Great Amer Ins Co v. Norwin Sch Dist ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
9-29-2008
Great Amer Ins Co v. Norwin Sch Dist
Precedential or Non-Precedential: Precedential
Docket No. 07-2441
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Case No: 07-2441
GREAT AMERICAN INSURANCE CO.
v.
NORWIN SCHOOL DISTRICT
v.
SHOFF CONSTRUCTION AND DESIGN, INC.
FOREMAN PROGRAM & CONSTRUCTION MANAGERS,
INC.
Foreman Program & Construction Managers, Inc.,
Appellant
On Appeal from the United States District Court
for the Western District of Pennsylvania
District Court No. 04-cv-01148
District Judge: The Honorable Terrence F. McVerry
ARGUED May 20, 2008
Before: SMITH and NYGAARD, Circuit Judges,
and STAFFORD, District Judge *
(Filed: September 29, 2008)
Amy E. Bentz, Esq. (Argued)
James W. Bentz, Esq.
Bentz Law Firm
680 Washington Road
The Washington Center Building
Pittsburgh, PA 15228-0000
Counsel for Great American Insurance Company
David Raves, Esq.
Maiello, Brungo & Maiello
3301 McCrady Road
One Churchill Park
Pittsburgh, PA 15235-0000
Counsel for Norwin School District
Ross A. Giorgianni, Esq. (Argued)
Metz Lewis
11 Stanwix Street
18th Floor
Pittsburgh, PA 15222-0000
Counsel for Shoff Construction and Design, Inc.
*
The Honorable William H. Stafford, Jr., Senior United
States District Judge for the Northern District of Florida, sitting
by designation.
2
Mark J. Gesk, Esq. (Argued)
Wayman, Irvin and McAuley
1624 Frick Building
437 Grant Street
Pittsburgh, PA 15219-0000
Counsel for Foreman Program & Construction
Managers, Inc.
OPINION
STAFFORD, District Judge.
Third-Party Defendant, Foreman Program &
Construction Managers, Inc. ("Foreman"), appeals from a
judgment entered in favor of Third-Party Plaintiff, Norwin
School District ("Norwin"), on Norwin's breach of contract
claim against Foreman. We vacate the District Court's judgment
and remand to the District Court with directions to enter
judgment in Foreman's favor.
I. FACTS
Our trek through the factual morass from which this case
arose begins in 2001, when Norwin undertook two public school
construction projects. These two projects spawned, inter alia,
four contracts and two payment bonds, namely: (1) two
3
construction contracts, under which Shoff Construction and
Design, Inc. ("Shoff"), agreed to serve as the general contractor
for the two projects, one for the construction of a new Sheridan
Terrace Elementary School and one for renovations and
additions to Hillcrest Intermediate School, both in North
Huntingdon, Pennsylvania; (2) an architectural services contract,
under which N.J. Cunzolo & Associates, Inc. ("Cunzolo"),
agreed to serve as architect for the two projects; (3) a
construction management services contract, under which
Foreman agreed to perform construction management services
for the two projects; and (4) two payment bonds,1 one on each
project, issued by Great American Insurance Company
("GAIC") as surety on behalf of Shoff as principal and in favor
of Norwin as obligee.
A. The Norwin-Foreman Construction Management Contract
Norwin and Foreman entered into a construction
management contract (the "CM Contract") on August 20, 2001,
using the American Institute of Architects ("AIA") standard
form B801/Cma–1992, entitled "Standard Form of Agreement
Between Owner and Construction Manager." As noted on the
cover page of the agreement, Form B801/Cma–1992 was
intended to be used in conjunction with the 1992 edition of AIA
standard form B141/Cma, entitled "Standard Form of
1
Shoff also procured two performance bonds from
GAIC, neither of which is at issue in this case.
4
Agreement Between Owner and Architect." Both forms
incorporated by reference standard form A201/Cma–1992,
entitled "General Conditions of the Contract for Construction"
("General Conditions"). The lump sum fee to be paid Foreman
for its services under the CM Contract was $807,168.00
($391,408.00 for Sheridan and $415,760.00 for Hillcrest).
The CM Contract required Foreman to act as a joint
adviser (with Cunzolo, the architect) to Norwin throughout the
Sheridan and Hillcrest projects. During the pre-construction
phase of the projects, Foreman was required to assist Norwin in
a number of tasks, including selection of the project contractors
and preparation of the construction contracts. Once the
construction contracts were awarded, Foreman was responsible
for administering those contracts in cooperation with Cunzolo
as set forth in Form A201/Cma.
Among other things, Foreman was required to review
Shoff's applications for progress and final payments. Based on
Foreman's observations of the work performed and evaluations
of Shoff's applications for payment, Foreman was required to
certify the amounts to be paid to Shoff by Norwin. As stated in
Article 2.3.11.3 of the CM Contract, Foreman's certification
constituted "a representation to [Norwin] . . . that the Work
ha[d] progressed to the point indicated and the quality of the
Work [wa]s in accordance with the Contract Documents."
Under Article 2.3.11.4, the issuance of a certificate of payment
was not a representation that Foreman had "(1) reviewed
5
construction means, methods, techniques, sequences for
[Shoff]'s own Work, or procedures, (2) reviewed copies of
requisitions received from Subcontractor and material suppliers
and other data requested by [Norwin] to substantiate [Shoff]'s
right to payment, or (3) ascertained how or for what purpose
[Shoff] ha[d] used money previously paid on account of the
Contract Sum." Indeed, Article 4.7 provided that Norwin, not
Foreman, was responsible for furnishing any services necessary
"to ascertain how or for what purposes [Shoff] ha[d] used the
money paid by or on behalf of [Norwin]." In other words,
before issuing a certificate for payment, Foreman was required
to verify the quality and quantity of Shoff's work but not the
appropriateness of Shoff's expenditure of monies.
B. The Norwin-Cunzolo Architectural Services Contract
Cunzolo and Norwin entered into an architectural
services contract (the "AS Contract") using Form B141/Cma,
the Form intended to be used in conjunction with Foreman's CM
Contract. Like the CM Contract, the AS Contract incorporated
by reference the General Conditions set forth in form
A201/Cma.
In addition to design services, Cunzolo agreed to perform
construction administration tasks in cooperation with Foreman.
Among other things, Cunzolo—like Foreman—was required
under the terms of the AS Contract to review and certify the
amounts due to Shoff. In particular, at the time of final
6
completion of the projects, Cunzolo was required—under
Article 2.6.14 of the AS Contract—to issue "a final Project
Certificate for Payment upon compliance with the requirements
of the Contract Documents." As stated in Article 2.6.9.1,
Cunzolo's certification constituted "a representation to [Norwin]
. . . that . . . the work ha[d] progressed to the point indicated and
the quality of the Work [wa]s in accordance with the Contract
Documents." Under Article 2.6.9.2, Cunzolo's certification was
not a representation that Cunzolo (1) "made exhaustive or
continuous on-site inspections to check the quality or quantity
of the Work, (2) reviewed construction means, methods,
techniques, sequences or procedures, (3) reviewed copies of
requisitions received from Subcontractors and material
suppliers, or (4) ascertained how or for what purpose [Shoff]
ha[d] used money previously paid on account of the Contract
Sum." Like Article 4.7 in the CM Contract, Article 4.9 in the
AS Contract made it Norwin's responsibility to provide all
necessary services—including auditing services—"to verify
[Shoff's] Application for Payment or to ascertain how or for
what purposes [Shoff] ha[d] used the money paid by or on
behalf of [Norwin]." As was the case for Foreman, Cunzolo
was required to verify the quality and quantity of Shoff's work
before issuing a certificate of payment, but he was not required
to verify the appropriateness of Shoff's expenditure of monies.
C. The Norwin-Shoff Construction Contracts
Norwin and Shoff entered into the Sheridan and Hillcrest
7
construction contracts (collectively the "Shoff Contracts") on
February 18, 2002, and April 17, 2002, respectively, using the
AIA standard form A101/CMa, entitled "Standard Form of
Agreement Between Owner and Contractor." The Shoff
Contracts specifically incorporated not only form A201/CMa,
containing the General Conditions applicable to construction
contracts, but also document 00800, entitled "Supplementary
Conditions." 2 The contract price of the Sheridan project was
$3,750,700.00; the contract price of the Hillcrest project was
$5,422,400.00.3
Each of the Shoff Contracts required Norwin to make
monthly progress payments to Shoff based upon "Applications
for Payment" submitted by Shoff to Foreman and upon
"Certificates for Payment" issued to Norwin by Foreman and
Cunzolo. The amounts requested in each Application for
Payment were required to be based upon a "Schedule of Values"
that allocated the entire contract sum among the various portions
of the work to be done. Upon receipt of an Application for
Payment, Foreman was required to forward the application to
Cunzolo. If Foreman and Cunzolo were both satisfied with the
2
The General Conditions were effective only to the
extent that they were not modified, voided, or deleted by the
Supplementary Conditions.
3
With change orders, the final contract price for the
Sheridan project was $3,731,574.00. For the Hillcrest project,
the final contract price was $5,615,267.11.
8
amounts requested in the Application for Payment, they issued
a Certificate for Payment—signed by each—to Norwin.
