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Great American Insurance Co. v. Honeywell International Inc.

May 29, 2009

GREAT AMERICAN INSURANCE COMPANY, PLAINTIFF/COUNTERCLAIM DEFENDANT,
v.
HONEYWELL INTERNATIONAL INC., DEFENDANT/COUNTERCLAIMANT.



The opinion of the court was delivered by: Conti, District Judge

MEMORANDUM OPINION

The instant case arises out of the design and construction of the Clay Center for the Performing Arts and Sciences ("Clay Center"), a multi-use museum and cultural facility located in Charlestown, West Virginia. Great American Insurance Company ("Great American" or "plaintiff") commenced this action against Honeywell International, Inc. ("Honeywell" or "defendant"), asserting claims for breach of contract, unjust enrichment, breach of express warranty, breach of implied warranty of merchantability, and breach of implied warranty of fitness for a particular purpose. Defendant filed a motion for summary judgment (Docket No. 40), which was granted with respect to the breach of warranty claims and denied with respect to the claims of breach of contract and unjust enrichment (Docket No. 51). On February 2, 3, 4, 5, and 10, 2009, this court heard evidence and argument with respect to the remaining claims during a bench trial. On March 20, 2009, defendant and plaintiff filed proposed findings of fact and conclusions of law.

Pursuant to Federal Rule of Civil Procedure 52, this court makes the following findings of fact and conclusions of law with respect to plaintiff's claims for breach of contract and unjust enrichment.

A. Findings of Fact The Parties

1. The Clay Center is a multi-use museum and cultural facility, located in Charleston, West Virginia, and its construction costs exceeded $60 million. Joint Stipulations ("J.S.") ¶ 1. The Clay Center included a climate control system, designed to maintain the heating and cooling requirements of spaces within the facility. Id.

2. Dick Corporation ("Dick") was hired as the project general contractor for the construction of the Clay Center (the "Project"). J.S. ¶ 3. Dick subcontracted various components of the Project to a number of other companies. J.S. ¶ 4. Dick subcontracted the mechanical work to Limbach Company ("Limbach"), and the electrical work to Rost Enterprises, L.P. ("Rost"). Id.

3. Initially, Limbach and Comfort and Process Solutions ("CPS") structured an agreement whereby CPS was subcontracted by Limbach to perform the control system work. J.S. ¶ 5. The control system was to regulate properly the heating, air conditioning, and ventilation of the Clay Center. Joint Exs. 6, 46. A significant amount of the control system work involved programming. Trial Transcript of February 4, 2009 (Docket No. 83) ("Feb. 4 Trial Tr.") at 178.

4. Honeywell was in the business of providing control system products, literature explaining how to install and use those products, and also programming, software, and technical support. J.S. ¶ 17. Honeywell's Indianapolis branch sold control system products to independent contractors; the independent contractors would secure subcontracts to install the products. The Indianapolis branch provided assistance to independent contractors in securing subcontracts. In contrast, Honeywell's Pittsburgh branch competed for projects; the Pittsburgh branch would secure subcontracts to install its own products. Trial Transcript of February 5, 2009 (Docket No. 84) ("Feb. 5 Trial Tr.") at 149-54.

5. Great American was the surety for Rost and provided certain payment and performance bonds to Limbach for the Project. J.S. ¶ 30.

Negotiations Between Limbach, CPS, and Honeywell

6. In Limbach's prior experience, Limbach contracted with Honeywell to install its own control system products. Trial Transcript of February 2, 2009 (Doc. No. 81) ("Feb. 2 Trial Tr.") at 74-75. Limbach contacted Honeywell's Pittsburgh branch to ascertain whether it was interested in the Project. Id. The Pittsburgh branch told Limbach that the Project was not within its territory; Honeywell referred Limbach to CPS. Id. Limbach had no prior experience with CPS. Id.

