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holding that subcontractor was liable where contract expressly stated subcontractor would assume "'all obligations, terms, conditions, duties, etc. that [contractor] assumes towards Owner and others' under the Prime Contract"
Summary of this case from Hanover Ins. Co. v. Engineered Sys. All., LLCOpinion
Civil No. JFM-03-1357.
August 6, 2004
MEMORANDUM
Bell BCI Company ("Bell") has brought this action against HRGM Corporation ("HRGM") and Atlantic Mutual Insurance Company ("Atlantic") to recover for breach of its subcontract with HRGM, and for breach of the performance bond issued on HRGM's behalf by Atlantic. HRGM has counterclaimed for breach of contract, tortious interference with prospective business relations, quantum meruit recovery, and unjust enrichment. Both parties have filed for summary judgment. For the reasons stated below, HRGM's motion will be denied. Bell's motion will be granted as to liability and stayed as to damages pending additional briefing.
Defendant HRGM filed a motion for leave to file a surreply. The motion is granted.
I.
On June 20, 2001 Bell entered into a contract with the Navy (the "Prime Contract") for the construction and renovation of certain facilities including two above ground fuel storage tanks at the Patuxtent River Naval Air Station in St. Mary's County, Maryland During the summer and fall of 2001, Bell negotiated with HRGM and STI Painting Sealant Contractors ("STI") regarding subcontracting some of the work under the Prime Contract. On January 7, 2002, Bell signed a contract with HRGM (the "HRGM Subcontract") for interior and exterior Tank and Steel Coating work. The value of the HRGM Subcontract was $409,000. Atlantic issued a performance bond for this work on behalf of HRGM.
The Prime Contract required that the Tank and Steel Coating work be completed by a SSPC QP 1 certified painter. At the time the HRGM Subcontract was signed, neither HRGM nor STI was properly certified. On March 12, Bell sent a fax to HRGM indicating that the work areas were ready and requesting an immediate response as to HRGM's plans to complete the work. Shortly thereafter, in light of the fact that neither HRGM nor STI had managed to obtain certification, HRGM informed Bell that it would subcontract with a properly certified painter. As a result, Stanley Taylor of STI contacted several SSPC QP 1 certified painters on HRGM's behalf, including P.S. Bruckel ("PSB") and Thompson Industrial Services ("TIS"). On or about May 2, HRGM entered into a subcontract with PSB. PSB was properly certified and contracted to perform all of the work under the HRGM Subcontract for $470,500. In addition, PSB agreed to provide performance and payment bonds on the work to be performed.
Over the course of the next month or so, PSB submitted four work plans to the Navy through Bell's Quality Control Manager. The Navy rejected all four plans. During this time, Bell directed PSB to mobilize despite its failure to obtain Navy approval. In June, Bell paid HRGM $80,892 for the costs of PSB's mobilization. On June 26, representatives of the Navy, Bell, HRGM and PSB gathered for a meeting on the status of the project. Following the meeting, HRGM decided to terminate PSB for convenience. In a letter dated July 17, HRGM informed Bell that it had entered into a second subcontract with TIS.
In August, Bell learned that HRGM had never signed a contract with TIS. Several days later, on August 23, Bell sent written notice to HRGM that it was considering declaring HRGM in default. The letter informed HRGM that it had three days in which to conclude a formal subcontract with TIS. On August 27, HRGM sent a response claiming that Bell had deprived itself of its right to terminate HRGM for default due to its "defective direction regarding second tier subcontractors," its "interference with HRGM's ability to manage its subcontractors," and its "failure to cooperate with HRGM." On September 3, TIS sent a letter to HRGM rejecting HRGM's proposed subcontract, but stating its willingness to contract directly with Bell. On September 10, HRGM sent a letter to Bell expressing a need for direction and suggesting that Bell, HRGM and TIS meet.
On September 11, Bell sent a letter to HRGM indicating that all of the work areas were ready for access and that a TIS work plan had been approved by the Navy. Bell requested a response from HRGM no later than the end of business on September 12. On September 12, HRGM sent a letter to Bell memorializing a teleconference that had taken place between Bell, HRGM and TIS. In that letter, HRGM stated its understanding that Bell intended to release HRGM from all obligations and liabilities so Bell could contract with TIS directly. One week later, HRGM followed up with a letter to Bell stating that HRGM had still not received the release that Bell had promised, and requesting an immediate statement in writing regarding Bell's intentions.
