of FIA's more expansive assertions, IBG could not have been in default at that time.
Following receipt of FIA's letter, on October 2, 1989, Turner formally awarded IBG the contract for the atrium space frame enclosure for the lump-sum of $ 1,288,000. FIA's bonds with respect to IBG's contract were ultimately dated February 7, 1990, in the penal sum of $ 1,288,000 on each bond. Even FIA's expert acknowledged that the following clause in the subject Performance Bond was typical in the industry: FIA "... hereby waives notice of any alteration of extension of time made by Obligee" (Finding 85, and exhibits of testimony cited therein). The record amply supports the Special Master's Finding 95, contrary to FIA's objection, that IBG was not in default in any material way as of the date FIA formally executed the surety bonds.
Shortly after entering into its October, 1989 contract with Turner, IBG began to design and ultimately to fabricate the work. By July of 1990, the space frame components had been fabricated in France and were shipped to the United States. By that same date, the skylight and curtainwall components were in fabrication and painting. Given the weighty support for these conclusions in the record, we find nothing clearly erroneous in Findings 96 through 147 that confirm the Special Master's summary conclusion VI that under such circumstances, "Turner did not consider IBG to be in default, irrevocably or otherwise" during this over-nine month period.
Ironically, in view of FIA's later contentions, from February through July of 1990 FIA never asked Turner or IBG for any information or report on the status of IBG's work, notwithstanding the frequent contact that took place between FIA's Paul Alongi and IBG's employees or officers on other, unrelated matters (Findings 160-161). In so doing, FIA failed to follow its own practices and procedures (Findings 164, 168-170 and 178).
It was not until late July of 1990 that both Turner and FIA learned for the first time that IBG had, in fact, failed to pay certain of its suppliers. In early September, Turner learned that IBG's financial condition had deteriorated so badly that work came to a complete halt because of IBG's failure to pay its suppliers. Turner advised FIA of this grave situation, and on September 28, 1990, Turner formally declared IBG in default (Finding 192). Paul Alongi, FIA's claims manager, recommended that Turner should declare IBG in such default so that FIA could "take action" (Finding 191). The record before the Special Master fully supports his findings, detailed at 179 through 194 and 484 through 487, that Turner reasonably concluded that IBG was not in default before September 28, 1990, and not irrevocably or incurably
so until October 29, 1990, the date of a climactic meeting between Turner and FIA (Findings 223-231).
When Turner called upon it to perform as surety, FIA began litigation in this court (Finding 214). An effort to obtain an injunction to compel the turnover of the space frame components by Space Engineering Company of Paris to FIA failed to resolve the problem. This earlier litigation was never adjudicated since the complaint was dismissed pursuant to Stipulation and Consent Order of this Court dated December 7, 1990 (O'Neill, J.).
When FIA failed to respond to Turner's formal October 22, 1990 written demand on FIA to perform as surety, Turner proceeded to make arrangements to complete IBG's work, and advised FIA that it would sue it for all losses.
FIA has not questioned the Special Master's findings, detailed at Nos. 234 through 264, that concluded that Turner's arrangements to complete IBG's work were fair and reasonable under the circumstances. FIA has not objected to the Special Master's calculation of Turner's legitimate excess costs and expenses of $ 1,045,940.75, meticulously canvassed in Findings 345 through 473. These sums to do not include interest, attorney's fees or "other litigation expenses" (Finding 474).
The essence of FIA's objections to the Special Master's findings of fact is that Turner waited too long to declare a default and that an earlier declaration of default would have enabled FIA to have assured completion of the atrium space frame for far less than the excess sums Turner incurred. After reviewing the Special Master's Findings 289 through 344 and 478 through 480, we find that none is clearly erroneous. To the contrary, the record fully supports the Special Master's summary in paragraph XII of these findings (p. 6), as follows:
The claim that [FIA] would have actively monitored IBG's performance if notified earlier is belied by its total inaction at all pertinent times, even after it was directly involved in IBG's problems. The suggestion that it would have reprocured the work earlier ignores the significant problems of reprocurement in the technically complex field of space frame construction. FIA has offered no credible evidence that any of Plaintiffs' completion costs would have been saved by an earlier default. Certain [of] FIA's witnesses lacked credibility,
were inconsistent and contradictory in their testimony and did not have the experience to credibly support their opinions. Finally, FIA's own failure to act was the proximate cause of a very large part of the excess completion costs for which they do not now wish to be responsible.
We therefore adopt the Special Master's findings and reject FIA's objections to them.
Conclusions of Law
Having adopted the Special Master's findings, we turn now to the conclusions of law that flow from those findings.