Consistent with provisions in both the CM Contract and
the AS Contract, the Shoff Contracts—through Article 9.4.3 of
the General Conditions—provided that the issuance of a
Certificate for Payment constituted "representations made
separately by [Foreman] and [Cunzolo] to [Norwin], based on
their individual observations at the site and the data comprising
the Application for Payment submitted by [Shoff], that the Work
ha[d] progressed to the point indicated and that, to the best of
[Foreman]'s and [Cunzolo]'s knowledge, information and belief,
quality of the Work [wa]s in accordance with the Contract
Documents." Also consistent with the CM Contract and the AS
Contract, Article 9.4.3 of the General Conditions provided that
a Certificate for Payment did not constitute a representation that
Foreman or Cunzolo
"(1) made exhaustive or continuous on-site
inspections to check the quality or quantity of the
Work, (2) reviewed [Shoff's] construction means,
methods, techniques, sequences or procedures, (3)
reviewed copies of requisitions received from
Subcontractors and material suppliers and other
data requested by [Norwin] to substantiate
[Shoff]'s right to payment, or (4) made
examination to ascertain how or for what purpose
[Shoff] ha[d] used money previously paid on
9
account of the Contract Sum."
Until the work was fifty percent (50%) complete, Norwin
was required under Article 5.6.1 of the Shoff Contracts to retain
ten percent (10%) from its monthly payments as security against
Shoff's performance. Article 5.7.1 in each of the Shoff
Contracts provided that, upon "Substantial Completion" of the
work, progress payments were to be modified by adding "a sum
sufficient to increase the total payments to ninety-five percent
(95%) of the Contract Sum, less such amounts as [Foreman]
recommends and [Cunzolo] determines for incomplete Work
and unsettled claims." The Sheridan contract, but not the
Hillcrest contract, defined "Substantial Completion" to mean
fifty percent (50%) completion. The Sheridan contract, but not
the Hillcrest contract, further specified that retainage was to be
reduced to five percent (5%) when the work was fifty percent
(50%) complete.4
Using somewhat different language, the Supplementary
Conditions applicable to both contracts addressed the matter of
retainage as follows:
4
Article 5.8 in each of the contracts provided that
"[r]eduction or limitation of retainage, if any, shall be as follows
. . ." In the Sheridan contract, the words "[r]educe to 5% at 50%
of work installed" had been added after the word "follows." In
the Hillcrest contract, no reduction or limitation of retainage was
specified.
10
9.3.6: The sum or sums withheld by [Norwin]
from [Shoff] shall be 10 percent of the amount
due [Shoff] until 50 percent of the Contract is
completed. When the Contract is 50 percent
complete, one-half of the amount retained by
[Norwin] shall be released to [Shoff], provided
that [Cunzolo] approves the Application for
Payment; and provided further, that [Shoff] is
making satisfactory progress and there is no
specific cause for greater withholding.
9.3.7: The sum or sums withheld by [Norwin]
from [Shoff] after the Contract is 50 percent
completed shall not exceed 5 percent of the value
of completed work based on monthly progress
payment requests.
Article 6 in the Shoff contracts provided that "[f]inal
payment, constituting the entire unpaid balance of the Contract
Sum, shall be made by [Norwin] to [Shoff] when (1) the
Contract has been fully performed by [Shoff] . . . and (2) a final
Project Certificate for Payment has been issued by [Foreman]
and [Cunzolo]." The parties' responsibilities with regard to final
payment were explained in greater detail in the General
Conditions:
9.10.1. Upon completion of the Work, [Shoff]
shall forward to [Foreman] a written notice that
the Work is ready for final inspection and
acceptance and shall also forward to [Foreman] a
final Contractor's Application for Payment. Upon
11
receipt, [Foreman] will forward the notice and
Application to [Cunzolo] who will promptly make
such inspection. When [Cunzolo], based on the
recommendation of [Foreman], finds the Work
acceptable under the Contract Documents and the
Contract fully performed, [Foreman] and
[Cunzolo] will promptly issue a final Certificate
for Payment stating that to the best of their
knowledge, information and belief, and on the
basis of their observations and inspections, the
Work has been completed in accordance with
terms and conditions of the Contract Documents
and that the entire balance found to be due [Shoff]
and noted in said final Certificate is due and
payable.
The General Conditions further provided that the final
Certificate for Payment constituted a "representation that
conditions listed in Subparagraph 9.10.2 as precedent to the
Contractor's being entitled to final payment have been fulfilled."
Subparagraph 9.10.2 of the General Conditions provided that
"[n]either final payment nor any remaining retained percentages
shall become due" until Shoff submitted to Cunzolo through
Foreman certain documents, including, inter alia, (1) "an
affidavit that payrolls, bills for materials and equipment, and
other indebtedness connected with the Work for which [Norwin]
or [Norwin]'s property might be responsible or encumbered . .
. ha[d] been paid or other wise satisfied;" and (2) "consent of
surety, if any, to final payment."
C. The Payment Bonds
12
As required under Pennsylvania law and Article 11.4.1 of
the Supplementary Conditions, Shoff was required to procure
payment bonds for the two school projects, each in the amount
of one hundred percent (100%) of the contract price. Shoff
obtained the required payment bonds from GAIC. 5 Under
paragraph 1 in each of the payment bonds, GAIC and Shoff
agreed to jointly and severally bind themselves to Norwin "to
pay for labor, materials and equipment furnished for use in the
performance of the Construction Contract, which is incorporated
herein by reference." Paragraph 8 in each of the two bonds
states: "By [Shoff] furnishing and [Norwin] accepting this Bond,
they agree that all funds earned by [Shoff] in the performance of
the Construction Contract are dedicated to satisfy obligations of
[Shoff] and [GAIC] under this Bond, subject to [Norwin]'s
priority to use the funds for the completion of the work."
To obtain the bonds, Charles and Melanie Shoff signed
an "Agreement of Indemnity"—dated July 26, 2001—under
which they agreed to indemnify GAIC for any losses and
expenses arising from issuance of the bonds. In addition, on
March 25, 2004, the Shoffs executed a loan and collateral
security agreement, which provided, inter alia, that "as of the
date of this agreement, there were in excess of $750,000.00 in
accrued debts owed to the equipment, labor and materials
suppliers relating to the [bonded] Projects," and "[the Shoffs]
have requested financial assistance from [GAIC] to enable
5
The record contains copies of the two payment bonds.
The bond on the Hillcrest project is signed; the bond on the
Sheridan project is not.
13
[Shoff] to meet its financial obligations and complete its bonded
construction projects that have not been terminated." GAIC
obtained a mortgage on the Shoff's personal property as
collateral security on the loan note.
D. The Payments
Shoff received eighteen (18) progress payments on the
Sheridan project and seventeen (17) progress payments on the
Hillcrest project. For each payment, Shoff submitted
Applications for Payment, designating both the contract sum
earned to date and the amount of retainage—expressed both as
a percentage and a dollar amount—to be subtracted from the
total earned. In each case, Shoff obtained a Certificate of
Payment from Foreman and Cunzolo and received payment from
Norwin with the designated retainage subtracted. At the time of
each payment, Shoff, Foreman, Cunzolo, and Norwin were all
aware of the amounts— in terms of dollars and
percentages—being retained from the payments due.
On the Sheridan project, Shoff designated ten percent
(10%) retainage on the first six of its Applications for Payment.
On the next nine Applications for Payment, when the work was
fifty percent (50%) or more completed, Shoff designated five
percent (5%) retainage. On Application No. 16, when work
completed to date totaled $3,652,547.49 (ending contract price
was $3,731,574.00), Shoff designated retainage of two and a
half percent (2.5%). On Application Nos. 17 and 18, Shoff
reduced retainage to less than one percent (0.67%).
On the Hillcrest project, Shoff designated ten percent
14
(10%) retainage on the first five of its Applications for Payment.
On the next seven Applications for Payment, when the work was
fifty percent (50%) or more complete, retainage was at or near
five percent (4.75% to 5%). On Application No. 16, when work
completed to date was estimated at a total of $5,649,902.51
(ending contract price was, in fact, $5,615,267.11), Shoff
designated retainage of three and a half percent (3.5%). On
Application No. 17, retainage was reduced to two percent (2%).
Each time Shoff submitted an Application for Payment,
Charles Shoff, as President of Shoff, certified as follows:
[T]o the best of the Contractor's knowledge,
information and belief the work covered by this
application for Payment has been completed in
accordance with the Contract Documents, that all
amounts have been paid by Contractor for Work
for which previous Certificates for Payment were
issued and payments received from the owner,
and that current payment shown herein is now
due.
Shoff's certifications were sworn and notarized. As provided in
Article 9.4.3 of the General Conditions, Foreman had no duty to
"ma[k]e examination to ascertain how or for what purpose
[Shoff] ha[d] used money previously paid on account of the
Contract Sum."
Shoff submitted its final Applications for Payment for
Sheridan on September 4, 2003, and for Hillcrest on November
15
24, 2003. Shoff requested a final payment of $24,961.17 for
Sheridan and $78,362.65 for Hillcrest. On the Sheridan project,
Foreman and Cunzolo both signed the final Certificate of
Payment in the amount of $19,961.17, $5000.00 less than was
requested. On the Hillcrest project, Foreman, but not Cunzolo,
signed the final Certificate of Payment in the amount of
$78,362.65.
With its final Applications for Payment, Shoff
transmitted affidavits—one each for the two projects—to
Foreman, indicating that all of Shoff's debts relating to the two
projects had been paid. Specifically, on AIA form G706,
"Contractor's Affidavit of Payment of Debts and Claims," Shoff
certified that "payment has been made in full and all obligations
have otherwise been satisfied for all materials and equipment
furnished, for all work, labor, and services performed, and for
all known indebtedness." On the Affidavit forms were boxes for
Shoff to check, indicating whether the "Consent of Surety to
Final Payment" was or was not attached.6 Shoff checked neither
box, and the Consent of Surety to Final Payment was not
attached.
