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Merrill Iron & Steel, Inc. v. Blaine Construction Corp.

United States District Court, W.D. Pennsylvania

January 20, 2017

MERRILL IRON & STEEL, INC., Plaintiff,
v.
BLAINE CONSTRUCTION CORPORATION, et al ., Defendants.

          OPINION

          ROBERT C. MITCHELL, United States Magistrate Judge.

         Presently pending is a Motion for Partial Summary Judgment filed on behalf of cross-claimant HOH Engineers, Inc. (“HOH”) [ECF No. 244]. A Brief in Opposition has been filed by cross-defendant Blaine Construction Corporation (“Blaine”) [ECF No. 257] to which HOH has replied [ECF No. 261]. For the reasons stated herein, the motion will be granted but entry of final judgment will be held in abeyance.

         I. Introduction

         This case concerns the construction of a $1.2 billion rolled-metal processing and water-treatment facility for Defendant Allegheny Ludlum Steel Corporation (“ATI”) in Brackenridge, Pennsylvania (the “Project”). On or about June 6, 2011 ATI contracted with Defendant Blaine to design and build a portion of the Project. In January of 2011 Blaine subcontracted with HOH, an engineering firm, to provide preliminary design services for the Project. Disagreements arose as to whether the Project complied with the tolerance requirements in Blaine's contract with ATI.

         The Complaint in this action was filed of February 14, 2014. [ECF No. 1]. On August 18, 2014, the parties filed a Consent Motion [ECF No. 111] to consolidate this action with Blaine Construction Corporation v. Allegheny Ludlum, LLC, et al.; Case No. 2:14-cv-00689-RCM (the "Blaine Action"). Blaine has alleged claims against HOH for professional negligence and breach of contract seeking damages in excess of $5 million; a portion of those claims are purported to be covered by professional errors and omissions insurance. On September 3, 2014, HOH filed an amended cross claim in which it seeks recovery for amounts allegedly owed to it by Blaine for five categories of services rendered.

         HOH now seeks partial summary judgment against Blaine as to two of those categories: 1) services provided pursuant to written change orders signed by both parties (approximately $44, 000); and 2) services consisting of Revisions after Initial Design (approximately $399, 000). HOH asserts it is entitled to final judgment in the amount of $440, 384.62, together with interest thereon at an annual rate of 6%. Blaine contends it had contracted the right to withhold payment from HOH for deficient work, and asserts withholding and setoff as affirmative defenses to HOH's claims. [ECF No. 116 at 7].

         At this juncture no trial date has been set. Certain parties have previously indicated that they may request to proceed with expert discovery. The court has a status conference scheduled for January 23, 2017.

         II. Factual Background

         The following facts are not in dispute, unless otherwise noted. The first contract between the parties was a written subcontract (“the Preliminary Design Work Subcontract”) wherein HOH agreed to provide preliminary design services for the ATI Project for a flat fee of $108, 000. [ECF No. 246 at ¶2]. HOH performed that work, and was paid the agreed-upon $108, 000 fee. Id.

         Blaine and HOH next entered into a second written subcontract, dated July 26, 2011 (“the Blaine/HOH Subcontract”) pursuant to which HOH was retained to perform the remainder of the engineering work for the ATI Project. [ECF No. 246 at ¶3.] The original Blaine/HOH Subcontract price was $798, 000 for basic services. [ECF No. 258 at 20].

         The Blaine/HOH Subcontract contains a provision (Section 6.3.5) permitting Blaine to withhold amounts due to HOH under certain conditions. [ECF No. 246 at ¶8.] It provides:

Should the Design Professional [HOH] or its consultants or subcontractors cause damage to the Project, or fail to perform or otherwise be in default under the terms of this Agreement, the Design-Builder shall have the right to withhold from any payment due or to become due, or otherwise be reimbursed for, an amount sufficient to protect the Owner and Design-Builder from any loss that may result. Payment of the withheld amount shall be made when the grounds for withholding have been removed.

[ECF No. 114-1 at 13; ECF No. 246 at ¶ 8).

         At the time the parties entered into the Blaine/HOH Subcontract, the design services that HOH agreed to provide were the “basis of design” of the mill, according to HOH. [ECF No. 246 at ¶5, ECF No. 258 at 4.] Blaine states that as is evident from the Blaine/HOH Subcontract, the parties intended that additional design services would be performed by HOH to finalize the design including, among other things, schematic design documents (Section 3.2.1), design development documents (Section 3.2.2), and construction documents (Section 3.2.3). [ECF Nos. 114-1 at 5-6, 258 at 4.]

         HOH provided design services to Blaine for the ATI Project pursuant to the Blaine/HOH Subcontract. [ECF No. 246 at ¶6.] The ATI Project was a “fast-track” job, which meant that HOH was required to release drawings for portions of the initial design as each was completed, rather than waiting until the initial design of all portions of the plant was completed and then releasing all of the drawings for the initial design at the same time. [ECF No. 246 at ¶33.] Substantial changes to the ATI Project were made by the owner, by Blaine, and by others during the course of HOH's provision of services pursuant to the Blaine/HOH Subcontract, including changes that resulted in (a) HOH being required to prepare a final design that was, in many respects, significantly different from the preliminary design that HOH had prepared pursuant to the January, 2011 Preliminary Design Work Subcontract and (b) many other substantial changes to numerous design calculations, modeling, and drawings that HOH had prepared and sent to Blaine and/or other subcontractors as part of the initial design pursuant to the Blaine/HOH Subcontract. [ECF No. 246 at ¶7.]

