Petition — Providence Hospital v. Manhattan Construction Co.

Supreme Court, U. &.

FILED

ofc 1897/7

AN., CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1977

No. 77-854

PROVIDENCE HOSPITAL,

Petitioner,

versus

MANHATTAN CONSTRUCTION COMPANY OF TEXAS,

K. C. ERNST, ING., CHARLES H. McCAULEY

ASSOCIATES, INC., AND FAIRBANKS-MORSE, INC.

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

WILLIS C. DARBY, JR.

Post Office Box 2565

Mobile, Alabama 36601

Counsel for Petitioner

December 12, 1977

SCOFIFLOS' QUALITY PRINTERS, FP O 80% 69006.N % LA 70169 804 822 1611

TABLE OF CONTENTS

Page

LL 11

Introductory Prayer 1

Citations to Opinions Belo 1

GUFIMEIOTIOR „ 6 0 0 6 6 6 6 6 6 6 6 6 6 6 0 0 6 0 6 6 6 66 6 60 2

Questions Presenteedgdgdad cece eee eeenes 2

DPR ee ee e ee lt 0 6 0 3

Statement of the Case 3

Reasons for Granting the Writ

A. The Fifth Circuit So Far Departed

From The Accepted And Usual Course

Of Judicial Proceedings As To Cali

For An Exercise Of This Court's

Power Of Supervision 10

B. The Decision Of TI. Fifth Circuit Is In

Conflict With The Decision Of Other

Courts Of Appeals 12

1. The Decision Below As To Waiver

Of Arbitration Conflicts With A

Decision Of The United States

Court Of Appeals For The Sixth

e actos 12

2. The Decision Below Conflicts

With The Decision Of The United

States Court Of Appeals For The

Tenth Circuit As To The

Deference To Be Given Under

Rule 52(a), F.R.Civ.P., To The Con-

struction Of A Purported “No

ii

TABLE OF CONTENTS (Continued)

Page

resse ses ee seen 15

r ̃ cil aa lal eas bia 15

Appendices

Excerpts from the General Conditions la

United States Code, Title 9 §§2, 3. ............. 6a

Decision of Court of Appeals Da

Decision of Court of Appeals on rehearing ... 30a

Decision of United States District Court 33a

Excerpt from Brief In Support of the

Motions of Providence Hospital to Dis-

rere ! eee eee 70a

Opinion in Germany v. River Terminal Ry.

K A V- nne oo. 73a

Opinion in Burgess Construction Co. v. M.

SO GI BNL. eee cece: 76a

Judgment of the Court of Appeals ............. 86a

TABLE OF CASES

Burgess Const. Co. v. M. Morrin & Son Co.,

Inc,, 526 F. ad 108 (10th Cir, 1975) ............... 14

Crown Coat Front Co. v. United States, 386

R eee 12

General Guar. Ins. Co. v. New Orleans

General Agency, Inc., 427 F. ad 924 (Sth Cir.

Germany v. River Terminal Ry. Co., 477 F.2d

. cccccdowcddbecscce ccccce 13

ill

TABLE OF CASES (Continued)

Page

Kulukundis Shipping Co. v. Amtorg Trading

Corp., 126 F. ad 978 (2d Cir, 1940)))))) 10

Republic Steel Corp. v. Maddox, 379 U. S. 650...... 12

Shanferoke C. & B. Corp. v. Westchester 8.

Corp., 293 U.S. 449, affirming 70 F.2d 297 (2d

Cle. 2GBE . e 00 666 6 66 6 6 6 6 6 6 6 6 0 666 6 6 6 6 6 6 6 6 66 10

Sims v. City of Birmingham, 254 Ala. 598

(10600 ·ꝛ „„ 11

Thompson v. St. Louis-San Francisco Ry. Co.,

113 F.Supp. 900 (N. D. Ala. 106 0)))) 11

United States v. Blair, 321 U. 8. 70 6.12

United States v. Callahan Walker Const. Co.,

%. . 6 6 „ „ „ „ 6 „ „ 6 6 6 6 6 6 6 6 6 0 12

United States v. Howard P. Foley Co., 320 U.S.

12•9„57» . f 14

United States v. Joseph A. Holpuch Co., 328

Deer. ...e eee ee ee ee eee 6.12

United States v. Rice, 317 U.S. 1 eee 6,14

United States v. Second National Bank of

North Miami, 502 F. ad 535 (Sth Cir. 1974)........ 14

United Steelworkers of America v. American

Mfg. Co., 363 U. 8. 6 — 12

United Steelworkers of America v. Enter-

prise Wheel and Car Corp., 363 U.S. 6 12

United Steelworkers of America v. Warrior

and Gulf N. Co., 363 U. 8. B74 dꝙiVrn; - 12

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1977 *

No.

PROVIDENCE HOSPITAL,

Petitioner,

versus

MANHATTAN CONSTRUCTION COMPANY OF

TEXAS, E. C. ERNST, INC., CHARLES !1.

McCAULEY ASSOCIATES, INC., AND

FAIRBANKS-MORSE, INC..

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

The petitioner, Providence Hospital (Providence),

respectfully prays that 2 writ of certiorari issue to

review the judgment and opinion of the United States

Court of Appeals for the Fifth Circuit, entered in this

proceeding on May 9, 1977 and on rehearing on

September 14, 1977.

The opinion of the Court of Appeals reported at 551

F. ad 1026, appears in the Appendix hereto, infra, page

9a; the opinion of the Court of Appeals on rehearing,

reported at 559 F.2d 268, appears in the Appendix

hereto, infra, page 31a. The opinion of the District

Court reported at 387 F.Supp. 1001, appears in the

Appendix hereto, infra, page 34a.

JURISDICTION

The opinion of the Court of Appeals was entered on

May 9, 1977. A timely petition for rehearing was grant-

ed in part on September 14, 1977; and this petition for

certiorari was filed within ninety (90) days of

September 14, 1977. This Court’s jurisdiction is in-

voked under 28 U.S.C. §1254(1). The jurisdiction of the

District Court was invoked under 28 U.S.C. §1332.

QUESTIONS PRESENTED

1. Does a defendant forfeit benefits of a contractual

dispute settlement procedure requiring arbitration as

a prior condition to suit by moving to dismiss a con-

tract claim, never presented to arbitration, for failure

to state a claim upon which relief can be granted?

2. Are courts bound by contractual provisions

specifying time limitations on filing and appealing

claims and restricting remedies where a party to the

contract waives the forum of arbitration?

3. Is the construction by a district court of a pur-

ported “no damage” clause in a construction contract

entitled to deference unless clearly erroneous under

Rule 52(a) F.R.Civ.P.?

3

STATUTORY PROVISIONS INVOLVED

United States Code, Title 9. Arbitration“ §§2, 3, and

4, appear in the Appendix hereto, infra, pages 6a and

8a.

-

STATEMENT OF THE CASE

On July 29, 1968, Providence and Manhattan Con-

struction Company of Texas (Manhattan) entered into

a construction contract for additions and

modifications to hospital facilities of Providence

(Finding 2, App. 36a).! The construction was aided bya

$1,000,000 - ral 2, App.

). contract incorporated General Conditions“

developed by the United States Public Health Service

and approved by the United States Budget Bureau for

use on federally assisted hospital projects (App. 1a, A.

441).

The General Conditions provided:

1. a two step procedure for settlement of all

claims of the Owner or Contractor arising

in connection with the contract by sub-

mission to the architect for a written deci-

sion, with the right to appeal to arbitration

pursuant to the standard Form of Arbitra-

tion Procedure of the American Institute of

Architects (App. 1a-2a);

i Citations to “Finding” and “Conclusion” are to the opinion of

the District Court: citations to “Decision” are to the opinion of the

Court of Appeals; citations to “Opinion on reh. are to the

— ml pe Sra pe to App. aretothe

SS See are to the printed Appendix in

4

2. “if the Architect fails to make a written

decision .. . within ten days after written

request for same... either party may then

demand arbitration” (App. 2a);

3. “any demand for arbitration shall be made

within thirty days after the dispute has

arisen if practicable” (App. 3a);

4. “the decision of the arbitrators shall be a

p ior condition to any right of legal ac-

tion” (App. 2a); and,

5. a remedy of an extension of time for com-

pletion of the contract occasioned by

delays caused by the Owner (App. 5a-6a).

In the course of the project Manhattan, pursuant to

paragraph 31(c) of the General Conditions, requested

extensions of time from the Architect; some were

allowed, some denied (Finding 4, App. 37a; Finding 16,

App. 42a). In November, 1968, a dispute arose over the

sewage ejection system. “Manhattan requested an ex-

tension on its contract. . . because of this delay, but its

request was denied by the Architect” (Finding 24, App.

44a). In January, 1969, a dispute arose over Palco bed

light fixtures (Finding 47, App. 49a); “Manhattan re-

quested a 59 day extension. no extension was

granted (Finding 49, App. 49a).

E. C. Ernst, Inc. (Ernst), Manhattan's electrical sub-

contractor, commenced this action on October 28, 1970,

against Manhattan, Providence, Fairbanks-Morse,

Inc. (Fairbanks), an Ernst supplier, and Charles H.

McCauley Associates, Inc. (McCauley), the architect;

Ernst sought damages, declaratory and injunctive

relief concerning the emergency generator (A. 1-48).

On November 27, 1970, Manhattan answered, claim-

ing damages from Ernst, McCauley, Providence and

Fairbanks for delays associated with the emergency

generator? (A. 49-54).

On December 16, 1970, Providence moved (1) to dis-

miss the complaint of Ernst against Providence for

failure to state a claim, (2) to dismiss the claims of

Manhattan against Providence for failure to state a

claim, and (3) “to stay further proceedings. . . because

this cause will not be ready for judicial determination

until such time as Manhattan has performed its

obligations under the construction contract with

Providence” (A. 54-79).

On December 17, 1970, in the BRIEF IN SUPPORT

OF THE MOTIONS OF PROVIDENCE HOSPITAL TO

DISMISS AND TO STAY, Providence raised the dis-

pute settlement procedure of the General Conditions

in support of Providence’s motion to dismiss and stay

Manhattan's cross-claim against Providence (Deci-

sion, App. 26a). Argument in the BRIEF IN SUPPORT

OF THE MOTIONS OF PROVIDENCE HOSPITAL TO

DISMISS AND TO STAY concerning Manhattan is

reproduced in the Appendix hereto, page 70a, infra.

Providence argued that the General Conditions

provided for arbitration of disputes between

Providence and Manhattan such as the emergency

generator system dispute, that Manhattan’s damages

2 .- LIT

6

(if any) could have been mitigated or avoided by

prompt demand for arbitration, and that the cross-

claim should be dismissed because the General Con-

ditions provided a complete and reasonable means to

resolve such disputes, which “ ‘must be exhausted

before relief is sought in the courts’ ’, quoting United

States v. Blair, 321 U.S. 730, 736. Providence cited Unit -

ed States v. Joseph A. Holpuch Co., 328 U.S. 234, 240 to

the effect that, if a contractor fails to exhaust his con-

tractual dispute settlement procedures, the court is

then obligated to outlaw his cleims, whatever may be

their equity. To do otherwise is to rewrite the con-

tract.’ Providence also raised Paragraph 31(c) of the

General Conditions, which provided for equitable ad-

justment for “delays in the completion of the work due

to.. . acts of the Owner” in that “the Architect. . shall

ascertain ... the extent of the delay and extend the

time for completing the work” and argued that the con-

tractual provision for extension of time on account of

delays by the owner precluded any right of the con-

tractor to collect damages for such delays, under Unit-

ed States v. Rice, 317 U.S. 61.

On December 22, 1970, the District Court granted

Providence’s December 16, 1970, motion to dismiss the

complaint of Ernst as to Providence (A. Docket En-

tries, p. 2). On January 11. 1971, Manhattan filed its

FIRST AMENDED ANSWER AND CROSS-CLAIM;

on January 13, 1971, Providence moved to dismiss the

cross-claim of Manhattan against Providence, as

amended January 11. 1971, for failure to state a claim

(A. 90-91).

On January 15, 1971, the District Court held the

Providence motion to stay of December 16, 1970, moot

(A. Docket Entries, p. 2).

7

On January 27, 1971, Manhattan filed its SECOND

AMENDED ANSWER AND CROSS-CLAIM which

again amended the cross-claim against Providence,

set forth the arbitration provision of the General Con-

ditions and alleged (incorrectly) that Manhattan had

demanded arbitration of the decision of the architect

not to accept the proposed emergency generator and

damages for delay, and further alleged (incorrectly)

that “Providence and McCauley refused to arbitrate”

(A. 94-98). In fact, no demand for arbitration was ever

filed (Decision, App. 26a, n. 38).

On February 4, 1971, after 5 days of testimony pre-

sented by Ernst and Fairbanks on the sufficiency of

the emergency generator, the District Court held that

the Fairbank’s emergency generator failed to meet

the requirements of the specifications.” (Finding 5,

App. 37a).

Manhattan amended its cross-claim against

Providence on May 17, 1971 (A. 106-09), July 30, 1971

(A. 113-33) and April 13, 1973 (A. 280-309). None of the

claims of Manhattan concerned the sewage ejection

problem (Finding 11, App. 40a-41a).

On October 22, 1971, Providence moved to dismiss

the claims of Manhattan against Providence, filed on

July 30, 1971, for failure to state a claim (A. 150).

On February 23, 1972, the District Court held

Providence’s January 13, 1971, motion to dismiss

claims of Manhattan moot (A. Docket Entries, p. 6). On

May 30, 1972, the District Court denied Providence’s

October 22, 1971, motion to dismiss the July 30, 1971,

claims of Manhattan (A. Docket Entries, p. 7).

On August 10, 1972, 19 months after tie District

Court had dismissed all Ernst claims against

Providence, the District Court allowed Ernst to amend

its complaint to claim $450,000 damages against

Providence (A. 168).

Providence answered the Manhattan cross-claims

of April 13, 1973, setting out the exclusivity of the dis-

pute settlement procedure as a remedy for Manhattan

against Providence, and setting out the effect of para-

graph 31(c) of the General Conditions in confining

Manhattan to an extension of the contract time as an

exclusive remedy for delays allegedly caused by

Providence (A. 309-52),

Providence made no claim against Manhattan for li-

quidated damages; such issue “was framed by the

[District] Court in its pretrial order” (Finding 11, I.

App. 41a; Finding 14, App. 42a). Providence did plead

over against McCauley for indemnification on the

claims asserted by Manhattan against Providence

(Finding 11, I, App. 41a). Providence participa‘ed in

discovery and in the trial in January and February,

1971, on the sufficiency of the emergency generator

while its motions to dismiss Manhattan's claims were

pending, and after Providence’s motions to dismiss

were denied. Providence counterclaimed against

Ernst and cross-claimed against Fairbanks, but not

against Manhattan. Providence had no arbitration

agreement with any party other than Manhattan.

On December 11, 1974, after a forty day trial which

commenced on August 6, 1973 (Finding 8, App. 38a),

the District Court, without specifying any reason, dis-

missed the claims of Ernst and Manhattan against

*

Providence for money damages (Conclusion of Law

13, App. 68a). The District Court charged Providence

with 65 days of delay in connection with the sewage

ejection system [which was not mentioned in any

pleading] (Finding 25, App. 44a-45a, and 29-1/2 days

delay in connection with the Palco light fixtures,

which was first mentioned in the cross-claim of

Manhattan filed January 27, 1971 (Finding 49, App.

49a-50a, A. 92-99) and held that Providence should not

deduct liquidated damages for such days of delay from

the amount due Manhattan (Finding 25, App. 44a-45a;

Finding 49, App. 49a-50a; Conclusion of Law 5, App.

67a). The District Court found that “Providence filed

motions to dismiss for failure to arbitrate certain of

the elements of controversy which were denied by the

Court” (Finding 126, App. 65a). The District Court did

not find that Providence failed to timely file such

motions or that such motions failed to raise the ar-

bitrability of Manhattan's claims against Provi-

dence. The District Court concluded

During the litigation the contention was

made by Providence that Manhattan's claim

should be held in abeyance or denied because

of failure to resort to arbitration. Providence's

entitlement to arbitration is permissive and

cannot operate to deny to a party its right to

present its claim in a court of law. A litigant

cannot fail to invoke permissive arbitration

provisions of a contract and then attempt to

advance this failure as a defense to claims

asserted against it. (Conclusions 8, App. 67a).

The Fifth Circuit affirmed the District Court's con-

clusion that Providence had waived arbitration,

although not because the arbitration was per-

missive’; but because Providence actively defended

10

the claims of Manhattan and Ernst and cross-claimed

against Ernst and Fairbanks for fraud associated with

the emergency generator, while Providence's motions

to dismiss or stay were pending or after they were de-

nied (Decision, App. 26a; Opinion on reh., App. 31a).