On September 24, Bell sent a second cure notice to HRGM and Atlantic regarding HRGM's failure to perform. Again, the notice informed HRGM that it had three working days from receipt of the notice to cure. HRGM received Bell's cure notice on September 25, and sent a response to Bell on September 26, alleging that Bell had materially breached their subcontract and declaring that HRGM would not perform unless Bell consented to raise the price due HRGM and committed to paying HRGM its increased costs associated with Bell's breaches, interference, delays and cardinal changes. On September 27, Bell issued notice to HRGM that it was terminated for default.
On October 2, Bell entered into a subcontract with TIS (the "TIS Subcontract") in the amount of $521,894 to complete the work. Bell maintains that its reprocurement costs total $460,098.00.
See Affidavit of Steven A. Ruether, Exhibit 14 to Bell's Statement of Material Facts ("Bell SMF").
II. A.
Pursuant to Federal Rule of Civil Procedure 56(c), summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Summary judgment is proper unless there is "sufficient evidence favoring the non-moving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). "A party opposing a properly supported motion for summary judgment `may not rest upon the mere allegations or denials of [his] pleadings,' but rather must `set forth specific facts showing that there is a genuine issue for trial.'" Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 525 (4th Cir. 2003) (quoting Fed.R.Civ.P. 56(e)).In evaluating summary judgment motions, the court must "view the evidence in the light most favorable to . . . the nonmovant, and draw all reasonable inferences in her favor without weighing the evidence or assessing the witness' credibility." Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 644-45 (4th Cir. 2002). Nevertheless, "[i]t is not the office of Rule 56 to preserve purely speculative issues of fact for trial." Atlantic States Constr. Co. v. Robert E. Lee Co., Inc. of South Carolina, 406 F.2d 827, 829 (4th Cir. 1969). Indeed, "`[t]he very mission of the summary judgment procedure is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.'" Id. (quoting Advisory Committee's Note, 1963 Amendments of the Federal Rules of Civil Procedure, Rule 56(e).)
B.
HRGM seeks summary judgment on the grounds that HRGM did not breach the HRGM Subcontract, and in any event, even if there was a breach, Bell's claim is barred because Bell wrongfully terminated HRGM for default and tortiously interfered with its prospective business relationship with TIS. Alternatively, HRGM argues that the HRGM Subcontract should be held void on the ground of mutual mistake. Finally, HRGM argues that should the court find some merit to Bell's claims, Bell's damages should be limited in three respects: 1) no excess reprocurement costs, 2) no credit for the amount paid to HRGM for PSB's mobilization, and 3) no NACE Inspector costs.
Bell seeks summary judgment on the grounds that HRGM was properly terminated for default and Bell has proven its reasonable reprocurement costs. Additionally, Bell argues that summary judgment should be granted in its favor on all of HRGM's counterclaims.
III. A.
The pivotal question in this case is whether Bell's default termination of HRGM was wrongful. The HRGM Subcontract provides that if "a court of competent jurisdiction finds that any termination for default of this Agreement was wrongful, then such termination shall be automatically converted to a termination for convenience." This determination is significant because the consequence of conversion into a termination for convenience would be that Bell would not be entitled to damages.HRGM contends that the termination was wrongful because: 1) HRGM was not in default, 2) even if HRGM is found to have been in default, that default was excusable, and 3) the termination was procedurally defective. The contract does not define what constitutes a "wrongful" termination, but only states that the parties will abide by the determination of a "court of competent jurisdiction" on this question. In a termination for default case, the initial burden lies on the party issuing the termination to establish that the contractor was in default. Libertatia Assocs., Inc. v. United States, 46 Fed. Cl. 702, 705 (2000). Once default is established, the contractor is bound by the termination for default unless it can show that its default was excusable, or that the termination was otherwise defective. See McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 285, 293 (1997).
1.
HRGM first contends that Bell's termination was improper because HRGM was not in default. HRGM maintains that it performed all of its obligations by subcontracting with a properly certified painter. However, HRGM's obligations under the HRGM subcontract were not so limited. Pursuant to the "flow down" provision of the HRGM Subcontract, HRGM assumed toward Bell "all obligations, terms, conditions, duties, etc. that Bell assumes toward Owner and others" under the Prime Contract. Furthermore, HRGM contracted to "perform" the Tank and Steel Coating work, not merely identify an individual capable of performing the work. Article 14 of the HRGM Subcontract provides that the failure to commence work or timely perform work are both grounds for the issuance of notice of termination and default. In the nine months following the signing of the Bell subcontract, HRGM failed to commence work on the project in earnest, and was therefore in default.
2.
Even when a contractor is found to be in default, it is still entitled to the opportunity to show that its default was excusable. Libertatia, 46 Fed. Cl. At 705. If HRGM can show that its default was beyond its control and without its own negligence, Bell's termination for default will be converted into a termination for convenience. CJP Contractors, Inc. v. United States, 45 Fed. Cl. 343, 371-72 (1999). HRGM alleges that Bell bears responsibility for its failure to perform because either Bell or the Navy was responsible for the inability of PSB to obtain approval of its work plans, and because Bell interfered with HRGM's contract negotiations with TIS.
