United States District Court, E.D. Pennsylvania
March 19, 2004.
ST. PAUL MERCURY INS. CO.
PHILADELPHIA HOUSING AUTH
The opinion of the court was delivered by: NORMA SHAPIRO, Senior District Judge
MEMORANDUM AND ORDER
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:
I. Findings of Fact
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 values for the
Project. Tr. at 87.
15. The work to be completed for the item designated "MO"
consisted of a management office and a mail room. Tr. at 87-88.
16. San Lucas built and completed the mail room. (Tr. 88)
17. Periodic Estimate No. 32 ("PE #32") (admitted into evidence as D
Exh. 3) shows that PHA paid San Lucas $74,940 for completing the mail
room, but that a balance of $83,060 was carried for the management office
work. D Exh. 3.
18. When St. Paul hired NDK to complete the work on the project, the
renovation of the management office was within the scope of the work St.
Paul was required to complete under the Agreement.
19. The management office renovation was never completed. At some point
in time, PHA decided that it was no longer necessary to renovate the
20. By December 2000, NDK had completed its work on the Project. Tr. at
21. The St. Paul employee who represented St. Paul with respect to the
Agreement and the work done thereunder was Christine T. Alexander
("Alexander"). Tr. at 24.
23. After the project was substantially complete, Timothy Trzaska
("Trzaska") of PHA presented St. Paul with a series of documents he
characterized as clean up documentation needed to close out the contract
and make final payment to St. Paul. Tr. at 33.
24. Contract Modification No. 9 was executed by Alexander
on behalf of St. Paul on November 14, 2000 and increased the Contract
Price by $33,720 from $12,068,945 (as originally cited in the Agreement)
to $12,102,665. This additional $33,720 was for work San Lucas had
completed before the Takeover Agreement, but had not been included in the
Contract Balance. When Alexander signed Contract Modification No. 9 it
was not yet signed by PHA. P Exh. 31.
25. Contract Modification No. 10 was executed by Alexander on behalf of
St. Paul on November 14, 2000 and increased the Contract Price by $16,212
from $12,102,665 to $12,118,877. This additional $16,212 was for work San
Lucas had completed before the Agreement, but had not been included in
the Contract Balance. When Alexander signed Contract Modification No. 10
it was not yet signed by PHA. P Exh. 31.
26. By reason of Contract Modifications Nos. 9 and 10, the Contract
Balance was increased by $49,932, from $2,711,413.84 to $2,761,345.84. P
Exh. 31; Tr. at 46.
27. Contract Modification No. 11 (admitted into evidence as D Exh. 4)
was executed by Alexander on behalf of St. Paul on December 11, 2000 and
decreased the Contract Price by $83,060 from $12,118,876.92 to
$12,035,816.92 When Alexander signed Contract Modification No. 11 it was
not yet signed by PHA. D Exh. 4
28. In February 2001, Trzaska informed Alexander that there was an
error in the execution of Contract Modifications 9, 10 and
11. PHA promised to send revised documents but did not do so. Tr. at
29. As a consequence of not receiving the revised documents from PHA,
Alexander telephoned PHA. During a telephone conversation on or about
February 27, 2001, Lyncoln Trower ("Trower"), PHA's contracting officer,
told Alexander that PHA had revoked all the paperwork. He stated that PHA
overpaid San Lucas by $150,000 and was determining how to reconcile the
overpayment with the contract funds due St. Paul. P Exh. 39.
30. Alexander sent a letter to Trower with respect to this February 27,
2001 conversation. The letter, dated February 27, 2001, confirmed
Alexander's conversation with him, and stated in part:
As we discussed, you advise that your department has
determined there was an overpayment in the area of
$150,000.00 by PHA to San Lucas and that PHA is
determining how to reconcile this overpayment with the
contract money due to St. Paul. When St. Paul and PHA
negotiated the Takeover Agreement, St. Paul advised
PHA that our investigation revealed there was a
substantial overpayment by PHA to San Lucas. We were
unable to resolve the overpayment issue during our
negotiations. So we specifically reserved this issue
for resolution after the project was complete. In the
Takeover Agreement, PHA agreed and promised to pay the
remaining contract balance of $2,711,413.84, which was
subsequently increased by change orders to
$2,761,345.84, to St. Paul despite the overpayment
issue. Therefore the $150,000 portion of the
overpayment that you and I discussed should not be
deducted from contract money due to St. Paul under the
P Exh. 39. The contract balance stated in the letter reflects the
changes made to the Contract Balance by Contract Modifications 9
and 10. Id.
31. On March 7, 2001, Alexander sent to Trower and to Phil Johnson,
another employee of PHA, a letter stating: "In the Takeover Agreement,
PHA agreed and promised to pay the remaining contract balance of
$2,711,413.84, which was subsequently increased by change orders to
$2,761,345.84, to St. Paul despite the overpayment issue." P Exh. 41. The
contract balance stated in the letter reflects the changes made to the
Contract Balance by Contract Modifications 9 and 10. Id.
