Granite Computer Leasing v. Travelers Indem. Co.
| Decision Date | 28 November 1988 |
| Docket Number | No. 81 Civ. 7705 (CBM).,81 Civ. 7705 (CBM). |
| Citation | 702 F. Supp. 415 |
| Parties | GRANITE COMPUTER LEASING CORP., Plaintiff, v. The TRAVELERS INDEMNITY COMPANY, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Shea & Gould, Lauren J. Wachtler, Barbara Slott, New York City, for plaintiff.
Max E. Greenberg, Cantor, Trager & Toplitz, James H. Reidy, New York City, for defendant.
The dispute concerns a contract involving Community Science Technology, Inc. (CST), National Modular Systems Corp. (NMS), and NMS' surety, The Travelers Indemnity Company (Travelers). The facts concerning this action are more fully set forth in this court's prior Amended Opinion of March 23, 1987, and will only be summarized here.
In March of 1973, CST was awarded a general contract by the United States Government for the manufacture and installation of prefabricated modular housing units at several Air Force bases. In April of 1973, CST entered into a subcontract with NMS in which NMS was to manufacture and deliver the necessary modular units for bases on the East Coast. As required by the terms of the subcontract, NMS obtained a performance bond with Travelers wherein NMS was named as principal, CST as obligee, and Travelers as surety.
In the spring of 1974, NMS encountered substantial financial difficulties. On April 5, 1974, NMS demanded a substantial increase in the contract price from CST. On April 26, 1974, NMS submitted to the Government a request for Extraordinary Relief in the amount of $750,000. On June 21, 1974, NMS closed its plant. Travelers was requested to intervene to provide financial assistance to its principal. Because of Travelers' refusal to extend the requested aid, CST, facing a possible termination by the Government, decided to advance the funds necessary for NMS to resume its plant operations. On July 8, 1974, CST and NMS entered into a financing agreement, with the consent of Travelers, and provided that no provision of the financing agreement was to operate as a waiver or relinquishment of any of the parties' rights or remedies.
In 1976, after the military housing project was completed, CST instituted suit against Travelers to recoup funds it had provided NMS to enable NMS to reopen its plant. This lawsuit was stayed pending administrative claims which CST had previously instituted against the Government on behalf of itself and its subcontractors. The claims against the Government settled in 1980. The Government agreed to increase the contract prices by approximately $2,800,000. The settlement proceeds were allocated to the subcontractors, including NMS. CST also applied a portion of the settlement proceeds to the amount it expended, pursuant to the financing agreement, that was still outstanding and owed by NMS. This allocation did not cover in full the funds CST previously provided.
Granite Computer Leasing Corp., a successor in interest to CST, now seeks to recover from Travelers the amount still remaining to CST that was not covered by the allocation from the Government's award. According to Granite, NMS' plant closure in June 1974 constituted a breach of its contract with CST, thereby triggering Travelers' suretyship obligations to provide financing for its principal, NMS, or to ensure its principal's performance. Travelers, on the other hand, claims that the plant closing by NMS was not a breach by NMS under the NMS/CST subcontract, and that even if it was a breach, it was justified due to prior breaches caused by either CST or the Government.
After hearing the trial testimony, examining the parties' exhibits, and studying all the evidence, the court now grants plaintiff Granite's motion for a directed verdict.
In its prior Amended Opinion of March 23, 1987, the court ruled that 1) "the bond between NMS and Travelers required the latter to ensure actual performance of the subcontract should NMS default, and in no way required a failure of indemnification on NMS's part for the ripening of the obligation; 2) that the `disputes resolution' clause of the main contract was applicable to NMS at the time of its plant closing in June 1974." (Amended Opinion at 5).
It is settled law, as Travelers maintains, that a surety's "obligations are no more than co-extensive with that of its principal." (Defendant's Memoranda in Opposition to Plaintiff's Motions for Multiple Relief, 8/15/88, Memorandum In Opposition to Motion # 1, at 3). Accordingly, "`there can be no obligation on the part of the surety unless there has been a default by the contractor on his contract.'" Pacific Employers Ins. Co. v. City of Berkeley, 158 Cal.App.3d 145, 204 Cal.Rptr. 387, 390 (1st Dist.1984) (quoting 13 Couch on Insurance § 47:20, at 240-242 (2d ed. 1982)). See also 74 Am Jur 2d, Suretyship, § 25 (1974) ().
