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Pierce Associates Inc. v. Nemours Foundation

filed as amended january 6 1989.: December 29, 1988.


Appeal from the United States District Court for the District of Delaware, D.C. Civil No. 83-58.

Sloviter and Hutchinson, Circuit Judges, and Debevoise, District Judge*fn*

Author: Debevoise


DEBEVOISE, District Judge.

I. The Parties and the Proceedings

The Nemours Foundation ("Nemours") owns the Alfred I. duPont Institute Children's Hospital in Wilmington, Delaware. In January 1980 Nemours entered into a general contract with Gilbane Building Company ("Gilbane") for completion of the interior of the Hospital. The Aetna Casualty & Surety Company ("Aetna") became surety on a performance bond which named Gilbane as principal and Nemours as obligee.

Gilbane entered into a number of subcontracts, including a $35.9 million fixed-price subcontract with Pierce Associates, Inc. ("Pierce") pursuant to which Pierce agreed to perform the mechanical work on the project (the heating, ventilation, air-conditioning, plumbing and fire-protection systems). Federal Insurance Company ("Federal") became surety on a performance bond which named Pierce as principal and Gilbane as obligee.

Disputes arose about performance under the general contract and under the subcontracts, and complex multi-party litigation ensued. During pretrial proceedings there were various changes in the parties' positions and realignments of adversaries which resulted in a trial at which Nemours and its general contractor Gilbane (joined by its surety Aetna) were plaintiffs seeking damages against Gilbane's subcontractor Pierce and Pierce's surety Federal.

After a 79 day trial the jury found in favor of Nemours and Gilbane on all their claims against Pierce and Federal and found against Pierce on its counterclaims. On September 15, 1986 final judgment was entered awarding $26,017,411 in damages and pre-judgment interest to Nemours and $3,018,372 in damages and pre-judgment interest to Gilbane. The total judgment amount of $29,035,783 was on account of the following items:

Against Pierce and Federal

For Nemours on account of Pierce's

breach of its subcontract with

Gilbane and Pierce's negligence and

on account of Federal's

obligation on its performance

bond (plus pre-judgment interest) $19,045,982

For Gilbane on account of Pierce's

breach of the subcontract with

it on account of Federal's obligation

on its performance bond 2,066,699

For Gilbane on account of interest

on the award of $2,066,699 at

the rate of 13-1/2% from

April 18, 1983 to the

date of judgment 951,673


For Nemours Against Pierce Only

On certain indemnity claims $3,375,000

Pre-judgment interest on

ndemnity claims 1,554,118

Punitive damages 1,000,000

Attorney's fees and

consultant's costs 1,042,311


After resolution of their post-trial motions for judgment n.o.v. or for a new trial Pierce and Federal filed a notice of appeal from the final judgment on January 26, 1988. Subsequently this Court remanded the case for adjudication of a Rule 60(b) motion which Pierce and Federal had filed challenging the rate of post-judgment interest in the final judgment. The district court granted the motion on April 4, 1988 and reduced the post-judgment interest rate from 10.5% to 5.63%. On April 15, 1988, the district court denied a second Rule 60(b) motion filed by Pierce and Federal which challenged the imposition of post-judgment interest on pre-judgment interest. Nemours, Gilbane and Aetna appeal from the order granting the reduction of post-judgment interest. Pierce and Federal appeal from the order denying the motion for relief from the award of post-judgment interest on pre-judgment interest.*fn1