32. By memorandum dated March 11, 2001, Trower reiterated the need for
Alexander to execute Contract Modification No. 11 to delete the $83,060
management office balance and stated PHA would reserve $116,940 as
"temporary security until the matter of the deletion amount for the
management office receives formal approval." P Exh. 42. PHA subsequently
withheld the $116,940 as temporary security. Id.
33. On March 12, 2001, Contract Modification No. 9 was re-executed by
Alexander on behalf of St. Paul, and increased the Contract Price by
$33,720 from $12,068,945 (as originally cited in the Agreement) to
$12,102,665. When Alexander signed this revised Contract Modification No.
9 it was not yet signed by PHA. This revised Contract Modification No. 9
was approved and signed by PHA on March 20, 2001. P Exh. 45.
34. On March 12, 2001 Contract Modification No. 10 was re-executed by
Alexander on behalf of St. Paul and increased the
Contract Price by $16,212 from $12,102,665 to $12,118,877. When Alexander
signed this revised Contract Modification No. 10 it was not yet signed by
PHA. This revised Contract Modification No. 10 was approved and signed by
PHA on March 20, 2001. P Exh. 45.
35. On March 15, 2001, PHA transmitted to St. Paul a revised version of
Contract Modification No. 11. P Exh. 44.
36. By letter dated April 10, 2001, Alexander stated that St. Paul
disputed the revised Contract Modification No. 11.
37. PHA paid St. Paul $116,940 at the bar of the court on August 19,
2003. As a result of that payment, St. Paul had received the Contract
Balance set forth in the Agreement, plus the additional amounts due under
Modifications 9 and 10.
38. The only payment St. Paul has not received is the disputed $83,060
for the management office.
St. Paul's breach of contract claim is based on PHA's refusal to remit
the outstanding Contract Balance of $83,060 for the management office.
St. Paul asserts that PHA is in breach of the Takeover Agreement because
PHA was obligated to pay St. Paul the entire balance of the underlying
Contract. St. Paul contends that because it never executed the revised
version of Contract Modification No. 11, the $83,060 was never deleted
from the Contract Price. PHA maintains that under the Agreement, and the
underlying construction contract, it has no obligation to remit
payment for an element of the Project never completed. The issue before
the court is whether PHA is in breach of the Takeover Agreement for
failure to pay $83,060 under the Contract.
A court's purpose in examining a contract is to interpret the intent of
the contracting parties, as they objectively manifest it. Pacitti by
Pacitti v. Macy's, 193 F.3d 766, 773 (3d Cir. 1999). First, the court
must make a preliminary inquiry whether the contract is ambiguous.
Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 613 (3d
Cir. 1995) This question is an issue of law for the court to resolve.
A term is ambiguous if it is susceptible to reasonable alternative
interpretations. Id. at 614. See also Mellon Bank, N.A. v. Aetna Business
Credit, Inc., 619 F.2d 1001, 1011 (3d Cir. 1980)(defining ambiguity as an
"intellectual uncertainty [or] the condition of admitting two or more
meanings, of being understood in more than one way, or referring to two
or more things at the same time . . . ."). If the court determines that a
given term in a contract is ambiguous, the interpretation of that term is
a question of fact for the trier of fact to resolve in light of the
extrinsic evidence offered by the parties in support of their respective
interpretations. See Hullett v. Towers, Perrin, Forster & Crosby, Inc.,
38 F.3d 107, 111 (3d Cir. 1994).
To determine whether a contract is ambiguous, the court looks to the
express language of the agreement, and assumes the
intent of the parties is embodied in the writing itself. Pacitti, 193
F.3d at 773. When the words are clear and unambiguous, the intent is to
be discovered only from the express language of the agreement. Id. Where
the intent is unclear from the express language, to determine the
parties' intentions, the court may consider, among other things, "the
words of the contract, the alternative meaning suggested by counsel, and
the nature of the objective evidence to be offered in support of that
meaning." Id., citing Hullett, 38 F.3d at 111.
The Takeover Agreement unambiguously manifests an intent that St. Paul,
as surety, would receive the balance remaining on the Contract Price in
return for its completion of the Project:
Surety is willing to undertake the completion of the
remaining Contract work in the manner hereinafter
related, provided the entire unpaid balance of the
Contract Price (as hereinafter defined), including
undisbursed retainage, together with any additional
amount of money added to the Contract Price after the
date hereof on account of extra work or changes agreed
to by Owner in writing pursuant to the terms and
provisions of the Contract is paid to Surety or its
designee as and when such sums or amounts shall become
due under the Contract.
P Exh. 25. Nothing in the Agreement contemplates paying St. Paul for work
not actually completed. Rather, the Agreement states St. Paul would be
paid only "as and when such sums shall become due under the Contract."
Id. Accordingly, the payments made by PHA to St. Paul followed the
Schedule of Values contained in the
original Construction Contract between PHA and San Lucas, as demonstrated
by the Periodic Estimates, including Periodic Estimate No. 32, reflecting
that the management office was only 47% complete.