Travelers is therefore not liable on its bond unless its principal NMS is liable for breach of contract with CST. Travelers contends that its principal NMS "was never in default of or in breach of the Supply Contract," (Pre-trial Order, 10/14/87, at 14), that CST was the one in default because of late payments, failures to pay, delays, changes in design, "failures to obtain timely approval of prototypes," id., failure to pay "NMS' proportionate share of progress payments received by CST from the Government for the `design' portion of the project," id. at 18, etc. The alleged prior breaches by CST gave NMS the right to rescind its contract, in spite of the "proceed diligently" clause,1 and according to Travelers, since its principal was not in default, its suretyship obligations were not triggered.
Travelers asserts, among other things, nonpayment and/or late payments as a defense for NMS' plant closing. Specifically, Travelers claims that "CST was tardy in its payment of contract monies (progress payments) to NMS." (Defendant's Pre-Trial Memorandum at 11). "That failure to pay, by itself, excused further performance by NMS." Id. at 18.
Granite contends, however, that even if NMS was entitled to payment for design work, it did not comply with the payment provisions of the contract requiring requisition before payment (Memorandum Relating to Granite's Position on `Non-Payment' of the $100,000 to NMS by CST for Design Work, at 2-6).
This court has previously ruled that Travelers is precluded from offering evidence of nonpayment of design work as justification for NMS' plant closure on June 21, 1974, because NMS failed to requisition for payments in contravention of terms provided in the contract. For reasons more fully stated below, the court adheres to its prior determination that NMS was contractually bound to requisition for payment, including design payment, before CST was obligated to make such payments to NMS.
Article II of the subcontract between CST and NMS provides for a total, fixed contract price of $3,347,180, to be paid to NMS for "all services and materials to be rendered and furnished by NMS." Travelers stated in its November 7, 1988 letter to the court, that it concedes that design payments were included in the inclusive contract price, but argues that the issue of contention is the "timing of payment of the contract price to NMS by CST...." (emphasis in original). In other words, Travelers argues that the Government's payment to CST for the design portion of the project should have been immediately paid to NMS within ten days of receipt, and should not have been "`paid out' over the term of the contract as part of the progress payments made for delivery of each module." (Travelers' November 7, 1988 Letter to the Court).
This court does not agree that design payments were somehow immune from contractual requirements for requisition prior to payment. Article II, subsections 1(a) and 1(b) of the subcontract referring to payment for materials so provide. (requiring invoices to be furnished with payment request). General Provision 7 and Special Provision 9 of the Prime Contract also require similar documentation. General Provision 7(b) requires the Government to make progress payments on "estimates approved by the Contracting Officer" and "if requested by the Contracting Officer, the Contractor shall furnish a breakdown of the total contract price showing the amount included therein for each principal category of work, in such detail as requested, to provide a basis for determining progress payments." Special Provision 9(a) similarly requires invoices to be furnished "with any such payment request."
Thus, according to General Provision 7 and Special Provision 9 of the Prime Contract, upon request of the government, CST would have to provide some sort of documentation, such as invoices, for work CST and its subcontractors did. In order to provide "a breakdown of the total contract price," CST in turn would necessarily need some sort of documentation from its subcontractor NMS. If NMS was entitled to design payments, it did not requisition for design work in violation of payment provisions in the contract and the subcontract. Travelers cannot now complain that design work which its principal may have performed was only paid out as "part of the progress payments" (Travelers' Letter, supra) rather than automatically doled out to NMS within ten days upon receipt of payment by CST.
In spite of abundant contractual provisions requiring invoices and requisitions for payment, Travelers nonetheless argues that those provisions delineating requisitioning procedures apply only to progress payments for materials. (Travelers' Brief on `Non-Payment' Defense, at 2). According to Travelers, other progress payments, presumably for design work, were exempt from requisition...
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Granite Computer Leasing Corp. v. Travelers Indem. Co.
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