7. In the summer of 2000, Limbach had discussions with CPS regarding CPS's bid for the subcontract for the control system work. J.S. ¶ 8. Limbach expressed concerns relating to CPS's ability to timely and properly complete the control system work. Feb. 2 Trial Tr. at 76-78. On July 13, 2000, Limbach's estimating manager/contract manager, James Claus ("Claus"), sent CPS a letter detailing Limbach's concerns. J.S. ¶ 22; Feb. 2 Trial Tr. at 83; Joint Ex. 2. Claus indicated in his July 13, 2000 letter that Limbach's concerns may be alleviated by drawing support, in the form of a guarantee, from Honeywell. Feb. 2 Trial Tr. at 83; Joint Ex. 2. The July 13, 2000 letter sent by Claus to CPS was copied to Honeywell. J.S. ¶ 22. Mark Saunier ("Saunier"), president of CPS, sent to Claus a letter dated July 17, 2000, regarding the concerns of CPS. J.S. ¶ 23.

8. During the course of the negotiations between Limbach and CPS, Honeywell indicated to Limbach that CPS was an authorized installer of the Honeywell Excel 5000 control system. Trial Transcript of February 10, 2009 (Doc. No. 85) ("Feb. 10 Trial Tr.") at 11-13. On June 20, 2000, Michael Keller ("Keller"), area market specialist for Honeywell, wrote to Limbach regarding CPS's qualifications. In that letter, Keller stated:

Comfort and Process Solutions (CPS) is an Authorized Honeywell Excel 5000 Contractor. This authorizes CPS to sell, engineer, install and service Honeywell's EXCEL 5000 direct digital control systems and related HVAC control components for building automation. CPS works directly with Honeywell to provide its customers with cost-effective solutions based on Honeywell's high-quality HVAC controls and building automation systems. Honeywell selected CPS after it met several stringent requirements. These include its proven reputation within the construction industry, financial resources necessary to undertake large projects, and its technical expertise in all facets of building control applications, such as engineering, project management, commissioning and ongoing maintenance. Honeywell has chosen CPS, in particular, because of their strong presence and quality reputation in the new construction and retrofit control industry. CPS has trained its staff at Honeywell's Home and Building Control University and through the company's professional training courses.

Since being authorized to sell Honeywell's Excel direct digital control systems CPS has demonstrated a very high level of technical expertise. Their staff includes ex-Honeywell personnel. Should CPS ever require support they have full access to Honeywell's direct factory technical support. Honeywell warrantees the products to CPS who in turn provides the specified warrantees to the customer.

With CPS, you are being served by one of our foremost Excel 5000 Contractors.

Joint Ex. 1 (emphasis added).

9. Keller believed that it was in Honeywell's interest that CPS procure a subcontract with Limbach because Honeywell would ultimately benefit from selling the control system products to CPS. J.S. ¶ 20. Keller's compensation was affected by the amount of Honeywell products sold in his territory, which encompassed the Clay Center. J.S. ¶ 21. Keller stated that CPS had not previously completed other projects that rivaled the magnitude or complexity of the Project. Feb. 10 Trial Tr. at 13-14. At the time of the negotiations related to the control system work, CPS had only recently been authorized as a Honeywell contractor; CPS was formed in late 1999. Id. at 10. Keller testified that his representations with respect to CPS were premature:

Q: . . . I think on direct you testified -- and you correct me if I'm wrong -- that [the statement that CPS was one of the foremost Excel 5000 contractors] might have been, quote, a little in advance.

A: Yes.

Q: At least in terms of representing that they were one of Honeywell's best contractors, proved contractors, you believed you jumped the gun a little bit there, correct?

A: Yeah, but Limbach also had the ability to do their investigation for the contractor, and ultimately they are the ones that decided to subcontract CPS for this project.

Q: Okay. But you're the one that made the statement here, right?

A: That is correct.

Q: Limbach didn't make this statement.

A: No.

Q: And that statement was premature, wasn't it?

A: Yeah, I believe it was a little in advance. Id. at 12-13.

The August 2000 Letter Agreement

10. Despite Honeywell's representations regarding CPS's qualifications to complete the controls work on the Project, Limbach sought further assurances from Honeywell. Feb. 2 Trial Tr. at 85-86; Joint Ex. 2. Specifically, Limbach wanted to enter into a written agreement with Honeywell that ensured that Honeywell would complete the control system work if CPS did not. Feb. 2 Trial Tr. at 85-86; Joint Ex. 2. Further, Limbach required that CPS provide payment and performance bonds to Limbach. Feb. 2 Trial Tr. at 85-86; Joint Ex. 2.