HRGM first claims that Bell was responsible for the inability of PSB to obtain Navy approval because Bell was obligated under the Prime Contract to ensure that all work plans were acceptable to the Navy in accordance with its role as quality control manager. HRGM points to an email from the Navy to Bell criticizing Bell for its failure to properly "interpret the contract specifications and understand the overall requirements of the project" in order to produce a satisfactory work plan. In the alternative, HRGM contends that the Navy is responsible for the inability of PSB to obtain Navy approval. HRGM points to letters from Bell to the Navy complaining that the Navy had acted unreasonably in rejecting PSB's proposals. While these letters reflect negotiating positions being taken by the Navy and Bell during the course of the construction project, they do not themselves establish the truth or accuracy of any facts underlying the Navy's and Bell's respective contentions.
See Specification Section 01330, Part. 1.5.1., Exhibit 5 to HRGM's Statement of Material Facts ("HRGM SMF").
Email from Joseph Brandon to Greg Martin and Vince Benedetti, August 5, 2002, Exhibit 22 to HRGM SMF.
Letter from Jeffrey Wade to Lt. Jeff Furman, June 19, 2002, Exhibit 19 to HRGM SMF.
Similarly, HRGM makes allegations of interference by Bell with TIS, but does not provide any specific facts supporting its claim. HRGM points accusingly to the record of direct correspondence between Bell and TIS, but fails to acknowledge that there was direct correspondence between Bell and STI at the very beginning of the project. Bell does not deny that it was in direct contact with TIS, but rather asserts that it communicated with TIS based on the understanding that TIS was already under contract to HRGM. Given that understanding, it was entirely reasonable for Bell to be in direct contact with TIS, the entity actually performing the work, in order to fulfill its quality control role and other obligations under the Prime Contract.
This understanding was due in no small part to representations made by HRGM itself, as, for example, in HRGM's July 17, 2002 letter to Bell stating, "[Thompson] signed the contract and furnished bonds." Exhibit 19 to Bell SMF.
HRGM bears the burden of showing that its default was excusable. At the summary judgment stage, HRGM cannot simply offer "assertions that facts might exist which could be eventually discovered and presented at trial in admissible fashion." Mid-Atlantic Tennis Courts, Inc. v. Citizen Bank and Trust Co. of Maryland, 658 F. Supp. 140, 142 (D. Md 1997). HRGM must present specific "evidentiary facts," and none of the letters relied on by HRGM provides specific facts supporting HRGM's claims. Id. Since HRGM has not met its burden of showing that its default was excusable, Bell's termination will not be converted into a termination for convenience on those grounds.
3.
HRGM finally argues that Bell's termination was improper, and should be converted to a termination for convenience, because it was procedurally defective. See Introl Corp., 80-1 BCA ¶ 14,380, 1980 WL 2381 (DOTCAB 1980). In accordance with the terms of the HRGM Subcontract, Bell granted HRGM a cure period of three working days from receipt of its cure notice dated Tuesday, September 24, 2002. HRGM received this notice on Wednesday, September 25, 2002, and therefore was entitled to a cure period expiring at the end of the day on Monday, September 30, 2002. HRGM responded to Bell's cure notice with a letter dated September 26, 2002. Bell received a copy of this letter on September 27, 2002, and sent a notice of termination to HRGM that same day.
As a general rule, once a cure period has been granted, a contract may not be terminated until that period has expired. See Int'l Verbatim Reporters v. United States, 9 Cl. Ct. 710, 723 n. 6 (1986), Introl Corp., 80-1 BCA ¶ 14,380, BC Janitorial Servs., 66-1 BCA ¶ 5355, 1966 WL 353 (ASBCA 1966). In addition to waiting until the end of the cure period, a party contemplating termination must consider "all of the contractor's efforts to comply with the cure notice." Cervetto Bldg. Maint. Co. v. United States, 2 Cl. Ct. 299, 302-03 (1983). Therefore, "when an irrevocable decision to terminate is made before the end of the cure period, and a contractor's timely efforts to cure are ignored, the termination is improper." Id. at 303.