The Fifth Circuit, without specifying any reason, re-

versed the District Court's denial of Manhattan's

claim for damages against Providence, directing the

District Court to award Manhattan actual delay dam-

ages arising from Providence’s mistakes on the

sewage ejection and bedlight fixture problems” (Deci-

sion, App. 26a).

REASONS FOR GRANTING THE WRIT

A.

The Fifth Circuit So Far Departed From The

Accepted And Usual Course Of Judicial

Proceedings As To Call For An Exercise Of

This Court's Power Of Supervision.

This case exemplifies the continuing hostility of

some courts to arbitration and contractual substan-

tive remedies. See Kulukundis Shipping Co. v. Am-

torg Trading Corp., 126 F. ad 978, 982-85 (2d Cir. 1942).

1. The District Court's finding that Providence waiv-

ed its right to arbitration because of the failure of

Providence to invoke arbitration is in conflict with

Shanferoke C. & S. Corp. v. Westchester S. Corp., 293

U.S. 449, 453-54, adopting the rationale of Learned

Hand below, 70 F. d 297 at 299, as well as Genera!

Guar. Ins. Co. v. New Orleans General Agency, Ino.

427 F. ad 924, 928 (Sth Cir. 1970). The Fifth Circuit recog-

11

nized that Providence’s motion to dismiss raised the

exclusivity of arbitration (Decision, App. 26a), but

held that Providence waived its right to demand ar-

bitration by actively defending the claims of Manhat-

tan while such motions were pending and after they

were denied. The Fifth Circuit equates defending an

unfounded claim to “invoking ... litigation

machinery” (Opinion on reh., App. 32a). The General

Conditions make “the decision of the arbitrators. ..a

prior condition to any right of legal action (App.

2a). Under Alabama substantive law. submission

of disputes to arbitration ... must be complied with

before an action may be brought on the contract”

where, as here, arbitration was a condition precedent

to suit under the contract. Sims v. City of Birming-

ham, 254 Ala. 598, 610 (1950); see also Thompson v. St.

Louis-San Francisco Ry. Co., 113 F.Supp. 900

(N. D. Ala. 1953) (motion to dismiss granted). Certainly,

the Federal Arbitration Act, which expresses an over-

riding federal policy favoring arbitration by making

arbitration agreements enforceable, was not intended

to preempt state substantive law requiring arbitration

as a condition precedent to suit, and thereby to allowa

party to avoid contractually required arbitration.

2. The Fifth Circuit likewise displayed a similar

hostility to a contractual substantive limitation on the

remedy available. Paragraph 31(c) of the General Con-

ditions of the Providence — Manhattan contract limit-

ed Manhattan's remedy for delays caused by

Providence to an extension of the contract completion

time. The District Court so construed the Providence

— Manhattan contract, by granting Manhattan an ex-

tension of time (Conclusion 5, App. 67a) but denying

damages for delays caused by Providence (Conclusion

13, App. 68a). The Fifth Circuit vacated without ex-

planation (Decision, App. 26a), effectively rewriting

the Providence — Manhattan contract. Compare Unit-

ed States v. Joseph A. Holpuch Co., 328 U.S. 234, 240

(the “court is then obliged to outlaw his claims, what-

ever may be their equity. To do otherwise is to rewrite

the contract.)

3. The rationale of Crown Coat Front Co. v. United

States, 386 U.S. 503, 511-12, that a government con-

tractor must seek the relief provided for under the con.

tract or be barred from any relief in the courts”,

previously enunciated in United States v. Callahan

Walker Const. Co., 317 U.S. 56, 61; United States v.

Blair, 321 U.8. 730, 735; United States v. Joseph A.

Holpuch Co., 328 U.S. 234, 239-40; and applied to labor

agreements in Republic Steel Corp. v. Maddox, 379

U.S. 650, and the Steelworker Trilogy cases,’ appears

equally applicable to private construction contracts

providing their own remedies and forum.

4

, .

The Decision Of The Fifth Circuit Is In Con-

flict With The Decision Of Other Courts Of

Appeals.

J.

The Decision Below As To Waiver Of Arbitra-

tion Conflicts With A Decision Of The United

States Court of Appeals For The Sixth Circuit.

3 United Steelworkers of America v. American Mig. Co., 363 U.S.

United Steelworkers of America v Warrior and Gulf N Co.

8. 574, United of America v. Enterprise Whee!

Car Corp. 363 U.S. 583.

13

In Germany v. River Terminal Ry. Co., 477 F. ad 546

(6th Cir. 1973), (App. 73a), the Sixth Circuit held that a

motion to dismiss a cross-claim for failure to state a

claim upon which reiief could be granted” properly

raised arbitration and further held that waiver of an

agreement to arbitrate “may not be inferred from the

fact that a party does not rely exclusively on the ar-

bitration provisions of a contract, but attempts to meet

«l) issues raised in litigation between it and another

party to the agreement.” The extent of the conflict

between the Fifth Circuit and the Sixth Circuit is

evidenced by the refusal of the Sixth Circuit to allow

River Terminal to withdraw its arbitration defense on

appeal “in the interest of concluding the dispute as

rapidly as possible” because “the courts are con-

cerned that the salutary results of the policy ex-

pressed in the Federal Arbitration Act be realized.”

447 F.2d at 548 (App. 75a).

The Decision Below Conflicts With The Deci-

sion Of The United States Court of Appeals

For The Tenth Circuit As To The Deference To

Be Given Under Rule 52(a), F.R.Civ.P., To The

Construction Of A Purported “No Damage

Clause By The District Court.

The Fifth Circuit vacated without discussion the

decision of the District Court denying Manhattan

damages for delays caused by Providence (Decision,

App. 26a). The District Court granted Manhattan an

extension of contract completion time for such delays

(Conclusion 5, App. 67a), but denied damages (Conclu-

sion 13. App. 68a).

14

The District Court implicitlys found that the

Providence — Manhattan contract contained a no

damage clause limiting Manhattan's remedy for

delays caused by Providence to contract time exten-

sion. Paragraph 31(c) of the Genera! Conditions of the

Providence — Manhattan contract is substantial

evidence upon which the District Court could make

such a finding. See United States v. Rice, 317 U.S. 61;

United States v. Howard P. Foley Co., 329 U.S. 64.

The Fifth Circuit gave no deference to the decision of

the District Court construing the Providence —

Manhattan contract to contain a no damage” clause,

as the Fifth Circuit likewise made no reference in

another portion of the decision below to the similar

decision of the District Court construing the Manhat-

tan — Ernst contract to contain a no damage” clause

(Decision, App. 12a-13a). The Fifth Circuit did not ap-

ply the “clearly erroneous” standard in review, which

is compelled by Rule 52(a), F.R.Civ.P.

The failure of the Fifth Circuit to give Rule 52(a) def-

erence is directly contrary to the decision of the Tenth

Circuit in Burgess Const. Co. v. M. Morrin & Son Co.,

Inc., 526 F. ad 108 (10th Cir. 1975), (App. 76a). The Tenth

Circuit in affirming the district court's construction of

a no damage” clause in Burgess Const. Co. held the

standard of review to be whether the decision was

“clearly erroneous” 526 F. ad 108. 115( 1975), (App. 83a).

4 As the Fifth Circuit has in United States v Second

National Bank of North Miami, 502 F.2d 536, % (Sth Cir. 1974)

implicit findings are nevertheless entitled to Rule 52(a) deference

—

_

—

15

CONCLUSION

For these reasons, a writ of certiorari should issue to

review the judgment and opinion of the Fifth Circuit.

Respectfully submitted,

Willis C. Darby, Jr.

Council for Petitioner

Post Office Box 2565

Mobile, Alabama 36601

PROOF OF SERVICE

I, Willis C. Darby, Jr., the attorney for Providence

Hospital, the petitioner herein, and a member of the

Bar of the Supreme Court of the United States, hereby

certify that on the 12th day of December, 1977, I served

copies of the foregoing Petition for a Writ of Certiorari

to the United States Court of Appeals for the Fifth Cir-

cuit on the several parties thereto by mailing copies in

duly addressed envelopes, with first class postage

prepaid to their respective attorneys of record as

follows:

Attorneys for E. C. Ernst, Inc.

Glower W. Jones, Esquire

SMITH, CURRIE & HANCOCK

2600 Peachtree Center, Harris Tower

233 Peachtree Street, N. E.

Atlanta, Georgia 30303

16

Arthur S. Friedman, Esquire

FRIEDMAN & GASS

99 Park Avenue

New York, New York 10016

Attorney for Manhattan Construction Company of

Texas

David M. Thornton, Esquire

1111 Mid-Continent Building

Tulsa, Oklahoma 74103

Attorneys for Charles H. McCauley Associates,

Inc.

Maurice Bishop, Esquire

BISHOP & CARLTON

_ 327 Frank Nelson Building

Birmingham, Alabama 35203

Clarence V. McDorman, Esquire

LONDON, YANCEY, CLARK & ALLEN

2100 First National Southern

Natural Gas Building

Birmingham, Alabama 25203

Attorney for Fairbanks-Morse, Inc.

Louis E. Braswell, Esquire

Post Office Box 123

Mobile, Alabama 36601

Willis C. Darby, Jr.

Attorney for Providence

Hospital

Post Office Box 2565

Mobile, Alabama 36601

APPENDIX

Excerpts from the General Conditions ........

United States Code, Title 9 §§2, 3. ............

Decision of Court of Appeals ..................

Decision of Court of Appeals on rehearing.....

Decision of United States District Court ......

Excerpt from Brief In Support of the Motions

of Providence Hospital to Dismiss and to

D ̃ D: .. .

Opinion in Germany v. River Terminal Ry.

R ]˙ üN—ʃ—̃ ̃ . ¼—̃—w“]

Opinion in Burgess Construction Co. v. M.

e d ek cenens

Judgment of the Court — er. eee

.. 30a

. . 73a

.. 76a

la

APPENDIX

EXCERPTS FROM GENERAL CONDITIONS

(THE GENERAL CONDITIONS ARE IN EVIDENCE

AS A PART OF PROVIDENCE EXHIBIT 2; THE

GENERAL CONDITIONS ARE REPRODUCED IN

THE APPENDIX AT PP. 57-65).

[A.57]

PHS-143 Form Approved

Rev. 5-64 Budget Bureau No. 68-R-312

GENERAL CONDITIONS

* + *

[A. 58] 5. Supervision. — All work shall be done un-

der the supervision of the Architect designated by the

Owner. The Architect shall determine the amount.

quality, acceptability, and fitness of all parts of the

work, shall interpret the Specifications, Contract

Documents, and any Extra Work Orders, and shall

decide all other questions in connection with the work.

The Architect shall have no authority to approve or

order changes in the work which alter the terms or

conditions of the contract. Upon request, the Archi-

tect shall confirm in writing any oral order, direction,

requirement, or determination.

6. Architect’s Decisions. — (a) It shall be the

responsibility of the Architect to make written

decisions in regard to all claims of the Owner or Con-

tractor and to interpret the Contract Documents on all

questions arising in connection with the execution of

the work.

2a

(b) Except as otherwise specified, all the

Architect's decisions or interpretations of contract re-

quirements are subject to arbitration.

(c) If the Architect fails to make a written deci-

sion or written interpretation of the contract require-

ments on any question within ten days after written

request for same by either party to the contract, either

party may then demand arbitration, in which event

later decision by the Architect shall not stop the ar-

bitration proceedings except with the mutual consent

of both parties to the contract.

7. Arbitration. — (a) It is mutually agreed that all

disputes arising in connection with this contract shall

be submitted to arbitration in accordance with the

provisions of the current standard Form of Arbitra-

tion Procedure of the American Institute of Archi-

tects and that all findings of fact by the arbitrators un-

der this agreement shall be conclusive and binding on

both parties. It is further mutually agreed that the

decision of the arbitrators shall be a prior condition to

any right of legal action which either party to thecon-

tract may have against the other.

(b) The work under this contract shall not be

stopped or delayed in any way during the arbitration

proceedings except by written mutual consent of both

parties to the contract, and such mutual consent shall

stipulate whether extension of the time for completion

of the contract will be authorized by such stoppage or

delay.

(c) Demand for arbitration in connection with

any dispute shall be filed in writing with the Archi-

3a

tect and with the other party to the contract. Any de-

mand for arbitration shall be made within thirty days

after the dispute has arisen if practicable, but, in any

event, no demand for arbitration shall be made after

the date of final payment except in the case of adispute

arising in connection with any guarantee provisions

of the Contract Documents.

(d) The arbitrators hereunder shall have

authority to award to the party whose contentions are

approved as being in conformity with contract re-

quirements such sums as they, or a majority of them,

consider is proper to compensate the injured party for

any loss in connection with the proceedings; and, if

they find that the arbitration proceedings were

demanded without ſeasonable cause, they may in

addition award th jured party damages for delay,

unless precluded by agreement between the contract-

ing parties before arbitration. The arbitrators shall set

their own compensation and determine the total

amount of such compensation and other costs and ex-

penses of the proceedings incurred by them, unless

otherwise agreed prior to the proceedings, and shall

assess the total of the costs of the proceedings upon

either or both parties to the contract in such propor-

tions as they, or a majority of them, may approve.

[A. 61] 31. Owner's Right To Stop Work or Ter-

minate Contract; Delays, Damages. — (a) If (1) the

Contractor shall be adjudged bankrupt or make an

assignment for the benefit of creditors, or (2) a

receiver or liquidator shall be appointed for the Con-

tractor or for any of his property and shall not be dis-

4a

missed within 20 days after such appointment, or the

proceedings in connection therewith shall not be

stayed on appeal within the said 20 days, or (3) the

Contractor shall refuse or fail, after Notice of Warn-

ing from the Architect, to supply enough properly

skilled workmen or proper materials, or (4) the Con-

tractor shall refuse or fail to prosecute the work or any

part thereof with such diligence as will insure its com-

pletion within the period herein specified (or any duly

authorized extension thereof) or shall fail to complete

the work within said period, or (5) the Contractor shall

fail to make payments as specified to persons supply-

ing labor or materials for the work, or (6) the Contrac-

tor shall fail or refuse to regard laws, ordinances, or

the instructions of the Architect or otherwise be guilty

of a substantial violation of any provision of this con-

tract, then, and in any such event, the Owner, upon the

certificate of the Architect that sufficient cause exists

to justify such action, and without prejudice to any

other rights or remedy he may have, may by 10 days

notice to the Contractor, terminate the employment of

the Contractor and his right to proceed, either as to the

entire work or (at the option of the Owner) as to any

portion thereof as to which delay shall have occurred,

and may take [A. 63] possession of the work and com-

plete the work by contract or otherwise, as the Owner

may deem expedient. In such case the Contractor shall

not be entitled to receive any further payment on that

work until the work is finished. If the unpaid balance

of the compensation to be paid the Contractor here-

under shall exceed the expense of so completing the

work (including compensation for additional

managerial, administrative, and inspection services

and any liquidated damages for delay), such excess

shall be paid to the Contractor. If such expense shall

exceed such unpaid balance, the Contractor and his

5a

sureties shall be liable to the Owner for such excess. If

the right of the Contractor to proceed with the work is

so terminated, the Owner may take possession of and

utilize in completing the work such materials, sup-

plies, plant, and equipment as may be on the site of the

work and necessary therefor. The expense incurred by

the Owner as herein provided, and the damage in-

curred through the Contractor's default, shall be cer-

tified by the Architect.

(b) Ifthe Owner does not terminate the right of

the Contractor to proceed, the Contractor shall con-

tinue the work, in which event the Contractor shall

pay to the Owner as fixed, agreed, and liquidated dam-

ages for each calendar day of the delay until work is

completed or accepted the amount as set forth in the

General Requirements section of the specification and

the Contractor and his sureties shall be liable for

the amount thereof.

(c) Provided that the right of the Contractor to

proceed shall not be terminated, or the Contractor

charged with liquidated damages because of any

delays in the completion of the work due to unfore-

seeable cause beyond the control and without the fault

or negligence of the Contractor including, but not re-

stricted to, acts of God or of the public enemy, acts of

the Government, acts of the Owner, acts of another

contractor in the performance of a contract with the

Owner, fires, floods, epidemics, quarantine restric-

tions, strikes, freight embargoes, and unusually

severe weather, or delays of subcontractors due to

such causes, if the Contractor shall, within ten days

from the beginning of any such delay (unless the

Owner shall grant a further period of time prior to the

date of final settlement of the contract) notify the

Owner in writing through the Architect of the causes

of delay, who shall ascertain the facts and the extent of

the delay and extend the time for completing the work

when in his judgment the findings of fact justify such

an extension, and his findings of fact thereon shall be

final and conclusive on the parties hereto, subject only

to arbitration as specified herein.

