MCI Constructors, Inc. v. City of Greensboro , 125 F. App'x 471 ( 2005 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-1395
MCI CONSTRUCTORS, INCORPORATED, a Delaware
Corporation,
Plaintiff,
versus
GREENSBORO, CITY OF, a municipality, organized
under the laws of the State of North Carolina,
Defendant - Appellee,
and
HAZEN AND SAWYER, P.C., a New York
Corporation,
Defendant,
versus
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PENNSYLVANIA, a Pennsylvania
Corporation,
Third Party Defendant - Appellant.
No. 04-1729
MCI CONSTRUCTORS, INCORPORATED, a Delaware
Corporation,
Plaintiff - Appellant,
versus
GREENSBORO, CITY OF, a municipality, organized
under the laws of the State of North Carolina,
Defendant - Appellee,
and
HAZEN AND SAWYER, P.C., a New York
Corporation,
Defendant,
versus
NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH, PENNSYLVANIA, a Pennsylvania
Corporation,
Third Party Defendant.
Appeals from the United States District Court for the Middle
District of North Carolina, at Greensboro. William L. Osteen,
District Judge. (CA-99-2-1)
Argued: December 2, 2004 Decided: March 15, 2005
Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.
Affirmed in part, reversed and vacated in part, and remanded by
unpublished per curiam opinion.
ARGUED: C. Allen Foster, GREENBERG TRAURIG, L.L.P., Washington,
D.C.; John Michael Gillum, MANIER & HEROD, Nashville, Tennessee,
for Appellants. George William House, Michael David Meeker,
BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, Greensboro, North
Carolina, for Appellee. ON BRIEF: Eric C. Rowe, David S. Panzer,
GREENBERG TRAURIG, L.L.P., Washington, D.C., for Appellant MCI
Constructors, L.L.C.; Thomas A. Farr, HAYNSWORTH, BALDWIN, JOHNSON
& GREAVES, L.L.C., Cary, North Carolina, for Appellant National
Union Fire Insurance Company. William P. H. Cary, John M.
DeAngelis, BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD,
Greensboro, North Carolina, for Appellee.
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Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
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PER CURIAM:
The City of Greensboro, North Carolina entered into a
contract with MCI Constructors, LLC on January 16, 1996, for the
construction of a wastewater treatment plant in Greensboro, for a
cost of roughly $29 million. Greensboro's City Manager signed the
contract on behalf of the City. As required by North Carolina law,
MCI obtained a performance bond from National Union Fire Insurance
Company of Pittsburgh, Pennsylvania. The bond incorporated the
terms of the contract between the City and MCI and guaranteed that
MCI would "well and truly perform" the contract. The contract
includes Article 16 which provides that Greensboro's City Manager
resolve disputes relating to the performance of the contract and
that the City Manager's decision "shall be final and conclusive"
and "in case any question touching the contract shall arise between
the parties, such . . . decision shall be a condition precedent to
the right of [MCI] to receive any monies under the Contract."
When construction of the wastewater plant became
substantially delayed, the City terminated the contract, and the
City Manager thereafter acting as "referee" under Article 16 of the
contract, determined that MCI materially breached the contract and
owed the City roughly $13.4 million in damages.
MCI commenced this action challenging, among other
things, the City Manager's determination. The district court ruled
that the City Manager's determination in favor of the City was
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analogous to the determination of a third party arbitrator, such as
an architect or engineer, and should not be set aside except on a
showing of "fraud, bad faith, or gross mistake." Because MCI
failed to advance evidence sufficient to prove fraud, bad faith, or
gross mistake, the district court entered summary judgment in favor
of the City. The district court also entered summary judgment
against the surety, National Union, on its bond.