11. Honeywell was reluctant to enter into an agreement to perform work on the Project in the event CPS defaulted. Honeywell wanted Limbach to agree to compensate Honeywell for amounts expended in excess of the CPS subcontract amount. Feb. 2 Trial Tr. at 131-33; Joint Exs. 3, 4. Limbach refused to pay excess amounts. Honeywell requested the right to pursue the bonding company for the excess costs. Limbach agreed that Honeywell could pursue the bonds for excess costs. Limbach did not represent to Honeywell that Honeywell could recover on the bonds since Limbach did not know whether the bonds afforded Honeywell such a right to recovery. Feb. 2 Trial Tr. at 131-33; Joint Ex. 10.

12. On August 23, 2000, Claus sent a letter agreement to Keller, which memorialized the agreement among Limbach, Honeywell, and CPS (the "August 2000 letter agreement"). J.S. ¶ 25; Joint Ex. 10. The August 2000 letter agreement provided:

We have issued a Subcontract to Comfort & Process Solutions of Lexington, KY. One of the conditions of this Subcontract is that Comfort and Process Solutions provide a double obligee bond naming both Limbach and Honeywell on the bond. This bond will protect both our firms in the event of default.

By executing this letter, Honeywell hereby agrees to assume the obligations of Comfort & Process Solutions under the Subcontract and to complete the work in a timely manner to meet the project schedule requirements in the event of default by Comfort & Process Solutions on the Subcontract as determined by Limbach.

As an obligee under the bond, Honeywell can then pursue the bonding company for its costs beyond those costs covered by the remaining Subcontract balance between Comfort & Process Solutions and Limbach Company.

Limbach will submit all CPS payment applications to Honeywell for review and approval before payment to CPS.

Joint Ex. 10 (emphasis added). The August 2000 letter agreement was executed by Keller, on behalf of Honeywell, and Claus, on behalf of Limbach. Id. Saunier was copied on the August 2000 letter agreement. Id.

13. Mark Shaffer ("Shaffer"), vice president of Limbach, testified that the definition of the term "default," as used within the construction industry, does not encompass physical removal of the defaulting party from the work site:

Q: Did you have an expectation that Limbach would have to remove CPS from the job in order to trigger Honeywell's obligations?

A: No. I mean in the construction industry removing somebody from a job is an extreme remedy that typically you only take after you've gone through a sequence of steps of first declaring them to be in default, giving them a chance to cure the default, trying to work with the contractor. Because really when you remove someone, it's a big shock to the whole project system and it's hard to get someone else back up to speed, particularly on a job like this, that it was on a fairly fast track; and to remove someone and replace them with someone else would take a lot of time to get that whole thing accomplished. So typically you don't remove people, you declare them to be in default and then work with them and try to cure those defaults.

Q: Okay. Are you saying that determination by Limbach of the CPS default and removal are two different things?

A: Oh, absolutely.

Q: And that's consistent with your long-term experience in the construction industry.

A: Yes, it is.

Feb. 2 Trial Tr. at 92-93. In contrast, Keller testified that default required removal: my understanding was that CPS on a default would be removed because it's very tough to come in and have two contractors on a project at the same time. So one has to, you know, physically be removed so that the other one can come in and do the job.

Feb. 10 Trial Tr. at 42.

14. According to Keller, this was the first time in his twenty-three years of employment with Honeywell that Honeywell obtained the right to review and approve an approved installer's payment applications on a job. J.S. ¶ 36. Honeywell obtained the right to review and approve payment applications in part to monitor CPS's work on the Project and the subcontract balance. J.S. ¶ 35. Keller testified: "If CPS was defaulted then we wanted to make sure that there was [sic] funds available to complete the work. So we did not want to have too much forward payment of their work progress." Pl.'s Ex. 30, Vol I., at 84-85. Keller approved CPS's first seven payment applications and CPS's tenth payment application. Joint Exs. 12-19.