However, this general rule is not without its exceptions. Termination prior to the expiration of a cure period may be "appropriate and provide no basis for setting aside the termination for default" if there is "no evidence that the contractor had taken any action which would have permitted it to perform the contract satisfactorily, or that it had taken any actions which were in any way affected by the termination prior to the expiration of the . . . cure period." Appeals of Soledad Enters., Inc., 77-2 BCA ¶ 12,552, 1977 WL 2287 (ASBCA 1977), see also Appeal of Contract Auto. Repair Mgmt., 94-1 BCA ¶ 26,516, 1993 WL 492273 (ASBCA 1993) (holding that termination prior to the expiration of a cure period may be proper where it is apparent that the contractor will not sufficiently perform, and the contractor has neither alleged that it actually cured prior to the expiration of the cure period nor that it could or would have cured prior to the expiration of the cure period if given the opportunity). When a contractor does not make further efforts to cure, an early termination causes "no harm." Cervetto, 2 Cl. Ct. at 303.
It is undisputed that Bell's notice of termination was issued before the expiration of the cure period. However, there was no indication that, had Bell waited to issue its termination notice on Monday, September 30, HRGM would have acted any differently. "The law does not require a useless act, particularly where . . . it would only enhance the actor's loss." L.K. Comstock Co., Inc. v. United Eng'rs Constructors, Inc., 880 F.2d 219, 232 (9th Cir. 1989) (quoting United States v. Buffalo Coal Mining Co., 343 F.2d 561, 565 (9th Cir. 1965)). Bell's notice of termination was issued subsequent to HRGM's cure response, which contained no assurances of performance, and in fact indicated an unwillingness to perform absent Bell's compliance with various demands. Furthermore, HRGM had ample notice of TIS's refusal to contract with HRGM and made no efforts to secure an alternate subcontractor to perform the work. Finally, HRGM has presented no evidence that it made any efforts to cure prior to the expiration of the cure period. Bell had already waited nine months for HRGM to perform. To require strict adherence to the cure period from Bell under these circumstances would be to require a "useless act." Bell's early termination did not harm HRGM, and the termination for default need not be converted to a termination for convenience.
TIS sent a letter to HRGM at the beginning of September declaring its unwillingness to contract with HRGM.
Bell also contends that it was entitled to terminate HRGM on September 27 because HRGM's response to the cure notice constituted an anticipatory repudiation of the Bell Subcontract. It is true that the "failure to provide reasonable assurances to a well-justified cure notice" can constitute a breach by anticipatory repudiation. See A.R. Sales Co., Inc. v. United States, 51 Fed. Cl. 370, 373 (2002) (citing Danzig v. AEC Corp., 224 F.3d 1333, 1337-38 (Fed. Cir. 2000)). However, although HRGM's failure to provide adequate assurances may justify Bell's termination by default, it cannot excuse Bell's failure to comply with the cure provisions. While the default rule of the Restatement may permit immediate termination for anticipatory repudiation, this rule has been displaced by the explicit contract provision agreed to by the parties requiring a cure period of three working days. See Choice Hotels Int'l, Inc. v. Madison Three, Inc., 83 F. Supp.2d 602, 608 (D. Md. 2000), Cross Petroleum v. United States, 54 Fed. Cl. 317, 325-26 (2002).
B.
HRGM alternatively contends that it is entitled to summary judgment on Bell's claims because the HRGM Subcontract should be voided on the grounds of mutual mistake. Claims to void a contract for mutual mistake must be timely made. "A failure to notify immediately the other party of the mistake may amount to a waiver of any objection or a ratification of the mistake." In re IBP, Inc. S'holders Lit., 789 A.2d 14, 77-78 (Del.Ch. 2001) (citing 22 N.Y. Jur.2d Contracts § 131 (1996)). In fact, "the power of a party to avoid a contract for mistake . . . is lost if after he knows or has reason to know of the mistake . . . he manifests to the other party his intention to affirm it or acts with respect to anything that he has received in a manner inconsistent with disaffirmance." RESTATEMENT (Second) OF CONTRACTS § 380(2).The "mistake" HRGM complains of was the "inability" of STI to obtain SSPC-QP1 certification. The parties discovered this "mistake" in the spring of 2002, and HRGM never attempted to avoid the contract for mistake until this action was initiated over a year later. By contrast, HRGM proceeded to affirm the contract by entering into a new subcontract with PSB, and subsequently attempted to enter another subcontract with TIS. Whatever the merits of HRGM's "belated cry of mistake" in its motion for summary judgment, it "comes far too late to be fairly asserted." In re IBP, 789 A.2d at 78.
HRGM presents no evidence that STI was incapable of obtaining the SSPC-QP1 certification. HRGM cites to Bell's response to Interrogatory No. 15, but Bell's response says only that HRGM and its subcontractor "failed" to obtain certification, not that they were incapable of doing so. The parties dispute whether it was HRGM or STI that declared its intention to obtain the certification.
IV.
Bell argues that it is entitled to summary judgment on all of HRGM's counterclaims. For the reasons discussed below, Bell's motion will be granted as to each of these counterclaims.