TITLE 9

ARBITRATION

§ 2. Validity, irrevocability, and enforcement of

agreements to arbitrate

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusal to perforin the whole or any part thereof, or an

agreement in writing to submit to arbitration an ex-

isting controversy arising out of such a contract,

transaction, or refusal, shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or

in equity for the revocation of any contract.

July 30, 1947, c. 392, 61 Stat. 670.

7a

§ 3. Stay of proceedings where issue therein

referable to arbitration

If any suit or proceeding be brought in any of the

courts of the United States upon any issue referable to

arbitration under an agreement in writing for such ar-

bitration, the court in which such suit is pending, upon

being satisfied that the issue involved in such suit or

proceeding is referable to arbitration under such an

agreement, shall on application of one of the parties

stay the trial of the action until such arbitration has

been had in accordance with the terms of the agree-

ment, providing the applicant for the stay is not in

default in proceeding with such arbitration.

July 30, 1947, o. 392, 61 Stat. 670.

§ 4. Failure to arbitrate under agreement; petition to

United States court having jurisdiction for

order to compel arbitration; notice and service

thereof; hearing and determination

A party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agree-

ment for arbitration may petition any United States

district court which, save for such agreement, would

have jurisdiction under Title 28, in a civil action or in

admiralty of the subject matter of a suit arising out of

the controversy between the parties, for an order

directing that such arbitration proceed in the manner

provided for in such agreement. Five days’ notice in

writing of such application shall be served upon the

party in default. Service thereof shall be made in the

manner provided by the Federal Rules of Civil

Procedure. The court shall hear the parties, and upon

being satisfied that the making of the agreement for

arbitration or the failure to comply therewith is not in

issue, the court shall make an order directing the par-

ties to proceed to arbitration in accordance with the

terms of the agreement. The hearing and proceedings,

under such agreement, shall be within the district in

which the petition for an order directing such arbitra-

tion is filed. If the making of the arbitration agreement

or the failure, neglect, or refusal to perform the same

be in issue, the court shall proceed summarily to the

trial thereof. If no jury trial be demanded by the party

alleged to be in default, or if the matter in dispute is

within admiralty jurisdiction, the court shall hear and

determine such issue. Where such an issue is raised,

the party alleged to be in default may, except in cases

of admiralty, on or before the return day of the notice of

application, demand a jury trial of such issue, and

upon such demand the court shall make an order re-

ferring the issue or issues to a jury in the manner

provided by the Federal Rules of Civil Procedure, or

may specially call a jury for that purpose. If the jury

find that no agreement in writing for arbitration was

made or that there is no default in proceeding there-

under, the prooseding shall be dismissed.If the jury

find that an agreement for arbitration was made in

writing and that there is a default in proceeding there-

under, the court shall make an order summarily

directing the parties to proceed with the arbitration in

accordance with the terms thereof.

July 30, 1947, c. 392, 61 Stat. 671; Sept. 3, 1954, c. 1263,

§ 19, 68 Stat. 1233.

E. C. ERNST, INC. „ MANHATTAN CONST. CO. OF TEXAS 3040

E. C. ERNST, INC., Plaintiff-Appellant

Appellee.

*

MANHATTAN CONSTRUCTION cox.

PANY OF TEXAS, Providence Hospi-

tal, Fairbanke-Morse, Inc., Charles H.

McCauley Associates, Inc, Defend-

ante-Appellees Appellants.

No. 75-1794.

United States Court of Appeals,

Fifth Cireuit.

May 9, 1977.

Parties to a diversity action arising

cuit Judge, held, inter alia, that the sub-

contractor was uded from recover

ing from the because of the

2. Contracts =299%(2)

Subcontractor on hospital construc-

tion project was precluded by “no dam-

age clause in subcontract from recover-

ing from contractor for delays encoun-

tered in work.

3. Contracts @=299(2)

Construction contractor did not

waive its defenses under “no damage”

clause of subcontract by breaching

agreement to assert subcontractor’s

claims for delay damage caused by own-

er or any subcontractor to extent per-

missible under contractor's contracts

with such parties.

delay damages from owner by virtue of

owner's alleged abortive attempt to

change to gravity sewage ejection sys-

tem after contractor had begun work on

10a

47 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

delays in its performance attributable to

such negligence of architect.

7. Arbitration @=47

Owner's architect on hospital con-

struction project was not immune from

liability for delays caused by it by virtue

of its arbitral/quasi-judicial functions

under such contract where its inaction

could fairly be characterized as delay or

failure to decide rather than timely deci-

sion-making.

8. Damages @ 140

Evidence in suit arising out of hospi-

tal construction project supported trial

court's action in awarding subcontractor

$61,626.12 actual damages against suppli-

er of generator system, calculated as dif-

ference between subcontractor's price to

contractor for obtaining and installing

supplier's generator system and contrac-

tors replacement cost in purchasing and

installing substitute system. Code of

Ala, Tit. TA, § 2 71 la)

9. Sales 4119)

Where electric generator supplied to

subcontractor in hospital construction

project proved defective, subcontractor

had contractual claim against supplier

for damages for delay sustained by sub-

contractor as result of such defective

generator.

10. Damages 94

Fact finder is not required to con-

sider wealth of defendant as paramount

in determining amount of punitive dam-

ages to be awarded; his decision to

award such damages should be based on

enormity of wrong and necessity of pre-

venting similar wrongs.

11. Fraud 1

Trial court, in awarding punitive

damages to construction subcontractor

against supplier for supplier's fraud with

respect to generator furnished to subcon-

tractor, did not err in focusing on cost of

generator rather than on supplier's net

12. Indemnity 92)

General rule is that indemnification

agreements contemplate payment for at-

torney fees incurred in litigation with

third parties concerning matter indemni-

fied against, regardiess of whether they

say 80, inclusion of attorney fees is pro-

sumed to have been intent of drafter

—_ agreement explicitly says other-

wise.

13. Indemnity @=9(2)

Where supplier agreed with con-

struction subcontractor to indemnify

subcontractor against all liabilities for

damages or injuries incurred by it, and

for its costs, resulting from supplier's

failure to make timely delivery of speci-

fied materials, subcontractor could recov-

er from supplier all the attorney fees

that it could show were related to its

litigation relating to delays caused by

defective generator obtained from sup-

plier; subcontractor was not entitled to

recover fees expended in pursuit of delay

damages against supplier itself.

14. Damages @*79(1), 80(1)

Liquidated damage provisions in

contracts are enforceable under Alabama

law as long as contractual stipulation is

reasonable and measure of damages at

time of contract was conjectural and un-

certain.

15. Contracts @=300(3)

Under Alabama law, owner was en-

titled to liquidated damages for delay in

completion of construction contract de-

spite fact that it contributed to such de-

= itself. Code of Ala, Tit. TA, 6 2

18.

16. Arbitration o=23.3

Where owner liquidated claims aris-

ing out of construction contract for two

112

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 3048

and one-half years without raising con-

tractor’s failure to pursue arbitration

provisions of contract, owner waived

right to demand arbitration. 9 U.S. C. A.

let seq., 3.

17. Negligence 54

Contractor on hospital construction

project was entitled to recover from

owner's architect for actual delay dam-

ages arising from architects defective

plane and specifications regarding gener-

ator system, as well as architect's pro-

crastinations in ruling on supplier's sub-

mittals for that system.

18. Federal Courts 869

Trial court was not clearly erroneous

in finding, in suit under contract for con-

struction of hospital, that contractor did

not make out case of fraud by subcon-

tractor regarding generator submittals.

19. Fraud 25901)

Where trial court found that subcon-

tractor’s supplier was guilty of fraud in

its representations concerning electrical

generator’s agility to comply with con-

tract specifications, contractor was enti-

tled to recover actual damages from sup-

plier for such fraud, if it could prove

them. Code of Ala., Tit. 7, § 107 et seq.

20. Damages 268

Construction contractor's claims for

damages for delay in contract for con-

struction of hospital were too uncertain

in amount to qualify for allowance of

prejudgment interest. 28 U.S. C. A.

§ 1961.

21. Contracts 32200

Trial eourt's finding that contractor

in hospital construction project had

failed to coordinate work, leading to liq-

uidated damages for delay to owner, was

not clearly erroneous.

22. Fraud 25801)

Owner was not entitled to recover

damages from subcontractor’s supplier

for latter's proven fraud in generator

submittals under hospital construction

contract where it proved no damages

other than delay, for which it had al-

ready been compensated by supplier

through contractor, and where it had ac-

quired substitute generator.

Appeals from the United States Dis-

trict Court for the Southern District of

Alabama.

Before GODBOLD, McCREE®* and

TJOFLAT, Circuit Judges.

GODBOLD, Circuit Judge:

This complex diversity case arises

from a series of disputes concerning dif-

ficulties encountered during construction

and renovation of a hospital at Mobile,

Alabama. The parties are Ernst, an

electrical subcontractor on the project;

Providence Hospital, the owner; McCau-

ley, the architect; Manhattan, the gener-

al contractor; and Fairbanks-Morse,

Ernst's electrical supplier. After more

than four years of proceedings and a

40-day bench trial, the district court en-

tered its ‘engthy opinion, 387 F.Supp.

1001 (S.L.Ala.1974).

I. Ernst s claim for damages

Ernst’s principal ground for appeal is

the refusal of the district court to award

it damages for delays on the Job caused

by the other four parties’ breaches of

their respective duties to Ernst. These

other parties have paid Providence for

* Judge McCree, of the Sixth Circuit, participated in the oral argument of this case, but did

not participate in this decision.

12a

3049 E. C. ERNST, INC. ». MANHATTAN CONST. CO. OF TEXAS

delays. But they have not paid damages

claimed by Ernst.

A. Ernst s claims against Manhattan

The district court held that Manhat-

tan's failure properly to coordinate and

supervise the activities on the jobsite vi-

olated paragraph 21(c) of the general

conditions of its contract with Provi-

dence, that Manhattan assumed the re-

sponsibility for delays by other subcon-

tractors (as well as its own) under para-

graph 21(b) of the general conditions,

that it failed to schedule double shifts

once delay had set in and thereby

breached the “general requirements” of

that contract, and that it failed to sched-

ule work properly, also in violation of

the general requirements.

{1} Ernst claims that it is entitled to

damages for these delays caused by

Manhattan. Manhattan points to the

following provision of its contract with

Ernst: N

An extension of time for the comple-

tion of this contract is hereby granted

to [Ernst] for a period equal to any

delay caused by MANHATTAN CON-

STRUCTION COMPANY. Such ex-

tension of time shall be in lieu of and

in full satisfaction of any and all

claims whatsoever of [Ernst] against

the MANHATTAN CONSTRUCTION

COMPANY.

This is a reformulation of the common

“no damage” clause in construction con-

tracts whereby one party contractually

limits its own liability for delay dam-

1. The choice of law rules of Alabama apply.

Klaxon Co. v. Stentor Elec. Mfg. Co, 313 U.S.

487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Al-

though it is unclear from the record where the

subcontract was made, this is irrelevant. The

validity of contractual provisions is generally

governed by the law of the place of making,

but the law of the place of full performance

ages. Although the Alabama! courts

have, not ruled on the validity of such

provisions, their validity is now well es-

tablished. See generally Peter Kiewit

Sons Co. . lowa Southern Utilities Co..

355 F.Supp. 376. 396 401 (S.D.lowa

1973).2 Given their harsh effect, courts

will strictly construe such provisions but

generally enforce them absent delay (1)

not contemplated by the parties under

the provision, (2) amounting to an aban-

donment of the contract, (3) caused by

bad faith, or (4) amounting to active in-

terference. Id. at 397. Ernst claims

none of these exceptions, and the delay

by Manhattan does not fit any of them.

{2} Manhattan’s failure to grant

Ernst a time extension was not the

breath of a condition precedent to Man-

hattan’s invoking the “no damage”

clause. The clause makes no reference

to any such requirement for formally

granting an extension; the language “an

extension of time is hereby

granted” seems to suggest the opposite.

The purpose for such a provision would

be to assure Ernst that Manhattan (or

those upstream from Manhattan) would

not sue Ernst for Manhattan's own de-

lays. No one in this case has charged

Ernst for those delays; Manhattan has

already been charged for them under the

liquidated damage formula.

{3} Ernst also claims that Manhat-

tan's failure to comply with a separate

contractual provision operates to negate

the effect of the “no damage” clause.

This separate clause appears to be an

governs where it diffeya from the former. J

R. Watkins Co. » Hill, 214 Ala. 507, 108 So.

244 (1926); accord, First Nat'l Life Ins. Co. v

Fidelity 4 Deposit Co. 525 F.2d 966 (CA5,

1976) (Alabama law).

2. See also cases cited in Annot., 10 A.L.R.2d

801 (1950).

13a

E. C. ERNST, INC. . MANHATTAN CONST. CO. OF TEXAS 3050

agreement by Manhattan to assert

Ernst's claims for delay damage caused

by Providence or any subcontractor, to

the extent permissible under Manhat-

tan's contracts with those parties. We

are not persuaded that the consequences

of breaching this obligation should in-

clude a waiver of the “no damage” de-

fense, which concerns damages for Man-

hat tan s delays.

B. Ernst s claims against Providence

4] Ernst claims damages for the re-

sults of several mistakes made by Provi-

dence on the job. The district court

found that Providence could not recover

liquidated damages for the entirety of

the delay on the job because Providence

had itself created some of the overall

delay by an abortive attempt to change

to a gravity sewage ejection system af-

ter Manhattan had begun work on a

pump system (65 days delay) and by a

refusal! to accept Palco lighting fixtures

in violation of federa! regulations incor-

porated into the contract (29% days).“

Ernst seeks to parlay these findings into

a recovery for itself against Providence,

pointing out that its “follow-on” electri-

cal work was inevitably delayed to its

damage by these same actions.

In order to establish that these actions

breached some duty to it established by

Alabama law, see Twine v. Liberty Na-

tional Life Insurance Co., 294 Ala. 43,

311 So.2d 299, 302 (1975), Ernst asserts a

third-party beneficiary theory, citing

3. Ernst incorrectly includes in the delays at-

tributable to Providence an additional 39-day

period of delayed access by Manhattan to the

old operating room area for renovation work.

The district court found that the old operating

area “had necessarily been kept in operation

until occupancy of the new operating area.”

387 F.Supp. at 1010 This delay was not a

default on Providence s part.

cases imposing owner-gencral contractor

duties and general contractor-subcon-

tractor duties. None of these cases im-

poses a theory of owner-subcontractor

duty. We turn elsewhere in the law of

Alabama to determine the validity of

third-party beneficiary liability on the

facts of this case.

The Alabama courts have made it

clear that one not a party to a contract

cannot generally sue for its breach.

Twine, supra; Watson v. Mills, 275 Ala.

176, 153 So.2d 612 (1963); Land Title

Guaranty Co. v. Lynchburg Foundry Co.,

80 So. 142 (Ala.App.1918). The Alabama

Supreme Court has indicated that the

well-established judge-made requirement

of vertical privity for manufacturers’ lia-

bility should not be overturned except by

legislative act. Compare Harnischfeger

Corp. v. Harris, 280 Ala. 93, 190 S0. 24

286, 290 (1966), with Bishop v. Faroy

Sales, 336 So.2d 1340 (Ala.1976) (Ala-

bama version of UCC 2 318 abolishes

vertical privity). We think judicial def-

erence is equally applicable in the area

of construction contracts.

Third parties may sue on the contract

if the provision is intended for their di-

rect, as opposed to incidental, benefit.

See, C. g., Anderson v. Howard Hall Co.,

278 Ala. 491, 179 So.2d 71 (1965); accord,

Burgreen Contracting Co. v. Goodman,

55 Ala.App. 209, 314 So.2d 284, petition

for cert. stricken, 294 Ala. 199, 314 So.2d

296 (1975). The duties to Manhattan

that Providence breached (the provision

4. The UCC, Ala Code tit. 7A (1966 Recomp.),

does not govern the Providence-Manhattan

construction contract. Ernst's contract to sup-

ply and install electrical equipment may make

it a seller of goods under id. §§ 2 102 and

-106. See Port City Constr. Co. v. Henderson,

48 Ala.App. 639, 266 So.2d 896 (1972). But

Ernst's capacity is irrelevant to the nature of

Providence’s contract with Manhattan.

14

3051 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

for a sewage ejection pump and an

agreement to accept electrical wall fix-

tures of equal quality” to Sunbeam fix-

tures) were not intended for the direct

benefit of the electrical subcontractor

Ernst. In a large construction project

each of the individual contracts is inevi-

tably intertwined with many others, all

devoted to the general goal of finishing

all phases of the project according to the

plans and specifications drawn up by the

architect and within the time period es-

tablished under the prime contract. See

E C. Ernst, Inc. v. General Motors Corp.