Foreman admitted that it did not obtain the consent of
surety before certifying Shoff's final Application for Payment on
both projects. Foreman explained that it signed and submitted
the Final Certificates for Payment without the consent of surety
because (1) it had not experienced any problems with Shoff on
6
The G706 form provided that "[w]henever Surety is
involved, Consent of Surety is required."
16
past projects, (2) Shoff's performance on the Sheridan and
Hillcrest projects—both in terms of timeliness and quality—had
been very good, (3) Shoff had met its obligations with regard to
final punch list items, (4) contractors and subcontractors
generally want to be paid promptly, (5) Norwin's board met only
once in a 30-day period to approve and issue payments, (6)
Foreman wanted to get the Final Certificates for Payment "in the
works" so that those certificates could be submitted at the next
school board meeting, and (7) Shoff had indicated that the
surety's consent would be forthcoming.
Unknown to Foreman, and despite certifications and
affidavits to the contrary, Shoff failed to pay all of its debts to
subcontractors and suppliers, resulting in liens that were not
disclosed to Foreman, Cunzolo, or Norwin. Shoff's President,
Charles Shoff ("Charles Shoff"), explained at trial that, while
the payments his company received from Norwin were used to
pay subcontractors and vendors, the jobs "lost $800,000,"
meaning "there wasn't enough money to pay" all of the debts.
Indeed, it appears that some of the subcontractors and suppliers
had begun making claims against the payment bonds before
Shoff made its final Applications for Payment, a fact that was
communicated to neither Foreman nor Norwin.7 It was not until
7
GAIC's representative, Joel Beach ("Beach"), testified
at trial that, had consent of surety been requested at the end of
the projects, such consent would have been withheld and GAIC
would have instead requested that final payment be sent to
GAIC "because we have had issues on the job." Beach did not
explain why, if GAIC knew about "issues on the job" before the
17
July 1, 2004—many months after Shoff submitted its final
Applications for Payment on September 4, 2003 (Sheridan), and
November 24, 2003 (Hillcrest)—that GAIC informed Norwin
that it had received bond payment claims totaling nearly
$800,000.00, roughly the same amount that Shoff said was
"lost" on the projects.
II. PROCEEDINGS
A. The Claims
Invoking the District Court's diversity jurisdiction, GAIC
filed suit against Norwin on August 4, 2004, alleging that
Norwin breached both of the Shoff Contracts by failing to obtain
GAIC's consent before making final payments to Shoff.
According to GAIC, the final payment under each of the
contracts should have been equal to five percent (5%) of the
contract price, the amount of retainage allegedly required at the
time of final payment. As alleged by GAIC, "[Norwin's] failure,
as . . . bond obligee and stakeholder, to obtain [GAIC's] consent
prior to paying Shoff, impaired [GAIC's] security to the extent
that the retainage was improperly paid." Under the doctrine of
equitable subrogation, GAIC sought damages in the total
amount of $467,342.06, an amount equal to five percent (5%) of
the combined Sheridan and Hillcrest contract prices.
After unsuccessfully moving to dismiss GAIC's
job was finished, timely notice was not given to Norwin,
Foreman, or Cunzolo.
18
complaint, Norwin filed a counterclaim against GAIC, alleging
that GAIC had breached its responsibility to remedy Shoff's
incomplete and/or defective work. Norwin also filed a third-
party complaint against Shoff and Foreman, alleging that (1)
Shoff had breached the Shoff Contracts by failing to pay its
suppliers and subcontractors; (2) Shoff had breached the Shoff
Contracts by failing to correct and complete, with the warranty
period, incomplete and defective work; (3) Foreman had
breached the CM Contract by failing to "produce and obtain the
necessary documentation and certify the same with respect to
payments to [Shoff];" and (4) Foreman was negligent in its
provision of construction management services. Norwin
asserted that Shoff and Foreman were either "solely liable to
[GAIC] for any damages allegedly sustained by [GAIC]," or
they were "jointly and severally liable with [Norwin] and/or
liable over to [Norwin] or directly liable for contribution and/or
indemnity." 8
8
As conceded at oral argument, the record does not
support— and Norwin is not pursuing— claims of
indemnification and contribution against Foreman. Foreman has
not raised—and we do not consider—whether Norwin's breach
of contract claim against Foreman states a proper claim under
Rule 14 of the Federal Rules of Civil Procedure. See e.g.,
American Zurich Ins. Co. v. Cooper Tire & Rubber Co., 512
F.3d 800, 805 (6th Cir. 2007) (explaining that "Rule 14(a) does
not allow a third-party complaint to be founded on a defendant's
independent cause of action against a third-party defendant,
even though arising out of the same occurrence underlying
plaintiff's claim").
19
After answering Norwin's third-party complaint, Foreman
filed a cross claim against Shoff, seeking contribution and
indemnity from Shoff. Shoff in turn filed a cross-claim against
Foreman and a counterclaim against Norwin. For whatever
reason, Cunzolo was left out of the fray.
B. The GAIC-Norwin-Shoff Agreement
On November 30, 2005, all parties—GAIC, Norwin,
Shoff, and Foreman—filed cross-motions for summary
judgment. Soon after, unbeknownst to both the District Court
and Foreman, the other three parties—GAIC, Norwin, and
Shoff—signed a settlement agreement9 (the "Settlement
Agreement") that provided as follows:
1. Norwin agreed not to oppose GAIC's motion
for summary judgment on the issue of liability.
2. Norwin agreed not to oppose GAIC's motion
for summary judgment on the issue of damages.
Not only did Norwin agree not to contest the
amount requested by GAIC, namely, $467,362.06;
but it also agreed not to assert that those damages
should be reduced by (a) the value of any
collateral taken by GAIC from Shoff; and (b) any
9
The copy of the agreement that appears in the record
contains the signatures of GAIC's and Norwin's representatives.
The signature line for Shoff is blank. It is undisputed, however,
that Shoff was a party to the agreement.
20
monies paid to GAIC by its underwriter Seubert
& Associates, Inc., under the Agency Agreement
or the Surety Profit Sharing Agreement.
3. Shoff agreed to undertake all corrective
measures requested by Norwin.
4. Norwin agreed to release GAIC from any
liability to Norwin with respect to all bonds
executed by GAIC as surety to Shoff, the
principal, and to Norwin, the obligee, including
all those claims that were asserted and could have
been asserted in the litigation.
5. Norwin agreed to retain—at no cost to
N orw in— G A IC 's counsel after G AIC 's
unopposed motion for summary judgment was
granted. GAIC's counsel would then pursue
Norwin's claims against Foreman. Norwin agreed
that it would turn over to GAIC any amounts that
it might obtain from Foreman through judgment
or settlement.
6. Norwin agreed to voluntarily dismiss its claims
against Shoff.
7. In the event GAIC's counsel was unable to
obtain a judgment against Foreman on Norwin's
behalf, GAIC agreed "to satisfy of record [GAIC's
21
judgment against Norwin] upon the occurrence of
one of the following: (1) the expiration of sixty
days after the entry of a final, non-appealable
judgment in favor of Foreman; or (2) the
expiration of sixty days after Foreman establishes,
to the satisfaction of GAIC, that Foreman and its
insurance carrier are unable to pay the amount of
any judgment entered in favor of Norwin's claims
against Foreman in this Litigation." This
provision appears to say, and the parties have
since conceded that it means, that Norwin will not
have to satisfy the judgment obtained by GAIC
against Norwin.
8. GAIC, Norwin, and Shoff agreed to cooperate
in the litigation against Foreman.
C. The Rulings
On February 13, 2006, the Magistrate Judge entered a
report and recommendation addressing the four motions for
summary judgment that were filed on November 30, 2005. The
Magistrate Judge did not then know about the GAIC-Norwin-
Shoff Settlement Agreement. Noting that Norwin altogether
failed to respond to GAIC's motion for summary judgment, the
Magistrate Judge recommended that summary judgment be
entered in GAIC's favor on GAIC's claims against Norwin and
on Norwin's counterclaims against GAIC. With respect to
Norwin's and Foreman's cross-motions for summary judgment
(regarding Norwin's third-party claims against Foreman), the
Magistrate Judge recommended that summary judgment be
22
granted in Foreman's favor on Norwin's third-party negligence
claims and in Norwin's favor—as to liability—on Norwin's
third-party breach of contract claims. With respect to Shoff's
motion for summary judgment against Foreman (regarding
Foreman's cross-claims against Shoff), the Magistrate Judge
recommended that summary judgment be entered in Shoff's
favor.
The District Court adopted the Magistrate Judge's report
and recommendation by order docketed March 20, 2006.
Neither the District Court nor Foreman had yet been informed
about the Settlement Agreement. Shoff later withdrew its cross-
claim against Foreman, and Norwin and Shoff withdrew their
claims against each other.