15. By letter dated August 24, 2000, Keller forwarded the executed August 2000 letter agreement to Limbach and indicated that Honeywell was providing "firm assurance that Honeywell will assume the obligation of [CPS] in the event of default of [its] subcontract." Joint Ex. 10.

16. Shaffer understood the August 2000 letter agreement to mean that, in the event of default by CPS, Honeywell would in essence be assigned CPS's portion of the subcontract, and Honeywell would assume CPS's responsibilities under that subcontract pursuant to the same terms and conditions. Shaffer testified as follows:

Q: Okay. And what again was your understanding of Honeywell had agreed to do if CPS defaulted?

A: They would assume all the obligations of CPS under our subcontract.

Q: And what do you mean by that?

A: They would step in and finish the job for the -- you know, all the requirements, make sure technical requirements were met, and would do it for the amount of the subcontact.

Q: And by "step in" do you mean take the place of CPS in your subcontract -- subcontract with CPS?

A: Yes, they would take the place of the subcontract.

Feb. 2 Trial Tr. at 87. Furthermore, Limbach specifically included the language "as determined by Limbach" to avoid the situation in which Honeywell would dispute whether CPS was in default. Shaffer testified that the reason this language was added was because: you can sometimes get in disputes on bond claims as to whether or not the subcontractor's actually defaulted on its obligations. I've had experience where you called the surety to come in and take over and they'll argue, no, the subcontractor is doing just fine and we're not going to come in.

So we didn't want to get into those kind of arguments. We wanted to be clear if we determined there was [default], that Honeywell would come in and take over.

Id.

17. Limbach awarded CPS the subcontract to perform control system work by reason of the assurance from Honeywell that Honeywell would perform under the subcontract in place of CPS, in the event of CPS's default. The bonds alone were not enough. Feb. 2 Trial Tr. at 78. Shaffer stated:

The other concern here was -- particularly with a control system, when we were buying a certain piece of equipment, in this case Honeywell equipment, there are only so many people out there that know how to do that, that would know how to put that system in place and make it operational.

So we were very concerned that Honeywell give us assurances if CPS wasn't able to do it, they would step in and finish the project.

Id. The promise made by Honeywell to perform under the subcontract in the place of CPS contained the necessary assurances to induce Limbach to award control system work to CPS:

Q: Did [the August 2000 letter agreement] contain the assurances from Honeywell that were required for Limbach to issue a subcontract to CPS?

A: Yes. With this letter, they specifically agreed to assume the obligations under the subcontract in the event of a default as determined by Limbach.

Id. at 91.

The March 2001 Letter Agreement

18. After the August 2000 letter agreement was executed, the parties learned that CPS was unable to obtain a surety bond for the control system work. J.S. ¶ 27; Trial Transcript of February 3, 2009 (Docket No. 82) ("Feb. 3 Trial Tr.") at 175-76. The parties, therefore, sought to restructure their previous agreement so that CPS would still be subcontracted to perform the control system work. J.S. ¶ 27. Limbach, Rost, and CPS agreed that Limbach would issue the control system subcontract to Rost. Id. Rost would obtain the performance bond, and then subcontract the control system work to CPS. Id. According to the Rost-CPS subcontract, the completion date for CPS's work was set for November 12, 2002. Joint Ex. 22.

19. On March 23, 2001, the parties entered into a letter agreement that memorialized the new agreement among the parties (the "March 2001 letter agreement"). J.S. ¶ 28; Joint Ex. 11. The March 2001 letter agreement, which was directed by Shaffer to Keller, provided: Referring to the letter dated August 2 [sic], 2000 that was executed by you on behalf of Honeywell (copy enclosed), Comfort & Process Solutions, in conjunction with Rost Enterprises (the electric contractor selected by Comfort & Process Solutions), has requested that we restructure the agreement. Specifically, they would like us to issue our subcontract to Rost Enterprises for the control system. Rost Enterprises, in turn, will issue the double obligee bond, required in our agreement, which will name both Limbach and Honeywell as oblige[e]s.