482 F.2d 1047, 1055 (CA5 1973). But this

interrelationship by itself does not justi-

fy imposing third-party beneficiary

duties, which flow not from the inevita-

ble consequences of a breach but rather

from the intent of the contracting par-

ties“ Here the agreement stated in

J 21a) of the general conditions that

“(njothing contained in the specifications

or drawings shall be construed as creat-

ing any contractual! relationship between

any subcontractor and the Owner.” See

4 A. Corbin, Contracts § 77, at 2

(1951):

intent requirement is best illustrated by the

type of relationship that does give rise to

party beneficiary liability. This is the

+

*

171

ari

u

16 So.2d 100 (1943).

specifications were found

oe

8

ra

7

3

2 k

i

if

ti

i

5

|

|

:

{I}f two contracting parties

expressly provide that some third par-

ty who will be benefited by perform-

ance shall have no legally enforceable

right, the courts should effectuate the

expressed intent by denying the third

party any direct remedy.

Ernst's effort to proceed against Provi-

dence on a third-party berieficiary basis

must fail.

C. Ernst's claim against McCauley

Is] The district court found that

McCauley, the architect for Providence,

was responsible for (1) refusing to ap-

prove the Palco bedlight fixture applica-

tion and (2) for the emergency generator

system, (a) drawing faulty

specifications“ and (b) failing promptly

to act on submittals.’ Neither the own-

er-architect agreement nor the Provi-

dence-Manhattan contract made any ref-

erence to the measure of liability from

McCauley to Providence. However, the

district cour’ recognized that agents are

liable to their principals for their “defi-

ciencies” * and utilized against McCauley

the liquidated damage measure in the

charged it for delays in the emergency genera-

tor area actually caused by difficulties in hous-

ing the Caterpillar substitute. The court at-

tributed this portion of the delay to McCau-

ley’s defective specifications and charged

McCauley accordingly

7. e., matters referred to him, pursuant to

** 5-6 of the genera! conditions, for a decision

regarding their comphance with the plans and

specifications

. 387 F Supp. at 1928. 033 The court did not

indicate whether it held McCauley liable under

its contract with Providence or under princi-

ples of negligence Compare Daugherty v.

Gulf Shores Motel Inc. 292 Ala 252. 292

So.2d 454 (1974) (contract), with McPheeters

„ Heard. 332 So2d 733 (Ala.Civ.App.1976)

(negligence).

15a

E. C. ERNST, INC. „. MANHATTAN CONST. CO. OF TEXAS 3052

Providence-Manhattan contract because

McCauley was instrumental in including

this provision. 387 F.Supp. at 1033.“

Ernst seeks the benefit uf these findings,

claiming that the delays in these electri-

cal-oriented problems also delayed it.

Ernst claims that it is a third-party ben-

eficiary to the owner-architect agrev-

ment and reinvokes its earlier-dismissed

negligence argument as well.“

McCauley raises two different theories

that it argues prevent Ernst from recov-

ering. The first, and more broadsweep-

ing, of these challenges Ernst’s status as

a third-party beneficiary to the owner-

architect agreement. We have already

described the general rule in Alabama

concerning third-party rights under con-

tracts (in denying Ernst any rights un-

der the owner-<ontractor agreement).

Ernst may sue under the contract only if

the particular provision is intended for

its direct, as opposed to incidental, bene-

fit. The special role of an architect on a

construction project may call for third-

party beneficiary rights here, although

recent cases have specifically rejected

this idea. See, e. g. Detweiler Bros.,

Inc. v. John Graham & Co., 412 F.Supp.

9. This ruling has not been appealed. McCau-

ley’s two-paragraph cross-appea! asserts dif-

ferent grounds for reversal.

18. Ernst also claims that by purchasing a copy

of the plans and specifications prepared by

McCauley it stood in a contractual relationship

with McCauley and can sue for breach of an

ject it. McCauley prepared the plans for Prov-

idence, which paid valuable consideration for

them. Ernst needed them solely because its

subcontract with Manhattan required it to fol-

low them. Ernst could not be deemed a “pur-

chaser” from McCauley to which implied war-

ranties would run simply because it bought a

copy of a document incorporated by reference

in its own contract. Viewed in another light,

416 (E.D.Wash.1976); A. R. Moyer, Inc.

v. Graham, 285 So.2d 397 (Fla. 197g).

See generally Annot., 65 A.L.R.3d 249

(1975). We need not decide the difficult

question whether Alabama would depart

from this rule, for we agree with the

further holdings of the Moyer line of

cases that contsa.‘ual privity is unneces-

sary for recovery on a negligence theory.

As the subcontractor on the project re-

sponsible for the installation of these

two systems, Ernst surely falls within

the scope of the risk created by McCau-

ley’s actions.”

Is] As we have noted, the district

court characterized McCauley's delays as

“deficiencies.” The court did not specify

whether this meant that the firm had

failed to perform adequately under its

contract with Providence, that it had

failed to satisfy an objective standard of

care required under tort principles, or

both. Having ruled in favor of a theory

of recovery based upon negligence, we

have no difficulty in clarifying the dis-

trict court’s findings by deciding that

MeCauley's activities regarding its arbi-

tral responsibilities on the emergency

generator submittals constituted negli-

what Ernst bought was a copy and the sole

warranty was that it was a true copy of the

original.

11. The Moyer holding appears to have been

influenced by the fact that the particular

agreement involved was not part of the record.

(The case arose from certification by a panel

of this court.) While we have the advantage

that the Florida court did not. the McCauley-

Providence agreement sheds little light on the

subject.

12. McCauley insisted at oral argument that,

court absolved Ernst of any fault with respect

to the bedlight and generator matters under

consideration here. .

*

, |

16a

3053 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

gence as a matter of law. They rep-

resent a pattern of procrastination *

which, in view of the interdependence of

effort so vital on a construction project,

falls below the standard of care required

in this situation for professional archi-

tects. However, whether McCauley’s

erroneous rejection of Palco bedlight fix-

tures also constituted negligence is a

closer question that we cannot answer

from our appellate perspective. We

leave this determination for the district

court on remand. For similar reasons,

we remand the question of negligence

with respect to McCauley’s faulty plans

and specifications.

7] McCauley’s second line of defense

is more troublesome. It claims that it is

protected from liability for at least some

of its errors by the immunity granted to

architects in performing their arbi-

tral/ quasi- judicial functions. McCauley

makes this immunity argument despite

already having been found liable to

Providence below for the same errors

and having taken no appeal from that

general ruling."* Neither the record be-

low nor the district court’s opinion re-

veals whether or not McCauley asserted

the immunity unsuccessfully in that

court-constructed claim by Providence.

However, McCauley did raise this bar

against the claims of Ernst and Manhat-

13. The nature of McCauley's activities on the

job site is described in detail by the district

court in its findings of fact, 387 F.Supp. at

1018-26. We discuss the particulars of the

generator submittal problems beiow in dealing

with the immunity question.

14. Of course, the mere breach of one's con-

tract does not give rise to liability in tort,

which creates duties by operation of law that

are collateral to those created by agreement of

the parties C & C Prods. Inc. v. Premier

Indus. Corp. 290 Ala. 179, 275 So.2d 124, 130

(1972). See also Berry v. Druid City Hosp.

Bd., 333 So.2d 796 (Ala 1976), reviewed in 7

Cum.L.Rev. 355 (1976), accord, Horton v.

tan below, and it is entitled to a ruling

from this court, as we address these lat -

ter claims, regarding the validity and

scope of the immunity.

The leading Alabama case on immuni-

ty of architects as arbitrators is Wilder

v. Crook, 250 Ala. 424, 34 So.2d 832

(1948). The contractor sued the owner

(the city) and the engineer hired by the

owner to supervise the work, claiming

that the engineer’s ruling as to the con-

tractor’s responsibilities under the con-

tract was incorrect. State law required

that the contractor bring suit in the

county in which a “material defendant”

resided; thus, if the theory of recovery

against the engineer failed, suing in the

engineer’s county of residence would

have been improper. The contractor ar-

gued that the engineer “personally as-

sumed a duty under the [owner-contrac-

tor] contract.” But because the engineer

had acted pursuant to a contractual pro-

vision appointing him the arbiter of all

contractual disputes, the court held that

he enjoyed immunity:

By the terms of the contract R. L.

Kenan was placed in a position some-

what analogous to that of an umpire

or arbitrator. His decisions were ac-

cordingly judicial in nature. Under

the circumstances the authorities ap-

pear to hold that he could not be held

Northeast Ala. Regional Medical Center, Inc.,

334 So.2d 885 (Ala.1976). Here, however, we

have pretermitted whether there is a breach of

a contractual duty owed to Ernst. We reach

our finding of negligence without regard to the

terms of McCauley's contract with Providence.

15. See note 9, supra.

16. The district court framed Providence's

claim on its own through a pretrial order. The

court had previously ordered Providence to

pay over additional contract sums despite the

existence of legal disputes about the adequacy

of performance by various parties.

17a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 3054

liable in damages for failure to exer-

cise care or skill in the performance of

his functions. The same principle

seems to apply even where the deci-

sion is the result of fraud or corrup-

tion.

Id. at 834."

As in Wilder, the owner-contractor

agreement here provides for the archi-

tect’s ruling on questions of contract in-

terpretation:

It shall be the responsibility of the

Architect to make written decisions in

regard to all claims of the Owner or

Contractor and to interpret the Con-

tract Documents on all questions aris-

ing in connection with the execution

of the work.

General Conditions Ga). TVO of

McCauley’s “deficiencies” fit into this ar-

bitral / quasi- judicial category its rejec-

tion of the acceptability of Palco bed-

light fixtures and its long-term set of

rulings on the acceptability of the Fair-

banks emergency generator. However,

with respect to both of these matters,

the question is not the insulation of

McCauley from suit because of a decision

it made but, more accurately phrased, its

immunity from suit for failing, or delay-

ing, in making decisions.

The arbitrator's “quasi-judicial” immu-

nity arises from his resemblance to a

judge. The scope of his immunity

should be no broader than this resem-

blance. The arbitrator serves as a pri-

vate vehicle for the ordering of economic

relationships. He is a creature of con-

tract, paid by the parties to perform a

17. There is no indication that this rationale for

immunity would not extend to suits brought in

tort. indeed, the language “failure to exercise

care or skill seems to apply directly to Ernst's

negligence claim as well See also Broyles v.

duty, and his decision binds the parties

because they make a specific, private de-

cision to be bound. His decision is not

socially momentous except to those who

pay him to decide. The judge, however,

is an official governmental instrumental-

ity for resolving societal disputes. The

partics submit their disputes to him

through the structure of the judicial sys-

tem, at mostly public expen His deci-

sions may be glossed with public policy

considerations and fraught with the con-

sequences of stare decisis. When in dis-

charging his function the arbitrator re-

sembles a judge, we protect the integrity

of his decisionmaking by guarding

against his fear of being mulcted in

damages. Cf. Broom v. Douglass, 175

Ala. 268, 57 So. 860 (1912). But he

should be immune from liability only to

the extent that his action is functionally

judge-like.“ Otherwise we become mes-

merized by words.

In his role as interpreter of the con-

tract and as private decisionmaker, the

arbitrator has a duty, express or implied,

to make reasonably expeditious decisions.

Where his action, or inaction, cun fairly

be characterized as delay or failure to

decide rather than timely decisionmaking

(good or bad), he loses his claim to im-

munity because he loses his resemblance

to a judge. He has simply defaulted on

a contractual duty to both parties.

We are mindful of the problems of

characterization that may attend the dis-

tinction between delay in deciding and

bad judgment in the decision itself. The

idea of a misfeasance-nonfeasance di-

chotomy has been subject to question.

Brown Eng ring Co. 275 Ala 35, 151 So2d

767, 772 (1963).

18. See 6 C.J.S. Arbitration § 74. ai p. 289 & nn

15-16 (1975).

18a

3055 E. C. ERNST, INC. ». MANHATTAN CONST. CO. OF TEXAS

See W. Prosser, Torts § 56, at 339-40

(4th ed. 1971). But with respect to the

generator submittals here, the pattern

seems obvious. The tentative, incongru-

ous, and often contradictory nature of

McCauley’s actions constitutes a default

to all parties in the contractual sense

that we have described.

The tone of McCauley’s course of ac-

tion was set by its first step. Fairbanks’

initial application was met with the one-

sentence equivocal response that the

generator units were “approved provid-

ing that the requirements of the plans

and specifications are met. By Feb-

ruary 1969 McCauley had discovered the

foreign-manufacture problem. In April

it shifted its criticism to the problem of

available spare parts. It then shifted to

a complaint that the engines were not a

sta product and did not meet the

horsepower requirement. It then urged

resubmittal. In the view of the district

court, the result of this last action was

“to start the entire process over again

from the beginning at a time when con-

struction progress was already seriously

impeded.” 387 F.Supp. at 1021. After

it had rejected two more resubmittals,

McCauley wrote Manhattan in Septem-

ber 1969 asking for verified horsepower

tests. McCauley called a meeting at the

end of October, the result of which was

to ask for another submittal, this time

19. But cf. Berry v. Druid City Hosp Bd. 333

So.2d 796, 799-800 (Ala.1976) Shores & Al-

mon, JJ., with Embry, J., & Heflin, C J. con-

curring on this point). While its interpretation

is not free from doubt, Justice Shores’ dictum

in Berry has announced as a rule in Alabama

that one who clearly has a cause of action for

breach of contract can also recover in tort

only if the defendant's action can be character-

ized as misfeasance. Here. we view McCau-

ley’s action as nonfeasance and yet do not

disallow recovery based on negligence. But

Ernst has no separate contractual claim. Even

with a different engine. By now, Man-

hattan had become seriously concerned

about the delays resulting from McCau-

ley's failure to take definitive action.

Three times in December 1969 and Janu-

ary 1970 Manhattan wrote McCauley to

spur the latter to action. MeCauley's

failure to do anything prompted Manhat-

tan to request an unlimited extension of

the completion date because of this lack

of cooperation. Equivocation continued.

At a March 1970 meeting, McCauley

first said that it would accept the gener-

ator subject to tests, then agreed to ac-

cept ii prior to tests. Six days later,

McCauley changed its mind and disap-

proved the system. Even so, not until

May of that year did McCauley finally

ask for a new system, specifying the par-

ticular models that would be acceptable.

Throughout this entire time period

McCauley consistently failed to list its

reasons for disapprovals, a step which

could perhaps have been used to resolve

the growing impasse. This pattern of

action demonstrates a consistent failure

to make decisions in a way that could

enable construction to continue. Only

McCauley had the authority to make

these decisions, and it failed to fulfill

that responsibility. The resulting dam-

ages Ernst seeks here represent compen-

sation not for McCauley’s finally select-

ing a different generator system but

if it did, we think the cases that Justice Shores

relied upon in Berry make it clear that the rule

would not bar Ernst's recovery in tort here

See Old S. Life Ins. Co. v. Woodall, 295 Ala.

235, 326 So.2d 726 (1976); C & C Prods., Inc.

v. Premier Indus. Corp., 290 Ala. 179, 275

So. 2d 124 (1972). We understand these cases

to say that the breach of contract, without

more, cannot justify recovery in tort. See

note 14, supra. They do not deny the right to

a tort recovery here.

20. Manhattan Exh. 36.

19a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 3056

rather for this failure to decide. We

cannot extend the arbitral immunity to

such conduct.

We next examine McCauley’s claim of

immunity with respect to its rejection of

Palco bedlight fixtures." Here, the dis-

trict court found a pattern of action sim-

ilar to, though less drawn out than, its

response to the generator submittals.”

In characterizing McCauley’s activities,

we take care in distinguishing Provi-

dence’s decisions from MeCauley's re-

sponsibilities as arbitrator. Providence

made a decision in advance of bid sub-

missions that only Centron-5 fixtures

would do. This decision (a wrong one

for which Providence has been charged)

was different from the architect’s deci-

sion on subsequent submittals. With re-

spect to this responsibility, McCauley

never acted. “McCauley refused even to

look at a sample of the Palco fixture

delivered to its offices.” 387 F.Supp. at

1017. Later, each of the Palco sulmit-

tals was marked “disapproved for rea-

sons noted”; yet McCauley gave no such

reasons. Id While this failure to arbi-

trate is admittedly tied closely to Provi-

dence’s earlier affirmative decision to ac-

cept only Centron-5 fixtures, McCauley

had decisional! responsibilities subsequent

to this and independent of its status as

advisor to the owner. It failed to exer-

cise these responsibilities, and so here,

too, it cannot obtain immunity in dam-

ages. As noted above, we leave for the

district court the question whether this

“deficiency” constituted negligence.

21. The parties have not briefed the question of

the effect here of federal regulations requiring

competitive bidding. We decline to enter this

thicket on our own.

22. See 387 F.Supp. at 1017-18 (findings 47-

49).