On appeal, MCI contends (1) that the district erred in
requiring MCI to submit its claims first to the City Manager; (2)
that the district court erred in applying a standard of "fraud, bad
faith, or gross mistake" to review the City Manager's decision; and
(3) that MCI was denied procedural due process when the City
Manager acted arbitrarily and when the district court subsequently
decided the City's claims based on the City Manager's
decisionmaking authority, which in MCI's view amounts to "a taking
of property without any process whatsoever." Independent of the
issues raised by MCI, National Union contends that the claim
against it on the bond was barred by a one-year contractual-
limitations period or a three-year statute-of-limitations period.
National Union also challenges the judgment against it because it
was not given the opportunity "to perform as surety" and complete
the contract, thereby reducing the damages which were based on
inflated costs.
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We affirm all the rulings of the district court except
its application of the "fraud, bad faith, or gross mistake"
standard, which it applied to review the decision of the City
Manager. On that issue, we reverse and remand for further
proceedings. We conclude that since the City Manager signed the
contract for the City and in essence was adjudicating his own
performance, rights, and liabilities under the contract, North
Carolina law requires that the City Manager's performance be
measured by a standard of objective reasonableness "based upon good
faith and fair play" -- a standard that must be read into the
contract so as to prevent the contract from being rendered
illusory. Accordingly, we affirm in part, reverse and vacate in
part, and remand to the district court for further proceedings
consistent with this opinion.
I
MCI commenced this diversity action against the City and
the City's engineer, alleging claims for breach of contract, breach
of warranty, quantum meruit, negligent misrepresentation, wrongful
termination, and declaratory relief that the City's termination of
the contract was wrongful. The City filed a motion to dismiss as
well as a counterclaim for breach of contract. It also filed a
third-party claim against National Union on its bond. Pursuant to
motions filed by the parties, the court dismissed most of the
claims, concluding that Article 16 of the contract was "broadly
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worded" and required that "all disputes regarding the fulfillment
of the contract by MCI go to the City Manager."
The parties submitted their claims to the City Manager,
and on April 16, 2002, the City Manager ruled that the City had
properly terminated MCI "for cause" and rejected MCI's claim that
the termination was "for convenience." MCI returned to the
district court and moved to vacate the decision for "evident
partiality" under the Federal Arbitration Act and sought to enjoin
further proceedings before the City Manager with respect to
damages. The district court rejected MCI's claims and ruled that
the proceedings before the City Manager were controlled by North
Carolina law, not the Federal Arbitration Act.
After the City Manager conducted hearings on damages, he
rendered a decision on February 5, 2003, concluding that "MCI
Constructors shall pay to the City of Greensboro the sum of
$13,377,842.73." On receipt of this decision, MCI filed a second
amended complaint to add claims for fraud, conspiracy, and "fraud
on the court."
Thereafter on the City's motion for summary judgment, the
district court found that "there is no legally sufficient
evidentiary basis for a reasonable jury to find that the City
Manager's decision was influenced by fraud, bad faith, or gross
mistake" and that "MCI [is left] with no further viable claims."
The court also granted the City's motion for summary judgment
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against National Union as surety. On MCI's Rule 59 motion for a
new trial, MCI renewed its objection to the application of the
fraud standard for reviewing the City Manager's decision and
argued, for the first time, that Article 16 in fact operated as a
"satisfaction clause," which would render the contract illusory and
therefore unenforceable. The district court denied this motion.
From the district court's final judgment, this appeal followed.
II
MCI contends first that the district court erred by
"requiring MCI to submit issues to [the City Manager] that the
Contract did not allow [the City Manager] to decide." As a
consequence, the City Manager allegedly exceeded the authority
conferred on him because, as MCI argues, the contract did not
empower him to decide issues concerning the City's breach of the
contract or the propriety of the City Manager's own conduct; it
only allowed him to render decisions regarding MCI's performance.
The district court ruled that the language of Article 16
of the contract "is broadly worded" and "requires that all disputes
concerning the fulfillment of the contract by MCI go to the City
Manager."* Article 16 thus "acts as a condition precedent to MCI's
*
Article 16 of the contract provides:
City Manager to be Referee:
To prevent disputes and litigations, the City Manager
shall in all cases, determine the amount, quality, and
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recovery of payment under the contract, but the condition precedent
does not, as MCI argues, act as a limit on the scope of the claims
which must be submitted to the City Manager."