A.
HRGM contends that Bell breached the subcontract by: 1) improperly rejecting STI and PSB as subcontractors to HRGM, 2) improperly delaying the approval process, 3) interfering with HRGM's relationship with TIS, 4) failing to provide HRGM with adequate information regarding performance, 5) failing to pay HRGM delay damages, 6) failing to tender HRGM's payment bond, and 7) improperly terminating the subcontract.
The terms of the HRGM Subcontract foreclose recovery for breach in the event of improper termination. The contract provides that HRGM's "sole remedy" in the event of wrongful termination would be "reimbursement for reasonable direct expenditures and costs for materials and equipment incurred prior to the termination for which [HRGM] has not yet been paid." Nonetheless, a termination for convenience made in bad faith breaches the contract and renders the terminating party liable for common law contract damages. See Allied Materials Equip. Co. v. United States, Ct. Cl. No. 342-75 (Sept. 30, 1997). HRGM, however, alleges no conduct amounting to bad faith, and points to no specific facts supporting a claim of bad faith termination.
HRGM has not presented any specific facts to support any of these claims. Because HRGM has the burden of proving a breach of contract, the entry of summary judgment against it on the contract claim is therefore proper.
B.
Secondly, HRGM alleges that Bell tortiously interfered with its efforts to enter into a contract with TIS. A claim for tortious interference with prospective business relations requires a showing of four elements: "(1) intentional and wilful acts; (2) calculated to cause damage to the plaintiffs in their lawful business; (3) done with the unlawful purpose to cause such damage and loss, without right or justifiable cause on the part of the defendants (which constitutes malice); and (4) actual damage and loss resulting." K K Mgmt., Inc. v. Lee, 316 Md. 137, 155, 557 A.2d 965, 973 (Md. 1989). In order to prevail on a claim for tortious interference with business relations, HRGM must demonstrate that Bell engaged in "conduct that is independently wrongful or unlawful, quite apart from its effect on business relationships." Alexander Alexander Inc. v. B. Dixon Evander Assocs., Inc., 336 Md. 635, 657, 650 A.2d 260, 271 (1994). Wrongful conduct includes "violence or intimidation, defamation, injurious falsehood or other fraud, violation of the criminal law, and the institution or threat of groundless civil suits or criminal prosecutions in bad faith." K K Mgmt., 316 Md. at 166, 557 A.2d at 979.
HRGM alleges that Bell negotiated directly with TIS in a manner that was "intentional, willful, and calculated to cause damage to HRGM's lawful business," but has not proffered any evidence of these elements. At the summary judgment stage, mere allegations are not enough. Furthermore, HRGM has not even alleged any wrongful conduct by Bell, much less presented any evidence of such conduct. Accordingly, HRGM's claim for tortious interference with prospective business relations fails.
Bell also contends that HRGM's claim is deficient because it has not shown any actual damages resulting from tortious interference. Because HRGM has otherwise failed to make out a prima facie case, I need not decide whether or not HRGM could prove actual damages.
C.
HRGM's third and fourth counterclaims may be considered together because they fail for the same reasons. HRGM contends that it has a claim to recovery under the quasicontractual theories of quantum meruit and unjust enrichment. Quasicontractual remedies are unavailable when the parties' relationship is governed by an express written contract. See Bright v. QSP, Inc., 20 F.3d 1300, 1306 (4th Cir. 1994), Blanton v. Friedberg, 819 F.2d 489, 491 (4th Cir. 1987), Vollmar v. CSX Transp., Inc., 705 F. Supp. 1154, 1176-1177 (E.D.Va. 1989). The relationship between HRGM and Bell is clearly governed by their express written contract, and HRGM is limited thereby to contractual remedies.V.
Atlantic asserts that it is not liable to Bell under the performance bond because Bell entered into a reprocurement contract with TIS on October 2, 2002, just days after the official notice of termination was issued to HRGM and Atlantic. In so doing, Atlantic contends, Bell deprived Atlantic of the opportunity to protect itself and thereby materially breached the performance bond. Bell contends that Atlantic "had more time than was agreed to in the Subcontract and Bond to honor its obligations under the Bond." The performance bond states:
Whenever Principal shall be, and be declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee's obligations thereunder:
1. Surety may promptly remedy the default subject to the provisions of paragraph 3 herein, or;
2. Obligee after reasonable notice to Surety may or Surety upon demand of Obligee, may arrange for the performance of Principal's obligation under the subcontract subject to the provision of the paragraph 3 herein;
3. The balance of the subcontract price, as defined below, shall be credited against the reasonable cost of completing performance of the subcontract. If completed by the Obligee, and the reasonable cost exceeds the balance of the subcontract price, the Surety shall pay to the Obligee such excess . . .