The Agreement also unambiguously manifests the parties' intent to
adjust the Contract Price through written modifications. Paragraph 8
clearly states that the "Authorized Individual, the individual authorized
to represent St. Paul in its dealings with PHA, has "the authority to
negotiate and sign change orders for extra work (work that is different
from, in excess of, or beyond the scope of the work required by the
Original Contract)." P Exh. 25. The Agreement unambiguously contemplates
deductions by written change orders reducing the scope of the work; the
Agreement states that St. Paul granted:
no authority to negotiate deductive Change Orders,
credits, back charges or net deductions from the
Original Contract or the Contract Balance of any
nature whatsoever without the Surety's prior written
Id. The Contract Price could only be adjusted by written modification
signed by both parties.
However, the Agreement also unambiguously provides: "[a]pprovals which
are to be made by Surety shall not be unreasonably withheld or delayed
and if not given within four (4) days from its receipt therefor, shall be
deemed to have been approved." Id. Should St. Paul unreasonably withhold
or delay written approval of a Change Order, the Contract Price would
automatically be adjusted, despite the failure to sign.
Under Pennsylvania law, a modification to a contract requires a new
meeting of the minds between the parties to the contract. Matevish v.
School Dist. Of Borough of Ramey, 74 A.2d 797, 800 ( Pa. Super. 1950); see
also Apgar v. State Employees' Retirement Sys., 655 A.2d 185 (Pa. Commw.
1994)("Our courts continue to recognize that once a contractual
obligation vests, no matter how innocuous it may appear, the same cannot
be altered, amended or changed by unilateral action"). Contract
Modification No. 11 was properly executed only if there were an offer,
acceptance, and meeting of the minds. Jenkins v. County of Schuvlkill,
658 A.2d 380 (Pa. Super. 1995), app. denied, 666 A.2d 1056 (Pa. 1995).
However, the words of this Agreement expressly stated that approval of
a change order "shall not be unreasonably withheld or delayed," so the
proper inquiry is whether St. Paul unreasonably withheld its signature
from the revised version of Contract Modification No. 11, and if so,
under the Agreement, the modification "shall be deemed to have been
To determine what was reasonable under the Agreement, we look no
farther than the four corners of the document. Nothing in the Agreement
contemplates that St. Paul would receive payment from PHA for work under
the Contract never completed. As surety, St. Paul stepped into the shoes
of the defaulting construction
company, San Lucas, and fulfilled its obligation to complete the
Project. As compensation, St. Paul was to receive remuneration "as and
when such sums shall become due under the Contract." P Exh. 25.
Here, there is no evidence the $83,060 for the renovation of the
management office ever came due under the Contract. There is no evidence
that the management office was ever renovated. Tr. at 88. PHA apparently
decided not to complete the management office because the Project was
behind schedule. Id. This decision is reflected by PHA's submission of
Contract Modification No. 11 to St. Paul on December 11, 2001.
Although, Alexander apparently misunderstood its significance, she
properly and reasonably executed Contract Modification No. 11 and returned
it to PHA. However, when PHA discovered an immaterial mathematical
mistake (a difference of $.08) and resubmitted Contract Modification No.
11, Alexander refused to sign. Under the Agreement, PHA was entitled to a
reduction in the Contract Balance for work never performed by St. Paul,
or its contractor NDK. St. Paul's refusal to reexecute the revised
Contract Modification No. 11 was patently unreasonable, so Contract
Modification No. 11 is deemed to have been approved. The Contract Balance
was properly reduced by $83,060 and PHA does not owe that amount to St.
III. Conclusions of Law
1. There is subject matter jurisdiction under 28 U.S.C. § 1332(a).
2. There is venue under 28 U.S.C. § 1391(a).
3. Under Pennsylvania law, if a contract is unambiguous, the court
interprets the contract as a matter of law. Pacitti v. Macy's,
193 F.3d 766, 773 (3d Cir. 1999).
4. The Takeover Agreement unambiguously provided that PHA was obligated
to pay St. Paul the Contract Balance only as and when such amounts were
due under the Contract between PHA and San Lucas.
5. Because PHA never required anyone to complete the management office,
and no one performed this work, PHA never owed San Lucas, or St. Paul,
the Contract Balance applicable to this work.
6. Under the unambiguous provisions of paragraph 8 of the Takeover
Agreement, St. Paul, as surety, was required to give prior written
approval of deductions modifying the Contract Balance, which approval
could not be unreasonably withheld.
7. This clause is consistent with PHA's right under the Contract, as
the owner of the Project, to determine the scope of the work, including
elimination of certain work, with the Surety's approval in determining
the amount to be deducted on
account of the work eliminated.
8. Where, as here, the work was deleted and never performed, St. Paul's
refusal to approve a deduction modifying the Contract Price was patently
9. PHA was entitled to a reduction in the Contract Balance of $83,060,
despite St. Paul's refusal to sign revised Contract Modification No. 11.
AND NOW, this 19th day of March, 2004, after a non-jury trial at which
counsel and witnesses for both parties were heard, it is hereby ORDERED
Partial Judgment is entered for defendant Philadelphia Housing
Authority and against plaintiff St. Paul Mercury Insurance Company on
Count II only.