All other terms of our August 23, 2000 agreement will remain in effect. If Honeywell agrees with this revised amendment, please have the enclosed copy of this letter executed by an authorized representative of Honeywell . . . .

Joint Ex. 11. Saunier from CPS, William Rost ("Mr. Rost") from Rost, and Jack Kumper from Limbach were copied on the March 2001 letter agreement. Id. Keller executed the March 2001 letter agreement on behalf of Honeywell and Shaffer executed the agreement on behalf of Limbach. Id. By letter dated March 27, 2001, Keller again stated that Honeywell was providing "firm assurance that Honeywell will assume the obligation of [CPS] in conjunction with [Rost]." Joint Ex. 11.

20. Shaffer testified that the March 23 letter agreement did not change the provision of the August 20 letter agreement which required Honeywell to take over CPS's obligations in the event Limbach determined CPS to be in default:

Q: Okay. Was there any change to that [requirement] based on this letter agreement?

A: No, the only change was the substitute or the flip flop of Rost and CPS and to make sure that Honeywell was comfortable with that arrangement.

Feb. 2 Trial Tr. at 105.

21. Great American issued subcontract performance and payment bonds (the "bonds") dated August 10, 2000. The bonds named Rost as the principal and Limbach as the obligee.

J.S. ¶ 30; Joint Ex. 8. By way of dual obligee rider, Honeywell was named as an additional obligee on the bonds. J.S. ¶ 30; Joint Ex. 8. Great American did not know about the August 2000 and March 2001 letter agreements (collectively referred to as the "Letter Agreements") until late 2003 or early 2004. Feb. 5 Trial Tr. at 15-16. Great American was not a party to the Letter Agreements and was not involved in negotiating those agreements. Id.

22. Performance bonds are to compensate a party owed performance under a construction contract. The performance bond protected Limbach, the party owed performance under the March 2001 letter agreement; Honeywell, being obligated to fulfill the contractual responsibilities of CPS in the event of default, would not be able to recover under the performance bond. Feb. 5 Trial Tr. at 8-12; Joint Ex. 8. On the other hand, payment bonds are to compensate a party for its performance, in the event the party it owes performance to does not pay. If Honeywell had performed under the subcontract, its recovery under the payment bond might be limited to the remaining balance on the subcontract amount. Feb. 5 Trial Tr. at 8-12; Joint Ex. 9.

CPS's Performance of the Control System Work

23. During the course of the Project, CPS purchased control system products from Honeywell. J.S. ¶ 32. The purchased products cost CPS approximately $150,000. J.S. ¶ 18; Feb. 10 Trial Tr. at 11. The amount of the Limbach-Rost subcontract was $668,281. J.S. ¶ 12. Rost in turn subcontracted the control system work to CPS; the value of CPS's portion was $444,705. J.S. ¶ 14.

24. Honeywell's building control specialist, Steven Amato ("Amato"), provided on-site training and assistance to CPS, and was designated by Honeywell to investigate the status of CPS's progress on the Project. Feb. 10 Trial Tr. at 80-81, 84-86. Limbach believed Amato was at the construction site in order to advise CPS and to approve payments from Limbach to CPS. Feb. 3 Trial Tr. at 60-61.

25. By reason of turnover at CPS, Amato had to train several individuals. In the course of training CPS employees, Amato performed some of the programming work for CPS for the control system. Amato indicated that he completed approximately fifty percent of the programming related to the control system. Feb. 10 Trial Tr. at 102-07.

26. On November 6, 2002, Daniel Homan ("Homan"), a project manager for Limbach, sent an email to Keller stating "I think it is anxiety time," and that "I do not think CPS has the horsepower to get the job done." Feb. 2 Trial Tr. at 172; Joint Ex. 20. Homan asked Keller when Honeywell could send workers to complete the control system work. Joint Ex. 20. On November 14, 2002, Homan sent a letter to Keller explaining problems with CPS's performance on the Project. The letter stated:

I have been trying to get CPS to man the Clay Center Project for quite a while with no success.

I started writing letters in Early October to try and drive home the seriousness of the situation, and all I have received in return are broken promises. I have been told for four weeks now that more ...


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