By motion filed April 18, 2006, GAIC requested entry of
judgment against Norwin in the total amount of $701,456.38,
which amount included $467,342.06, plus "attorney's fees, costs,
and other damages under the Public Contractor and
Subcontractor Payment Act, 62 Pa. C.S.A. § 3931." The next
day, Norwin filed a motion for entry of judgment against
Foreman, arguing that Foreman was "liable over" to Norwin for
the summary judgment granted to GAIC on March 20, 2006, a
judgment purportedly requiring Norwin to pay $467,342.06,
plus "attorney's fees, costs, and other damages." Norwin
thereafter responded to GAIC's motion for entry of judgment by
stating that it would not contest the amounts sought by GAIC,
"so long as the Court enters Judgment in its favor and against
Foreman in the same amount, as requested in Norwin's Motion
for Judgment."
23
Foreman first learned about the GAIC-Norwin-Shoff
Settlement Agreement at a status conference held before the
Magistrate Judge on April 18, 2006. Foreman thereafter filed a
counter-motion to GAIC's and Norwin's motions for entry of
judgment, asserting that the District Court's previous order
granting summary judgment to Norwin against Foreman should
be vacated based on the secret Settlement Agreement. Foreman
also moved to amend its affirmative defenses to Norwin's third-
party claims. Specifically, Foreman sought leave to add three
affirmative defenses, one each based on: (1) GAIC's agreement
to forebear from executing on its judgment against Norwin,
thereby relieving Norwin from having to pay any damages; (2)
Norwin's failure to mitigate damages; and (3) GAIC's and
Norwin's agreement, which purportedly released or extinguished
Norwin's claims against Foreman.
In a memorandum order dated June 8, 2006, the
Magistrate Judge noted as follows:
Great American and Norwin argue that Foreman
is liable over to Norwin for the amount that
Norwin owes Great American. However, the
Court has not determined what the amount is that
Norwin owes Great American and, even if they
[Great American and Norwin] were to
unequivocally agree upon an amount, such an
agreement would not be binding upon a third
party. Moreover, that argument appears to be
based on an indemnity theory which, as explained
above, is not the basis for Foreman's liability.
24
The Magistrate Judge accordingly dismissed Norwin's motion
for entry of judgment as premature and deferred GAIC's motion
for entry of judgment, stating that the motion "will be
considered by the Court if and when Norwin unconditionally
consents to the entry of judgment against it." The Magistrate
Judge also denied Foreman's motion to amend its affirmative
defenses on the ground that the proposed amendment would be
futile. In the Magistrate Judge's words: "[B]ecause Foreman's
liability to Norwin is based on Foreman's breaches of its
contractual obligations and not on a theory of indemnification,
the provisions of the Agreement would not have made any
difference in this case." Finally, the Magistrate Judge denied
Foreman's counter-motion to set aside the district court's March
20 order regarding the parties' cross-motions for summary
judgment. According to the Magistrate Judge, "the issue of
liability has been established and all that remains to be
determined is the amount of damages."
On June 19, 2006, GAIC filed an amended motion for
entry of judgment against Norwin. In its amended motion,
GAIC requested entry of judgment in the amount of
$467,342.06, plus prejudgment interest. After Norwin advised
the District Court that it did not oppose the motion, the District
Court entered an order dated September 1, 2006, directing entry
of judgment in favor of GAIC and against Norwin "in the
amount of $467,342.05 [sic] together with prejudgment
interest."
On June 20, 2006, Norwin filed an amended motion for
entry of judgment against Foreman, this time requesting
judgment in the amount of $467,342.06 plus interest. As he did
25
with Norwin's earlier motion for entry of judgment, the
Magistrate Judge dismissed the amended motion as premature.
Norwin thereafter filed a motion for summary judgment on
damages, arguing that Foreman owed $467,342.05, the amount
of the judgment already entered in GAIC's favor and against
Norwin. On November 13, 2006, the Magistrate Judge
recommended that Norwin's motion for summary judgment as
to damages be denied. The Magistrate Judge wrote:
Norwin cannot sustain this burden [of proving its
damages] by referring to a judgment entered
against it, with its consent, by Great American.
Although Great American and Norwin can agree
to Norwin's liability, such an agreement is not
binding on third parties. Nor can Norwin succeed
by proffering an agreement reached between other
parties when Foreman has presented testimony
that Norwin will not be making payments to Great
American as a result of this agreement.
The District Court later adopted the Magistrate Judge's report
and recommendation and denied Norwin's motion for summary
judgment as to damages. A jury trial on damages was scheduled
to begin on April 16, 2007.
As the case proceeded toward a trial on Norwin's
damages, Norwin and Foreman filed a number of motions in
limine. On April 5, 2007, the District Court ruled on these
motions, ordering, among other things, that (1) neither party
would be permitted to introduce the GAIC-Norwin-Shoff
Settlement Agreement into evidence, the agreement being
26
"irrelevant to the merits of the instant dispute;" (2) Norwin
could introduce evidence of the judgment in favor of GAIC and
against Norwin, as well as evidence of the retainage amounts
paid to Shoff, in order to establish its damages; (3) Foreman
would not be permitted to argue that, because Norwin would
never have to pay the GAIC judgment, Norwin suffered no
damages; (4) Foreman would be permitted to introduce evidence
to establish that Norwin failed to mitigate its damages; and (5)
Norwin would not be permitted to present evidence regarding
Foreman's insurance coverage. In essence, the District Court
concluded that, "[t]o put Norwin in the same position that it
would have been had Foreman performed [the CM Contract]
properly, the Great American judgment against Norwin must be
satisfied." The District Court determined—in other words—that
"the entry of judgment against Norwin is sufficient evidence of
its damages."
Several days before trial began, Foreman submitted an
offer of proof regarding evidence that it wished to introduce at
trial. On the morning of trial, the District Court addressed
Foreman's offer of proof by ruling that Foreman could not
introduce (1) the Settlement Agreement to show bias or
prejudice on the part of "any witnesses who are employees,
agents, or representatives of the signatories to the said
settlement agreement;" (2) evidence that Norwin's damages were
caused by Shoff's alleged misrepresentations; (3) evidence that
Norwin caused its own damages by failing to abide by the
provisions of the Shoff Contracts; (4) evidence that Norwin
breached its CM Contract with Foreman by assigning rights
under that contract to Great American; and (5) the deposition
testimony of Superintendent Boylan, indicating that Norwin
27
expected that "not one dime of school district money would be
used toward payment of the judgment [in favor of GAIC]." At
the same time, the District Court granted Norwin's motion in
limine to exclude all evidence (1) that Shoff breached its
contract with Norwin and/or committed fraud; (2) that Norwin
failed to mitigate its damages by not pursuing claims against
Shoff; (3) that Norwin failed to mitigate its damages by not
contesting the amount of damages claimed by GAIC; and (4)
that GAIC had a potential, but speculative, right of recovery
against Shoff through a security interest granted to GAIC by
Charles and Melanie Shoff.
During trial, over Foreman's objection, the District Court
took judicial notice of the uncontested judgment entered against
Norwin in the amount of $467,342.05. Norwin's business
manager testified that the amount of the judgment was equal to
the amount of the retainage (5%) that was improperly released
to Shoff. Other than introducing the certified payment
applications documenting the release of the five percent (5%)
retainage, Norwin presented no other evidence of its damages.
Indeed, when instructing the jury, the District Court stated: "The
Court has taken judicial notice of the judgment in favor of Great
American Insurance Company against Norwin School District.
Therefore, Norwin School District need not produce any other
formal proof of the existence or amount of its damages." Not
surprisingly, the jury returned a verdict in favor of Norwin and
against Foreman in the amount of $467,347.05, plus six percent
28
(6%) interest from July 1, 2004.10 On April 19, 2007, consistent
with the jury's verdict, the District Court entered judgment in
favor of Norwin in the amount of $467,347.05, plus six percent
(6%) interest from July 1, 2004. This timely appeal followed.11
III. DISCUSSION
In its notice of appeal filed May 10, 2007, Foreman
stated that it was appealing from (1) the judgment entered on the
jury's verdict; (2) the ruling on summary judgment docketed
March 20, 2006, granting summary judgment in favor of GAIC
against Norwin, in favor of Norwin against Foreman (as to
liability), and in favor of Shoff against Foreman; 12 (3) the order
docketed September 1, 2006, entering judgment in favor of
GAIC and against Norwin in the amount of $467,342.05; and
(4) the order docketed April 5, 2007, on motions in limine.
10
The jury awarded $467,347.05, which is five dollars
more than the figure used in the September 1 judgment.
Apparently, no one complained about the jury's error.
11
The district court exercised jurisdiction pursuant to 28
U.S.C. §§ 1332(a) and 1367. Appellate jurisdiction exists under
28 U.S.C. § 1291.
12
Although Foreman appealed from the order granting
Shoff's motion for summary judgment against Foreman,
Foreman has abandoned its appeal against Shoff. Foreman not
only failed to address the Shoff ruling in its appellate brief, but
it also advised this Court at oral argument that it was not
pursuing its appeal against Shoff.
29
Because this is a diversity case, we apply the substantive law of
Pennsylvania. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-80
(1938).
A. Contract Interpretation
The Pennsylvania Supreme Court summarized
Pennsylvania law as it relates to contract interpretation in
Murphy v. Duquesne University, 777 A.2d 418 (Pa. 2001).
The fundamental rule in interpreting the
meaning of a contract is to ascertain and give
effect to the intent of the contracting parties.
The intent of the parties to a written agreement
is to be regarded as being embodied in the
writing itself. The whole instrument must be
taken together in arriving at contractual intent.
Courts do not assume that a contract's language
was chosen carelessly, nor do they assume that
the parties were ignorant of the meaning of the
language they employed. When a writing is
clear and unequivocal, its meaning must be
determined by its contents alone.
