Hanover Area Sch. Dist. v. Sarkisian Bros., Inc.

• Decision Date: 12 January 1981
• Docket Number: Civ. No. 79-154.
• Parties: HANOVER AREA SCHOOL DISTRICT, Plaintiff, v. SARKISIAN BROTHERS, INC. and The Travelers Indemnity Company, Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

514 F. Supp. 697

HANOVER AREA SCHOOL DISTRICT, Plaintiff, v. SARKISIAN BROTHERS, INC. and The Travelers Indemnity Company, Defendants.

Civ. No. 79-154.

United States District Court, M. D. Pennsylvania.

January 12, 1981.

Anthony C. Falvello, Sugarloaf, Pa., Michael J. Hudacek, Plymouth, Pa., for plaintiff.

Kenneth Cushman and Kenneth I. Levin, Philadelphia, Pa., Donald H. Brobst, Wilkes Barre, Pa., for defendants.

MEMORANDUM AND ORDER

I. BACKGROUND

NEALON, Chief Judge.

This case involves an attempt by the Hanover Area School District ("District") to recover liquidated damages upon a bid bond executed by Sarkisian Brothers, Inc., and the Travelers Indemnity Company.¹ The operative facts date to the summer of 1977. At that time, the District solicited sealed bids for the construction of a junior-senior high school in Hanover Township, Pennsylvania. Special instructions were issued for the submission of all proposals.² The District announced that it would divide erection of the school into six different facets: (1) General Construction; (2) Heating, Ventilating, and Air Conditioning; (3) Plumbing and Drainage; (4) Electricity; (5) Kitchen Equipment; and (6) Resilient Floor Covering and Carpet. Potential contractors were informed that bids were to be submitted with regard to these specific categories.

Sarkisian competed for the right to carry out the General Construction and offered to perform the job for $5,745,000.00.³ The builder enclosed a bid bond underwritten by Travelers which protected the District against losses incurred through breach of the promulgated instructions. The bond provided up to $287,250.00 in indemnification in the event that Sarkisian reneged after acceptance of the bid.⁴ On September 20, 1977, the District adopted a resolution which identified the contractors who had made the lowest offers in each of the six categories. This list included Sarkisian under the designation "General Construction." The resolution also stated:

Section 5. The School District hereby declares its intent to award the several contracts for the construction of the School to the respective apparently lowest responsible bidders named in Section 4 hereof and the Architect is hereby authorized and directed to give notice, on behalf of the School District, to each of such bidders of such intent to award and, pursuant to the Public Works Contractors' Bond Law of 1967, to direct each such bidder to submit the Performance Bond and Payment Bond required under the terms of the bidding.⁵

Apparently, the other contractors complied with these terms and reached satisfactory arrangements with the District. Sarkisian, however, experienced difficulties which ultimately resulted in litigation.

Problems arose with the formalization of the final agreement. R. J. LaChance, Sarkisian's General Manager for the Northeast Region, informed the District on two separate occasions that his company could not obtain the requisite performance and payment bonds until a binding contract was finalized or, at least, scheduled for signing.⁶ District Solicitor John Doran claims that in a phone conversation on October 27, 1977, he told a representative of Sarkisian that the closing would occur around the ninth or tenth of November.⁷ The parties, nevertheless, did not draw up a final contract, and Sarkisian failed to secure the necessary bonds. Significantly, the instructions regulating the bidding provided that all proposals were to remain in effect for sixty days beyond August 30, 1977, the date of submissions. On October 16th, the District's Architect asked Sarkisian to hold its bid until November 15th, at which time a contract would be awarded and signed.⁸ That date, of course, was fifteen days beyond the stated deadline. The construction company replied that such an extension would probably be impossible due to "estimated costs from subcontractors and anticipated increases in general condition costs."⁹ Ultimately, the entire transaction collapsed. The District invited a new round of bids for the General Construction of the school. The Sutter Corporation received the award.¹⁰ In January 1979, moreover, the School District filed the instant lawsuit. A defense motion for summary judgment is presently before the court.

II. CONTENDING CHARACTERIZATIONS

The material facts of this litigation are not contested. The two sides, nevertheless, portray the underlying controversy much differently. Selection of the proper characterization is the key to resolution of the matter.

