effectuate the expressed intent by denying the third party any direct remedy.

Ernst's effort to proceed against Providence on a third-party beneficiary basis must fail.

C. Ernst's claim against McCauley

The district court found that McCauley, the architect for Providence, was responsible for (1) refusing to approve the Palco bedlight fixture application and (2) for the emergency generator system, (a) drawing faulty specifications ⁶ and (b) failing promptly to act on submittals. ⁷ Neither the owner-architect agreement nor the Providence-Manhattan contract made any reference to the measure of liability from McCauley to Providence. However, the district court recognized that agents are liable to their principals for their "deficiencies" ⁸ and utilized against McCauley the liquidated damage measure in the Providence-Manhattan contract because McCauley was instrumental in including this provision. 387 F.Supp. at 1033. ⁹ Ernst seeks the benefit of these findings, claiming that the delays in these electrical-oriented problems also delayed it. Ernst claims that it is a third-party beneficiary to the owner-architect agreement and reinvokes its earlier-dismissed negligence argument as well. ¹⁰

McCauley raises two different theories that it argues prevent Ernst from recovering. The first, and more broadsweeping, of these challenges Ernst's status as a third-party beneficiary to the owner-architect agreement. We have already described the general rule in Alabama concerning third-party rights under contracts (in denying Ernst any rights under the...