Only where a contract's language is
ambiguous may extrinsic or parol evidence be
considered to determine the intent of the parties.
A contract contains an ambiguity if it is
reasonably susceptible of different constructions
and capable of being understood in more than
one sense. This question, however, is not
30
resolved in a vacuum. Instead, contractual
terms are ambiguous if they are subject to more
than one reasonable interpretation when applied
to a particular set of facts. In the absence of an
ambiguity, the plain meaning of the agreement
will be enforced. The meaning of an
unambiguous written instrument presents a
question of law for resolution by the court.
Id. at 429-30 (internal quotation marks and citations omitted).
We exercise plenary review over questions of contract
interpretation. Local Union No. 1992 v. Okonite Co., 189
F.3d 339, 341 (3d Cir. 1999).
1. Reduction of Retainage
An issue central to this case is whether GAIC's consent
was required before retainage fell below five percent (5%) of
the combined final prices of the two projects. The contracts
provided that GAIC's consent was required before "final
payment." Norwin and GAIC contend that the contracts
required Norwin to retain a full five percent (5%) of the total
contract prices until the time of final payment, at which time
GAIC's consent was purportedly required.13 Foreman argues
13
It bears noting that all four of the parties to the various
construction contracts—Shoff, Cunzolo, Foreman, and
Norwin—participated in the decision to gradually reduce the
retainage below five percent (5%). Shoff submitted
Applications for Payment with the reduced retainage amounts
31
otherwise. The District Court never addressed the issue,
assuming, instead, that an amount equal to five percent (5%) of
the total contract prices was a proper measure of what the final
payment should have been.
We begin with the Hillcrest contracts. The relevant
language in the Shoff Contract–Hillcrest ("Hillcrest Contract")
provided as follows:
5.6 Subject to the provisions of the Contract
Documents [namely, the Shoff Contract plus the
General and Supplementary Conditions], the
amount of each progress payment shall be
computed as follows:
5.6.1. Take that portion of the Contract Sum
properly allocable to completed Work as
determined by multiplying the percentage
completion of each portion of the Work by the
share of the total Contract Sum allocated to that
portion of the Work in the Schedule of Value, less
retainage of ten percent (10%). . . .
5.6.2 Add that portion of the Contract Sum
properly allocable to materials and equipment
delivered and suitably stored at the site for
listed; Foreman and Cunzolo both certified the Applications for
Payment with the reduced retainage amounts; and Norwin paid
Shoff amounts that clearly reflected the reduced retainage.
32
subsequent incorporation in the completed
construction . . . , less retainage of ten percent
(10%).
....
Article 5.6 of the Hillcrest Contract thus set the amount of
retainage applicable to progress payments at ten percent (10%).
As provided in Article 5.7 of the Hillcrest Contract, the
amount of retainage was subject to modification:
5.7 The progress payment amount determined in
accordance with Paragraph 5.6 shall be further
modified under the following circumstances:
5.7.1 Add, upon Substantial Completion of the
Work, a sum sufficient to increase the total
payments to ninety-five percent (95%) of the
Contract Work, less such amounts as the
Construction Manager recommends and the
Architect determines for incomplete Work and
unsettled claims.
While it appears that Article 5.7.1 required the eventual release
of one-half of the amounts previously retained, i.e., one-half of
the ten percent (10%) retainage, the timing of the release was
left unclear because the Hillcrest Contract failed to define the
phrase "Substantial Completion of the Work."
Article 5.8 of the Hillcrest Contract provided that "[i]f it
33
is intended, prior to Substantial Completion of the entire Work,
to reduce or limit the retainage resulting from the percentages
inserted in Subparagraphs 5.6.1. and 5.6.2 above, and this is not
explained elsewhere in the Contract Documents, insert here
provisions for such reduction or limitation." Because no
percentage was inserted in Article 5.8 of the Hillcrest Contract,
we look "elsewhere in the Contract Documents" for guidance.
Indeed, in the Supplementary Conditions, retainage was
specifically addressed as follows:
9.3.6: The sum or sums withheld by [Norwin]
from [Shoff] shall be 10 percent of the amount
due [Shoff] until 50 percent of the Contract is
completed. When the Contract is 50 percent
complete, one-half of the amount retained by
[Norwin] shall be released to [Shoff], provided
that [Cunzolo] approves the Application for
Payment; and provided further, that [Shoff] is
making satisfactory progress and there is no
specific cause for greater withholding.
9.3.7: The sum or sums withheld by [Norwin]
from [Shoff] after the Contract is 50 percent
completed shall not exceed 5 percent of the value
of completed work based on monthly progress
payment requests.
The first sentence in Article 9.3.6 made very clear that
ten percent (10%) retainage was required until the project was
fifty percent (50%) complete. The words "shall be 10 percent"
were unequivocal. The second sentence in Article 9.3.6
34
provided that, when the project was fifty percent (50%)
complete, and with certain provisos, one-half of the amounts
previously retained "shall be released." Such release
presumably served to increase the total payments to Shoff to
ninety-five percent (95%) of the then-completed work, leaving
Norwin with five percent (5%) retainage at the fifty percent
(50%) completion mark.
In addressing the sums to be withheld after the work was
fifty percent (50%) complete, Article 9.3.7 did not use the "shall
be" language that was used in Article 9.3.6. Instead, Article
9.3.7 provided that retainage "shall not exceed 5 percent" after
the project was fifty percent (50%) complete. While the words
"shall be 10 percent" drew a bright line, permitting no variation
in the amount of retainage before the work was fifty percent
(50%) complete, the words "shall not exceed 5 percent" left
room for a range of retainage values—capped at five percent
(5%)—after the work was fifty percent (50%) complete.
The Supplementary Conditions were expressly
incorporated into, and constituted a vital part of, the Hillcrest
Contract. Like the General Conditions, the Supplementary
Conditions supplied details that were not contained in the
Hillcrest Contract itself. With respect to retainage, the detail
provided by the Supplementary Conditions was not inconsistent
with any other provision in the Hillcrest Contract. We must,
accordingly, give effect to the retainage provision contained in
the Supplementary Conditions. As noted above, that provision
stated that "[t]he sum or sums withheld by [Norwin] from
[Shoff] after the Contract is 50 percent completed shall not
exceed 5 percent of the value of completed work." We cannot
35
assume that the language used in the retainage provision was
chosen carelessly; we cannot ignore the difference in meaning
between the words "shall not exceed" and the words "shall be;"
and we cannot distort the unambiguous meaning of the words
"shall not exceed." Applying—as we must—the rules of
contract interpretation, we conclude that the Hillcrest Contract
did not require five percent (5%) retainage at the time of final
payment.14 Thus, after the projects were more than fifty percent
(50%) complete, Foreman and Cunzolo were permitted to certify
payments with less than five percent (5%) retainage, and Norwin
was permitted to make payments to Shoff with less than five
percent (5%) retainage, all without the consent of surety.
We are not persuaded otherwise by the arguments of
Norwin and GAIC. According to Norwin and GAIC:
By stating that sums withheld "shall not exceed 5
percent," Paragraph 9.3.7 is consistent with
Paragraph 9.3.6 of the General [sic] Conditions
and the payment provisions in the contracts
themselves which directed that first 10% and then
14
Our conclusion is buttressed by Article 9.10.2 of the
General Conditions, which addresses the conditions precedent
to final payment as follows: "Neither final payment nor any
remaining retained percentage shall become due until the
Contractor submits to the Architect through the Construction
Manager" certain documents. The phrase "any remaining
retained percentage" suggests that the percentage of retainage at
the time of final payment could vary.
36
5% shall be retained. In no way did Paragraph
9.3.7 overrule the clear directive that retainage
shall be 5%.
In fact, there was no "clear directive" in the Hillcrest Contract
that retainage "shall be 5%" at the time of final payment.
Indeed, the only directive concerning a reduction in retainage
appeared in Article 9.3.7 of the Supplementary Conditions, and
that directive did not specify that retainage "shall be" five
percent (5%) until the project was complete.
Nor are we persuaded by Norwin's and GAIC's
suggestion that the words "shall not exceed" should be construed
to mean "shall be." The use of different language to address the
same or similar issue—namely, retainage—strongly implies that
a different meaning was intended. In fact, it would have been
quite easy to draft the requirements for retainage, both above
and below the fifty percent (50%) completion mark, using the
same "shall be" language. The same language was not used,
however; and we must assume that the choice of different words
was deliberate. See, e.g, Penncro Assocs., Inc. v. Sprint
Spectrum, L.P., 499 F.3d 1151, 1156-57 (10th Cir. 2007) (noting
that, "[w]hen a contract uses different language in proximate
and similar provisions, we commonly understand the provisions
to illuminate one another and assume that the parties' use of
different language was intended to convey different meanings");
Taracorp, Inc. v. NL Industries, Inc., 73 F.3d 738, 744 (7th Cir.
1996) (noting that "when parties to the same contract use such
different language to address parallel issues . . ., it is reasonable
to infer that they intend this language to mean different things");
see also Commonwealth v. Berryman, 649 A.2d 961, 969 (Pa.
37
Super. Ct. 1994) (recognizing the rule that, when different
language is used in parallel provisions of a statute, the
provisions are intended to mean different things). In plain
terms, by using the words "shall not exceed" instead of "shall
be," Article 9.3.7 of the Supplementary Conditions set a ceiling
on the monies to be retained during the second half of the
project; it did not "direct" that retainage be five percent (5%) at
the time of final payment.