         Blaine explains that a “large” number of those changes occurred after Merrill had been released to begin fabrication (and after steel had been fabricated). See Affidavit of Ray Duncan ("Duncan Aff.") [ECF No. 259-2 at ¶ 8.] HOH has acknowledged that the changes included some revisions to the drawings to remedy HOH's own errors or incomplete work. [ECF No. 259-1 at pp. 158-161.] Recordkeeping in this regard appears to have been less than ideal. HOH acknowledged that it did not highlight all of the revisions to the drawings and that it did not make any notes or otherwise advise Blaine as to the reason for some of the revisions. See Deposition of Nicholas Raskovich ("Raskovich Dep.") [ECF No. 259-3 at pp. 375-379.] Mr. Raskovich testified that while changes on HOH drawings on this job were (as is the industry norm) typically clouded by HOH, the reasons for the changes were not indicated. He testified that "normally we cloud all of the changes and indicate the reason for the change, " but that on this job, while the changes were clouded "we didn't indicate the specific reason behind the change. And the reason was, there was a lot of changes that were taking place….our engineers informed me it was difficult to keep track of all that stuff. That's the way I understood it." [ECF No. 259-3 at p. 379.]

         A dispute arose between Blaine and HOH: Blaine alleged that HOH had committed professional errors and/or omissions that rendered HOH liable to Blaine. [ECF No. 246 at ¶9.] As a result, according to HOH, Blaine began to withhold payments to HOH pursuant to Section 6.3.5 of the Blaine/HOH Subcontract, but demanded that HOH nevertheless continue to provide design services that were needed to complete the Project. [ECF No. 246 at ¶10.] HOH, which denied that it had committed any professional errors or omissions that would render it liable to Blaine, wanted to be timely paid for the work that it had already performed, as well as for any future work. [ECF No. 246 at ¶11.]

         The Blaine/HOH Subcontract was subsequently modified by (a) 18 written change orders signed by both parties, and according to HOH it was also modified by a written agreement contained in an exchange of e-mails on April 20 and 24, 2012 (“the April, 2012 Agreement'). [ECF No. 246 at ¶4.] Blaine disputes that that there are any other modifications to the Subcontract and further disputes that the email exchange of April 20 and 24, 2012 is a written agreement between HOH and Blaine or a modification of the Subcontract; rather, it is an exchange of emails between attorneys who were attempting to resolve the dispute.

         Regardless, there is no dispute that parties were attempting to resolve the issues and to ensure the Project continued to progress by entering into the April, 2012 Agreement. [ECF No. 246 at ¶12.] In it HOH agreed to continue to provide services for the ATI Project and, in return, Blaine agreed (a) to immediately pay HOH all past due amounts and (b) in the future, not to offset against any amounts owed to HOH any amount of damage that Blaine might claim to have incurred as a result of any alleged professional errors or omissions by HOH. [ECF No. 246 at ¶12.] Instead, Blaine agreed to reserve its rights to subsequently recover back any amounts to which it could prove entitlement (which, if Blaine was found to be entitled to recover, would be paid by HOH's insurance carrier, rather than by HOH). [ECF No. 246 at ¶12.]

         Pursuant to the April, 2012 Agreement, HOH continued to provide services for the ATI Project, but HOH claims that Blaine breached by failing to pay HOH as it had agreed to do. [ECF No. 246 at ¶13.] Between January 3, 2012 and March 12, 2014, HOH and Blaine entered into 18 written change orders, each of which was signed by both HOH and Blaine. [ECF No. 246 at ¶15.] According to Blaine, these change order requests were rejected in writing, some on the basis of untimeliness, and after (or because of) the inception of this lawsuit, HOH re-categorized them as “allowance” items, in what Blaine characterizes as an attempt to avoid the timeliness issue (allowances were to be reconciled at the completion of the Subcontract). [ECF No. 258 at ¶¶ 14, 15].

         The April, 2012 Agreement consisted of an exchange of e-mails between counsel for HOH and counsel for Blaine. HOH's counsel's April 20, 2012 e-mail to counsel for Blaine said:

Ford - Ford - Thanks for your letter. On Monday, HOH will contact Blaine to make certain that Blaine has all of the documentation it needs to get the currently outstanding amount paid. As we agreed on the phone, it makes most sense for both parties for Blaine to pay those amounts, as well as amounts coming due in the future, in cash, and for the parties to reserve their rights to assert whatever claims and defenses they may have to another time and to concentrate now on finishing the project. As I said in my letter, HOH will need Blaine's written assurance that that is how it intends to proceed before HOH performs any additional services pursuant to Section 3.3 of the contract. This need not be in any formal document; an e-mail or letter from Blaine, or from you on Blaine's behalf, will suffice.
Dan

[ECF No. 246 at ¶17.]

         In response Blaine's counsel on ...


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