Herlihy Mid-Continent Co. v. Northern Ind. Pub. Serv. Co.

• Decision Date: 23 July 1957
• Docket Number: No. 11922.,11922.
• Citation: 245 F.2d 440
• Parties: HERLIHY MID-CONTINENT COMPANY, Plaintiff-Appellee, v. NORTHERN INDIANA PUBLIC SERVICE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

245 F.2d 440 (1957)

HERLIHY MID-CONTINENT COMPANY, Plaintiff-Appellee, v. NORTHERN INDIANA PUBLIC SERVICE COMPANY, Defendant-Appellant.

No. 11922.

United States Court of Appeals Seventh Circuit.

June 21, 1957.

Rehearing Denied July 23, 1957.

Edwin H. Friedrich, R. Stanley Anderson, Edmund A. Schroer, Hammond, Ind., Lawyer, Friedrich, Petrie & Tweedle, Hammond, Ind., of counsel, for appellant.

Martin J. McNally, Chicago, Ill., Thomas D. Nash, Jr., Chicago, Ill., for appellee.

Before DUFFY, Chief Judge, and FINNEGAN and LINDLEY, Circuit Judges.

LINDLEY, Circuit Judge.

Plaintiff sued to recover, under the terms of certain contracts, amounts exacted from and paid by it under the Indiana Gross Income Tax Law. Burns' Indiana Stats. §§ 64-2602, 64-2603(g). The cause, tried by the court without a jury, resulted in judgment for plaintiff in the sum of $31,529.55.

Multiple construction contracts were consummated between the parties wherein plaintiff, a building contractor, agreed to perform certain work in connection with the construction of defendant's generating system near Michigan City, Indiana. The first contract, identified as K-814, executed August 13, 1948, provided that the contractor would be paid for the "net cost" of the work, plus a fixed fee covering overhead and profit and a fixed equipment rental. In other words, plaintiff agreed to advance all costs, and for them it was to be reimbursed, in addition to overhead and profit. The contract defined "net cost" as follows: "It is mutually agreed that the Net Cost of the work shall include all expenses incurred by Contractor which are directly chargeable to the work, and that said Net Cost of the work shall, without restricting the generality of the foregoing, include the following items: * * * Amounts required by any Federal, State or local taxes applicable to the Work, including old age benefit and unemployment taxes. * *" (Emphasis supplied.) Thus, it is to be kept in mind that the contract specifically defines by way of example but not by way of exclusion expenses "directly chargeable to the work" in part as State taxes "applicable to the work."

On October 19, 1948, the second contract, K-825, was executed. It defined the term "net cost" in precisely the same terminology as that employed in contract K-814. The third contract, K-851, dated October 27, 1948 differed from the other two in that payment was based on firm unit prices rather than "net cost plus a fixed fee." However, it contained a cost provision, with which we are here concerned, by including in the extra work clause the following provision: "`Cost Plus' basis on which Bidder will perform extra work on old steel authorized by Purchaser and not covered by the unit prices. This should be based on the cost of labor, material, taxes and insurance; plus a percentage, which percentage shall include general superintendent, field office overhead, use of hand tools and profit * * *."

All the instruments were prepared by the engineering firm of Sargent and Lundy, employed by defendant to prepare contracts, plans and specifications, and to aid in the procurement of bids. After contracts were awarded, their further duties entailed supervising construction and checking and approving invoices submitted by the contractor.

After commencement of work under contract K-814, plaintiff sent defendant several invoices. The first in point of time, that of September 30, 1948, set forth amounts claimed to be due for labor, materials and other items, but did not include a charge for the Indiana Gross Income Tax. Later, however, invoices dated October 30, 1948, November 16, 1948, and November 30, 1948, respectively, contained as an item of cost the tax applicable to moneys received by plaintiff for performance of the work. The November 16th invoice included a charge for the tax item which had been omitted from the initial September bill. After the invoices had been examined and tentatively approved by defendant, they were forwarded to Sargent and Lundy, by whom they were then checked and certified for payment. After this certification, the invoices were mailed to defendant's principal office where that part of each pertaining to the tax was stricken, defendant refusing to pay it as an item of cost. As a result of the controversy as to which of the two contracting parties should ultimately bear the thrust of this item, on December 28, 1948, a meeting was held between plaintiff's president, now deceased, and two employees of defendant, as a result of which, it was decided that the demand for the tax would be stricken from the bills. Defendant contends that in the event that the terms of the contract are found to be ambiguous, this conduct of the parties should be construed as a practical construction of the terms of the contract by the parties. In the event that an interpretation favorable to plaintiff is reached, it is urged that by its action plaintiff has waived its right to reimbursement under the contract.

Subsequent to the meeting of December 28, plaintiff sent 19 invoices under contract K-814 wherein no charge was included for the tax, all of which were paid by defendant. The tax item was not included in any of the 42 invoices submitted under contract K-825. Under contract K-851 the first invoice of August 5, 1949 contained a charge for the Gross Income Tax, but it was later eliminated. Subsequent invoices under contract K-851 did not contain charges for the tax. However, on November 30, 1950, plaintiff commenced submitting separate invoices which included only charges for the tax: these were never paid by defendant. Plaintiff continued to pay the entire Indiana income tax attributable to the moneys received from defendant and it is to recover that amount that this suit was brought.

We lay aside for the moment the issues involving the alleged waiver and certain evidentiary questions, for it is first necessary to determine whether the construction placed upon them by the trial court can be sustained. The court found: "The State of Indiana Gross Income Taxes in the total amount of $31,529.55 which the plaintiff paid on moneys received from the defendant as net costs for expenses incurred by plaintiff are state taxes applicable to the Work, and under the provisions of the contracts in question the plaintiff is entitled to payment from the defendant of such State of Indiana Gross Income taxes as part of plaintiff's net costs of the Work."

In approaching the problem, it is well to keep in mind that the parties, as a matter of contract, may shift the burden of the tax. Thus, Regulation 404, of the Gross Income Tax Division of the State of Indiana, in effect at all times pertinent to this litigation, provided: "Passing the Tax on. — Since the gross income tax Act is silent upon the matter...