NATIONAL UNION F. INS. CO. OF PITTSBURGH, PA. v. D & L CONST. CO.

• Decision Date: 27 December 1965
• Docket Number: No. 18013,18014.,18013
• Citation: 353 F.2d 169
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellant, v. D & L CONSTRUCTION CO. et al., Appellees. D & L CONSTRUCTION CO. et al., Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

353 F.2d 169 (1965)

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellant, v. D & L CONSTRUCTION CO. et al., Appellees.

D & L CONSTRUCTION CO. et al., Appellants, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellee.

Nos. 18013, 18014.

United States Court of Appeals Eighth Circuit.

November 18, 1965.

Rehearing Denied December 27, 1965.

COPYRIGHT MATERIAL OMITTED

Douglas Stripp and Clayton R. Smalley, Kansas City, Mo., for the National Union Fire Ins. Co. of Pittsburgh.

John A. Biersmith, Kansas City, Mo., for the D & L Construction Co., et al., on brief with Charles J. Fraas, Jr., Kansas City, Mo.

Before VOGEL, Chief Judge, and VAN OOSTERHOUT and MEHAFFY, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National) appeals from a judgment entered in favor of D & L Construction Company and Associates (D & L) for $711,528.55, such judgment being for the principal amount of bonds issued by National on behalf of Mojave Electric Company (Mojave) and determined by the court to be in the amount of $530,000 plus attorneys' fees and interest. D & L is the prime contractor on a contract awarded it under the Capehart Act, 42 U.S.C.A. § 1594 et seq., for the building of 700 residential units at Fort Leonard Wood, Missouri. Mojave had two subcontracts on the project; one for $200,000 for the exterior electrical work and another for $330,000 for interior electrical work. National was the compensated surety on the payment and performance bonds demanded by and furnished to D & L, the prime contractor, on behalf of Mojave. National executed and delivered to D & L four bonds totalling $1,060,000, to-wit, (1) a performance bond on the $330,000 interior contract; (2) a payment bond on the $330,000 interior contract; (3) a performance bond of $200,000 on the exterior contract; and (4) a payment bond of $200,000 on the exterior contract.

By cross-appeal, D & L raises the issue that the court erred in denying it full coverage on the four bonds just described and in limiting the aggregate bond coverage to $530,000 — $330,000 on the interior and $200,000 on the exterior.

Mojave defaulted on its subcontract. National, when given timely notice of the default, refused to complete the work which Mojave had contracted to do. D & L completed the subcontract work and claims as damages on the bonds the completion costs plus attorneys' fees and interest.

The facts, many of which are stipulated, are set out in the trial court's opinions reported Triangle Electric Supply Co. v. Mojave Electric Co., D.C., at 234 F.Supp. 293 and 238 F.Supp. 815. Detailed findings of fact and conclusions of law are there set out as well as a discussion of the court's view of the applicable law. We shall not attempt to set forth the rather lengthy and involved factual history in detail here, but will discuss the facts necessary in the course of the opinion.

I. CHOICE OF LAW

Before turning to the substantive legal issues, this court must determine the body of law which governs this appeal. Both agreements between D & L and Mojave specifically stated, "This contract shall be interpreted pursuant to the laws of the State of California." National argues that such specific intent in the subcontracts must be read into the bonds referring to the subcontracts and that California law should control. We disagree. Parties' specific intention concerning what law will control their agreements is binding on courts only where there is a logical basis for applying such law. See 17 C.J.S. Contracts §§ 12(3), 12(4); Weintraub, Contracts and Conflicts of Laws, 46 Iowa L.Rev. 713. National is a Pennsylvania corporation, not a California corporation. The bonding agreement with National was negotiated in the state of Louisiana. The bonds were executed on behalf of National by a Missouri agent. The performance and payment bonded was to be carried out entirely in the state of Missouri. The bond makes no specific provision as to controlling law. Such circumstances show the lack of a logical basis for recourse to California law in this case.