We are also unconvinced by Norwin's and GAIC's
protection-of-the-surety argument. According to Norwin and
GAIC, the only reasonable construction of the contract
documents is a construction that affords meaningful security and
protection to the surety—and that purportedly means requiring
five percent (5%) retainage at the time of final payment.15 As
15
We note that a surety is not necessarily without
protection when a construction contract makes retainage
permissive rather than obligatory. A surety, for example, can
protect itself by issuing a notice to the obligee that the contractor
is in default and/or that claims have been made against the
surety. Such notice places the obligee in the role of a
stakeholder, with a duty to protect the surety by withholding
payments to the contractor. See, e.g., American Ins. Co. v.
United States, 62 Fed. Cl. 151, 155 (2004) (noting that, under
the doctrine of equitable subrogation, "notice [by the surety] that
the contractor is in default and that the surety is invoking its
rights to the remaining contract proceeds converts the [obligee]
to a stakeholder with duties to the surety," allowing the surety to
sue the obligee for recovery of contract funds owed but not yet
38
the case law makes clear, however, the Court may not rewrite
the contracts to provide protections that the contracts did not
themselves provide. See, e.g., Meeting House Lane, Ltd. v.
Melso, 628 A.2d 854, 857 (Pa. Super. Ct. 1993) (noting that "the
parties have the right to make their own contract, and it is not
the function of a court to rewrite it or to give it a construction in
conflict with the accepted and plain meaning of the language
used").
Norwin and GAIC cite three cases in support of their
argument that Norwin "had no discretion" to reduce retainage
below five percent (5%) prior to final payment. Prairie State
Nat'l Bank of Chicago v. United States, 164 U.S. 227 (1896);
Nat'l Sur. Corp. v. United States, 118 F.3d 1542 (Fed. Cir.
1997); Transamerica Premier Ins. Co. v. United States, 32 Fed.
Cl. 308 (1994). None of the cited cases involved the issues
and/or the contract terms that are before this Court. In Prairie
State National Bank, 164 U.S. at 230-40, the Supreme Court
considered the relative priorities of parties competing for
retainage held by the government under a construction contract.
In National Surety Corp., 118 F.3d at 1545, the Federal Circuit
held that, by improperly releasing retainage in violation of clear
contractual terms, the government incurred liability to the
surety. In Transamerica Premier Insurance Co., 32 Fed. Cl. at
313-16, the Court of Federal Claims held that the government
was liable to the surety for payments that the government
wrongly issued to the contractor after the government was put
on notice regarding the contractor's financial inability to
complete the contract. To be sure, in each of these cases, the
courts recognized, as a general proposition, that contract
retainage serves to protect not only the obligee but also the
paid). If, as GAIC's representative testified, GAIC knew before
the projects were completed that there were "issues on the job,"
GAIC could have protected itself by notifying Norwin.
39
surety. None of these cases, however, supports Norwin's and
GAIC's assertion that, under the terms of the Contract
Documents at issue here, Norwin was required to retain five
percent (5%) of the contract price until the time of final
payment.
The Sheridan Contract differed from the Hillcrest
Contract in one important respect: namely, the words "[r]educe
to 5% at 50% of work installed" were inserted in Article 5.8 of
the Sheridan Contract to explain any "[r]eduction or limitation
of retainage." In contrast, no provision for reduction or
limitation of retainage was inserted in Article 5.8 of the Hillcrest
Contract. We must decide whether the added insertion in the
Sheridan Contract leads to a different conclusion regarding the
amount of retainage that was required at the time of final
payment.
In construing the Sheridan Contract, we must consider
the entirety of the contract documents, including the
Supplementary Conditions; and we must read the contractual
provisions to avoid ambiguities if possible. Masters v. Celina
Mut. Ins. Co., 224 A.2d 774, 115 (Pa. Super. Ct. 1966). We
must also keep in mind that specific provisions ordinarily
control more general provisions. In re Alloy Mfg. Co.
Employees Trust, 192 A.2d 394, 396 (Pa. 1963).
Here, the words inserted in Article 5.8 of the Sheridan
Contract—"[r]educe to 5% at 50% of work installed"—must be
read in conjunction with the more detailed retainage provisions
contained in the Articles 9.3.6 and 9.3.7 of the Supplementary
Conditions. By themselves, the words "[r]educe to 5% at 50%
of work installed" were ambiguous. For example, those words
could have meant that any limitation—or ceiling—on retainage
was reduced to five percent (5%) at the fifty percent (50%)
completion mark, or those words could have meant that
40
retainage was reduced to, and would remain at, five percent
(5%) at and after the fifty percent (50%) completion mark. Any
ambiguity was eliminated, however, if the words were
considered in conformity with the more detailed Supplementary
Conditions. The Supplementary Conditions provided that, while
retainage was to be reduced to five percent (5%) when work was
fifty percent (50%) complete, retainage was thereafter to be
capped at five percent (5%). If the words "[r]educe to 5% at
50% of work installed" were construed to mean that retainage
was limited to, or could not exceed, five percent (5%) after the
project was fifty percent (50%) complete, the words would be
consistent with the clear provisions contained in Articles 9.3.6.
and 9.3.7. So construed, the insertion did nothing more than
provide, in broad terms, what the Supplementary Conditions
provided more explicitly.
In sum, we find that the Supplementary
Conditions—specifically Articles 9.3.6 and 9.3.7—controlled
the matter of retainage on both the Sheridan and the Hillcrest
projects. Because the Supplementary Conditions did nothing
more than place a five percent (5%) ceiling on retainage once
the projects were fifty percent (50%) complete, we
conclude—as to both projects—that five percent (5%) retainage
was not required at the time of final payment, that GAIC's
consent was not required before retainage could be reduced to
amounts less than five percent (5%), and that Foreman,
accordingly, did not breach its contract with Norwin by failing
to obtain GAIC's consent before certifying Shoff's progress
payment applications reflecting retainage of less than five
percent (5%).
2. Consent of Surety
Article 9.10.2 of the General Conditions provided that
"[n]either final payment nor any remaining retained percentage
41
shall become due until the Contractor submits to the Architect
through the Construction Manager . . . consent of surety, if any,
to final payment." Foreman now argues—as it argued before the
district court—that the Contract Documents required Shoff to
submit the consent of surety if, and only if, the surety reserved
such right in the bond documents. In this case, the bond
documents were silent as to any consent-of-surety requirement.16
In support of its argument, Foreman cites Exchange
National Bank of Chicago v. United States Fidelity & Guaranty
Co., No. 81C7119, 1985 WL 2123, *1 (N.D. Ill. July 25, 1985).
In that case, the court construed a contract provision stating that
"[n]either the final payment nor the remaining retained
percentage shall become due until the Contractor submits to the
Architect . . . consent of the surety, if any, to final payment." Id.
The court concluded that the contract provision itself did not
require the surety's consent to final payment. Instead, the court
determined that the words "if any" in the phrase "consent of
surety, if any, to final payment" indicated that a consent-of-
surety requirement must be found elsewhere, perhaps in the
bond documents. Id.
We know of no other court that has followed the decision
in Exchange National Bank. Nor are we persuaded to follow the
decision ourselves. Indeed, we conclude that the words "if any"
in the phrase "consent of surety, if any, to final payment" were
meant to qualify the word "surety," meaning that, if and when a
surety was involved, the surety's consent to final payment was
16
The record establishes that Foreman's project
managers were well aware that the surety's consent was needed
as part of the close-out documentation.
42
required.17 Here, a surety—GAIC—was involved, and GAIC's
consent to final payment was required. See Capital Indemnity
Corp. v. Price Municipal Corp., No. 2:99cv0141, 2002 WL
818064 (D. Utah April 25, 2002) (assuming, without discussion,
that the surety's consent to final payment was required when the
contract provided that "final Application for Payment shall be
accompanied . . . by . . . consent of the surety, if any, to final
payment").
3. Final Payment
Because the Shoff Contracts required the consent of
surety to "final payment," we must consider the meaning of the
words "final payment." Unfortunately, the contract documents
provided no clear definition of those words. Article 6 of the
Shoff Contracts provided that final payment constituted "the
entire unpaid balance of the Contract Sum." Article 9.10.1 of
the General Conditions provided that the final Certificate of
Payment should state "the entire balance found to be due the
Contractor." Article 9.10.2 of the General Conditions provided
that "[n]either final payment nor any remaining retained
percentage shall become due until . . . consent of surety, if any,
to final payment" was obtained. In essence, the contract
documents allowed "final payment" to mean whatever the final
Certificate of Payment said it was.
Foreman contends that, as to the Hillcrest project, "final
payment" was $78,362.65, the amount requested by Shoff on the
17
We note that AIA Form G706, entitled "Contractor's
Affidavit of Payment of Debts and Claims," stated that
"[w]henever Surety is involved, Consent of Surety is required."
Although AIA Form G706 was used in this case, the form was
not incorporated into the Contract Documents and was,
therefore, not binding on Foreman.
43
Final Application for Payment. That amount equaled the
difference between the final contract price ($5,615,267.11) and
the total amounts previously paid ($5,536,904.46). Shoff's Final
Application for Payment was certified by Foreman and paid by
Norwin on December 16, 2003. The check issued by Norwin on
that date was marked "FINAL." We agree with Foreman that
"final payment" on the Hillcrest project was $78,362.65.