We conclude as follows: (i) The award of $19,045,982 in favor of Nemours against Pierce must be reversed for the reason that Nemours has neither a contract claim nor a negligence claim against Pierce. (ii) The award of $19,045,982 in favor of Nemours against Federal must be reversed for the reason that Federal's liability is dependent upon and derivative of Pierce's liability. (iii) The award of $2,066,699 for contract damages in favor of Gilbane and against Pierce and Federal will be reversed to the extent it represents delay liquidated damages and affirmed to the extent it represents recovery of $269,699 in back charges. (iv) The award of pre-judgment interest on $269,699 in favor of Gilbane and against Pierce will be reversed and remanded for recomputation of interest in accordance with applicable Delaware law. (v) The awards in favor of Nemours and against Pierce on the indemnity claims and interest thereon and for punitive damages, attorneys' fees and consultants' costs will be reversed. (vi) To the extent that they are still applicable, the district court's orders granting Pierce's and Federal's motion to reduce post-judgment interest and denying Pierce's and Federal's motion for relief from the award of post-judgment interest on pre-judgment interest will be affirmed.

The court has jurisdiction under 28 U.S.C. ยง 1291.

II. The Background

These appeals do not challenge the sufficiency of the evidence. Rather, they challenge the legal sufficiency of the claims submitted to the jury and concern legal rulings of the trial court. The facts upon which these rulings were based are not in dispute.

As recited above, in January 1980 Nemours entered into a general contract with Gilbane to complete the interior of its Children's Hospital. This contract includes the American Institute of Architects' "General Conditions of the Contract of Construction" (1976 ed.) (the "AIA General Conditions"). Article 1.1.2 of the AIA General conditions states:

Nothing contained in the Contract Documents shall create any contractual relationship between the Owner [Nemours] or the Architect and any Subcontractor or Sub-subcontractor.

Gilbane in turn entered into a number of subcontracts. The largest was its $35.9 million fixed-price subcontract with Pierce, executed in June 1980 which called for Pierce to perform the mechanical work on the project. Gilbane entered into other subcontracts including a $19.7 million subcontract with Dynalectric Company ("Dynalectric) for electrical work and an $8.6 million subcontract with Honeywell, Inc. ("Honeywell") for installation of the building management systems.

Section 1 of the Gilbane-Pierce subcontract provided that Pierce would "furnish all materials and perform all work as described in Section 2 hereof for Phase 5B: A. I. duPont Institute for the Nemours Foundation Hospital Building . . . all in accordance with the Drawings and Specifications . . . and subject in every detail to the supervision and satisfaction of [Gilbane] and of [Nemours] or his duly authorized representative."

The subcontract provided in Section 6 that " [Pierce] agrees to be bound to [Gilbane] by the terms and conditions of this Agreement, the Drawings and Specifications, the General Contract and the General Conditions for construction and . . ., to assume toward [Gilbane] all the obligations and responsibilities that [Gilbane], by these documents, assumes toward [Nemours]." The General Conditions, of course, contained the provision that nothing contained in the "Contract Documents" shall create any contractual relationship between Nemours and any subcontractor.

A number of provisions in the subcontract, particularly those found in Section 7, imposed upon Pierce specific obligations vis-a-vis Nemours. For example: Section 7(a) requires Pierce to "furnish Shop Drawings, Erection Drawings, Details, Samples, etc.," for Nemours' approval. Section 7(b) bestowed upon Nemours the right to agree on lump sum pricing of changes to Pierce's work. Section 7(c) gave Nemours the right to inspect and condemn Pierce's work and required Pierce to "make good" the condemned work at its own expense. Section 7(e) required Pierce to "indemnify and save harmless" Nemours from any expenses, liability or loss arising from patent, copyright or trademark infringement.

After the terms of the Gilbane-Pierce subcontract were agreed upon, Gilbane sent it to Nemours for approval. By letter dated September 9, 1980 Nemours approved the subcontract and also stated, "by this approval, The Nemours Foundation does not waive, and expressly reserves all of its rights and remedies under said contract and nothing herein shall be deemed or construed to create any contractual relationship between The Nemours Foundation and said subcontractor." At the foot of the letter Gilbane executed the following: "Receipt and Acceptance acknowledged this 19th day of September, 1980."