The City Manager rendered a decision first that the
City's termination of MCI was for the delays in the project and
therefore was for cause. This was plainly a determination
concerning "the amount, quality, and acceptability of the work" as
well as "the fulfillment of the Contract on the part of the
Contractor." Likewise, the City Manger's determination of damages
went directly to the cost of completion, the liquidated damages,
and to the contract itself, which also falls within the scope of
Article 16. Under Article 16, the City Manager is entitled to
determine "the amount, quality, and acceptability of the work and
materials which are to be paid under the contract." In view of the
expansive nature of Article 16, the City Manager was properly given
the issues he decided as a condition precedent to further action
and we affirm on this issue. See, e.g., Rodgers Builders, Inc. v.
acceptability of the work and materials which are to be
paid for under the contract; shall determine all
questions in relation to said work and supplies, and the
performance thereof; and shall in all cases decide every
question which may arise relative to the fulfillment of
the Contract on the part of the Contractor. His estimate
and decision shall be final and conclusive, and in case
any question touching the Contract shall arise between
the parties, such estimate and decision shall be a
condition precedent to the right of the Contractor to
receive any monies under the Contract.
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McQueen, 331 S.E.2d 726, 731 (N.C. Ct. App. 1985) (illustrating
that North Carolina courts interpret such clauses broadly).
In reaching its conclusion, the district court stated
that "the City and MCI are two sophisticated and competent parties
who selected the City Manager to determine issues relating to
payment for work performed and other issues relating to the
fulfillment of the contract. . . . The court cannot act in
contravention to the terms of the contract to let MCI out of what
it perceives is a bad deal." We agree.
III
MCI next contends that the district court erred in
holding that under North Carolina law the decision of a
contractually designated referee must be upheld in the absence of
a showing of "fraud, bad faith, or gross mistake." MCI argues that
the City Manager's decision had to be measured under a standard of
reasonableness. According to MCI, North Carolina law writes into
every contract the implied covenant of good faith and fair dealing.
Moreover, to prevent Article 16 from being illusory -- based on one
party to the contract determining its own benefits and liability --
the City Manager's decisions had to be evaluated under an objective
standard of reasonableness defined by this good faith and fair
dealing. In sum, MCI asserts that the district court erred in
requiring it to show "fraud, bad faith, or gross mistake" and in
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requiring direct proof of "fraudulent intent" with respect to the
City Manager's decision.
The district court did indeed rule that "the law in North
Carolina allows MCI to have a court review the City Manager's
decision for bad faith or gross mistake." Principally, the
district court relied upon two North Carolina cases in reaching its
determination as to the governing standard. See Elec-Trol, Inc. v.
C.J. Kern Contractors, Inc., 284 S.E.2d 119, 121 (N.C. Ct. App.
1981); Welborn Plumbing & Heating Co. v. Randolph County Bd. of
Educ., 150 S.E.2d 65, 69 (N.C. 1966).
We agree with MCI that the district court applied an
improper standard under North Carolina law. The cases on which the
district court relied construed contractual provisions in which the
parties to the contract referred disputes to a third party, who was
not a party to the contract. See Elec-Trol, 284 S.E.2d at 120-21(illustrating that the third-party referee was an architect);
Welborn, 150 S.E.2d at 68-69 (same). These cases thus are
distinguishable from the case at hand where the referee, the City
Manager, was also the one who signed the contract on behalf of the
City and was responsible for seeing to its performance by the City.
When one party to a contract is designated in the
contract to decide finally the issues about whether the contract
was breached, the contract, without more, becomes illusory, because
the performance of the contract is determined by the party alleging
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that the contract was breached. On this, Professor Williston
observes:
Promises to render a performance satisfactory to the
other party, or to pay for performance if it is
satisfactory to the promisor, are common in contracts.