Liability and Compensatory Damages
Under Pennsylvania law,
"the liability of a surety is coextensive with that of the principal, and accordingly, a surety is bound to perform whatever may be legally required of its principal." Diversified Utilities Sales, Inc. v. Monte Fusco Excavating Contracting Co., 71 F.R.D. 661, 664 (E.D. Pa. 1976). Furthermore, when a performance bond surety fails to complete its principal's work, the surety is "liable for the loss plaintiff sustained, not exceeding the amount of the bond" because of the surety's breach of its "absolute undertaking to erect and complete the building". Purdy v. Massey, 306 Pa. 288, 159 A. 545, 547 (1932).
In the instant case, Turner declared IBG, the principal, in default on September 28, 1990 (Finding 192). Under the subcontract, Turner was then entitled to take control of the premises and hire anyone necessary to complete IBG's work. See Finding 81; IBG-Turner Subcontract ("Subcontract") P XI, Exhibit P-5 to Turner's brief in support of motion for adoption of special master's report, conclusions of law and judgment ("Turner's brief").
If the costs of completing IBG's work exceeded the unpaid balance on the Subcontract, then under the Subcontract IBG was required to reimburse Turner "not only [for] the costs of completing the work . . . but also [for] all losses, damages, costs and expenses, including legal fees and disbursements sustained, incurred or suffered by reason of or resulting from the Subcontractor's default". Id. Moreover, IBG "and its Surety agreed to promptly pay all lawful claims of subcontractors, materialmen, laborers, persons, firms or corporations for labor or services performed or materials . . . and other items furnished . . . and to indemnify . . . [Turner] of and from all liability loss, damage and expense . . . which [Turner] . . . may sustain by reason of IBG's failure to do so." The parties incorporated these provisions by reference into FIA's performance bond. See Finding 82; Performance Bond, Ex. P-7 to Turner's brief.
The Special Master found that Turner's "legitimate" cost for completing IBG's work - not including interest, attorney fees, court costs and other litigation expenses - exceeded the subcontract balance by $ 1,045,940.75 (Findings 471-477).
Therefore, under the Subcontract and Pennsylvania law, both IBG and FIA are liable for this amount.
FIA does not dispute that, under normal circumstances, Pennsylvania law holds a surety liable for the reasonable costs an obligee incurs as a result of the principal's default. It suggests, however, that there are facts specific to this case that relieve it of its liability on the bonds.
First, FIA contends that Turner should be estopped from recovering under the bonds because Turner could have declared IBG in default on the Subcontract before the bonds became effective and did not inform FIA of this fact. FIA's brief in support of motion for adoption of its proposed conclusions of law ("FIA's brief") at 3-8 (citing St. Paul Fire & Marine Insurance Co. v. Commodity Credit Corp., 646 F.2d 1064 (5th Cir. 1981)). This argument must fail, however, because Turner could not have declared IBG in default before the bonds became effective.
According to FIA, a bond does not become effective until it is legally "issued", that is, until it is both executed and delivered. FIA's brief at 2 (citing Pa. Law Encyclopedia Suretyship, §§ 26, 27 (1961)). Under this theory, the bonds here did not become effective until February 7, 1990 when they were delivered to Turner. Using this date, it was arguable that IBG was in default on the Subcontract, which was executed on October 2, 1989, before the bonds became effective.
The Special Master, however, came to a contrary factual conclusion regarding the intended date of effectiveness. Although he agreed that the Subcontract was physically executed in October, he found that "FIA did not condition its [September 29, 1990] letter in any way", "expected and intended that Turner would rely upon its letter in awarding the subcontract to IBG", and that "Turner in fact relied upon FIA's letter in awarding the subcontract to IBG" (Findings 73 through 75). On these findings, it was impossible for IBG to have been in default before FIA became committed on the bonds (see also Findings 77-78 and 481-483).
Pennsylvania statutory law confirms the conclusion that FIA's letter of intent on September 29, 1990 as a matter of industry practice and FIA's express words constituted a binding and enforceable surety contract even before execution and delivery of the bonds in their final form. 8 Pa.C.S.A. § 1 provides:
§ 1. What constitutes contract of suretyship
Every written agreement hereafter made by one person to another for the default of another shall subject such person to the liabilities of suretyship, and shall confer upon him the rights incident thereto, unless such agreement shall contain in substance the words: "This is not intended to be a contract of suretyship," or unless each portion of such agreement intended to modify the rights and liabilities of suretyship shall contain in substance the words: "This portion of the agreement is not intended to impose the liability of suretyship."