The opinion of the court was delivered by: NORMA SHAPIRO, Senior District Judge
In November 1997, Defendant Philadelphia Housing Authority ("PHA")
contracted with San Lucas Construction Co. ("San Lucas") to perform
general construction work at the Richard Alien Homes housing project
("the Project") owned and managed by PHA. Plaintiff St. Paul Mercury
Insurance Company ("St. Paul") provided performance and payment bonds to
PHA as surety for San Lucas. On May 31, 2002, St. Paul filed this civil
action against PHA, alleging four counts arising from the issuance of its
performance bond. By Order dated August 20, 2003, Count II (Breach of
Takeover Agreement) was severed from the remaining counts and tried
non-jury.*fn1 In accordance with Fed.R.Civ.P. 52(a), the following
are findings of fact and conclusions of law with respect to Count II:
Parties, Jurisdiction and Venue
1. St. Paul is a corporation organized under the laws of Minnesota with
its principal place of business in St. Paul, Minnesota. Among other lines
of business, St. Paul issues insurance as surety to construction
2. PHA is an instrumentality of the Commonwealth of Pennsylvania,
organized in 1937 pursuant to the Housing Authorities Law, 35 P.S. §§
1541, 1550 et seq., with its principal place of business in Philadelphia,
Pennsylvania. PHA owns and manages public housing projects in the
1. In November 1997, PHA contracted with San Lucas Construction
Company, Inc. ("San Lucas") to perform general construction work at the
Richard Alien Homes. P Exh. 25.
2. The number assigned to the construction contract ("the Contract")
between PHA and San Lucas was No. 9589. Tr. at 91.
3. On January 24, 2000, PHA terminated San Lucas' right to proceed
under the Contract for default, and called upon St. Paul to ensure
performance of the Contract. P Exh. 25.
4. On April 6, 2000, PHA and St. Paul entered into a Takeover Agreement
("the Agreement") (admitted into evidence as P Exh. 25) reciting the
terms and conditions by which St. Paul agreed to undertake completion of
the work remaining under the
Contract. P Exh. 25.
5. The Agreement defined the term "Contract" as contract number 9589
between San Lucas and PHA. P Exh. 25.
6. The Agreement defined the "Contract Price" and the "Contract
Balance" as follows:
Whereas, as of Requisition No. 23, the adjusted
contract price, including Change Orders 1 thru 8
through 12/6/99 is $12,068,944.92 (hereinafter
called the "Contract Price") and as of the date
hereof there remains a balance including retainage
still held and unpaid by Owner, in the amount of
$2,711,413.84 (hereinafter called the "Contract
7. Paragraph 1 of the Agreement provided that the recitals contained in
the Agreement were incorporated by reference as if fully set forth
therein. P Exh. 25.
8. Paragraph 2 of the Agreement provided, among other things, that PHA
would pay the remaining Contract Balance to St. Paul "as and when due
under the Contract" and payments would be made only ". . . to the extent
the Contract Balance is due and payable under, and pursuant to the terms
and provisions of, the Contract."*fn2 P Exh. 25.
9. The Contract Balance to be paid by PHA to St. Paul could be
increased for extra work performed pursuant to written change
orders approved and signed by PHA.*fn3
10. Paragraph 8 of the Agreement provided the Contract Balance could be
decreased through a modification, but only if the modification were
approved by St. Paul. Paragraph 8 further provided that the surety's
approval of modifications decreasing the price could not be unreasonably
withheld.*fn4 P Exh. 25.
11. The Agreement provided that "in the event of a conflict between the
terms of this Agreement and the terms of the Contract, this Agreement
shall take precedence." P. Exh. 25.
12. Paragraph 14 of the Agreement provided, "this Agreement shall not
be changed, amended or altered in any way except in writing and executed
by both the Owner and Surety." P Exh. 25.
Management Office Renovation
13. St. Paul hired NDK General Contractors, Inc. ("NDK") to complete
the work on the project. Tr. at 15.
14. One item in the original Contract to be completed by San Lucas was
a management office, designated "MO" in the schedule of ...