Pursuant to the requirements of the subcontract Pierce furnished Gilbane a performance bond naming Pierce as principal, Federal as surety and Gilbane as obligee. Two provisions are pertinent to the present case. The bond provides, "No right of action shall accrue on this bond to or for the use of any person or corporation other than the Obligee named herein or the heirs, executors, administrators or successors of the Obligee." Immediately after that provision there appears the following: "Provided, however, that this Performance Bond issued on behalf of the named Principal may not be assigned to any party other than the Owner, The Nemours Foundation, without the consent of the Sureties." The bond was never assigned to Nemours.

Gilbane and its subcontractors commenced performance under their respective contracts. Serious delays ensued, the causes of which were the subject of vigorous disagreement. The delays and disputes over contract plans and specifications, design revisions, job progress schedules, progress payments and change orders resulted in Nemours withholding payments. In response, in April 1983 Pierce suspended performance under the subcontract. Although the other subcontractors asserted claims against Gilbane and Nemours, they stayed on the job.

To meet the situation created by Pierce's abandonment of the job, Nemours hired contractors to correct and finish Pierce's work under the direction of Turner Construction Company ("Turner"). Gilbane and its other subcontractors coordinated with Turner and the completion contractors to finish the Hospital. Substantial completion took place by December 1984 twenty-one months late.

Not surprisingly, litigation ensued. It was carried on while the Hospital was being completed and thereafter. On April 5, 1983 Gilbane filed a complaint against Nemours and its architect and engineer alleging breach of contract, breach of warranty and negligence. Gilbane sought compensation for delay damages suffered by it and its subcontractors.

It would appear that at that time Gilbane and certain of its subcontractors, including Pierce, were working in tandem. On the day Gilbane filed its complaint against Nemours, Pierce and the electrical contractor, Dynalectric, filed similar breach of contract actions against Gilbane and its surety, Aetna, seeking compensation for delay, for changed and added work and for monies wrongfully withheld. Honeywell, the management systems subcontractor, filed a similar complaint against Gilbane sometime later.

In Gilbane's action, counterclaims were filed against it by Nemours and its architect and engineer. In the subcontractors' actions, Gilbane filed counterclaims for indemnification and contribution and also impleaded Nemours and its architect and engineer. Nemours, in turn, filed counterclaims against Gilbane.

Nemours also filed breach of contract and negligence claims directly against Gilbane's subcontractors and their sureties, alleging that it was a third party beneficiary of the subcontracts and of the surety bonds. Pierce and Dynalectric moved to dismiss Nemours ' claims against them on the ground that there was no third party beneficiary relationship between Nemours and them, and Nemours could not recover on a negligence theory for purely economic loss. On March 15, 1984 the district court denied the motions.*fn2 Pierce and Dynalectric then answered Nemours' claims and filed counterclaims against it.

Up to that point and for some time thereafter the positions of Gilbane and its subcontractors, despite the claims asserted against each other, appeared to be in substantial alignment. That is to say, they attributed responsibility for the delays and other difficulties to Nemours and its architect and engineer. In March 1985 Gilbane settled with Nemours and its architect and engineer, joining with them in asserting claims against Pierce. Pursuant to the settlement, Gilbane received $4,025,000, of which Nemours paid $3,375,000, Nemours' architect paid $300,000, and its engineer paid $350,000. Gilbane in turn paid the aggregate sum of $3,669,000 to settle the delay claims asserted by Dynalectric, Honeywell and other smaller subcontractors, retaining $356,000 for itself. The settlement agreement further provided that Gilbane would be entitled to share with Nemours on a 50-50 basis the first $8,000,000 of any possible recovery from Pierce.

A recital in the settlement agreement stated that the parties to it were of "the strong opinion and belief" that the primary causes of the delays to the completion of the project and of the damages incurred by them were attributable to Pierce's breaches of contract, negligence and, in the opinion of Nemours, fraud on Pierce's part. Gilbane promised in the settlement agreement to cooperate with Nemours in its action against Pierce by forsaking any claim or defense based on Nemours' action, to seek commitments from its subcontractors in their settlement ...

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