It has been questioned whether an agreement in which the
promise of one party is conditional on his own or the
other party's satisfaction contains the element of a
contract -- whether the agreement is not illusory in
character because conditioned upon the whim or caprice of
the party to be satisfied. Since, however, such a
promise is generally considered as requiring a
performance which must be satisfactory to him or her in
the exercise of honest judgment, such contracts have been
almost universally upheld.
13 Williston On Contracts § 38:21, at 458-60 (4th ed. 2000)
(footnotes omitted) (citing for this proposition, among other
cases, Fulcher v. Nelson, 159 S.E.2d 519 (N.C. 1968)).
Given this understanding, the general rule in North
Carolina, where a contract confers on one party a discretionary
power affecting the rights of the other party, is that such a
contract is not illusory so long as its interpretation is exercised
in an objectively reasonable manner based upon good faith and fair
play. See, e.g., Mezzanotte v. Freeland, 200 S.E.2d 410, 414 (N.C.
Ct. App. 1973), cert. denied, 201 S.E.2d 410 (N.C. 1974). This
rule has been applied generally "[w]here, from the language of the
contract, it is doubtful whether the parties intended that one
party should have the unqualified option to terminate it in case of
dissatisfaction or whether the intention was to give the right to
terminate only in the event of dissatisfaction based upon some
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reasonable ground." Fulcher v. Nelson, 159 S.E.2d 519, 522 (N.C.
1968) (internal quotation marks and citations omitted). In such a
case, "the contract will be construed as not reposing in one of the
parties the arbitrary or unqualified option to terminate it." Id.(internal quotation marks and citations omitted).
Accordingly, we conclude that the standard to be applied
in this case to review the City Manager's decision is not "fraud,
bad faith, or gross mistake" but rather is an objective standard of
reasonableness based upon good faith and fair play. We therefore
reverse this ruling, vacate that part of the judgment which depends
on it, and remand this portion of the case to the district court
for further proceedings consistent with this opinion.
IV
Finally, MCI contends that the way the district court
referred claims to the City Manager and then subsequently decided
those claims based on the City Manager's rulings denied MCI of
procedural due process. MCI argues that the City Manager's actions
made a mockery of the due process guarantee, and therefore the
district court improperly and without notice dismissed all of MCI's
claims based solely upon the City Manager's decisionmaking
authority. In essence, the district court concluded that the
issues raised by MCI were covered by the reference to the City
Manager because they related to the fulfillment of the parties'
contractual obligations.
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We find MCI's claim without merit. As this court has
stated in another contract case involving a city government, "there
manifestly are no federal constitutional issues posed by a simple
dispute over the construction of a [contract] and that is all there
is to the case." Heath v. Fairfax, 542 F.2d 1236, 1238 (4th Cir.
1976) (per curiam) (holding that the plaintiffs' claim which was
based on a city's failure to pay them the salary allegedly provided
for by a contract did not rise to the level of a due process
violation). For there to be a due process violation, the City must
have acted to deprive an individual of life, liberty, or property.
There is no such deprivation here when it is grounded on the
contractual language agreed to by the parties. "The mere fact that
a city is a municipal corporation does not give to its refusal to
perform a contract the character of a law impairing its obligation
or depriving of property without due process of law." McCormick v.
Oklahoma City, 236 U.S. 657, 660 (1915).
Accordingly, we affirm on this claim by MCI.
V
National Union independently challenges the district
court's judgment against it alleging that the City's action was not
filed within the one-year limitation period provided for by the
contractual language and, alternatively, that the City's claim was
filed beyond the three-year statute of limitations provided by
North Carolina law. Finally, National Union contends that the City
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first and materially breached the bond by precluding National Union
from performing upon MCI's termination and by expending more than
double the uncontroverted evidence of the reasonable cost to
complete. We address these claims in turn.
