Opinion
Case No. 02-83984-SSM, (Jointly Administered)
May 21, 2004
George J. Pierson, Esquire, Peckar Abramson, P.C., River Edge, NJ, for the reorganized debtors
Lawrence E. Rifken, Esquire, McGuire Woods LLP, McEean, VA, for the reorganized debtors
Robert A. King, Esquire, Reed Smith, LLP, Pittsburgh, PA, for Limbach Company LLC and Limbach Company LLC/Parker Associates
Francis P. Dicello, Esquire, Reed Smith, LLP, Washington, DC, for Limbach Company LLC and Limbach Company LLC/Parker Associates
Malcolm Mitchell, Esquire, Vorys, Sater, Seymour Pease, E.E.P., Alexandria, VA, for the post-confirmation creditors committee
MEMORANDUM OPINION AND ORDER
Before the court is the motion of Limbach Company LLC and Limbach Company LLC/Parker Associates, Inc., a Joint Venture (collectively, "Limbach") for partial summary judgment concerning the reorganized debtors' objection to their $14.8 million amended proofs of claim. The issue is whether US Airways, having terminated its contracts with Limbach for convenience rather than for cause, is precluded from asserting $2.65 million in "back charges" as offsets to Limbach's claim for sums due under the contract. For the reasons stated, the court determines that, with one limited exception, the back charges are precluded as having been subsumed in the termination for convenience.
Claim No. 4388 was filed by Williard, Inc./Parker Associates, a Joint Venture, in the amount of $5,686,694.73 "plus unliquidated claim." Claim No. 4389 was filed by Williard, Inc., in the amount of $8,586,811.08 "plus unliquidated claim." Both claims were filed prior to the claims bar date. Limbach Company, LLC represents that it is the successor by merger to Williard, Inc. Following the claims bar date, Limbach Company LLC filed an amended proof of claim (Claim No. 5470) in the amount of $8,905,403.13 "plus unliquidated claim", while Limbach Company LLC/Parker Associates, a Joint Venture filed an amended proof of claim in the amount of $5,917,638.73 "plus unliquidated claim."
Background
US Airways, Inc., together with its parent holding company and five affiliates, filed voluntary chapter 11 petitions in this court on August 11, 2002. A joint plan of reorganization was confirmed on March 18, 2003, and became effective on March 31, 2003.
Prior to the chapter 11 filing, US Airways had entered into a contract in October 1999 with Williard, Inc., to perform the electrical work for a terminal US Airways was building at the Philadelphia International Airport. A separate contract was entered into between US Airways and Williard, Inc./Parker Associates to perform the HVAC and mechanical work for the terminal. Each contract was for a fixed price and included a "schedule of values" of amounts due for each stage of the work. The contracts further provided for interim progress payments and allowed US Airways, in connection with each payment, to withhold 10% of the sum otherwise due as "retainage" until the entire work was completed.
Each contract permitted US Airways to terminate the contract either for cause or for its own convenience. Although US Airways asserts that it could have terminated the contracts for cause, it did not do so but instead terminated the contracts for convenience by letter dated May 29, 2002. Both contracts contained the following language related to terminations for convenience:
17.4 TERMINATION BY OWNER FOR CONVENIENCE
17.4.1 TERMINATION BY OWNER FOR CONVENIENCE. The owner may, without cause, terminates its agreement with the Contractor. Contractor shall immediately stop the work, follow the Owner's and/or Construction Manager's instructions regarding showdown and termination procedures, and mitigate all costs.
17.4.2 ADJUSTMENTS. If the work is so terminated, the Contractor may recover from the Owner payment for all work performed in accordance with the agreement, all direct costs actually incurred by the Contractor from the termination, plus a reasonable profit in accordance with Subparagraph 14.1.5 of this Agreement.
(emphasis added).
The proofs of claim filed by Limbach and its predecessors identified specific amounts totaling $5.39 million which it claimed were due under the contract terms but also asserted a broader "cost-plus" basis of recovery in an amount that substantially exceeded the fixed price that would have been due had the contracts been fully performed. By prior order, this court held that Section 17.4.2 did not have the effect of transforming the contracts from fixed-price to cost-plus contracts upon a termination for convenience, but had to be read as allowing the recovery only of (a) amounts owed under the contract (including any change orders) through the date of termination; (b) the direct costs incurred as a result of the termination; and (c) a reasonable profit calculated as a percentage of those costs.
Discussion A.
The debtor has challenged nearly every component of Limbach's claim but in addition has asserted the right to set off against any sums due to Limbach some $2.65 million in "back charges." Limbach, however, argues that when an owner terminates a contract for convenience rather than for cause, the owner effectively waives all damage claims against the contractor for pre-termination breaches. To support this proposition, Limbach points to various court decisions involving government contracts (in which termination-for-convenience clauses are more common than in private-sector contracts). See, e.g., Linan-Faye Constr. Co., Inc. v. Housing Auth. of the City of Camden, 847 F. Supp. 1191 (D. N.J. 1994); Tishman Constr. Corp., Inc. v. City of New York, 643 N.Y.S.2d 489 (N.Y.App.Div. 1996). In Linan-Faye, the court, after an extensive discussion of the history of termination-for-convenience clauses in government contracts, explained their purpose as follows:
The claimed back charges on the electrical contract total $1,359,276 plus a 10% "construction management fee." The claimed back charges on the mechanical contract total $1,033,006 plus a 10% "construction management fee."