HRGM Subcontract Performance Bond, Exhibit 2 to Bell SMF.
Relying on Dragon Construction v. Parkway Bank Trust, 687 N.E.2d 55, 58 (Ill.App. 1997), Atlantic contends that by entering into a subcontract with TIS a few days after terminating HRGM, Bell "stripped" Atlantic "of its contractual right to minimize its liability under the performance bond." In addition to the fact that Dragon is not binding authority on this court, that case is readily distinguishable from the case at bar. In Dragon, the obligees terminated the principal and hired a successor contractor on the very same day, and neglected to notify the surety of either of these events until several days later.
In the instant case, Atlantic had ample notice that HRGM was having problems fulfilling its contractual obligations and that Bell was contemplating termination for default. Bell issued two cure notices to HRGM and Atlantic, indicating that it was contemplating defaulting HRGM and holding HRGM and Atlantic liable for all costs associated with the action. The first notice was issued on August 23, 2002. Although HRGM responded to this cure notice, it failed to take any steps to cure its default. The second notice was issued on September 24, 2002. Again, HRGM responded, but failed to indicate any steps it would take to cure the default. Bell issued a formal notice of termination on September 27, 2002. Five days later, Bell contracted with TIS to complete the work HRGM had originally contracted to perform. Bell asserts that Atlantic made no proposal to complete the work, and Atlantic has not claimed otherwise. The performance bond states that Bell may arrange for performance of HRGM's obligations "after reasonable notice to" Atlantic. There was no failure on the part of Bell to keep Atlantic apprised of the status of its contract with HRGM, and the only issue is whether Bell acted too quickly after that notification in securing a contract with TIS, thus depriving Atlantic of the opportunity to participate in the selection of the successor contractor.
The purpose of including a "reasonable notice" provision in a performance bond is to allow the surety "to ensure that the lowest bidder is hired and damages mitigated." See, e.g., Enterprise Capital v. San-Gra Corp., 284 F. Supp.2d 166, 177 (D. Mass. 2003). Atlantic has not alleged that TIS was an unreasonable selection as the reprocurement subcontractor. In fact, given that TIS had already obtained the necessary Navy approvals, was available to perform the work, and had been the choice of HRGM itself to perform the work, it seems that TIS was the optimal candidate with respect to the mitigation of damages.
In addition, Atlantic showed no inclination to act. Atlantic was aware from at least the time of the August 23, 2002 cure letter that TIS was on the verge of obtaining approval from the Navy, and that HRGM was having problems concluding a contract with TIS. Atlantic knew, therefore, that swift action was necessary, and failed to take any. As stated earlier in this opinion, the "law does not require a useless act, particularly where . . . it would only enhance the actor's loss." L.K. Comstock, 880 F.2d at 232. Bell was at risk of losing an already approved subcontractor if it waited too long to take action, and Atlantic made no proposal to complete the work. I conclude that Bell acted within its rights in contracting with TIS, and did not thereby breach the performance bond.
VI.
Finally, I must determine the appropriate damages award. The HRGM Subcontract states that, in the event of termination by default of HRGM, both HRGM and Atlantic "shall be liable to Bell for all damages incurred by Bell in performing the Work, including but not limited to, reprocurement costs, impact costs, delay damages, reasonable overhead, profit, reasonable attorneys fees, expert fees and costs and expenses which exceed the unpaid balance of Subcontract Amount." HRGM disputes whether Bell is entitled to: 1) reprocurement costs, 2) a credit for payments made to HRGM for the PSB mobilization, and 3)NACE Inspector costs.
Article 14, HRGM Subcontract, Exhibit 1 to Bell's SMF.
A.
The first question is whether Bell is entitled to recover reprocurement costs. In order to recover excess reprocurement costs from a subcontractor that is terminated for default, Bell must show that: "(1) the reprocured [services] are the same as or similar to those involved in the termination, (2) [Bell] the contractor actually incurred excess costs, and (3) [Bell] acted reasonably to minimize the excess costs resulting from the default." Cascade Pacific Int'l v. United States, 773 F.2d 287, 293-94 (Fed. Cir. 1985). Recovery for reprocurement relieves the contractor from having to prove the market value of the work as is required for breach of contract damages. Marley v. United States, 423 F.2d 324, 333 (Ct.Cl. 1970). Instead, if the contractor can meet its burden of persuasion as to these aforementioned elements, it is entitled to recover the amount by which its cost of reprocurement exceeds the amount for which the defaulted subcontractor was obliged to complete performance. General Dynamics Corp. v. United States, 671 F.2d 474, 480-81(Ct.Cl. 1982).
