Department of Transp. v. PIBH

• Decision Date: 26 October 2005
• Citation: 886 A.2d 706
• Parties: DEPARTMENT OF TRANSPORTATION, Petitioner v. PENNSYLVANIA INDUSTRIES FOR the BLIND AND HANDICAPPED, Respondent.
• Court: Pennsylvania Commonwealth Court

886 A.2d 706

DEPARTMENT OF TRANSPORTATION, Petitioner v. PENNSYLVANIA INDUSTRIES FOR the BLIND AND HANDICAPPED, Respondent.

Commonwealth Court of Pennsylvania.

Argued September 15, 2005.

Decided October 26, 2005.

Audrey R. Miner, Asst. Counsel, Harrisburg, for petitioner.

Bradley A. Schutjer, Harrisburg, for respondent.

BEFORE: SMITH-RIBNER, Judge, and PELLEGRINI, Judge (P.), and LEAVITT, Judge.

OPINION BY Judge LEAVITT.

The Pennsylvania Department of Transportation (Department) petitions for review of an adjudication of the Board of Claims (Board) finding the Department in breach of its contract with the Pennsylvania Industries for the Blind and Handicapped (PIBH). By this contract, PIBH agreed to operate the Department's photo licensing centers under a "cost-plus" system of compensation. The Board held that the Department was obligated to reimburse PIBH for bonus and severance payments made to employees because they were valid "costs" within the meaning of the contract.

BACKGROUND

The facts are not in dispute. Since 1984, PIBH has operated the Department's photo licensing centers under a series of contracts whereby the Department has compensated PIBH on a per license basis. Effective December 31, 1996, the parties departed from their prior practice to adopt a "cost plus system" of compensation. Under this new system, the Department agreed to reimburse PIBH for its costs for operating the centers, with the proviso that reimbursement would not exceed $10,806,058 in any one year and that aggregate maximum reimbursement for the five-year term of the contract would not exceed $55 million.

The contractual relationship between the Department and PIBH was set forth in several writings. Agreement No. 72099, "Photographic Driver's License/Identification Card Service and Location Agreement," is the basic contract document. It incorporates two other essential documents. "Exhibit A," "Photo License Service Specifications," contains the details of PIBH's performance on matters that range from facility layout (1.3.1), furnishings (1.6.1) and employee job description (3.3) and training (4.2) to metal reflective signs (6.1) and type of electrical outlets (1.4.1). "Exhibit B," "Contract Specification Budget Proposal," is a four-page document prepared by PIBH that identifies fourteen categories of expenses and PIBH's projected costs for each category. In terms of dollar amounts, rent and labor costs are the largest expense categories in the Budget. "Direct Labor," i.e., labor provided by the photo license technicians, is projected to cost $4,213,684 each year, and "Indirect labor," i.e., labor provided by the program managers, is projected to cost $831,673. "Occupancy" is expected to cost $4,247,010 each year. In addition to estimating an annual amount for each of the fourteen expense categories, the Budget specifies a "burden" consisting of 15% to be added to each expense category to cover PIBH's overhead costs for such items as personnel administration and central computer maintenance.¹ PIBH compensates its employees in salary and benefits, including vacation time, pension, health insurance, life and disability insurance. Reproduced Record at 178a (R.R. ____). In addition, PIBH pays employees who retire, or resign, their accrued but not used vacation time. Finally, PIBH pays employees performance bonuses if certain targets are met. These compensation practices antedate the inception of the relationship instituted by Agreement No. 720999, the Specifications and the Budget (collectively Agreement).

On August 21, 1998, PIBH submitted Invoice No. 10011872 to the Department that requested reimbursement for costs incurred in July 1998, including, inter alia, $77,294.61 for the category "indirect labor." Of that amount invoiced, the Department approved $72,726.65. The Department's discrepancy report noted a deduction of $4,567.96 for severance pay, which it refused to pay as outside the terms of the Agreement.

On December 16, 1998, PIBH submitted Invoice No. 10014358 requesting reimbursement for costs incurred in November 1998. Of the $69,027.01 invoiced for "direct labor," the Department approved $56,596.58. The Department's discrepancy report explained the reason for the reduction as "no provision ... in the contract for employee-bonus payments." Reproduced Record at 29a. R.R. 29a.

