Subsurfco, Inc. v. B-Y Water Dist., B-Y

• Decision Date: 10 August 1983
• Docket Number: B-Y,No. 13679,13679
• Citation: 337 N.W.2d 448
• Parties: SUBSURFCO, INC., a Nebraska Corporation, Plaintiff and Appellant, v.WATER DISTRICT, a Water User District Organized pursuant to SDCL 46-16, Defendant, Counterclaimant and Appellee, v. SEABOARD SURETY COMPANY, a New York Corporation, Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 448

337 N.W.2d 448

SUBSURFCO, INC., a Nebraska Corporation, Plaintiff and Appellant, v. B-Y WATER DISTRICT, a Water User District Organized pursuant

to SDCL 46-16, Defendant, Counterclaimant and Appellee, v. SEABOARD SURETY COMPANY, a New York Corporation, Defendant

and Appellant.

No. 13679.

Supreme Court of South Dakota.

Argued Feb. 14, 1983.

Decided Aug. 10, 1983.

Francis M. Smith of Woods, Fuller, Shultz & Smith, Sioux Falls, R. James Zieser, Tyndall, Gerald M. Kraai of Margolin & Kirwan, Kansas City, Mo., for appellants.

Thomas E. Alberts of Engel & Alberts, Avon, Robert C. Ulrich, Vermillion, for defendant, counterclaimant and appellee.

DOBBERPUHL, Circuit Judge.

PROCEDURAL HISTORY

Subsurfco, Inc. (Contractor) commenced this action to recover the value of materials and services it supplied to the B-Y Water District (B-Y) pursuant to a written contract for the construction of a distribution piping system for B-Y. B-Y counterclaimed against Contractor for completion costs, liquidated damages and water used by Contractor. By way of third party complaint, B-Y claimed the same damages from Seaboard Surety Company (Surety) on its performance bond. The case was tried to a jury. A jury verdict in the sum of $2,740,702.93 was rendered against Contractor on B-Y's counterclaim and against Surety on B-Y's cross-claim. A judgment in that amount, less $729,264.60 representing the unpaid balance of the contract price (without adjustment for work in place), or a net judgment of $2,011,438.33 was entered by the court against Contractor and Surety (appellants). Appellants appeal from that judgment. We affirm in part, reverse in part and remand.

FACTS

On October 11, 1978, Contractor and B-Y entered into a written contract for the construction of Division I of Phase II of B-Y Rural Water System for $5,627,210.50. Division I consists of water distribution lines, shutoff valves, control valves and appurtenant work required to distribute potable water to approximately eleven hundred rural users and five towns in southeastern South Dakota. Division I was divided into

three sections for construction purposes, with approximately 614 miles of pipeline contained in all three sections

Peter Johnson, of Johnson Engineering Company, designed and prepared the specifications and drawings of Division I. The contract defines "ENGINEER" as "[t]he person, firm or corporation named as such in the CONTRACT DOCUMENTS." No one is named as such in the contract, although the term "ENGINEER" is frequently used therein. The status of Peter Johnson or Johnson Engineering Company with respect to the project is unclear. B-Y and Johnson Engineering executed a contract which set forth the duties of Johnson Engineering. For the purpose of determining such status, appellants offered this contract in evidence, but the court refused to admit the contract after an offer of proof was made.

The B-Y inspectors observed all aspects of the pipeline operation, including the bedding, backfilling, compaction, joining of pipe, deflections, and the depth to which the pipe was laid. With a few minor exceptions, no work was rejected by the "engineer" or inspectors at the time it was performed.

During construction on the project, a total of 20 payments were made by B-Y to Contractor. Each payment was approved by B-Y, Johnson Engineering, and the Farmers Home Administration and was based upon and contained the certificate of the B-Y Project Coordinator.

Contractor began construction on October 11, 1978, starting with the construction of the asbestos cement (AC) pipeline in Section 1. The AC pipeline consists of approximately 25 miles of pipe with various diameter sizes ranging from 18 inches to 10 inches and serves as the main water line through which all three sections of Phase II of Division I are served. The 25 miles of AC pipeline in Section 1 together with a portion of the polyvinyl/chloride (PVC) pipeline in Section 1 did not pass pressure tests.

Beginning in April, 1980, portions of the AC pipeline in Section 1 exploded, blew out, loosened and leaked.

While Contractor was attempting to remedy the construction defects existing on the AC pipeline, it proceeded to lay the remaining PVC pipelines in Sections 1, 2 and 3. Portions of the PVC pipelines failed to pass pressure tests.

On May 5, 1980, the other Divisions of Phase II had been completed by other contractors, including the water treatment plant, and were ready for operation.

In the summer of 1980, after the time had expired for the work to be completed, Contractor informed the water district board that they were unable to complete the project and that such inability was the result of a defective design. Contractor alleged that Johnson Engineering had failed or neglected to properly provide for adequate air-relief valves in his plans and specifications and, as a result of this defect, the pipeline was not serviceable.

Throughout the summer and fall of 1980, Contractor, one year after the date specified for completion, was still attempting to repair the numerous leaks existing on the AC line that had failed to pass pressure tests as of that time.

In the late summer and fall of 1980, Contractor had appeared before the board on various occasions and informed them that they were having problems with the AC line. On December 10, 1980, Contractor informed the board that they no longer knew what to do with the AC line and suggested to the board that the line be turned on and put into service and that the leaks be repaired as they surfaced. The board refused to accept this recommendation of Contractor.