Bell asserts that it is entitled to the difference in value between the HRGM Subcontract ($409,000) less the amount paid to HRGM on that contract ($80,892) and the value of the reprocurement contract with TIS ($521,894). HRGM contends that Bell cannot recover its claimed excess costs because Bell has not actually incurred any excess costs, and because the reprocurement contract with TIS is broader in scope than the HRGM Subcontract.
Bell's burden of proving that it has actually incurred excess costs is complicated by the fact that the reprocurement contractor itself, TIS, was also terminated for default by Bell before completing the work. As a result, the record indicates that Bell has paid TIS only $206,359.78, less than the cost of completion of the HRGM Subcontract. Bell asserts, however, that it has paid "more than the value of the TIS subcontract."
See Exhibit 29 to Bell SMF, Exhibit 38 of Exhibits Filed under Seal in connection with HRGM's Motion for Summary Judgment.
Ultimately, Bell did pay more than the amount of the TIS quote in securing a second reprocurement from AS, the subcontractor that replaced TIS. Bell has produced an excerpt from its accounting records, and it lists a check made out to AS in the amount of $631,455. It is evident that HRGM cannot be held accountable for the excess costs attributable to TIS's default. However, there is no apparent reason (and HRGM has not suggested none) why Bell may not rely on payments made to AS to the extent of the amount of the TIS subcontract, as proof of payment of excess costs incurred due to HRGM's default.
See Exhibit 29 to Bell SMF. HRGM contends that I should exclude from trial any evidence or testimony related to payments to AS due to Bell's untimely disclosure of these costs pursuant to Federal Rule of Civil Procedure 37(c)(1). Rule 37(c)(1), however, does not require exclusion if the failure is harmless. See Rowland v. Amer. Gen. Fin., Inc., 340 F.3d 187, (4th Cir. 2003). In this case, the disclosure of the payments to AS does not affect the amount sought by Bell in damages, but merely provides evidence of proof of payment to support Bell's claim for reprocurement costs against HRGM. HRGM does not allege, nor does the evidence indicate that HRGM was harmed by the untimely disclosure of the AS information. Furthermore, failure to consider this evidence now despite its tardy submission, "would deny relief to [Bell] on what is otherwise a meritorious [claim]." Whitlock v. United States, 159 F. Supp. 602, 608 (Ct. Cl. 1958).
Exhibit 29 to Bell SMF.
The problem is that Bell has not produced any documentation regarding AS apart from its accounting records. Without a copy of the subcontract entered into by AS and Bell (the "AS Subcontract"), it is impossible to evaluate the reasonableness of that reprocurement because there is no way to assess the various factors set forth in Cascade with regard to AS without more information. Given this uncertainty regarding the AS reprocurement, I will defer ruling on the specific award of damages and request additional briefing by Bell substantiating its damages demands. The wisdom of deferring judgment on damages is reinforced by several other factors.
First of all, Bell seeks some costs based on an estimate of future costs to be paid. As discussed above, proof of payment is an essential element of the recovery of reprocurement costs, and therefore Bell may not recover these costs until the payments have actually been made. Cascade, 773 F.2d at 293-94. Secondly, some courts have required not only proof of payment, but proof of completion of the work under contract before an award for reprocurement costs may be made. Whitlock v. United States, 159 F. Supp. 602, 607 (Ct.Cl. 1958), Pyramid Packing, Inc., 92-2 BCA ¶ 24,831, 1992 WL 39215 (AGBCA 1992). Bell does not offer any proof that the work at Patuxtent River has been completed, and its request for damages based on an estimate of future costs suggests that the work is, in fact, not complete. Finally, HRGM's claim that the TIS Subcontract is broader in scope than the HGRM Subcontract may have some merit. The TIS Subcontract contains an additional work item, which had been excluded from the scope of the HRGM Subcontract: "SP-10 Sand Blast and Full Prime Coat of the Aboveground carbon steel pipe." Where the reprocurement contract is not identical to the defaulted contract, the cost of the reprocurement contract may be adjusted to reflect any differences. See Ubique Ltd. v. United States, 224 Ct. Cl. 646 (1980). Additional briefing as to the cost added by these additional services will be useful to determine what, if any, adjustments may need to be made.
See TIS Subcontract, Exhibit 27 to Bell SMF. The TIS Subcontract also requires TIS to "collect and remove all abrasive materials from the site." Although this does not sound like the sort of involved activity that would greatly affect the contract price, it is still an item included in the TIS Subcontract that is absent from the HRGM Subcontract. Bell bears the burden of showing that the contracts are the same, and thus should address these items in greater detail.
B.