Originally, the termination for convenience clause was designed to permit the government to relieve itself from burdensome procurement contracts once the raison d'etre of the contracts had ceased. The typical example involved a wartime requirements contract which was terminated once the war had ended. However, the expansion of the clause into peacetime and civilian contracts brought with it an expansion of the clause's purpose. Today, the termination for convenience clause operates to allow the government to extricate itself from contractual relationships that have soured, for whatever reason, without quibbling with the contractor as to which party is in default.
847 F. Supp. at 1203 (emphasis added). An additional benefit is that the provisions specifying the payments due on termination allow the government "to cut through the thicket of construction litigation." Id. It therefore follows, as a matter of policy, that claims for prepetition breaches "are subsumed within the termination for convenience clause." Id., citing Nolan Bros., Inc. v. United States, 405 F.2d 1250 (Ct.Cl. 1969). In Linan-Faye, to be sure, it was the contractor who was seeking damages for the government agency's alleged pre-termination breaches. However, the same rule was applied the other way in Tishman. In that case, the City of New York had terminated a construction management contract for convenience. When the construction manager brought an action for payment under various provisions of the contract, the City counterclaimed for damages incurred to cure the manager's alleged breach as well as for alleged overpayments. The court held, "Where the City elects to terminate for convenience . . . whether with or without cause, it cannot counterclaim for the cost of curing any alleged default." 643 N.Y.S. at 590. The City was not precluded, however, from recovering overpayments to the extent they were made as a result "of fraud or mistake, rather than under the terms of the contract." Id.
B.
As noted, the termination for convenience clause in this case allows the contractor to recover, among other sums, "payment for all work performed in accordance with the agreement" (emphasis added). The question is whether that clause should be read as allowing recovery for all work specified in the contract and actually performed, or whether it should be read as incorporating other parts of the contract allowing US Airways to deduct amounts expended to correct non-conforming or defective work or to remedy damage caused by the contractor to installed work. US Airways's expert characterized the back charges identified in his report as costs incurred to "[repair] damage caused by, or [fulfill] contract obligations not undertaken by [Williard]" or to "[modify] work that was the subject of deficiency notices from the Design team." These back charges, according to the expert, fall within three broad categories: "Repair to damaged work," "Clean up charges," and "Modifications, repairs and corrections."
The list of back charges appended to his report, however, does not identify the specific charges by category.
There is little question that, absent a termination for convenience, US Airways would be able to offset these types of costs against the final payment due under the contract. However, the court agrees with Limbach that the termination for convenience clause in this case cannot fairly be read to essentially allow US Airways its full range of remedies for Limbach's pre-termination breaches while denying Limbach recovery for possible pre-termination breaches by US Airways. As the district court noted in Linan-Faye, a termination for convenience clause is "[a]n exception to the common-law requirement of mutuality of contract." 847 F. Supp. at 1198. Where commercially sophisticated parties nevertheless clearly and unambiguously agree to unequal remedies, courts will enforce the bargain the parties have made. However, the court will not lightly presume the parties intended such a result. Given that Limbach is precluded under the termination for convenience clause from asserting damage claims of its own (such as lost profits) and is limited to payment for the portion of the work it performed and for demobilization costs, to allow US Airways to recover (by way of setoff) on its damage claims against Limbach for allegedly defective or nonconforming work would place the parties in a manifestly unequal position. The principle that a termination for convenience subsumes all claims for pre-termination breaches is well-established, and while sophisticated parties are free to contract around that principle, their intention to do so must be clear and unequivocal. Since the termination clauses in this case do not clearly preserve US Airways's right to set off damages for defective or non-conforming work, the court concludes that any such claims were effectively subsumed when US Airways chose to terminate the contract for convenience rather than for cause.
C.
Under the court's ruling, many of the identified back charges are clearly precluded. These include, for example, charges for the alleged "damage to installed work caused by [Limbach's] forces" or for "removing [Limbach's] debris to maintain the cleanliness of the site." Nor, as discussed, may US Airways set off costs incurred to correct work that was allegedly defective. However, US Airways is not required to pay for work that, although included within the scope of the Limbach contracts, was not actually performed by Limbach, either because Limbach did not get around to it, or because US Airways directed that it be performed by another contractor. Unfortunately, the summary judgment record is insufficient to permit a ruling as to which, if any, of the identified back charges is properly characterized as work not performed rather than corrective work. Accordingly, that will remain an issue for trial.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion for partial summary judgment is granted in part and denied in part. The termination of the contracts for convenience precludes US Airways from asserting — as an offset against payments due to Limbach for work performed through the date of termination — back charges for corrective and remedial work, site clean-up, and damage to installed work. US Airways may, however, assert back charges for work not actually performed by Limbach.
2. The clerk shall mail a copy of this memorandum opinion and order, or give electronic notice of its entry, to the parties listed below.