the EPA to inspect construction of treatment plants or sewer lines. On the contrary, the regulations in force at the time the EPA awarded its grant place the burden of inspection on the grantee. "In the case of any project involving Step 3, [that is, the construction of treatment works, 40 C.F.R. § 35.930-1 (1976)] the grantee will provide and maintain competent and adequate engineering supervision and inspection of the project to insure that the construction conforms with the approved plans and specifications." 40 C.F.R. § 35.935-8 (1976).
Other regulations illustrate the consistency of placing responsibility for inspection on the grantee, which ultimately enters the contracts and pays the bills. For example, before the EPA awards a waste treatment grant, the regional administrator must determine that the applicant "has the legal, institutional, managerial, and financial capability to insure adequate construction, operation and maintenance of the treatment works . . ." 40 C.F.R. § 35.925-5 (1976). After a treatment plant is built, "The grantee must make adequate provisions satisfactory to the Regional Administrator for assuring economic, effective and efficient operation and maintenance of such works in accordance with a plan of operation approved by the State water pollution control agency . . ." 40 C.F.R. § 35.935-12 (1976). We find further support in an EPA handbook published in 1976 entitled "How to Obtain Federal Grants to Build Municipal Wastewater Treatment Works", which plaintiff has supplied in its brief.
The provisions of this handbook are not legally binding, of course, and we do not consider them as such. After researching EPA regulations, however, we find this handbook to be a fair guide to what may be expected from the Agency's administration of waste treatment grants. Under the heading "On-Site Inspection," the handbook states that " EPA or the State may conduct on-site project inspections to insure that the project is being managed properly, is on schedule, and is being constructed in accordance with approved plans, specifications and change orders" (emphasis supplied). Plaintiff's Brief, Exhibit G § 14.8. The ambiguity of which body may conduct these inspections and how frequently, if at all, helps convince us that EPA regulations do not set out a duty to inspect by which the EPA could incur tort liability.
b. FmHA regulations
The FmHA's regulations mirror those of the EPA. Applicants for loans for "community facilities" such as waste treatment plans "must have . . . the legal authority necessary for constructing, operating and maintaining the proposed facility or service and for the obtaining, giving security for, and repaying the proposed loan." 7 C.F.R. § 1933.17(a)(2)(iii) (1978).
This section of the regulations is "specifically designed for use by applicants including their professional consultant and/or agent." 7 C.F.R. § 1933.17(a) (1978). These provisions aimed at bodies like the Authority notify them in general terms that they bear the burden of executing a project that will perform as scheduled, one that will not be hindered by legal, financial, or practical problems. The FmHA certainly is bound to inspect construction of and monitor financing for any project involving FmHA loans. 7 C.F.R. § 1933.9(f)(1978). Other regulations make clear, however, that this does not relieve the borrower from taking steps to assure that the project will perform as expected. During the course of construction, for example, the borrower usually is required to make progress payments to contractors. But "The review and acceptance of partial payment estimates by FmHA does not attest to the correctness of the quantities shown or that the work has been preformed [sic] in accordance with the plans and specifications." 7 C.F.R. § 1933.17(a)(13)(vii) (1978). Finally and most significantly, under the heading "Development inspections", the regulations provide:
The State Director will designate an FmHA representative to assist the County Supervisor in monitoring the construction of all projects being financed, wholly or in part, with FmHA funds. This assistance will include construction inspections and a review of each project inspection report, each change order and each partial payment estimate and other invoices such as payment for engineering and legal fees and other materials determined necessary to effectively monitor each project. These activities will not be performed on behalf of the applicant/borrower, but are solely for the benefit of FmHA and in no way are intended to relieve the applicant/borrower of his corresponding obligation to conduct similar monitoring and inspection activities.
7 C.F.R. § 1933.9(f)(1979).
Thus, in addition to finding that the Agencies have not been statutorily charged with a duty to inspect, we find that they have effectively disclaimed any implication of such a duty through their regulations.
c. The loan agreement
The regulations cited above govern the relationship between the Agencies and the Authority. It may have been possible for the Agencies to assume additional duties through the loan agreement, but such is not the case. Only Pennbank and the Authority are parties to the agreement.