23. We do not hold that architects-as-arbitra-

tors must issue satisfactory statements of rea-

Ernst’s claim that defects in MeCau-

ley’s generator plans and specifications

also contributed to its delays challenges

mistakes not even arguably made in the

capacity of arbitrator. We read Broyles

v. Brown Engineering Co., 275 Ala. 35,

151 So.2d 767 (1963), as imposing upon

architects drawing up plans and specifi-

cations not “a contract of guaranty or

insurance of favorable results,” id. at

771, but “a guaranty of reasonable re-

sults,” id. at 772. See Centraal Stikstof

Verkoopkanter, N.V. v. Walsh Stevedor-

ing Co., 380 F.2d 523, 529-31 (CA5 1967)

(interpreting Broyles). We interpret

this implied warranty under contract to

be equally applicable under negligence

claims. The facts of Broyles confirm

this view. The plaintiffs in that case

had failed to allege negligence, and the

court's opinion sought to protect them hy

finding a similar duty implied under the

contract:

Certainly a contracting party has a

right to expect the survey to be done

with reasonable accuracy chargeable

to the profession, and should not be

dependent in his effort to recover

damages on an allegation of negli-

gence or unskillful and imprudent

work.

151 So.2d at 772 (emphasis supplied).™

Again, if the district court finds on re-

mand that the “deficiencies” in the plans

and the specifications constituted negli-

gence, then Ernst is entitled to recover

for its delay damages attributable to this

particular act.

sons for their decisions in order to maintain

their immunity from suit. We point to this

action by McCauley only as evidence of its

failure to rule on the Palco submittals at all.

24. For a list of similar cases supporting liabili-

ty of architects to third parties for defects in

plans and specifications, see Annot., 65 A.L

R.3d 249 (1975).

3057 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

D. Ernst s claims for damages

from Fairbanks

Is] The court awarded Ernst $61,-

626.12 actual damages against Fairbanks

(in addition to a pass-through of liqui-

dated damages to Providence). This fig-

ure represents the difference between

Ernst's price to Manhattan for obtaining

and installing the Fairbanks generator

system and Manhattans replacement

cost in purchasing and installing the sub-

stitute Caterpillar- driven system. As

such, it is simply an indemnity to Ernst

for its payment of this same amount to

Manhattan.

Despite objections by both parties to

this figure, we uphold its propriety.

Ernst claims, in effect, that Fairbanks

should pay its installation fee. But

Ernst never installed anything Fair-

banks claims that $12,764.59 of the $61,-

626.12 figure is a windfall to Ernst. The

theory here is that Ernst should bear the

loss represented by Manhattan's installa-

tion expenses, since Fairbanks never con-

tracted to install a generator but only to

supply one. This seems a simple case of

requiring the breaching party in a con-

tract for the sale of goods to pay conse-

quential damages. Ala Code tit. 7A,

§ 2-71K2\a) (1966 Recomp.).

{9} Ernst claims in addition that

Fairbanks should pay its share of any

damages for the delay sustained by

Ernst as a result of the defective gener-

ator. We agree that Ernst has a con-

tractual claim against Fairbanks for this

consequence of the latter's breach. The

district court should determine the ex-

25. Manhattan also appeals from an identical

punitive damage award to « from Fairbanks.

adopting the arguments made by Ernst. Our

holding applies to both appeals.

tent of these delay damages actually

caused by Fairbanks.

{10,11} The district court also

charged Fairbanks with punitive dam-

ages for its fraud with respect to the

generator matter Ernst * appeals from

this award to it of $20,000 in punitive

damages on ground that the court fo-

cused too sharply on the cost of the gen-

erators rather than on Fairbanks’ net

worth. The factfinder is not required to

consider the wealth of the defendant as

paramount. His decision to award puni-

tive damages should be based on “the

enormity of the wrong and the necessity

of preventing similar wrongs.” Loch

Ridge Construction Co. v. Barra, 291 Ala.

312, 280 So.2d 745, 751 (1973). The dis-

trict court here recognized this principle

in observing generally that “the greater

the wrong the greater the damage.” 387

F.Supp. at 1031. The amount of puni-

tive damages was within the discretion

of the trier of the facts.

E. Problems of proof on remand

On remand the court will face the

question of whether Ernst has satisfacto-

rily proven that the extended time de-

voted by its personnel to this project has

resulted in financial loss“ We intimate

no view on this question. Ernst must

also prove to what extent the actionable

failings of Fairbanks and McCauley were

responsible for these alleged losses. Its

proof of the fact of loss should be meas-

ured against the “reasonably certain”

standard adopted in United Bonding In-

surance Co. v. W. S. Newell, Inc., 285

Ala. 371, 232 So.2d 616, 624 (1969). And

its proof of amount of loss, as well as

26. Because of its liquidated damage clause.

Providence did not confront this issue Ernst,

unhke Providence. has no time-based measure

of damages by which may automatically as-

sess and apporuon us damages.

21a

E. C. ERNST, INC. . MANHATTAN CONST. CO. OF TEXAS 3058

attribution to the above two causes,

should be governed by the “fair and rea-

sonable estimate” language cited in Ne-

well. The appellees argue for the appli-

cation of a nonapportionment rule, based

upon Kershaw Mining Co. v. Lankford,

213 Ala. 630, 105 So. 896 (1925). We see

the Kershaw rule as simply a refinement

of the general proposition in Alabama

that damage must be proven with rea-

sonabie certainty. See Mobile & O. R.

Co. v. Red Feather Coal Co., 218 Ala.

582, 119 So. 606, 609 (1928) (dictum) (cit-

ing Kershaw). Where the plaintiff does

present evidence of attribution to vari-

ous causes, he may recover under the

reasonable certainty standard. See Tan-

ner v. Case, 277 Ala. 641, 173 So.2d 803,

808 (1965).

Unlike the plaintiff in Kershaw, Ernst

faces four defendants all of whom to-

gether were in fact responsible for the

great majority of its damages. Each

seems to point its finger at the others.

Fairbanks, for example, claims that its

fraud caused no delays in the generator

installation because other pre-existing

delays were concurrent with its fraud.

In this context, the district court can, as

it did regarding Providence's claims, as-

certain Erust's total damages and then,

where there exists a legal duty to Ernst

as discussed above. allocate respective re-

sponsibilities for those damages based

upon reasonable certainty.

F. Ernst s claim for attorney's fees

The district court refused to award

Ernst attorney's fees on the basis of

Fairbanks’ agreement in its contract

with Ernst to “indemnify [Buyer]

against all liabilities for damages or in-

juries incurred by the Buyer, for Buyer's

27. Our holding ma, require some re-evaluation

by the district court of its $20,000 punitive

cost, resulting from Seller's failure to

make timely delivery of the materials

specified herein.” (Emphasis supplied).

In Alabama attorney's feces are not ru.

coverable unless provided for in the con-

State v. Alabama

did not examine whether the above in-

demnity provision constituted such à con-

tractual provision for fees but skirted

this issue by ruling:

attorney fees and expenses.

387 F Supp. at 1034. We do not know

how to interpret this conclusion. If thc

court was in fact including within its

$20,000 punitive damage award some in-

resulting from Fairbanks’ delay provide

a basis for Ernst to recover its attorney's

fees? We hold that it does, to some

extent.”

damages award to Ernst. if the court was

requiring the payment of attorney's as

3059 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

{12] The Alabama courts have not

squarely addressed the issue of whether

or when indemnity agreements contem-

plate the payment of attorney's fees.

Cf. Miller & Co. v. Louisville & Nashville

R_R., 328 F.2d 73, 78 (CA5), cert. denied,

377 U.S. 966, 84 S.Ct. 1648, 12 L.Ed.2d

737 (1964) (Alabama law), holding that

judgment against the indemnitee in a

third party's suit would entitle it to “the

costs of defending the claim as well as

the amount of liability. Miller at least

suggests that Alabama would follow the

generally held view that indemnification

agreements contemplate payment for at-

torney'’s fees incurred in litigation with

third parties concerning the matter in-

demnified against, regardiess of whether

they say so. See, e g., Bagby v. Merrill

Lynch, Pierce, Fenner & Smith, Inc, 491

F.2d 192, 198 n 9 (CA8 1974); Insurance

Co. of North America v. King, 340 So.2d

1175 (Pla.D.Ct.App.1976); cf. 5 A. Cor-

bin, Contracts § 1037, at 225 26 (1964 &

Supp.1971). Inclusion of attorney's fees

is presumed to have been the intent of

the drafter unless the agreement explic-

itly says otherwise This rule simply

gives effect to the very nature of indem-

part of the $20,000, Fairbanks should not now

have to pay again for these fees under an

indemnity theory. While our own scrutiny of

nity, which is to make the party whole.

“(T}rue indemnification would contem-

plate the inclusion of these items

”" Seaboard Coast Line Rail-

road v. Tennessee Corp., 421 F.2d 970,

975 (CA5), cert. denied, 398 U.S. 928, 90

S.Ct. 1819, 26 L.Ed 2d 91 (1970) (dictum).

The reference to “cost” in the Ernst-

Fairbanks agreement was not an explicit

denial of the right to attorney's fees.

We do not even interpret it to be an

implied denial,” although in view of the

rule above we need not go this far. As

a result, we hold that the agreement

contemplates recovery of relevant attor-

ney s fees.

{13} The cases cited above limit the

recovery of attorney's ſbes to the subject

matter of the indemnity agreement and

exclude fees expended in suing the in-

demnitor in order to recover under the

agreement. Accordingly, Ernst may re-

cover from Fairbanks only those fees

that it can show were related to its liti-

gation of the generator matter“ This

leaves the question whether Ernst can

recover fees expended in pursuit of delay

damages against Fairbanks itself. This

is not precisely what the rule contem-

(CAS), cert. demed. 357 US 881. 78 SC.

1372. 2 LEd 2d 1371 (1958) ( ‘Any expense’

includes, of course, attorney's fees”). The pro-

vision for cost here is more probably used

as synonymous with “expense it says noth-

ing about the costs being rendered with a

“judgment.” which reference might imply the

more technical concept of court costs (

Fazpatrick v Buzer, 427 US. 445, 459-460, 96

S.Ct. 2666, 2673. 49 L Edd 614, 624 (1976)

(Stevens, J. concurring)

38. These would include the origina! deciarato-

ry judgment action Ernst brought agaist

Manhattan insisting that the Fairbanks genera.

tor conformed to the specifications Applica-

tion of the general rule does not depend upon

who was the plaintiff in the third-party litiga

ton

23a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 3060)

plates when it denies a right of recovery

for fees expended in pursuit of indemni-

ty itself. However, we still find recov-

ery for this portion of the fees inappro-

priate. The terms of the agreement

speak of indemnity for “liabilities.” To

us, this seems to refer to the ciassic in-

demnity situation whereby one party

the reasonable certainty standard articu-

lated above.

II. Ernst’s challenge to Providence’s

liquidated damage recovery

At an early stage of this proceeding,

the district court ordered Providence to

pay over an added portion of the con-

court then proceed to the difficult task

of ascertaining which parties were re-

sponsible for which parts of the delays.

It ordered McCauley to pay its share and

ordered the three other parti (through

Manhattan) te pay their shares, deduct-

ing these from the balance of the con-

tract price which Providence ha! yet to

pay.

[14] Liquidated damage provisions in

contracts are enforceable under Alabama

law as long as the contractual stipulation

is reasonable and the measure of dam-

ages at the time of the contract was

conjectural and uncertain. This rule has

been applied to provisions against delay

in performance on construction con-

tracts. Otinger v. Water Works & Sani-

tary Sewer Board, 278 Ala. 213, 177

So.2d 320 (1965). None of the parties

disputes the conjectural nature of delay

damage in a case like this one or the

lack of disproportion in the $250 per day

damage formula.

1161 However, Ernst seeks to avoid

an assessment of liquidated damages

the so-called rule against

apportionment." This rule states that

under a liquidated damage provision

against delay, where the owner has con-

tributed to delays on the project he may

not apportion the fault but forfeits all

right to recover under the provision.

The rule has been adopted by some juris-

dictions but rejected by others™ The

Alabama courts have never been

presented with the decision of whether

to adopt it or allow apportionment. (/

Kershaw Mining Co., supra (concerning

apportionment for actual damages).

32. See Annot. i152 ALR 1349, 1359 78

(1944).

24a

3061 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

Like the Alabama district judge, we

—

do not remain in full force. One of the

dominant reasons underlying it is early

judicial hostility to the use of privately

agreed upon contract damage remedies.

See, > fea an = v. Maiden

Lane Safe Deposit Co., 199 N.Y. 479, 98

N.E. 81 (1910):

While such an agreement has not the

harshness of a penalty, it is, neverthe-

less, in its nature, such that its en-

forcement, where the party claiming

the right to enforce has, in part, been

the cause of delay, would be unjust.

Today, given the increasing complexity

of contractual relationships, liquidated

damage provisions have obtained firm

judicial and legislative support. See, e.

g. Otinger, supra; Ala. Code tit. 7A, § 2-

718 (1966 Recomp.). As long as the own-

ers own delay is not incurred in bad

faith, it is not unjust to allow propor-

tional fault to govern recovery. Gener-

ally, owners do not benefit from delays

that they incur. Another reason cited in

support of the rule is that proving ap-

portionment is simply too difficult. We

do not disagree with the difficulty of the

task,™ but recovery should not be barred

in every case by a rule of law that pre-

33. There are two different levels of “appor-

uonment that the district court had to reach

cludes examination of the evidence.™

The district court did not err in allowing

apportioned liquidated damages to Provi-

dence.

III. Ernstes appeal on the

electrical receptacles

Ernst concedes that its workmen in-

stalled the receptacles improperly but

claims that this caused no delay (i. c., no

damage). The district court's findings of

delay, 387 F.Supp. at 1014 15, are not

clearly erroneous.

IV. Manhattans claims for

delay damages

Like Ernst, Manhattan claims actual

damages for delays resulting from other

parties’ mistakes. Much of what we

have said about Ernst’s claims applies

with equal force to Manhattan's, but we

examine each party’s potential liability

to Manhattan separately.

A. Claims against Providence

{16) Manhattan’s claim bere is

stronger than that of Ernst, since Man-

hattan and Providence stood in privity of

contract. Providence contends, however,

that by failing to pursue the arbitration

provisions of the genera! conditions in

their contract,™ Manhattan cannot assert

The second step, necessary only for the gen-

E. C. ERNST, INC. . MANHATTAN CONST. CO. OF TEXAS

its claim in federal court. Manhattan's

response is that the activities of Provi-

dence constituted a waiver of the right

to demand arbitration. The district

court agreed, and we do also.

This question is one of federal law,

given the enactment of the United

States Arbitration Act of 1925, 9 U.S.C.

§§ 1 et seg.“ even though this is a di-

versity case. Prima Paint Corp. Flood

& Conklin Mfg. Co., 388 U.S. 395, 404

05, 87 S.Ct. 1801, 18 L.Ed.2d 1270, 1278

(1967); accord, Stokes v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 523 F.2d

433, 437 (CA6 1975). Section 3 of the

Act reads:

If any suit or proceeding be brought

in any of the courts of the United

States upon any issue referable to ar-

bitration under an agreement in writ-

ing for such arbitration, the court in

which such suit is pending, upon being

satisfied that the issue involved in

such suit or proceeding is referable to

Architect's decisions or interpretations of

Nea

i

14

: g

i!

|

i

12

1111

+

i

rE

arbitration under such an agreement,

shall on application of one of the par-

ties stay the trial of the action until

such arbitration has been had in ac-

cordance with the terms of the agree-

ment, providing the applicant for the

stay is not in default in proceeding

with such arbitration. [Emphasis sup-

plied).

The first indication of the parties’ atti-

tude about arbitration is an April 7,

1970, telephone conversation to Manhat-

tan from Providence's attorney, in which

the attorney

pointed out that the Architect turned

down the [Djorman engine in Septem-

ber of 1969. He further contends that

by not requesting arbitration within

the following six months period, the

contractor waived his right for arbi-

tration. He proposed that if they, at

this point, requested arbitration, Provi-

dence L.ospital will file a suit in feder-

al court asking that arbitration be dis-

ther mutually agreed that the decision of the

arbitrators shall be 2 prior condition to any

right of legal action which either party to

the contract may have against the other

(e) Demand for arbitration in connection

with any dispute shall he filed in writing

with the Architect and with the other party

to the contract. Any demand for arbitration

shall be made within thirty days after the

after the date of final payment except

in the case of a dispute arising in connection

with any guarantee provisions of the Con.

tract Documents."

36. Though no explicit finding was nad, the

Providence-Manhattan contract obviously is a

transaction involving commerce, so the Aci

applies. Insofar as Gavisk Constr. Co. v. H. F

Campbell Co. 526 F.2d 777. 784 (CA3 1975),

suggesis the need for explicit findings in a

case imvolving this clear a dependence upon

interstate commerce, we decline to follow

3063 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

allowed and that the contractor be re-

quired to furnish an engine meeting

specifications.”