In the opinion of the complainant, the defendants simply defaulted on the bid bond. The District contends that the "preliminary declaration" of intent to award the project to Sarkisian obligated the builder to enter a final contract. The construction company's failure to adhere to this duty supposedly forfeited the security that protected the District against improprieties during the period between submission of proposals and finalization of agreements.

Travelers and Sarkisian, conversely, note that the instructions the plaintiff issued for submission and acceptance of the bids contained the following terms:

Execution of Contract

19. The School District will notify the successful bidder by mail. This letter awarding the contract subject to the successful bidder complying with the requirements of the "Public Works Contractors Bond Law of 1967", will contain instructions and enclosures for the proper execution of the contract documents, bonds and insurance.

Bond and insurance requirements are found in Sections 5 and 6 of the "Conditions of Contract". Said bonds and insurance shall be issued by Companies legally authorized to conduct business in the Commonwealth of Pennsylvania and which are acceptable to the School District.

When applicable, the successful bidder shall also deliver to the Hanover Area School District at the time of execution of the contract a cost breakdown for rough grading and sanitary sewage.

20. All contract documents must be returned to the School District, properly executed, within ten (10) days of receipt of the award letter. No proposals or awards shall be considered binding upon the School District unless and until the contract documents, required bonds, and required certificates are properly executed and returned.

Failure to Execute the Contract

21. If the lowest responsible bidder to whom the contract is awarded fails to give bonds or execute the contract within the time specified in the proposal, the amount of the proposal guaranty shall be forfeited to the School District not as a penalty, but as liquidated damages.

The District did not adhere to the method outlined in Paragraph 19 for awarding contracts. The defendants insist that this deviation from the procedure for the bidding, precludes any default on the bond. Analysis of the facts indicates that this theory is correct. Travelers and Sarkisian shall be granted summary judgment.

III. PREREQUISITES TO FORFEITURE

The defendants place heavy reliance on Travelers Indemnity Company v. Susquehanna County Commissioners, 17 Pa. Cmwlth. 209, 331 A.2d 918 (1975). In that case, a county government solicited sealed bids for a courthouse improvement plan. The proposals were accompanied by bonds guaranteeing the Commissioners liquidated damages in the event that a contractor received an award but failed to execute a contract. Bids could not be withdrawn until thirty days after their opening. Furthermore, the instructions for the submission of proposals said that acceptance of all awards would occur in writing. Difficulties developed when the county officials deviated from the established procedures. The Commissioners selected a lowest bid, but failed to forward the written notice required by the instructions. The builder, who apparently had a representative present when the Commissioners made the award, contacted the engineering firm retained by the county. Unfortunately, the parties never agreed to a final contract, and the builder requested relief from its bid. The Commissioners accepted the next-lowest offer and sued the first builder's surety. The Commonwealth Court ruled for the defendant.

Speaking for a unanimous panel, Judge Blatt recognized that under Pennsylvania law a contractor normally may not withdraw a proposal without forfeiting its security. This principle is known as the "firm bid rule." Yet Judge Blatt also noted that such a default cannot occur until "the conditions for bond forfeiture ... fully ripen." 331 A.2d at 920. In Susquehanna County, the plaintiff did not prevail for the following reasons:

The conditions of forfeiture are included in the instruction to bidders, all of which, of course, form a material part of the contract between the parties. Compliance, therefore, is necessary for the enforcement of rights and obligations arising thereunder. In the instant case, forfeiture could not take place unless the bidder either withdraws his bid within 30 days after the bid opening or refuses to execute and deliver the contract documents within ten days after receiving written notice of acceptance. Here there is no indication that these conditions of forfeiture had actually ripened. Rudy merely requested to withdraw its bid, a request which the Commissioners apparently misidentified as an actual withdrawal. The Commissioners, therefore, mistakenly failed to notify Rudy of the acceptance and failed to present the company with the contract papers for execution and delivery. Thus, it is impossible to determine now whether or not Rudy, if put to the test by the Commissioners, would have undertaken the project as the company was obligated to do. Instead, the contract was awarded to another bidder.

However, inadvertent their actions may have been, the Commissioners did not perfect their right to collect on the forfeiture of the bid bond. Accordingly, the decision of the court below must be reversed. emphasis added, citations omitted

Id.

Application of this logic undermines the...