As to the Sheridan project, Foreman argues that no "final
payment" was ever made. In support of its argument, Foreman
points to the $5,000.00 that was "retained" from Shoff's final
Application for Payment. Indeed, Shoff requested a final
payment of $24,961.17, the difference between the final contract
price ($3,731,574.000 and the total amounts previously paid
($3,706,612.83). While Foreman certified the amount requested
by Shoff, Norwin paid Shoff only $19,961.17 (by check dated
November 26, 2003). According to Foreman, Norwin withheld
the $5,000.00 for uncompleted work. The record is otherwise
silent about what alerted Norwin to the need to withhold a
portion of the certified amount.
That Norwin withheld $5,000.00 from the amount
requested by Shoff in its final Application for Payment does not
change the fact that the final Certificate of Payment reflected a
"final payment" of $24,961.17, the remainder of what was owed
under the Sheridan Contract. Foreman certified final payment
in the amount of $24,961.17, and—under the Contract
Documents—that certification constituted a representation that
the consent of surety had been obtained. Thus, for purposes of
the consent-of-surety requirement on the Sheridan project, "final
payment" was $24,961.17.
B. Breach
Foreman contends that the District Court erred in
44
entering summary judgment in Norwin's favor on the issue of
Foreman's liability for breach of contract. The Magistrate Judge
recommended that Norwin's motion for summary judgment be
granted on the basis that there were "no genuine issues of
material fact that Foreman failed to provide close-out
documents, including the Consent of Surety." The District
Court adopted the Magistrate Judge's recommendation regarding
Foreman's liability for breach of contract. Because breach of a
contract is essentially a question of contract interpretation, our
review is plenary. St. John Mortgage Co. v. United States
Fidelity and Guar. Co., 897 F.2d 1266, 1268 (3d Cir. 1990).
Foreman admits that it failed to obtain GAIC's consent
before it certified Shoff's final Applications for Payment. Under
Articles 9.10.1 and 9.10.2 of the General Conditions, Foreman
was required to obtain GAIC's consent as a condition precedent
to final payment to Shoff. By issuing final Certificates of
Payment without such consent, Foreman clearly breached the
terms of the contract documents.
Foreman contends that, because Norwin itself breached
the terms of the contracts, Norwin should not be permitted to
demand Foreman's strict adherence to the contractual terms.
Foreman refers specifically to Norwin's act of issuing final
payment to Shoff on the Hillcrest project without first obtaining
Cunzolo's certification. The Magistrate Judge rejected this
argument, stating, without explanation, that "Great American's
damages were not the result of Norwin's failure to obtain
Cunzolo's certification for the Final Payment Application on the
Hillcrest project." The Magistrate Judge did not mention that,
as to the final Certificate of Payment, the contract documents
treated Cunzolo and Foreman alike; both were required to
certify that all conditions precedent to final payment—which
included having the consent of surety—had been fulfilled.
45
In practice, Cunzolo apparently did not review the close-
out documentation before reviewing and certifying Shoff's final
Applications for Payment. According to Hank Tkacik
("Tkacik"), the Cunzolo representative responsible for signing
the various Applications for Payment, Foreman did not forward
the close-out documentation to Cunzolo because of its volume.
Thus, Tkacik's review of the final Applications for Payment did
not include verification that all of the close-out documentation
had been submitted. The procedure used on both projects was
as follows: (1) Foreman would review the Applications for
Payment, certify payment, then send the certified Applications
for Payment to Norwin; (2) upon receipt of the certified
Applications for Payment, Norwin would notify Tkacik, who
would go to Norwin's offices to sign the Applications; and (3)
Norwin would then issue payment to Shoff. Tkacik had no
recollection about why he failed to sign the final Application for
Payment on the Hillcrest project. He stated that, consistent with
his certification on the Sheridan project, he would have signed
the final Application for Payment on Hillcrest because Shoff's
work had progressed to a point entitling it to final payment.
We are unconvinced that the District Court erred in
rejecting Foreman's attempt to excuse its breach by pointing to
Norwin's failure to obtain Cunzolo's signature before issuing
final payment on the Hillcrest project. Norwin, Cunzolo, and
Foreman all apparently acquiesced in a procedure that resulted
in Foreman's being the only party that, in fact, reviewed the
close-out documentation. Foreman cannot now complain about
a procedure that it endorsed.
C. Damages
Foreman challenges a number of the District Court's
evidentiary rulings with respect to damages. This Court
generally reviews evidentiary decisions for abuse of discretion;
46
however, to the extent an evidentiary decision involves a legal
component, this court's review is plenary. Inter Med. Supplies,
Ltd. v. EBI Med. Systems, Inc., 181 F.3d 446, 464 (3d Cir.
1999). An erroneous evidentiary ruling will be considered
harmless if "it is highly probable that the district court's [ruling]
did not affect [the party's] substantial rights." Becker v. ARCO
Chem. Co., 207 F.3d 176, 179 (3d Cir. 2000).
Among other things, Foreman challenges the District
Court's motion-in-limine ruling that entry of judgment against
Norwin in GAIC's first-party action was admissible in Norwin's
third-party action as evidence of damages caused by Foreman.
At trial, consistent with its ruling in limine, the District Court
took judicial notice of the uncontested judgment against Norwin
in the amount of $467,342.05, then instructed the jury as
follows: "The Court has taken judicial notice of the judgment in
favor of Great American Insurance Company against Norwin
School District. Therefore, Norwin School District need not
produce any other formal proof of the existence or amount of its
damages."
We note initially that Foreman was not a party to the
uncontested judgment against Norwin. Accordingly, the
judgment was not binding on Foreman. The Magistrate Judge
correctly explained what the District Court failed to recognize:
"Norwin cannot sustain th[e] burden [of proving its damages] by
referring to a judgment entered against it, with its consent, by
Great American. Although Great American and Norwin can
agree to Norwin's liability, such an agreement is not binding on
third parties."
Furthermore, the amount of the judgment was the
unchallenged product of GAIC's and Norwin's behind-the-
scenes Settlement Agreement. Norwin agreed not to oppose
GAIC's motion for summary judgment in the amount of
47
$467,362.06; in return, GAIC agreed not to seek satisfaction of
the judgment from Norwin unless Norwin first obtained a
judgment and received payment from Foreman. From Norwin's
perspective, it mattered little, if at all, what amount was plugged
into an uncontested judgment that required no payment from
Norwin's pockets.
Indeed, knowing that it would never have to pay the
judgment, Norwin had little incentive to challenge the amount
of damages sought by GAIC. That amount, moreover, was
subject to at least one meritorious defense that Norwin never
raised. Norwin could have challenged, for example, GAIC's
erroneous interpretation of the contract language. As we have
already explained, the contract documents did not require
GAIC's consent before retainage was reduced to amounts less
than five percent of the total contract prices. GAIC's consent
was required before "final payment;" and—for consent-of-surety
purposes—"final payment" was $78,362.65 on the Hillcrest
project and $24,961.17 on the Sheridan project. The combined
total of improperly released payments was thus
$103,323.82, not $467,362.06.18 Norwin was certainly free to
18
There may have been other meritorious defenses as
well. For example, GAIC's actual damages would be less than
$103,323.82 if the evidence revealed that GAIC was not
prejudiced by the unauthorized release of final payments to
Shoff. In National Security Corp., the court explained that, if
the unauthorized payments "were expended for the purposes of
the contract so that the extent of the surety's subsequent
performance was reduced thereby, any injury to the surety would
to that extent be mitigated." Id. at 1548 (concluding that a
surety seeking money damages for an obligee's improper release
of funds must establish prejudice); Ramada Devel. Co. v. United
States Fidelity & Guar. Co., 626 F.2d 517, 521 (6th Cir. 1980)
48
agree to an inflated judgment, but that inflated judgment was not
an appropriate—or relevant—measure of damages caused by
Foreman.19 Clearly, the District Court abused its discretion in
admitting GAIC's uncontested judgment as evidence of damages
caused by Foreman.
Not only did the District Court admit, over Foreman's
objection, the uncontested judgment as the sole evidence of
Norwin's damages; it also denied Foreman's request to introduce
evidence to challenge that judgment. By doing so, the District
Court, in effect, directed a verdict against Foreman in an amount
(noting that a compensated surety is not entitled to pro tanto
discharge following improperly released retainage unless the
surety experiences some injury, loss or prejudice). Here,
Charles Shoff stated during his deposition that the payments his
company received from Norwin were used to pay subcontractors
and vendors. Shoff also stated that the projects lost
approximately $800,000—roughly the amount GAIC had to pay
on the bonds. Such deposition testimony tends to demonstrate
that GAIC's bond payments were the result of project losses and
not the result of Norwin's improper release of the final
payments.
19
While we agree that the $467,362.05 judgment was an
improper measure of damages for purposes of Norwin's suit
against Foreman, we reject Foreman's argument that the District
Court erred in entering the $467,342.05 judgment in GAIC's
first-party action against Norwin. We cannot fault the District
Court for entering summary judgment against Norwin when
Norwin raised no opposition to the motion and, indeed,
expressly advised the District Court that it did not oppose entry
of the $467,342.05 judgment. Norwin picked its own poison in
that regard.
49
that not only was unsupported by the contract language but
may also have been unsupported by the facts.