The only other evidence of any pre-suit

reference to arbitration is a September

17, 1970, letter to Manhattan from its

own attorney. This letter asked Man-

hattan to date, sign, and complete an

enclosed AIA Demand for Arbitration

and file it with the AAA Regional Of-

fice, sending copies to Providence and

McCauley.™

Ernst's complaint initiated this suit on

October 28, 1970. Providence’s initial

pleading, filed December 16, 1970, was

captioned as a “motion to dismiss” Man-

hattan’s claim and alternatively “to stay

the action.” The requested “stay” was

not for purposes of resort to arbitration

but to require Manhattan to finish con-

struction first. Attached to the motion

was a copy of the 20-page general condi-

tions of the contract, paragraphs 6 and 7

of which concerned arbitration. Provi-

dence filed a supplemental brief which

referred to arbitration but only as 4

ground for dismissing Manhattan’s suit.

For the next two and a half years Provi-

dence litigated—it engaged in discovery,

presented cross-claims (trying to appeal

to this court from dismissal of some of

them), and filed various motions.” It

never brought up arbitration except to

ever executed.

deny Manhattan's assertion that it (Man-

hattan) had earlier sought arbitration

pursuant to the contract. In May (or

possibly April) 1973, Providence for the

first time asserted that Manhattan's sole

remedy was arbitration. In view of this

pattern of pre- and post-suit behavior,

Providence waived arbitration. Burton-

Dixie Corp. v. Timothy McCarthy Con-

struction Co., 436 F.2d 405, 408 09 (CA5

1971); Cornell & Co. v. Barber & Ross

Co., 123 U.S.App.D.C. 378, 360 F.2d 512

(1966).

On remand the district court should

find Manhattan's actual delay damages

arising from Providence’s mistakes on

the sewage ejection and bedlight fixture

problems.

B. Claims against McCauley

[17] Manhattan's claims in this re-

gard are similar to Ernst’s. Manhattan's

closer relationship to the architect makes

an even more persuusive case for its in-

clusion within the scope of the risk cre-

ated by the latter’s actions. Manhattan

may recover on remand for actual delay

damages arising from McCauley’s defec-

tive plans and specifications regarding

the generator system (if such be found

to constitute negligence) as well as the

architect’s procrastinations in ruling on

Fairbanks’ submittals for that system.

4@. Manhattan is not barred by failing to obtain

a “certificate of completion” pursuant to the

general conditions. Its appeal is concerned

not with obtaining final payment but rather

with securing delay damages in addition to

final payment. We note that McCauley did

give Manhattan a “certificate of acceptance,”

dated June 21, 1972, accepting the building as

complete in accordance with plans, specifica-

tions, and contract documents.

41. See part |, section E. supra.

27a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 3064

C. Claims against Ernst

{18} The district court was not clear-

ly erroneous in finding that although it

was “an extremely close question,” 387

F.Supp. at 1028, Manhattan did not

make out a case of fraud by Ernst re-

garding the generator submittals.

The court also found that Ernst know-

ingly installed the explosion-proof recep-

tacles in an improper and hazardous

manner and then concealed this danger

by using longer screws. But the court

did not rule on the question whether this

action constituted fraud under Alabama

law. Manhattan raised this issue

throughout the trial,“ and the district

court should make appropriate findings

and conclusions on remand.

Manhattan’s claims for damages

against Ernst on this receptacle matter

are complicated by a subcontract provi-

sion ® which the district court appears to

have referred to in passing“ but which

we cannot find in the record. On re-

mand the district court should make

findings on the existence of, and conclu-

sions on the interpretation of, this provi-

sion in the subcontract.

*

D. Claims against Fairbanks

{19} The district court found Fair-

banks guilty by clear and convincing evi-

dence of fraud in its representations con-

cerning the generator's ability to comply

with the specifications. It awarded

42. Record on Appeal 128!. Our reading of the

record does not reveal with certainty whether

the district court ever ruled on this claim with

finality. The court granted Ernst’s motion to

dismiss the claim on May 9, 1973, without

opinion. Id at 1366. But it would seem to be

included within the scope of the pretrial order

setting issues for trial, and it later became

subject to various motions by Manhattan. Id.

at 1625, 2064.

Manhattan $20,000 in punitive damages

for this fraud but did not grant compen-

satory damages, even though it found

that [tjhe other parties did rely upon

the misrepresentations with the result

that the project was delayed and sub-

stantial losses were incurred.” 387

F.Supp. at 1031. Alabama law allows

recovery of compensatory damages in

cases of statutory fraud. Ala.Code tit. 7,

$§ 107 et seg. (1960 Recomp.); Ringer v.

First National Bank, 291 Ala. 364, 281

So.2d 261 (1973). On remand, Manhat-

tan is entitled to recover actual damages

from Fairbanks if it can prove them.

E. Claim for prejudgment interest

120] Manhattan claims prejudgment

interest on any damage award that it

may receive. Alabama law governs any

award of interest, regardless of the ex-

istence of 28 U.S.C. § 1961. Degelos

Bros. Grain Corp. v. Fireman's Fund In-

surance Co., 498 F.2d 1238 (CA5 1974).

In Alabama only liquidated claims gener-

ally justify prejudgment interest. Grand

Bay Land Co. v. Simpson, 207 Ala. 303,

92 So. 789 (1922). The claims of Man-

hattan here are too uncertain in amount

to qualify under any of the recognized

exceptions to this rule. Roc v. Baggett

Transportation Co., 326 F. 20 298 (CA5

1963) (Alabama law); accord, Belcher !

Birmingham Trust National Bunk, 488

F.2d 474 (CA5 1973).

43. According to Ernst, this provision read

Limit of liability for delay in «ompletion on

part of E C Ernst, inc. shall be no greater

than the penalty as set up in the Owner's

contract.

Reply Brief for Ernst 40 n

44. See 387 F.Supp. at 1004 05 (finding 3).

1009, 1033 (finding 128).

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS 300

3065 E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEXAS

V. Manhattan liability for

liquidated damages

121] Manhattan claims that the dis-

trict court was clearly erroneous in find-

ing that it failed to coordinate work,

leading to liquidated damages for delay

to Providence. The only claim worthy of

discussion here is that a general “flat-

tening out” of work occurred after the

generator delays had set in. The district

court recognized this problem, 387

F.Supp. at 1027, but apparently found it

to be no excuse to a party whose respon-

sibility as general contractor included

eliminating the effect of such occurrenc-

es, and we agree.

VI. Providence’s claims

{22} We agree with the district court

that Providence’s claim for damages

from Fairbanks’ proven fraud could not

withstand a motion to dismiss. Provi-

dence has proven no damages other than

delay, and for this it already has been

compensated by Fairbanks (through

Manhattan). Providence now has a Cat-

erpillar- driven generator in place of the

Dorman-powered one that never materi-

alized. In addition, as noted above, the

district court’s refusal to find Ernst

guilty of fraud in connection with the

generator matter was not clearly errone-

ous.

VII. Summary

1. Ernst may not recover from Man-

hattan, because of the “no damage”

clause in their subcontract.

2. Ernst may not recover from Provi-

dence, since the Providence-Manhattan

contract evidences an intention not to

vest Ernst with third-party beneficiary

rights.

3. The liquidated damages assessed

against Fairbanks by the district court

did not include delays caused by defec-

tive specifications for the emergency

generator's engine housing. McCauley

was properly assessed responsibility for

this mistake.

4. Ernst may recover under a negli-

gence theory for McCauley’s procrastina-

tions in rejecting the Fairbanks emer-

gency generator units.

5. Ernst may recover under a negli-

gence theory for McCauley’s erroneous

rejection of Palco bedlight fixtures and

its defective plans and specifications if,

on remand, the district court finds that

these defects constitute negligence.

6. The district court's calculation of

$61,626.12 as the indemnity due Ernst

from Fairbanks for Ernst's upstream lia-

bility on the generator is correct.

7. Ernst may recover damages for

delays caused by Fairbanks’ breach of

contract.

8. The district court’s $20,000 award

of punitive damages from Fairbanks to

Manhattan was not an abuse of its dis-

cretion.

9. The district court's $20,000 award

of punitive damages from Fairbanks to

Ernst was not an abuse of its discretion.

However, the court should reduce this

figure on remand if it included some

amount compensating Ernst for its at-

torney's fees.

10. Ernst may recover attorney's fees

from Fairbanks based on their indemnity

agreement. However, this recovery

should be limited to amounts expended

on the generator litigation, excluding

suit against Fairbanks itself.

11. The district court did not err in

allowing apportioned liquidated damages

to Providence.

12. The district court did not err in

finding that Ernst was responsible for

delay arising from its installation of the

explosion-proof receptacles.

13. Manhattan may recover for its

actual delay damages arising from Provi-

dence’s mistakes on the sewage system

and Paleo bedlight fixture matters.

14. Like Ernst, Manhattan may re-

cover under a negligence theory for

McCauley’s procrastination in rejecting

the Fairbanks emergency generator

units.

15. Like Ernst, Manhattan may re-

cover under a negligence theory for

MeCauley's erroneous rejection of Palco

bedlight fixtures and its defective plans

and specifications if, on remand, the dis-

trict court finds that these defects con-

stitute negligence.

16. The district court did not err in

rejecting Manhattan’s and Providence's

claims of fraud by Ernst in counseling

Fairbanks on its generator submittals.

17. Manhattan's claim for actual de-

lay damages from Ernst on the explo-

sion-proof receptacles matter is remand-

ed for further consideration concerning

4 true copy

Tests E NN

Clerk, Ve 5 1

eo Se LN. “yt

dev Orleans, Louisiana

the existence and effect of a provision in

their subcontract. The district court

should also make an explicit finding re-

garding the existence of fraud on

Ernst's part in connection with the in-

stallation of the receptacles.

18. Manhattan may recover compen-

satory damages for Fairbanks’ fraud.

19. Manhattan may not recover pre-

judgment interest on any damage award

that it may receive.

20. The district court did not err in

assessing liquidated damages for delay

against Manhattan for its failure to co-

ordinate the work on the job site.

21. Providence has proven no dam-

ages for which it has not already been

compensated with respect to Fairbanks’

fraud.

22. On remand, Ernst and Manhat-

tan’s recoveries will be predicated on

their ability to show fact, amount, and

apportionment of damage with reasona-

ble certainty.

The district court's judgment is AF-

FIRMED in part, VACATED, in part,

and REMANDED for further proceed-

ings not inconsistent with this opinion.

+ geen 7

x:

Sp. ay

OCT 3 1977

Adm. Office, U.S. Courts—West Publishing Company, Saint Paul, Minn.

30a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

E. C. ERNST, INC., Plaintiff-Appellant

Appellee,

V.

MANHATTAN CONSTRUCTION COM-

PANY OF TEXAS, Providence Hospi-

tal, Fairbanks-Morse, Inc., Charles H.

McCauley Associates, Inc., Defend-

ants-Appellees Appellants.

No. 75-1794.

United States Court of Appeals,

Fifth Circuit.

Sept. 14, 1977.

In a complex diversity case, concern-

ing difficulties encountered during con-

struction and renovation of a hospital,

the parties appealed from a judgment

entered in the United States District

Court for the Southern District of Ala-

bama, at Mobile, Daniel H. Thomas, J.,

387 F.Supp. 1001. The Court of Appeals

affirmed in part, vacated in part and

remanded for further proceedings, 551

F.2d 1026. On petition for rehearing

and petition for rehearing en banc, the

Court of Appeals held that (1) a subcon-

tractor was entitled to profit that it

would have earned for installing a gen-

erator pursuant to contract, not the full

amount it would have charged the con-

tractor had there been no breach by sup-

plier, but profit on the installation job,

though only if amount of profit could be

shown with reasonable certainty; (2) ex-

tensive postsuit actions in all phases of

complex litigation served as a waiver of

the hospital's right to demand arbitra-

tion of grievances, and (3) where the

hospital was given opportunity to have

its fraud claim reinstated and considered

5796

during trial but elected not to avail itself

of the offer, the hospital was in no posi-

tion to complain of want of opportunity

to prove fraud damages.

Granted in part and denied in part;

petition for rehearing en bane denied.

I. Damages 117

Damages «warded for breach of con-

tract should return party to position he

would have occupied had contract not

been violated.

2. Damages 12403)

Subcontractor was entitled to profit

that it would have earned for installing

generator pursuant to contract, not full

amount it would have charged contractor

had there been no breach by supplier,

but profit on installation job, though

only if amount of profit could be shown

with reasonable certainty.

3. Arbitration 23.4

Extensive postsuit .actions in all

phases of complex litigation served as

waiver of party's right to demand arbi-

tration of grievances.

4. Federal Courts 714

Where landowner was given oppor-

tunity to have its fraud claim reinstated

and considered during trial but elected

not to avail itself of offer, landowner

was in no position to complain of want

of opportunity to prove fraud damages

Appeals from the United States Dis

trict Court for the Southern District o:

Alabama.

31

5797

ON PETITION FOR REHEARING

AND PETITION FOR REHEAR-

ING EN BANC

(Opinion May 9, 5 Cir., 1977, 551

F.2d 1026.)

Before GODBOLD, MeCREE and

TJOFLAT, Circuit Judges.

PER CURIAM:

Ernst, McCauley and Providence have

petitioned for a rehearing of numerous

aspects of our original opinion in this

case, 551 F.2d 1026 (CA5, 1977). We

modify that opinion in the following re-

gards.

1. Ernst challenges our agreement

with the district court's calculation of

damages due from Fairbanks for fraud

in connection with its generator contract,

551 F.2d at 1035, asserting that it was

shortchanged by 85.541, the amount that

it would have charged Manhattan for in-

stallation had Fairbanks actually sup-

plied the generator.

{1,2) By requiring Fairbanks to com-

pensate Ernst only for the amount Ernst

paid to Manhattan to make Manhattan

whole, we essentially returned Ernst to

its position prior to the contract (except

for its alleged delay damages, to be de-

termined on remand). This was wrong.

Damages awarded for breach of contract

should return the party to the position

he would have occupied had the contract

not been violated. Jewell v. Jackson &

Whitsitt Cotton Co., 331 So.2d 623, 625

26 (Ala.1976). Ernst should therefore be

entitled to the profit that it would have

earned for installing the generator, not

the full $5,541 that it would have

charged Manhattan but the profit on the

installation job. Of course, this recovery

will be predicated on ability to show the

Hon Wade H. McCree, Jr., of the Sixth Circuit,

now Solicitor General of the United States,

E. C. ERNST, INC. ». MANHATTAN CONST. CO. OF TEX.

amount with reasonable certainty. Paris

v. Buckner Feed Mill, Inc., 279 Ala. 148,

182 So.2d 880 (1966).

2. For the first time in this court,

McCauley raises the statute of limita-

tions as a bar to possible recovery by

Ernst and Manhattan for its negligence

in failing to rule on the acceptability of

the generator and for its alleged negli-

gence in drawing plans and in rejecting

Palco bedlight fixtures. McCauley as-

serts that it pleaded this affirmative de-

fense in the trial court. It cites no

pleading to substantiate this assertion,

and our search of the record reveals

none. Rather than engage in any fur-

ther search, we think it appropriate to

include the entire statute of limitations

question in the issues to be determined

upon remand of Ernst's and Manhattan's

negligence claims. Remand will also

give these parties an opportunity to re-

spond to the views first propounded here

by McCauley concerning the dates of ac-

crual and tolling of their various causes

of action.

{3} 3. Providence correctly points

out that the April 7, 1970, telephone call

by Providence’s attorney, threatening to

sue Manhattan if it attempted to arbi-

trate the generator matter, was made to

Alabama state officials and not, as we

said at 551 F.2d 1040, to Manhattan it-

self. However, this does not affect our

holding that Providence’s extensive post-

suit actions in all phases of this complex

litigation served as a waiver of its right

to demand that Manhattan arbitrate its

grievances concerning the sewage

ejection and bedlight fixture matters.

When one party reveals a disinclination

to resort to arbitration on any phase of

suit involving all parties, those partics

participated in the oral argument of this case

but did not participate in this decision.

32a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX. 5798

are prejudiced by being forced to bear

the expenses of a trial, which in this case

was quite lengthy. Arbitration is de-

signed to avoid this very expense. Sub-

stantially invoking the litigation machin-

ery qualifies as the kind of prejudice to

Manhattan that is the essence of waiver.

Burton-Dixie Corp. v. Timothy McCarthy

Construction Co., 436 F.2d 405, 408-09

(CA5, 1971); Cornell & Co. v. Barber &

Ross Co., 123 U.S.App.D.C. 378, 360 F.2d

512 (1966). See also Carolina Throwing

Co. „ S & E Novelty Corp., 442 F.2d 329

(CA4, 1971); Carcich v. Rederi A/B Nor-

die, 389 F.2d 692 (CA2, 1968).