The loan agreement recognizes that the Agencies will provide long term financing. In addition, the Authority warrants that all plans and contracts for the project are subject to FmHA approval. See Complaint Exhibit A, § F(7) and (8) and G(2)(F). The Authority also warrants, however, that it is empowered to acquire, construct and operate a sewage system. The Authority is further bound to enter into "construction contracts for the complete construction of the Initial Construction Project with contractors which are financially responsible and have the resources, equipment, experience and ability to perform their obligations under said contracts. . . ." Id. at § G(2)(a). The Banks' own language thus makes plain their expectations that the Authority would be responsible for the construction of the sewage system.
This action by the Banks must fail because it portrays the Agencies in hats they do not wear. The Banks here attempt to thrust the Agencies into the role of construction supervisors. After reviewing how responsibilities for this project have been delegated by the statutes, regulations and agreements, we find that the Agencies involvement is chiefly financial. Their duty is to oversee the federal money being spent. They do examine plans and monitor construction, but as a safeguard against wasteful, negligent or illicit use of government money. The distinction we draw is between overseeing the money being spent on the work and overseeing performance of the work itself. The Agencies use inspections as a tool for fulfilling the former; they have not been made responsible, or accepted responsibility, for fulfilling the latter. No doubt this line occasionally blurs, but it is clear enough in this case to show that the Agencies had no actionable duty to oversee construction.
A hypothetical situation will illustrate the limited purpose of the Agencies' inspections and the ultimate reason why the Banks cannot escape being barred by the misrepresentation exception. Assume, arguendo, that a team of Agency inspectors discovered excessive infiltration and defective pipe joints during a development inspection. This discovery occurred in April 1978, a year before the project was finished. What then would be the Agencies' duties?
We conclude that the Agencies would be obligated to take the same course of action that they took in the case at bar: notifying the Authority that significant construction defects had been found and that Agency funding would be withheld pending corrective measures. EPA regulations provided for suspension or termination of grants for good cause; a sewage system that pollutes surrounding waterways would seem to qualify under this standard. 40 C.F.R. §§ 30.915 and .920 (1976). FmHA regulations likewise state that "If there is any indication that construction is not being completed in accordance with plans and specifications or that any other problems exist, the County Supervisor should notify the State Director immediately and withhold all payments on the contract." 7 C.F.R. § 1933.9(f) (1978). The key provision of these regulations is the Agencies' responsibility to notify the Authority of any funding changes.
Here lies the fundamental difference between this case and the cases on which plaintiffs rely, Block v. Neal, supra, and J.M. Mechanical v. HUD, supra. We distinguish those cases because, in addition to their duties to inspect and to notify, those government agencies were charged with a duty to cure. In Neal, for example, the Court held that "FmHA's duty to use due care to ensure that the builder adhere to previously approved plans and cure all defects before completing construction is distinct from any duty to use due care in communicating information to respondent." 460 U.S. at 297 (our emphasis). The Court of Appeals likewise found in J.M. Mechanical that "JM's claim is based on the failure of the government to secure new bonds, not on the government's failure to tell JM of the failure of the original bonds." 716 F.2d at 195. These cases demonstrate that when the government has the power to correct mistakes directly, it should use that power and is negligent when it does not.
Here, the Agencies had no power, thus no duty, to cure defects. They were not party to construction contracts. They had no authority over the contractors and engineers once plans had been approved.
They were not entitled to order the contractors to perform certain work or to correct any defects. They could have directed the Authority to have defects corrected, as they ultimately did, but this duty relies on communication to the Authority. This communication -- or lack of it -- implicates the misrepresentation exception.
The FmHA and the EPA were entitled to periodically inspect the construction work only to better control the purse strings. This view is consistent with the overall picture of the Agencies as funding sources, not construction managers. For the Agencies to inspect the sewage system, or be entitled to inspect it, and fail to notify the Authority of the true, defective condition of the construction is to misrepresent it as acceptable. Agency communication thus is essential to the Banks' claim. We have found no possible Agency duties to the Banks other than the duty to notify the Authority of any funding changes. This includes notice about the discovery of significant construction defects, which intimately affects scheduled funding. The Agencies never provided this notice. The Banks claim thus can only be construed as one for negligent misrepresentation, which is barred by 28 U.S.C. § 2680(h). We need not address defendants' other arguments.
We will enter an order consistent with this opinion.