In particular, Foreman wanted to introduce evidence to
prove that, in fact, Norwin suffered no damages at all and that
Norwin received the benefit of its bargain at no more than the
contract price. See Ferrer v. Trustees of Univ. of Pennsylvania,
825 A.2d 591, 609 (Pa. 2002) (explaining that damages for
breach of contract are typically measured by the non-breaching
party's expectation interest, the interest—that is—in having the
benefit of its bargain by being put in as good a position as it
would have been in had the contract not been breached). In
rejecting Foreman's request to introduce the Settlement
Agreement as evidence that Norwin would never have to pay a
dime to GAIC, the District Court concluded that "it is not
necessary for Norwin to actually pay the judgment to suffer
'actual damages' or to maintain its damages claim against
Foreman." The District Court based its conclusion on two
Pennsylvania cases, Ammon v. McCloskey, 655 A.2d 549 (Pa.
Super. Ct. 1995), and Gray v. Nationwide Mutual Insurance Co.,
223 A.2d 8 (1966), both of which involved assignees who
stepped into the shoes of assignors to bring suit against third
parties who caused damage—in tort—to the assignors in
amounts determined by juries in contested proceedings. No
such circumstances exist in this case.20
In Gray, the plaintiff brought suit against an insured for
20
We note that, among other differences, there was no
assignment of Norwin's breach-of-contract claim to GAIC. As
stated by the District Court in its order on motions in limine:
"There is no assignment provision in the settlement agreement
and there is no evidence of record that any such assignment
[from Norwin to GAIC] took place."
50
personal injuries resulting from an automobile accident. The
insurance company undertook the defense and a jury verdict in
excess of the policy limits was returned in the plaintiff's favor.
After the insurance company paid the policy limits, the plaintiff
demanded the unpaid balance of the judgment from the insured.
The insured then assigned to the plaintiff his right to assert a bad
faith claim against the insurer. The assignment agreement
provided that, regardless of the outcome of a bad faith action,
any obligation of the insured to the plaintiff would be satisfied.
The plaintiff, as assignee, then brought suit against the insurer.
After the trial court dismissed the assignee's bad faith claim
against the insurer, the plaintiff appealed.
When the Gray case reached the Supreme Court of
Pennsylvania, the first issue addressed was whether the insured
was required to pay the balance due on the judgment as a
prerequisite to a bad faith action against the insurer. In deciding
that no such actual payment was required, the supreme court
explained that, among other things, adoption of a non-payment
rule would
prevent[] an insurer from benefiting from the
impecuniousness of an insured who has a
meritorious claim but cannot first pay the
judgment imposed upon him. . . . Were payment
the rule, an insurer with an insolvent insured
could unreasonably refuse to settle, for, at worst,
it would only be liable for the amount specified by
the policy. To permit this would be to impair the
usefulness of insurance for the poor man.
Id. at 10 (internal quotation marks and citation omitted). The
supreme court also noted that "such [non-payment] view
recognizes that the fact of entry of the judgment itself against
the insured constitutes a real damage to him because of the
51
potential harm to his credit rating." Id.
In Ammon, a passenger who was injured in an automobile
accident sued the driver of the vehicle. The driver's lawyer
failed to raise a meritorious defense at trial, and a substantial
judgment—on a jury verdict—was entered against the driver in
favor of the passenger. The driver fired his lawyer, then
retained new counsel who negotiated a settlement between the
driver and the passenger. In exchange for the passenger's
promise not to execute the judgment against the driver, the
driver assigned to the passenger the driver's claim for legal
malpractice against the driver's former lawyer. Relying on
Gray, the Ammon court held that actual payment of the
judgment by the driver was not a prerequisite to the assignee's
legal malpractice claim against the lawyer. The court explained:
"The lawyer occupies no less a fiduciary relationship to the
client than an insurer occupies with respect to its insured, and
the judgment entered against a client constitutes no less a real
damage than the entry of a judgment against an insured." Id. at
553.
We are unpersuaded that the non-payment view adopted
in Gray (and followed in Ammon) applies in this case. In Gray,
the defendant in the original action (the insured) suffered a
litigated judgment, the amount of which resulted, in part, from
the alleged tortious conduct of the defendant in the second
action (the insurance company that defended the original
action). The insured satisfied the judgment by assigning to the
plaintiff the insured's right of action against the insurance
company. Fashioning a rule to fit the circumstances, the
Supreme Court of Pennsylvania would not permit the insurance
company to raise as a defense in the second action the insured's
non-payment of the judgment because, to do so, would reward
the insurance company whose tortious conduct contributed to
52
the harm suffered by the insured. The circumstances in Ammon
were similar. In contrast, the original defendant in this
case—Norwin—agreed to entry of an uncontested judgment, all
the while knowing that it would never have to pay the judgment
from its own pockets. The defendant in the second
action—Foreman—did not participate in or have any knowledge
of the agreement that resulted in the uncontested judgment. The
Gray rule simply does not fit the circumstances here, and the
District Court's reliance on those cases was misplaced.
In its breach of contract action against Foreman, Norwin
was required to prove that it did not get the benefit of its
bargain. Foreman was entitled to defend by showing otherwise.
That Norwin had no obligation to pay GAIC any monies for the
two school projects was relevant to the issue of Norwin's
damages, and Foreman should have been permitted to introduce
evidence to that effect. The District Court abused its discretion
by ruling to the contrary.
In its motion for summary judgment, Norwin argued to
the District Court that the "[d]amage incurred by the School
District is the amount that it is required to pay twice resulting
from Foreman's failure to obtain consents of surety."21 In fact,
the record is devoid of evidence that Norwin has been, or ever
21
Norwin's "pay-twice" argument was first advanced to
the District Court before the Settlement Agreement was
executed. The District Court entered summary judgment months
after the Settlement Agreement was executed, without being
informed that, pursuant to the terms of the Settlement
Agreement, Norwin would never have to pay any monies twice.
At oral argument, this panel pointed out that, by failing to
inform the District Court about the changed circumstances,
Norwin caused the District Court to enter summary judgment
based, in part, on misrepresentations.
53
will be, under an obligation to pay any amounts twice for its
school projects. At oral argument before this panel, Norwin's
counsel was asked to explain what damages Norwin suffered.
Counsel did not reiterate the "pay twice" argument. She,
instead, responded by saying that there was a judgment against
Norwin that could affect the school's credit rating.22 She gave
no other explanation for Norwin's damages.
When a District Court has abused its discretion in
admitting, or not admitting, evidence, and has affected a party's
substantial rights in doing so, we ordinarily remand the case to
the District Court for further proceedings. Here, we see no need
for remand. To succeed on its breach-of-contract claim against
Foreman, Norwin was required to prove that it was damaged,
that it did not receive the benefit of its bargain. We have said
that Norwin cannot rely on GAIC's uncontested judgment to
prove that it was damaged by Foreman. For the same reasons,
the effect—if any—of that judgment on Norwin's credit rating
also cannot be attributed to Foreman. In addition, the record
establishes that Norwin has not paid, and will not be required to
pay, anything to GAIC. The record is otherwise devoid of
evidence that Norwin did not get exactly what it bargained
for—two completed school projects at the contract price.23
22
Norwin's counsel did not mention that the judgment
against Norwin will be satisfied—without Norwin's having to
pay one dime—once Norwin's action against Foreman is
resolved. The effect, if any, on the school's credit rating will be
brief.
23
We note, moreover, that even though Norwin failed to
complain about defective and non-conforming work within the
one-year post-completion maintenance bond period, Shoff
nevertheless made the needed repairs—at no cost to Norwin—as
the Settlement Agreement required.
54
Because the record establishes that Norwin suffered no damages
as a result of Foreman's breach, we think a remand would be
fruitless.
IV. CONCLUSION
The facts in this case are singular, the case history
bizarre. Briefly, Foreman breached its contract with Norwin by
certifying final payment on two construction projects without
obtaining the consent of surety. Such breach left Norwin
exposed to potential damages. The issue of Norwin's damages
was tried before a jury, but the District Court's evidentiary
rulings precluded a fair trial for Foreman. Consequently, the
results of that trial—both the District Court's judgment on
damages as well as the jury's verdict upon which the damages
judgment was based—cannot stand. The record, moreover,
contains no evidence to establish that Norwin was, in fact,
damaged by Foreman's breach. Accordingly, we will vacate the
jury's verdict and the District Court's judgment and will remand
to the District Court with directions to enter judgment in
Foreman's favor.
NYGAARD, Circuit Judge, dissenting
Because the majority’s conclusion collides with the plain
language of the contract, I must dissent. I shall be brief:
In ruling that Norwin did not have any actual damages,
the majority relies heavily upon a settlement agreement between
Norwin and Great American that was properly excluded in an
evidentiary ruling by the District Court because it was not
relevant to the matter between Norwin and Foreman. Moreover,
Great American’s conditional forbearance of its judgment
55
against Norwin did not negate Norwin’s obligation to satisfy the
judgment. The result reached by the majority now allows
Foreman to escape the consequences of its breach, leaving either
Norwin or Great American to suffer the damages.
Moreover, the majority posits that, even if damages had
been awarded, the amount of damages could not exceed the
“final payment” made by Norwin to the contractor. I think the
majority misinterprets the language of the contract. The contract
required Foreman to obtain the consent of Great American
before releasing the final payment and retainage. The majority
misinterprets the contract to conclude that Great American’s
authority was limited to signing off only on the final payment.
In so doing, the majority misapprehends an important factual
basis for the damages.
Because, in my view, the majority has erred and the
District Court was correct, I must respectfully dissent.
56