[4] 4. Providence takes issue with

our statement that it “has proven no

damages other than delay” for Fair-

banks’ fraud in connection with the gen-

A “rane copy

erator matter, 551 F.2d at 1042. The

district court dismissed Providence's

fraud claim prior to trial, and Providence

points out it had no opportunity to prove

fraud damages. But Providence was

given an opportunity to have its fraud

claim reinstated and considered during

trial but elected not to avail itself of the

offer.

In all other respects, the petitions are

to be denied.

The petitions for rehearing are

GRANTED in part and DENIED ir

part. No member of this panel nor

judge in regular active service on the

court having requested that the court b.

polled on the petition for rehearing er

banc of Providence Hospital, the petitior

for rehearing en banc is DENIED.

cast: FDWARD N. 74° T7OSTH

; -ifth Circuit

cc l.a, L. 8. Cowyst D ;

a ee

Lever 3 1977

Sew Orleans, Louisiena

33a

E. C. ERNST, INC., Plaintiff,

V.

MANHATTAN CONSTRUCTION

COMPANY OF TEXAS

et al., Defendants,

v.

MANHATTAN CONSTRUCTION COM.

PANY OF TEXAS, Plaintiff

by Counterclaim,

v.

E. C. ERNST, INC., et al., Defendants

by Counterclaim.

Civ. A. No. 6340-70-T.

United States District Court,

S. D. Alabama, S. D.

Dec. 11, 1974.

An electrical subcontractor on a

hospital building project brought an ac-

tion against the hospital owner, archi-

tect, prime contractor and others seek-

ing a declaratory judgment and order

preventing the purchase and installation

of any substitute equipment in place of

an emergency generator which the sub-

contractor had proposed to install under

its contract with the prime contractor.

After final completion of the project,

and after parties to the action had filed

numerous cross claims and counter-

claims, the suit developed into one for ap-

portionment of responsibility for a con-

struction overrun of 453 duys. The Dis-

trict Court, Daniel Holcombe Thomas, J.,

34a

1002

entered numerous findings of fact and

conclusions of law concerning responsi-

bility for the overrun and damages pay-

able as a result thereof.

Order accordingly.

1. Federal Civil Proced ure 1938

Even though hospital made no for-

mal claim in its pleadings to recover liq-

uidated damages from prime contractor

and others involved in hospital construc-

tion contract, such damages were re-

coverable where issue of liquidated dam-

ages was framed by district court in its

pretrial order. Fed.Rules Civ.Proc. rule

15(b), 28 U.S.C.A.

2. Contracts ©300(1)

Where prime contractor under hos-

pital construction and renovation con-

tract experienced delay in obtaining ac-

cess to old operating room area of hospi-

tal because hospital was required to keep

area in operation until it could occupy

new operating area, hospital was re-

quired to extend construction deadline

accordingly and prime contractor was

not responsible for overrun resulting

from lack of access.

3. Contracts 300(3)

Where hospital and its architect

caused delay of 131 days in installation

of sewage system under hospital con-

struction contract because of failure to

decide promptly whether to use electric

sewage ejection pump or gravity system,

but some of such delay could have been

absorbed by prime contractor during re-

mainder of job, one-half of resulting

contract overrun would be charged

against hospital and subtracted from pe-

riod for which it would be paid liquidat-

ed damages under construction contract.

4. Damages 85

Where employees of electrical sub-

contractor under hospital construction

contract knowingly installed explosion-

proof receptacles in operating room of

hospital in unacceptable manner and

concealed their wrongdoing, subcontrac-

tor was liable to pay liquidated damages

387 FEDERAL SUPPLEMENT

for 108-day project overrun caused by

such actions.

5. Contracts 301, 312(1)

Hospital and its architect breached

hospital construction contract by failing

in timely manner to accept bed light fix-

tures which were admittedly equivalent

to those described in contract specifica-

tions, and each would therefore be held

responsible for one-half of 59-day project

overrun caused by resulting delay. Pub-

lic Health Service Act, § 600 et seq., 42

U.S.C.A. § 291 et seq.

6. Contracts 23

Where electrical subcontractor un-

der hospital construction contract failed

to provide emergency generator system

which complied with contract specifica-

tions and such system was instead pro-

vided by prime contractor at its own

cost, prime contractor was entitled to re-

duce amount due to subcontractor by en-

tire amount which it cost to obtain and

install emergency generator sytem.

7. Sales 418(7)

Where company which was to sup-

ply emergency generator system through

electrical subcontractor under hospital

construction contract failed to supply

system which met specifications of con-

tract, and system was instead procured

by prime contractor, subcontractor could

recover from supplier difference be-

tween purchase price of system as in-

curred by prime contractor and refunded

to it by subcontractor and price of sup-

plier’s proposed system, plus additional

installation costs incurred by prime con-

tractor and subcontractor.

8. Contracts 301

Where architect under hospital con-

struction contract prepared deficient

plans and specifications for emergency

generator to be installed in hospital and

failed to act properly and promptly on

proposal submitted for furnishing of

that equipment, and where proposed

supplier of generator unit concealed fact

that unit did not meet specifications of

contract, architect and supplier were |

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

Cite ax XT F.Supp. 1001 (1974)

each responsible for one-half of 161-day

project overrun occasioned by resulting

delay.

9. Fraud ©58(1)

Although proposed supplier of emer-

gency hospital generator unit under hos-

pital construction project engaged in

fraudulent conduct in misrepresenting

unit as complying with specifications of

contract, evidence faile’ ‘> establish

that electrical subcontractor, which was

responsible for obtaining unit, partici-

pated in such fraud.

10. Fraud ©=13(1), 61

Proposed supplier of emergency hos-

pital generator system under hospital

construction contract was guilty of

fraud in seeking to obtain approval of

proposed units by means of flagrant and

false representations, including repre-

sentations that units met specifications

of contract and false statements as to

quality and performance capabilities of

equipment, and supplier was therefore

liable to pay punitive damages both to

electrical subcontractor and prime con-

tractor.

11. Contracts $301

Prime contractor under hospital

construction proj was guilty of lack

of proper management of project in sev-

eral respects, including failure to pro-

vide additional manpower when request-

ed to do so by architect and required by

general conditions of construction con-

tract, and failure to schedule work prop-

erly, and 60 days of a 453-day overrun

on project would therefore be attributa-

ble to prime contractor’s failure to prop-

erly supervise and coordinate work.

12. Principal and Agent 159(1)

Architect is agent for owner in con-

struction project, and owner is responsi-

ble for any damages caused by archi-

tect’s deficiencies insofar as other par-

ties are affected thereby.

13. Damages 85

Where, although no _ contractual

agreement existed between architect and

owner concerning liquidated damages

which might arise from delay of comple-

tion of hospital construction project at-

tributable to fault of architect, architect

itself hed been instrumental in inclusion

vision in construction contract, such rate

of liquidated damages would be utilized

in awarding damages to owner for de-

lays in completion of project caused by

architect.

14. Contracts 290

Where hospital at no time sought to

begin arbitration of disputes arising un-

der hospital construction contract and in

fact threatened to prevent arbitration by

filing lawsuit, hospital’s actions consti-

tuted waiver of arbitration provisions of

contract, and litigation arising under

contract would therefore not be dis-

missed for failure to arbitrate.

15. Federal Civil Procedure 2737.5

Where all parties involved in dis-

pute over responsibility for overrun in

hospital construction contract were to

some extent at fault, all parties had op-

portunity to settle action but chose to

litigate, and each party defended only

its own interests and asserted only its

own claims and defenses, each party-liti-

gant would bear its own attorneys fees

and expenses.

16. Damages ©80(2)

Provision in hospital construction

contract for payment by prime contrac

tor to hospital of sum of $250 per day

for each day that completion of project

was delayed beyond date specified in

contract was reasonable and binding

upon hospital and prime contractor.

17. Damages 88

Where hospital, either itself or

through its architect, was chargeable

with 163 days of 453-day overrun on

project, it could not recover liquidated

damages from prime contractor for such

portion of overrun.

18. Contracts C290

Litigant cannot fail to invoke per-

missive arbitration provisions of con-

tract and then attempt to advance such

failure as defense to claims aaserted

against it.

19. Limitation of Actions © 100(1)

Where more flagrant facets of

fraud of proposed supplier of emergency

generating equipment for hospital con-

struction project were revealed in dis-

covery within only months prior to com-

mencement of hearing on litigation con-

cerning parties’ responsibility for delay

in project, claims for punitive damages

against supplier on grounds of such

fraud were not barred by one-year stat-

ute of limitations.

20. Fraud 81

When misrepresentation and fraud

have been established by clear, cogent

and convincing evidence, it is appropriate

and proper for court to award not only

actual damage caused thereby, but also

punitive damages in appropriate

amount.

ee

Willis C. Darby, Jr., Mobile, Ala., for

Providence Hospital.

Glower W. Jones, Smith, Currie &

Hancock, Atlanta, Ga., Edward S. Sledge,

III. Gallalee, Denniston 4 Edington,

Mobile, Ala, Arthur Friedman, Tanner

& Friedman, New York City, for E. C.

Ernst, Inc.

David M. Thornton, Thornton &

Stamper, Tulsa, Okl., for Manhattan

Const. Co. of Texas.

Maurice Bishop, Bishop & Carlton,

Clarence L. McDorman, Jr., London,

Yancey, Clark & Allen, Birmingham,

Ala., for Charles H. McCauley Asso-

ciates, Inc.

Louis E. Braswell, Hand,

Bedsole, Greaves & Johnston,

Ala., for Fairbanks-Morse, Inc.

Arendall,

Mobile,

FINDINGS OF FACT AND CONCLU-

SIONS OF LAW

DANIEL HOLCOMBE THOMAS,

District Judge.

HISTORY OF CASE

1. This proceeding should serve for

years to come as a classic example of the

|. Ernst had also submitted bids to several of

the geveral contractors bidding on the job,

economic futility of litigation of this na-

ture and the need for settlement of such

controversies.

2. In 1967, Providence Hospital of

Mobile ( Providence), a Catholic hospital

operated by the Sisters of Charity, de-

cided to substantially expand its facili-

ties and to renovate and remode! its ex-

isting buildings. Providence obtained a

Hill-Burton Federal Grant in the

amount of $1,000,000.00. On October

27, 1967, Providence entered into a

standard form architectural contract

with Charles H. McCauley Associates,

inc. (McCauley), a large architectural

firm in Alabama with wide experience

in hospital construction. Pursuant to

this contract, McCauley prepared plans,

specifications and contract documents.

On April 12, 1968, McCauley advertised

the job for bids to be received until July

18, 1968. Seven contractors submitted

bids. On July 29, 1968, the contract was

let by Providence to Manhattan Con-

struction Company of Texas ( Manhat-

tan) for a total contract price of

$6,117,500.00. Manhattan entered into a

subcontract with E. C. Ernst, Inc.

(Ernst) under which Ernst agreed to

furnish the materials and equipment and

perform all of the electrical work for a

cost of $982,215.00.' Under this subcon-

tract, Ernst was required to provide

emergency generators which it later con-

tracted to purchase from Fairbanks-

Morse, Inc. (Fairbanks-Morse), a fifth

party to this litigation.

3. The contract between Manhattan

and Providence incorporated the plans

and specifications prepared by McCauley

and provided that Manhattan was re-

quired to complete the project within

730 days. If the project was not com-

pleted within this specified period and

any granted extensions of time, Manhat-

tan agreed to pay liquidated damages of

$250.00 per day until completion. The

subcontract between Manhattan and

Ernst provided the same time schedule

and liquidated damages plus an indemni-

but submitted its lowest proposal to Manhat-

tan.

37a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

1005

Cite as M F Supp. 1001 (1974)

fication agreement from Ernst to Man-

hattan.

4. The order to proceed was issued

August 19, 1968. Therefore, the origi-

nal completion date was August 18,

1970. During the period of construc-

tion, the time was extended by appropri-

ate change orders for 185 days. Accord-

ingly, the revised completion date was

February 19, 1971. The job was accept-

ed on May 17, 1972, making an overrun

of 453 days.

5. This extended litigation was com-

menced on August 28, 1970, by Ernst fil-

ing a complaint against all other parties

seeking a declaratory judgment and or-

der “preventing the purchase and instal-

lation of any substitute equipment” in

place of the Fairbanks-Morse emergency

generator, with engines, which Ernst

had proposed to install under its con-

tract with Manhattan. The Court set

the matter for hearing on January 27,

1971, on the sole issue of the sufficiency

of the Fairbanks-Morse emergency gen-

erator system. Hearing on this issue

was concluded on February 4, 1971, when

this Court issued an order specifically

finding that:

“The emergency generator system

(proposed to be furnished) does not

meet the requirements of the specifi-

cations”,

and that:

“The Dorman engines proposed by

Fairbanks-Morse to power the emer-

gency generator system do not fulfill

the horsepower requirements of the

specifications.

“The Court finds from the evidence

that the material submitted to Mc-

Cauley by Fairbanks-Morse, Ernst

and Manhattan, or any one or more of

them, failed to establish that the

emergency generator system proposed

to be supplied by Fairbanks-Morse,

met the requirements of the

specifications.” *

2. The Court's Findings of Fact and Conciu-

sions of Law on this generator feature are

6. This suit triggered a long plead-

ing war with a series of amendments,

cross-claims, counterclaims, and motions,

bearing little resemblance to the original

complaint and resulting in many issues

between and among the parties.

7. On April 11, 1973, this matter was

set down for pretrial, and the attorneys

were instructed to have present at the

pretrial, a representative of each litigant

who had authority to negotiate settle-

ment of this matter. Besides all attor-

neys being present, the litigants were

represented as follows: Ernst, by a Vice

President; Fairbanks-Morse, by e direc-

tor; McCauley, by its liability carrier;

Manhattan, by a Vice President; Provi-

dence, by its Administrator. At the

commencement of the pretrial, the Court

made the following statement:

“Gentlemen, this is a case which should

be settled between the parties. In

present day thinking, it seems to be the

idea that any problem can be cured in a

Federal District Court. This, I assure

you, is an erroneous approach. There is

not a lawyer in this courtroom capable

of operating the Providence Hospital.

There is not a lawyer in this courtroom

capable of running Manhattan Construc-

tion Company; there is not a lawyer in

this room capable of running McCauley

Associates; nor a lawyer in this room

capable of running Fairbanks-Morse;

nor a lawyer capable of running Ernst,

and I assure you there is not a Judge in

this courtroom capable of doing so. All

of you litigants are successful operators

or you would not be participating in a

six million dollar contract. Lawyers in

their zeal to represent their clients many

times fail to see but one side of the liti-

gation and that is the side of his client.

This litigation is not a one-sided bit of

litigation, it is a five-sided bit of litiga-

tion.

I stated at the outset that this was a

case that should be settled between the

hereto attached and made a pert hereof as

Exhibit 1.

1006

patios. I said that because this is a

classic example where the cost of proper

preparation of the case for trial is com-

pletely disproportionate to the benefits

any of the parties could hope to derive.

You’all are represented by capable attor-

neys. None of the attorneys want to go

to trial in this case unless and until they

have properly and thoroughly prepared

their case for trial. This entails much

pretrial discovery and pretrial discovery

entails much lawyer time, much travel,

much hotel expense. The point is, it is

extremely expensive.

Not only does this continued litigation

require discovery expenses, it entails ex-

penses in the appellate court. This case

is already no stranger to the Fifth Cir-

cuit nor the U. S. Supreme Court. Yes,

litigation is expensive, but remember the

courts do not create litigation, it is cre-

ated by the litigants. I have asked that

you representatives of the litigants be

here today. Although I know you have

been kept abreast of this litigation by

your attorneys, I wanted you to hear di-

rectly from the trial judge his thoughts

on this matter. You litigants are in a

fairly closely related field. Being

trained in this field, you are in a far bet-

ter position to adjust your differences

than those untrained in these related

fields. As an illustration, I, who have

had no training whatsoever in engineer-

ing, had to determine whether or not the

emergency generator system proposed to

be furnished by Fairbanks-Morse, met

the specifications, when experts couldn't

agree. That is a strange bit of logic.

If this case is not settled quickly, it is

going to trial quickly, properly prepared

or otherwise. To try this case will prob-

ably take not only days, but weeks, and I

wish to state to all of you litigants and

all attorneys here and now, if this case

is not settled, it will be tried during the

month of August, 1973, and it will take

the precedence over vacations or any

other business conflict.

The object of litigation is to do sub-

stantial justice between the parties liti-

gant, but the parties litigant should re-

387 FEDERAL SUPPLEMENT

alize that, in most situations, they are

by their particular training better able

to accomplish this among themselves.

This is your court, it is the peoples’

court. It is properly staffed and ready,

willing and able to try this case and will

do so in August.

Regardless of the outcome, an appeal

is almost certain. This will entail more

expense and more delay.

