The opinion of the court was delivered by: BY THE COURT; STEWART DALZELL
This non-jury action arises out of difficulties encountered in the construction of a large atrium space frame built on the east side of Mellon Bank Center, a fifty-five story office building plaintiff Turner Construction Company erected at 1735 Market Street in Philadelphia, Pennsylvania.
Turner contracted with a French-owned entity, Space U.S.A., Inc., doing business as IBG International ("IBG"), to build the space frame to the specifications of the project's architect, Kohn, Pederson, Fox Associates, P.C. ("KPF"). When in September of 1990 it became apparent that IBG would be unable to complete its contract with Turner to build the atrium, Turner looked to First Indemnity of America Insurance Company ("FIA"), IBG's surety, to perform IBG's contract.
By its filing of the present diversity action, Turner made good on this advice.
Shortly after this action was transferred to our docket,
we suggested to the parties that, given the unusually complex and highly technical nature of the factual disputes between them, it might serve all concerned to appoint a Special Master to resolve such issues. The parties responded positively to this suggestion and, consequently, by an October 6, 1992 Order we appointed John Rauch, A.I.A., as Special Master in this action to "hear the evidence and make the findings of fact as to all of the non-legal issues in this case."
After the Special Master conducted a preliminary conference, he conducted hearings in Philadelphia during the course of fourteen days between December 10, 1992 and January 6, 1993. Mr. Rauch heard the testimony of eleven witnesses, including experts both sides offered. The deposition testimony of five additional witnesses was submitted to the Special Master during the fifteenth day of hearings. The Special Master also received many exhibits, and after hearing protracted final oral arguments on February 2, 1993 spent twenty days analyzing the record and drafting his findings. He rendered his findings of fact on March 3, 1993.
We ordered the parties to serve their objections and responses to the Special Master's findings of fact to the Special Master, and on April 1 and April 2, 1993, held a hearing at which FIA's counsel exhaustively questioned the Special Master about FIA's objections to the findings of fact.
In his 487 detailed findings, the Special Master concluded, in essence, that FIA failed timely and responsibly to investigate and respond to Turner's claims under the surety bonds made in consequence of IBG's default. The Special Master found that the excess cost and expenses Turner reasonably incurred in completing IBG's work totalled $ 1,045,940.75.
Pursuant to Fed.R.Civ.P. 53(e) and 52(a), the plaintiffs moved that we adopt the Special Master's findings, as well as make our conclusions of law based thereon and direct the entry of judgment in their favor. FIA has filed its objections to certain of the Special Master's findings, and has prayed for judgment in its favor.
Legal Standard Governing Review of the Special Master's Findings
Fed.R.Civ.P. 53(e)(2) provides, in relevant part, that "In an action to be tried without a jury the court shall accept the master's findings of fact unless clearly erroneous." See also NLRB v. International Union of Operating Engineers, 659 F.2d 379, 383 (3d Cir. 1981).
In applying Rule 53's "clearly erroneous" standard, the Supreme Court has stated that it requires affirmation of the Special Master's findings unless the district court is left "... with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 92 L. Ed. 746, 68 S. Ct. 525 (1948); Operating Engineers, supra, 659 F.2d at 383; Ray v. Safeway Stores, Inc., 614 F.2d 729, 730 (10th Cir. 1980). This review standard is congruent with that which Courts of Appeal apply when they review district courts' Rule 52 findings. See generally, Charles A. Wright and Arthur R. Miller, 9 Federal Practice and Procedure, Civil, § 2614 at 809-810 (1971) ("... exactly the same as the standard governing review by court of appeals of findings of fact by a district court ....").
For the reasons stated below, we do not believe that FIA has begun to carry the heavy burden Rule 53(e)(2) imposes on it, and we therefore adopt the Special Master's findings of fact in toto and reject FIA's objections.
As noted above, the Special Master made 487 detailed findings of fact. FIA has, in fact, only objected to 39 of those factual findings. We therefore regard 448 of the findings as unobjected to.
Given the comprehensiveness of these findings, as well as their ample support in the voluminous record made before him, it is unnecessary to do little more than paraphrase the summary findings the Special Master provided in the first seven pages of his March 3, 1993 Findings of Fact.
Nine Penn Center Associates, L.P. ("NPCA") is the owner of what is now known as the Mellon Bank Center, a fifty-five story office building in Philadelphia fronting on Market Street on its south, and bounded by 18th Street on the west, John F. Kennedy Boulevard on the north, and other structures on the east.