A
Section 5.1.1 of the contract between the City and MCI,
for which National Union provided the performance bond, provides:
Performance Bond -- in an amount not less than 100% of
the total amount payable to the Contractor by the terms
of the Contract as security for the faithful performance
of the work. Bond must be valid until one year after the
date of issuance of the Certificate of Substantial
Completion.
National Union contends that by these terms, the bond was only
valid for one year and therefore that any suit filed on it more
than one year after issuance of the certificate of substantial
completion was barred. According to National Union, the one-year
period commenced on May 31, 2001, when the Certificate of
Substantial Completion was issued, and suit was not filed until
March 11, 2003.
We conclude that National Union misconstrues the import
of the statutory language on which it relies. The statutory
language does not provide a contractual limitations period within
which to commence suit. Rather, it describes the period during
which the bond is "valid." Such a provision, surely, extends the
bond from not only the construction period, but also to the end of
one year after construction. Thus, if some part of the work fails
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within the one year after completion, the bond would provide
coverage.
Accordingly, we affirm the district court's ruling in
rejecting this theory.
B
National Union also contends that the action against it
was barred by the North Carolina statute of limitations contained
in § 1-52 of the North Carolina General Statutes. Because this
statute begins to run on the date a promise is broken, see Penley
v. Penley, 314 S.E.2d 51, 62 (N.C. 1985), National Union contends
the City's action is barred three years after June 24, 1998, the
date of MCI's termination.
The City contends that even if National Union is correct
about its dates and about when a cause of action against it may
have accrued, the statute of limitations does not run "against the
king," i.e. the municipality as an agency of the State. Rowan
County Bd. of Educ. v. United States Gypsum Co., 332 S.E.2d 648,
653 (N.C. 1992). In general terms, this doctrine permits a
municipality or the State to file an action beyond the time period
prescribed by the State's statute of limitations.
While National Union recognizes this principle, it argues
that the State and its municipalities are protected under it only
with respect to governmental functions and not proprietary
functions. See Rowan County, 418 S.E.2d at 654. While National
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Union may be correct in that proposition, it cannot demonstrate
that the City's actions in constructing a wastewater treatment
plant were proprietary, as opposed to governmental. The Rowan
court defined these terms as follows:
Any activity of the municipality which is discretionary,
political, legislative, or public in nature and performed
for the public good in behalf of the State, rather than
for itself, comes within the class of governmental
functions. When, however, the activity is commercial or
chiefly for private advantage of the compact community,
it is private or proprietary.
Id. at 373 (citation omitted). It is readily apparent that in
constructing a wastewater treatment plant, the City was promoting
and protecting the health, safety, security, and general welfare of
its citizens in this case. See Ex rel. State Art Museum Building
Comm'n v. Travelers Indemnity Co., 432 S.E.2d 419, 422 (N.C. Ct.
App. 1993). Accordingly, we agree with the district court that the
City's counterclaim against National Union was not barred by North
Carolina's statute of limitations governing contracts.
C
Finally, National Union contends that it should not be liable
on the bond because it was not given the opportunity of performing
upon MCI's termination. National Union argues that effectively it
should have been given the opportunity to find a replacement
contractor.
This argument, however, ignores the fact that the City
had a specific contractual right by virtue of Article 5, § 15.2.4,
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to complete the performance of the work itself, and it exercised
that right. As a bond is to be read in light of the contract it
secured, see, e.g., RGK, Inc. v. United States Fidelity & Guaranty
Co., 235 S.E.2d 234 (N.C. 1988), the bond had to be read in light
of this contractual provision which authorized the City to "take
possession of the work and . . . finish the work as owner deem[s]
expedient." Accordingly, we also affirm the district court in
rejecting this argument.
VI
In sum, with respect to the standard applied by the
district court in reviewing the City Manager's decisions on the
contract, we reverse and vacate the judgment insofar as it depends
on application of this standard. In all other respects, we affirm.
AFFIRMED IN PART, REVERSED AND
VACATED IN PART, AND REMANDED
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