In January 1999, PIBH initiated an attempt to resolve the matter, but when it was unsuccessful, PIBH filed a complaint with the Board. The complaint specified that the Department was in breach of contract with respect to four invoices submitted between July 1998 and February 1999, including Invoice Nos. 10011872 and 10014358, described above. Additionally, the complaint alleged that as "of the date of this Claim, [Department] has continued to refuse to pay PIBH's invoices and it is believed and therefore averred that [Department] will continue to refuse to pay such invoices as well as the invoice[s] set forth in the preceding paragraph." Complaint, ¶ 11; R.R. 7a. As anticipated, the Department continued to refuse to reimburse PIBH for the disputed labor costs for the next four years while the matter was litigated before the Board.

The record before the Board was developed by a joint stipulation of facts, agreed-upon exhibits and the deposition testimony of Joy Gross, the Department's former manager of the Driver License Division of the Bureau of Driver Licensing. Ms. Gross's deposition was placed into the record to explain the Department's position with respect to its obligation to reimburse PIBH for labor costs.

With respect to such labor costs, Ms. Gross delved into the specific matter of bonus and severance payments. She testified that:

A: We believe that the contract does not cover severance pay as severance pay, and, therefore we would not be required to pay for severance. And as far as bonuses are concerned, there are no allowances for bonuses, and so we do not believe that we would be liable to pay for bonuses.

Q: And we've looked at three documents, all of which sort of make up the majority of the contract between the parties. Am I correct that there's no provision that directly defines what is reimbursable salary and benefits.

A: That's correct.

Q: So to put it simplest, [the Department's] position is since it's not in there, we don't have to pay it?

A: Yes.

R.R. 176a (emphasis added). However, when confronted with the fact that the Department had reimbursed PIBH for other expenses that were "not in there," such as pension and health insurance payments, Ms. Gross opined:

A: Bonuses are above and beyond salary expectations in my view. Bonuses are not something that you expect to get routinely. These [reimbursed] expenditures, I believe, are things you would expect to get routinely if that's in your contract, you individually. Bonuses are above and beyond this.

Q: So [the Department's] position on what is reimbursable relates to what an employee would expect as a normal part of their salary and benefits?

A: I believe so, yes.

Q: But that expectation was not written out in any fashion, was it?

A: Specifically, no.

R.R. 178a (emphasis added).

In its pre-trial statement, PIBH explained that it sought damages equal to all bonus and severance payments that the Department had rejected over the life of the contract. The Department objected, asserting that each invoice rejection gave rise to a new cause of action, requiring a separate complaint to be filed. In response, PIBH filed a petition to amend complaint to conform the pleading to the evidence of damages; the Board granted PIBH's petition.

Upon consideration of the evidence, the Board concluded that PIBH's expenses for bonuses and severance pay were reimbursable under the Agreement. It reasoned that the Agreement used very general terms, i.e., "direct labor" and "indirect labor," without any limit on or exclusion for "bonus" and "severance" payments.² Further, because it was PIBH's policy to pay performance bonuses and severance for unused vacation time, the Board noted that such payments were appropriate even under the Department's argument that "direct and indirect labor" meant "routine" compensation. Permitting PIBH to amend its complaint, the Board held, did not violate the statute of limitations because the original complaint, which was timely filed, alleged a continuing harm. It rejected the notion that each invoice constituted a separate cause of action and required the filing of a new complaint.

Accordingly, the Board ordered the Department to pay PIBH $319,016.34, plus interest, for unpaid amounts on invoices submitted from August 21, 1998, to June 8, 2002. In addition, the Board ordered the payment of pre-judgment interest in the amount of $81,458.59. The Department then petitioned for this Court's review.

On appeal,³ Department presents two issues for our consideration. First, it contends that the Board erred in its construction of the term "actual work completed" as used in the Agreement. Second, it contends that the Board erred in granting PIBH's petition to amend its complaint to include additional unpaid invoices.

CONTRACT TERMS ON BONUS AND SEVERANCE

The Department contends that PIBH's payments for bonus and unused vacation time were not "for actual work completed" but, rather, were payments "in addition" to compensation received for the work completed, and, therefore, not reimbursable. In response, PIBH argues that in the absence of specific language on what items make up "labor costs," payments for unused vacation time and for performance bonuses constitute payments for "actual work completed."

Contract interpretation is a question of law that requires the court to ascertain and give effect to the intent of the contracting parties as embodied in the written agreement. Robert F. Felte, Inc. v. White, 451 Pa. 137, 144, 302 A.2d 347, 351 (1973). Courts assume that a contract's language is chosen carefully and that the parties are mindful of the...