More significantly, this controversy grows out of events in the performance of a Government contract, the prime Capehart contract between D & L and the United States. This court has outlined at some length the federal interest inherent in Capehart projects. Continental Cas. Co. v. Allsop Lumber Co., 8 Cir., 336 F.2d 445, 449-452. See United States for Use and Benefit of Fine v. Travelers Indem. Co., W.D.Mo., 215 F.Supp. 455, 466-474. In such cases, this court has specifically held with respect to Capehart cases that "the rules of decision that will be applied to the factual situations involved in the various cases will be the rules of decision developed under the Heard and Miller Act decisions." D & L Constr. Co. v. Triangle Elec. Supply Co., 8 Cir., 332 F.2d 1009, 1012.

The Capehart Act requires payment and performance bonds of the prime contractor. There is no specific requirement that the subcontractor furnish bonds. In American Cas. Co. of Reading, Pa. v. Brezina Constr. Co., 8 Cir., 295 F. 2d 603, the surety on a Miller Act subcontractor's bond was held to the same rules of construction and contractual liability as the surety for the prime contractor by this court. The instant situation is directly analogous. The trial court properly determined that the controlling law is the federal law developed under the Capehart, Heard and Miller Acts.

II. D & L CROSS-APPEAL.

Consideration will first be given to D & L's cross-appeal as the determination of the issue there presented with respect to the amount of bond coverage has a direct bearing on some of the issues presented by National's appeal.

D & L contends that National is legally obligated on the two performance bonds and on the two payment bonds heretofore described, aggregating $1,060,000 coverage, and that the court erred in determining that National's bonds coverage was limited to $530,000, the amount of the subcontract.

We have difficulty in determining the precise legal basis upon which the trial court determined this issue. The terms of the bonds are clear and unambiguous and on their face provide a total coverage of $1,060,000. The trial court, at pp. 302 to 309 of 234 F.Supp., sets out facts bearing upon this issue and at finding 35 on p. 314 states:

"The separate payment bonds sued upon were issued by National Union as a result of a mistake, which should not be held to increase the limits of liability established by the performance bonds written on each subcontract in the full amount of the subcontract price."

Apparently upon the basis of our decision in Brezina, supra, the court determined that the performance bonds covered payments due material suppliers and laborers and that the payment bonds here issued were surplusage and issued by mistake. We adhere to our holding in Brezina. We there held that under the circumstances of that case the performance bond covers material claims for which the prime contractor was legally responsible. Conflicting cases are discussed. Our holding is limited to the facts there presented and such case does not go to the extent of holding that a performance bond will under all circumstances cover all of the liabilities contemplated by a payment bond. The case does not deal with the issue of the validity and effect of a validly issued payment bond.

The subcontract pursuant to which the bonds here involved were issued provided for "a performance and payment bond" for not less than 100% of the subcontract price. Clearly the parties had a right to contract for a specific performance and payment coverage.

National in its brief does not attempt to uphold the theory upon which the trial court resolved this issue. In its brief, it states:

"The case evidenced by the record is a clear and simple instance of mutual mistake as to the legal effect of the instruments in question.

* * * * * *

"Doubtless a lawyer under these circumstances would have realized that the legal effect of thus issuing four bonds rather than two would be to afford coverage in double the amount requested.

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"Double the contemplated protection resulted from a mistake as to the legal effect of the use of separate payment and performance bonds — a mistake of law which, while it might seem `incredible\', is nonetheless clearly shown by the evidence to have occurred. If we are to be charitable to D & L and Mojave, the mistake should be classed as `mutual.\' A less charitable interpretation of the evidence, probably undeserved, would convict both Mojave and D & L of having, with full awareness of National\'s unintended largess, accepted their windfall without a murmur. In either case, the trial court\'s reformation of the bonds to accord with all of the parties\' true intentions was the only result consistent with law, equity, and good conscience."

In response to a question from the court in oral argument, counsel for National conceded that the bonds as written were unambiguous and created liability and that reformation was essential to entitle National to relief. The trial court did not expressly find National was entitled to reformation. However, since reformation if available would support the trial court's decision on the issue raised by the cross-appeal, we shall determine whether National has established a right to reformation.

There is no evidence to support a finding of mutual mistake. If any mistake was made by National, the mistake was one of law. The bonds were contracted for and executed by an authorized New Orleans agency of National under power of attorney pursuant to a general line of credit of $2,000,000 previously extended Mojave. No combination payment and performance bond forms were available, so the agents chose to execute and deliver separate payment and performance bonds covering each subcontract, and such bonds were delivered to D & L. D &...