On January 9, 1981, B-Y notified Contractor that it intended to terminate Contractor's services on the project and subsequently terminated Contractor's services on January 29, 1981. Thereafter, B-Y removed one and one-half miles of the 18-inch diameter AC pipeline and relaid it. Sections 2 and 3 were then turned on in May, 1981, and since then have been serving water to customers.

The jury determined that B-Y was entitled to a verdict against appellants. In reaching this verdict, the jury specifically found that the design of the system was not defective; that Contractor was not prevented from completely performing the terms of the contract by the actions of B-Y; that Contractor's services were rightfully terminated by B-Y; that Contractor materially breached the contracts; and that Johnson Engineering acted in good faith in determining the damages incurred to B-Y regarding the AC pipeline and warranty work to be completed.

ISSUES

I.

WERE DETERMINATIONS AND ESTIMATES OF DAMAGE BY THE "ENGINEER" CONCLUSIVE DETERMINATIONS OF B-Y'S DAMAGES OR "COSTS INCURRED" SUBJECT ONLY TO A FINDING THAT SUCH DETERMINATIONS AND ESTIMATES WERE NOT MADE IN GOOD FAITH? THE TRIAL COURT HELD THESE DETERMINATIONS AND ESTIMATES TO BE CONCLUSIVE, AND WE REVERSE.

II.

DID B-Y RECOVER AN IMPROPER MEASURE OF DAMAGES CONTRARY TO THE DIMINUTION IN VALUE RULE AND SDCL 21-1-3 AND 21-1-5? THE TRIAL COURT HELD THE RECOVERY WAS NOT IMPROPER, AND WE REVERSE.

III.

SHOULD THE ISSUE OF B-Y'S WAIVER OF CONSTRUCTION DEFECTS HAVE BEEN SUBMITTED TO THE JURY? THE TRIAL COURT REFUSED TO SUBMIT THE ISSUE TO THE JURY, AND WE REVERSE.

IV.

SHOULD THE JURY HAVE BEEN ALLOWED TO CONSIDER TESTIMONY OR EVIDENCE PRESENTED IN RELATION TO ACTS OR OMISSIONS BY B-Y INSPECTORS OR ENGINEERS REGARDLESS OF THE CONTRACT? THE TRIAL COURT HELD THE JURY WAS NOT ENTITLED TO CONSIDER TESTIMONY OR EVIDENCE, AND WE REVERSE.

V.

WERE THE WRITTEN CONTRACT BETWEEN JOHNSON ENGINEERING AND B-Y AND THE LETTER, WHICH DESCRIBED THE DUTIES AND AUTHORITY OF JOHNSON ENGINEERING, ADMISSIBLE REGARDING THE DUTIES AND AUTHORITY OF JOHNSON ENGINEERING AND B-Y? THE TRIAL COURT HELD THE EXHIBITS WERE NOT ADMISSIBLE, AND WE REVERSE.

VI.

DID B-Y'S TERMINATION OF CONTRACTOR CONSTITUTE AN ABROGATION WAIVER OR ELECTION REQUIRING DENIAL OF B-Y'S CLAIM FOR LIQUIDATED DAMAGES? THE TRIAL COURT HELD IT DID NOT, AND WE REVERSE.

VII.

WERE EXHIBITS REGARDING DAMAGES PROPERLY ADMITTED INTO EVIDENCE? THE TRIAL COURT ADMITTED THE EXHIBITS, AND WE AFFIRM.

VIII.

SHOULD THE $46,524.57 DUE CONTRACTOR FOR WORK IN PLACE HAVE BEEN INCLUDED IN THE UNPAID BALANCE OF THE CONTRACT PRICE FOR THE PURPOSE OF DETERMINING THE AMOUNT PAYABLE UNDER THE CONTRACT? THE TRIAL COURT HELD THIS AMOUNT SHOULD NOT BE INCLUDED, AND WE REVERSE.

IX.

WERE EIGHT OF THE JURY INSTRUCTIONS IMPROPER AND PREJUDICIAL? THE TRIAL COURT GAVE THOSE INSTRUCTIONS, AND WE AFFIRM IN PART AND REVERSE IN PART.

DECISION

I.

Appellants contend it was error to instruct the jury that the determinations and estimates of the damage by the "engineer" under the contract were conclusive determinations of B-Y's damages or "costs incurred" subject only to a finding that such determinations were not made in good faith. We agree.

General Condition (GC) 18.2 of the contract provides:

If the CONTRACTOR ... violates any provision of the CONTRACT DOCUMENTS, the OWNER may ... terminate the services of the CONTRACTOR and take possession of the PROJECT ... and finish the WORK by whatever method he may deem expedient.... If the unpaid balance of the CONTRACT PRICE exceeds the direct and indirect costs of completing the PROJECT, including compensation for additional professional services, such excess shall be paid to the CONTRACTOR. If such costs exceed such unpaid balance, the CONTRACTOR will pay the difference to the OWNER. Such costs incurred by the OWNER will be determined by the ENGINEER and incorporated in a CHANGE ORDER.

The trial court directed the jury to find damages in favor of B-Y in the amount determined by the "engineer" if the "engineer" acted in good faith in making that determination.

We hold that the trial court erred in giving the instructions regarding conclusive determination of damages or costs incurred because the parties did not intend to give the "engineer" the power to make such determinations and the Johnson Engineering estimates...