NPCA hired Turner to be the general contractor of the Mellon Bank Center project under an agreement dated May 2, 1988. Under this agreement, Turner submitted to NPCA a Guaranteed Maximum Price Proposal of $ 148,263,050, for which Turner would be paid an original contractor's fee of $ 3,424,150. The agreement called for a substantial completion date of December 1, 1990, and stated that if the work were not substantially completed "within ninety days after the date for Substantial Completion (i.e., by March 1, 1991)" Turner would pay, as liquidated damages, approximately $ 850,000, or 25% of its contractor's fee (Finding 21). NPCA never released Turner from the March 1, 1991 liquidated damages assessment date.
Turner began work on the Mellon Bank Center project in May of 1988.
After considering alternatives, NPCA, in a May 11, 1989 letter, instructed Turner to solicit bids for an atrium space frame installation, based upon performance specifications KPF had prepared, to be built to the east of the office tower at 1735 Market Street. The KPF specifications required the space frame contractor to do all the engineering and final design work in connection with the space frame, the fixed skylight and the curtainwall in conformity with aesthetic, engineering and performance criteria. The space frame contractor was further required to fabricate and construct these three elements (space frame, skylight, and curtainwall) based upon designs KPF would approve.
Although Turner had in March of 1989 allocated a budget of $ 1.5 million for the atrium space frame enclosure, it was based upon early and incomplete documentation, and was in any event intended to be conservative (Findings 31-32).
After IBG approached Turner, IBG was permitted to respond to the June 27, 1989 invitation to bid. IBG was the low bidder among five that submitted completed bids. After adjustments, IBG's proposal was $ 1,338,952. Further negotiations between Turner and IBG refined the agreed price to $ 1,288,000.
Although FIA made much of the fact that IBG's bid was 16.88% lower than the next lowest bidder's, the expert testimony amply supports the Special Master's finding that this differential "was not a cause for concern or alarm" (Finding 48, quoting and crediting the testimony of Mic Patterson, plaintiffs' expert).
IBG, as the successful bidder for the atrium space frame, knew from the bid specifications that it had to provide surety bonds for the work. On September 29, 1989, FIA provided Turner with a letter that notified Turner that FIA "... will issue 100 percent Performance and Payment Bonds on Turner Construction Company bond form for [IBG] for approximately" $ 1.2 million to $ 1.3 million "to furnish and install the space frame, skylights and curtain walls at the Atrium ...." (Finding 72). At the time of this September 29, 1989 notice, IBG had not yet commenced performance and, therefore, contrary to some 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 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.
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
FIA's September 29, 1990 letter to Turner stated without reservation that it would
issue 100 percent Performance and Payment Bonds on Turner Construction Company bond form for [IBG] for approximately $ 1,200,000.00 to $ 1,300,000.00 to furnish and install the space frame skylights and curtain walls at the Atrium . . .
(Finding 72). As the Special Master found, this letter conveyed FIA's unqualified agreement to become a surety for IBG (Findings 73, 77, 481), and that Lynch both expected and intended Turner to rely upon it in entering the Subcontract with IBG (Finding 482). The Special Master also found that Turner's reliance on the letter was in accordance with industry custom (Findings 76, 482).
Under these circumstances, FIA's letter as a matter of law constituted a contract of suretyship under 8 Pa.C.S.A. § 1, which immediately subjected FIA to "the liability of suretyship". The bonds therefore became effective and enforceable on September 29, 1990, and because the Subcontract was not executed until October, it was impossible for IBG to have been in default before the bonds became effective.
Even if we accepted FIA's contention that the surety contract was not effective until February 7, 1990, however, FIA's assertion that Turner "could have" declared IBG in default before February 7, 1990 is completely unrealistic and unsupported by the Special Master's findings. These findings make clear that Turner would have been both imprudent and irresponsible to declare IBG in default as early as February of 1990. Although it is true that IBG was beginning to experience trouble meeting certain interim milestone dates prior to February 7 (Findings 107, 118-119), Turner did not believe that IBG's tardiness in any way jeopardized the more important Project completion date or the liquidated damages assessment date (Finding 120). Moreover, the Special Master found that Turner's decisions not to declare IBG in default at this early date and not to provide notice of the schedule problems ...