Next, I must determine whether Bell is entitled to a credit for the $80,892 payment made to HRGM for work done by PSB. HRGM argues that it should not be penalized for Bell's "ill advised direction to PSB to mobilize prior to approval by the Navy" in contravention of the provisions of the Prime Contract. The question of whether or not Bell complied with the provisions of its contract with the Navy is not material to the damages inquiry here. Bell did not agree to assume the same obligations toward HRGM as it assumed toward the Navy. Thus, Bell's alleged duty to the Navy is irrelevant with regard to Bell's duty to HRGM.
HRGM contracted to perform the Tank and Steel Coating work for $409,000. HRGM submitted a payment application for $80,892 to Bell, and Bell issued a check to HRGM in that amount. HRGM was therefore contractually obligated to complete the remaining work for the balance of the contract price, and Bell is entitled to a credit for the portion it has already paid.
C.
Finally, although I will reserve judgment on the final amount of damages owing to Bell, I will resolve the parties' dispute as to who bears responsibility for the costs of the NACE Coating Inspector. The Prime Contract requires the retention of a NACE Coating Inspector as follows:
The NACE Coating Inspector shall be an independent third party hired directly by the prime construction contractor as an integral part of the prime construction contractor's Quality Control Organization. This inspector shall have no business relationships (owner, partner, operating officer, distributor, salesman, technical representative, or inspector) with any subcontractors involved with this project; or with any manufacturers, suppliers, or installers for any material or equipment provided as part of this project.
Specification 01450, Part 1.2.1, Exhibit 6 to HRGM SMF.
Bell maintains that these specifications speak only to the identity of who must conduct the inspections, and not to the question of who must ultimately pay for the inspections.
The cost of the NACE inspections, Bell maintains, was shifted to HRGM via the HRGM Subcontract. In addition to the "flow down" provision through which HRGM assumes all of Bell's obligations to the Navy under the Prime Contract, the Bell Subcontract specifically provides that "NACE Coating Inspector and CIH Requirements are included in this scope." Section B.2. In addition, the Bell Subcontract states that "Subcontractor shall be responsible for all permits, fees, licenses, assessments, inspections, testing and taxes necessary to complete, or relating to the work."
HRGM argues that the TIS Subcontract supports its contention that NACE Coating Inspector costs are not the responsibility of the subcontractor. The TIS Subcontract includes language similar to that contained in the HRGM Subcontract, and according to HRGM, the TIS Subcontract value does not include costs for a NACE Coating Inspector. It is true that TIS submitted a proposal letter dated September 5, 2002 indicating that NACE Inspector costs were not included in its lump sum proposal. However, the fact that TIS clearly indicated that it had not included NACE costs within its lump sum proposal reflects only TIS's, not HRGM's, stance on the issue. HRGM cannot point to a letter of its own disclaiming responsibility for NACE costs. I conclude therefore, on the basis of the contract language, that HRGM is responsible for the costs of the NACE Coating Inspector.
See Exhibit 42 to HRGM SMF.
As discussed above, the contract language controls on the question of who bears responsibility for the NACE Inspector costs. Nonetheless, HRGM contends that records from the Navy reflecting that Bell was requesting an "equitable adjustment" regarding the NACE Inspector costs demonstrate that Bell initially sought to recover those costs not from HRGM, but from the Navy. See EWO-41 Response, Exhibit 2 to HRGM Opposition and Reply. According to HRGM, Bell's effort to recover costs from the Navy constitutes an acknowledgment that Bell was responsible for the NACE Inspector costs under the HRGM Subcontract. Bell responds that its request for an equitable adjustment did not concern costs, but rather asked the Navy to permit the inspections to be conducted by a non-independent third party. HRGM bears the burden of proving that Bell's request for an "equitable adjustment" was an effort to recover NACE Inspector costs from the Navy. The language in the Navy document supports Bell's explanation, and HRGM has not provided any facts rebutting that explanation. Moreover, even if Bell's request for an "equitable adjustment" was an effort to recover NACE inspection costs from the Navy, as HRGM contends, this would only demonstrate that Bell was pursuing every possible avenue for recovery of the NACE Inspection costs, not that Bell was, or considered itself to be, responsible for the NACE Inspector costs under the HRGM Subcontract.
VI.
For the foregoing reasons, HRGM's motion will be denied. Bell's motion will be granted as to liability and stayed as to damages pending additional briefing. A separate order to that effect is being entered herewith.ORDER
For the reasons stated in the accompanying memorandum, it is, this 6th day of August 2004,ORDERED that
1. Defendant's motion for summary judgment is denied, and
2. Plaintiff's motion for summary judgment is granted as to liability, and
3. The issue of damages is stayed pending additional briefing.