Having thusly expressed myself, we

will now proceed with the pretrial of

this case. I will ask you representatives

of the litigants to remain throughout

this pretrial as your presente will most

likely be helpful.”

8. The case was not settled, and the

trial was commenced on August 6, 1973.

It entailed 40 days of court time, 41 wit-

nesses (34 live and 7 by deposition) and

1056 exhibits. Presentation of the evi-

dence was finally concluded on Novem-

ber 27, 1973. Thereafter, the litigants

were given until the 28th day of Janu-

ary, 1974, within which to file Findings

of Fact and Conclusions of Law. This

time was extended to February 11, 1974.

The Court after studying these Findings

and Conclusions set the matter for final

argument on May 22, 1974, each litigant

being given one hour’s time. The pre-

trial order entered in this case on the

26th day of April 1973, and amended on

the 6th day of July 1973, is attached

hereto and made a part of this Finding

hereof as Exhibit 2. As stated above,

portions of this case have already been

before the Fifth Circuit and the Su-

preme Court. Docket numbers 72-3073

and 73-1287, Fifth Circuit and A-129,

Supreme Court. Each contains a part

of the history of this litigation.

9. PARTIES—The following parties

are litigants in this action: Plaintiff, E.

C. Ernst, Inc. (Ernst), is a corporation

incorporated under the laws of the Dis-

trict of Columbia and has its principal

place of business in the District of Col-

umbia. Defendant Manhattan Construc-

tion Company of Texas (Manhattan) is

a corporation incorporated under the

laws of the State of Texas and has its |

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

1007

Cite as 387 F Supp. 1001 (1974)

principal place of business in the State

of Texas. Defendant Fairbanks-Morse,

Inc. (Fairbanks-Morse) is a corporation

incorporated under the laws of the State

of Delaware and has its principal place of

business in the State of Wisconsin. De-

fendant Providence Hospital (Provi-

dence) is a corporation incorporated un-

der the laws of the State of Alabama.

Defendant Charles H. McCauley Asso-

ciates, Inc. (McCauley) is a corporation

incorporated under the laws of the State

of Alabama and has its principal place

of business in the State of Alabama.

10. DESIGNATION OF BUILD-

INGS—In the plans and specifications

and in the testimony of witnesses, vari-

ous portions of the construction project

are referred to by separate building des-

ignations, although all of the work was

inter-related and not separable into inde-

pendent units. The project upon com-

pletion was a single integrated struc-

ture. The structure as it existed prior

to commencement of the new construc-

tion or remodeling was referred to as the

“existing building”. The newly con-

structed six floor addition was referred

to as “Building A” and consisted princi-

pally of patient rooms, operating suites,

x-ray facilities and treatment rooms. A

new single story addition with basement

was added to the front of the existing

building and was referred to as “Build-

ing B“. It contained principally admin-

istrative spaces, entrance lobby, and rec-

ords library (Tr. 2119). The kitchen

and cafeteria of the existing building

were expanded by another one story ad-

dition referred to as “Building C“. (PX

14A)

11. CLAIMS—The matter in contro-

versy exceeds, exclusive of interests and

costs, the sum of Ten Thousand Dollars

($10,000.00). The following claims are

asserted by the different parties:

A. ERNST AGAINST MANHAT-

TAN—Ernst seeks damages against

Manhattan for delays and disruptions

3. The following abbreviations are used

throughout this opinion: Tr., Transcript of

Trial; EX, Ernst Exhibit; PX, Providence

caused by Manhattan's breach of its ob-

ligations to do the following: To pro-

vide accurate plans, drawings and speci-

fications for the project; to complete all

preliminary work necessary in order to

allow Ernst to perform its work; to co-

ordinate the work of and among the var-

ious subcontractors; to make or obtain

prompt decisions on all questions requir-

ing an answer from the owner, architect

or general contractor; to supply

promptly information required from the

owner, architect or general contractor;

to act promptly and dispositively, or to

procure others to so act, upon all re-

quests for approval of material and

equipment; to make available to Ernst

in timely fashion the specific areas nec-

essary for the performance of each part

of Ernst’s work; to coordinate the work

performed by Manhattan and other sub-

contractors so as to prevent any inter-

ference with the timely performance

of Ernst's work; to promptiy make, is-

sue or procure understandable and feasi-

ble clarifications of specifications, draw-

ings or plans, and to issue promptly any

directions necessitated thereby; and to

do all things necessary to be done in or-

der to complete, or to permit the comple-

tion of, the project within the time

frame specified therefor. In addition to

the above, Ernst claims a balance of 36.

252.60 due from Manhattan under the

contract. Finally, Ernst asserts that a

novation was agreed to among Manhat-

tan and Tube-O-Matic, Inc., one of Man-

hattan’s subcontractors, whereby Man-

hattan was directed in writing to pay

Ernst a sum of money on account of

work done by Ernst in fulfillment of

Tube-O-Matic's obligations on the proj-

ect.

B. ERNST AGAINST FAIR-

BANKS-MORSE—Enrnst claims damages

against Fairbanks-Morse for breach of

its obligations under their contract for

the procurement of an acceptable emer-

gency generator system. Manhattan has

Exhibit; Mex. McCauley Exhibit; MX.

Manhattan Exhibit and FX, Feirbanks-

Morse Exhibit.

40a

1008

withheld from Ernst funds due it total-

ling $143,293.65 on account of claimed

costs to Manhattan in furnishing, in lieu

of the Fairbanks-Morse system, an

emergency generator system which com-

plied with the plans and specifications.

Ernst therefore claims damages in an

amount, plus interest, equal to all or any

portion of such back charges which are

sustained as proper by this court and

which are in excess of $83,740.00, such

latter sum being the contract price to

Ernst for the Fairbanks-Morse system.

If all back charges are sustained, then

the damages sought by Ernst hereunder

would be $59,553.65 plus interest. Ernst

also seeks general damages for any loss-

es it has sustained which are attributa-

ble to delays or disruptions caused by

Fairbanks-Morse’s attempt to supply

and have accepted its non-complying

emergency generator system. In addi-

tion, Ernst claims that Fairbanks-Morse

is obligated pursuant to their contract to

indemnify Ernst against any losses for

which Ernst is held liable and which re-

sulted from Fairbanks-Morse's failure to

furnish timely a complying emergency

generator, said indemnification to in-

clude all of Ernst’s legal fees and expens-

es in this action. Finally, Ernst claims

punitive and compensatory damages

against Fairbanks-Morse for wilfully

and knowingly making fraudulent mis-

representations to Ernst relating to its

generator’s compliance with all specifi-

cations of the Contract Document and

Ernst’s own purchase order, Ernst hav-

ing relied upon such misrepresentationr:

Ernst asserts that such misrepresenia-

tions regarded, among other matters,

horsepower ratings and merchantability,

the latter despite the used, failed, re-

built and cannibalized condition of the

generators supplied by Fairbanks-Morse.

C. ERNST AGAINST PROVI-

DENCE—As a third-party beneficiary of

the contract between Providence and

Manhattan, Ernst claims damages

against Providence for delays and costs

of court caused by Providence’s breach

of its contract to do the following: to

supply plans, drawings and specifica-

387 FEDERAL SUPPLEMENT

tions for the project which correctly and

completely depicted the work to be per-

formed and which were feasible for the

accomplishment of the work; to prompt-

ly supply such information as was re-

quired from it in the course of the per-

formance of the work; te promptly is-

sue such clarifications as were required

from it in the course of the performance

of the work; to act promptly upon nec-

essary approvals of material or equip-

ment to be used in the course of per-

formance of the work; and to promptly

do all things required in order to enable

all persons, including Ernst, timely and

in an orderly manner to perform their

obligations under their contracts and

subcontracts within the time frame spec-

ified therein.

D. ERNST AGAINST McCAULEY

As a contractee with McCauley in con-

nection with the procurement of the

plans and specifications, Ernst claims

damages against McCauley for breach of

its warranty that the plans and specifi-

cations were in all respects accurate,

complete and sufficient so as to allow

proper evaluation of work to be done un-

der the contract. Ernst asserts that

McCauley’s breach of its warranty

caused delays and disruptions in the

supply of equipment and materials and

ultimately in the completion of the proj-

ect. As third-party beneficiary of the

contract between Providence and Mc-

Cauley, Ernst claims damages against

McCauley for failure to provide plans

and specifications suitable for determin-

ing the scope and cost of work to be per-

formed and for feasible construction;

for failure to timely effect necessary

clarifications, corrections and changes in

the plans and specifications; and for

failure to promptly act upon submittals

of data, samples and the like which were

required to be submitted to the archi-

tect.

E. MANHATTAN AGAINST

PROVIDENCE—Manhattan initially

claimed that a balance of $334,473.79

was due it under its contract with Prov-

idence. On July 27, 1973, the Court or-

dered Providence to make a payment of

4la

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

1009

Cite ax 387 F.Supp. 1001 (1974)

$211,475.00, thus reducing the balance

due to $123,000.00. In addition, Man-

hattan claims damages against Provi-

dence for intentional interference with

Manhattan’s timely performance of the

contract by failing to deliver portions of

the “existing building” for renovation

and by employing incompetent agents

and representatives. Manhattan claims

further damages for improper process-

ing of submittals, improper handling of

the patient bed light fixtures selection

and installation, and improper handling

of the emergency generator selection

and installation.

F. MANHATTAN AGAINST Me—

CAULEY—Manhattan seeks damages

against McCauley for failure to perform

general contractual duties, for failure

to properly process submittals, jor fail-

ure to handle properly the bed light fix-

tures selection and installation and for

failure to handle properly the emergency

generator selection and installation.

G. MANHATTAN AGAINST

ERNST—Manhattan seeks indemnifica-

tion from Ernst as to any liquidated

damages for which Manhattan is deemed

liable to Providence and for recoveries

against Manhattan by any cross-claim-

ant or plaintiff. Manhattan also seeks

damages based on contract and fraud

theories relating to the furnishing of

the patient bed light fixtures, the explo-

sion-proof receptacles, the wiring and

the emergency generator. Manhattan

alleges that Ernst and Fairbanks-Morse,

jointly and independently beginning in

October 1968, represented to Manhattan

that the Fairbanks-Morse generator sys-

tem met the required specifications, that

said representations were made knowing

them to be false and that Manhattan re-

lied on the misrepresentations to its det-

riment. Manhattan alleges a conspiracy

to defraud it by Ernst and Fairbanks-

Morse and seeks punitive damages

against Ernst for its fraud.

H. MANHATTAN AGAINST

FAIRBANKS-MORSE — Manhattan

seeks damages against Fairbanks-Morse

based on contract and fraud theories re-

387 F

lating to the furnishing of the emergen-

cy generator. Manhattan also seeks pu-

nitive damages against Fairbanks-

Morse.

II] I. CLAIMS BY PROVIDENCE

—Providence has no formal claim for

liquidated damages. However, this issue

was framed by the Court in its pretrial

order. Rule 150b) provides that,

(hen issues not raised by the plead-

ings are tried by the express or implied

consent of the parties, they shall be

treated in all respects as if they had

been raised in the pleadings.“ Provi-

dence has also pleaded over against

McCauley for indemnification as to any

liability Providence might have on the

various claims asserted by Manhattan

against Providence.

12. McCauley and Fairbanks-Morse

make no claims against any of the other

litigants. Their sole position being de-

fensive.

13. The pleadings as framed are

more the product of fertile legal minds

that they are definitive of the real is-

sues involved in the law suit. Every

conceivable issue was raised even though

many would have no effect on the out-

come of the case. The real issues are:

a. What was the actual number of

days of overrun for which liquidated

damages are to be assessed, and who

was responsible therefor?

b. Did the question of whether or

not to use a sewage ejector pump or a

gravity system cause any delay in the

completion of the entire contract?

e. Did the installation of the explo-

sive proof receptacles in the new operat-

ing rooms cause any delay in the ulti-

mate completion of the job?

d. Did the decision as to what pa-

tient room light fixtures would be used

cause any delay in the ultimate comple-

tion of the job?

e. Did the problems in selection and

installation of the emergency generator

system cause any delay in ultimate com-

pletion of the job?

42a

387 FEDERAL SUPPLEMENT

1010

t. Did Ernst's activities during the

selection and installation of the emer-

gency generator constitute fraud?

g. Was Fairbanks-Morse guilty of

fraud in regards to the emergency gen-

erator system?

h. Did the method in which the hos-

pital released space in the old building

to Manhattan cause any delay in the ul-

timate completion of the job?

i. Did Manhattan fail in its duty to

supervise and coordinate the work, and,

if so, did it delay the ultimate comple-

tion of the job? |

j. Is Providence entitled to a judg-

ment over against McCauley?

FINDINGS OF FACT

The Issue of Liquidated Damages

14. The claim of Providence, raised

sua sponte by the Court, for liquidated

damages under its construction contract

creates several factual issues, primary

of which is the period of time for which

these damages should be applied. This

question is resolved by determining the

number of days for which extensions

were granted or should have been grant-

ed beyond the scheduled completion date

of August 18, 1970. The number of

days for which extensions were ap-

proved, or should have been approved,

should be subtracted from the 638 days

between August 18, 1970, and May 17,

1972, when the project was conditionally

accepted. Another question relates to

the extent, if any. that Providence may

have been responsible for delays which

caused the project to extend beyond its

scheduled completion date.

{2} 15. There was a dispute with

respect to a request by Manhattan for

an extension of time for 39 days. Man-

hattan contended that it experienced

that much delay in obtaining access to

the old operating room area, which had

necessarily been kept in operation until

occupancy of the new operating area.

(EX-492. 493) By letter of April 27,

1972, McCauley had recommended ap-

proval of the request to Providence.

(EX-493) On April 28, 1973, Providence

first denied the request (EX-494), but

then, by letter of May 10, 1972, it ad-

vised that it would grant the extension

of 39 calendar days. (EX-495) On

May 18, 1972, Providence changed its

position and directed McCauley to disre-

gard its approval letter of May 10, 1972,

and to deny the requested extension

(EX-494) The Court finds that the ex-

tension requested should have been, and

was, approved by Providence and there-

fore allows it in the computation herein.

16. Additional extensions of time

were requested and denied. These re-

quests were properly denied and will be

considered in connection with the discus-

sion of the portion of the work to which

they were related. The extensions prop-

erly granted and due to be deducted

from the 638 total days overrun com-

prise 185 days which total includes the

disputed 39 days discussed above and ex-

tensions granted in connection with

Change Orders i-12, inclusive. There

should also be deducted 65 days for

which Providence was responsible in re-

gard to the sewage ejector pump and

2914 days in regard to the bed light

fixtures, as are hereinafter discussed.

In addition, for the purpose of comput-

ing liquidated damages, there must be

deducted from the total overrun the de-

lays caused by McCauley, it being Provi-

dence’s agent, which were 2942 days in

regard to the bed light fixtures and 80!

days in regard to the emergency gen-

erator, also hereinafter discussed. Ac-

cordingly, the overrun for which liqui-

dated damages are due is 2482 days

for a total of $62,125.00 in damages, the

contract providing for liquidated dam-

ages of $250.00 per day.

17. The more difficult age 4 —

confronting this Court is how the blame

for this overrun should be assessed

among the parties and what effect this

will have on the right of Providence to

recover the liquidated damages sought.

From the foundation to the finish work

there were multiple difficulties, many of

which should have been anticipated in a

job of this magnitude involving new con-

43a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

1011

Cite as 387 F.Supp. 1001 (1974)

struction and the remodeling of hospital

facilities where sick patients had to be

treated, operations performed, and hos-

pital functions continued without inter-

ruption.

18. In summary form, to be further

detailed in connection with the more

specific issues to follow, the progress

was substantially as follows: In 1968

and early 1969, foundations for the addi-

tions to the existing hospital (Buildings

A and B) were being laid. Inclement

weather and the necessity for some un-

expected work on the pilings on which

the foundation would rest (for which all

extensions requested were granted) put

the project behind schedule. Manhattan

prepared a bar chart showing anticipat-

ed commencement and completion dates

for cataloged portions of the job, but ad-

mittedly abandoned the chart during the

early parts of the project. There is tes-

timony that there was a period of prog-

ress during the time that Building A

was being raised to its full six stories,

but there were difficulties regarding

certain materials and equipment to be

installed, specifically the emergency gen-

erator system, bed light fixtures, and

deficiencies discovered in the explosion-

proof receptacles. Delays involving

these items will be discussed in more de-

tail. In 1970 work continued on the new

building. Building B was completed in

November 1970, and the renovation work

begun in the non-patient areas of the ex-

isting building. By Janury 1971, Build-

ing A had reached a point in its con-

struction where it could have promptly

been made ready for patient occupancy

if the emergency generators had been

available. Apparently, Manhattan and

its subcontractors did not push to com-

plete the building during the winter of

1970-1971. After the emergency gener-

ator arrived and was installed, Building

A was occupied by patients from the ex-

isting building, and portions of the ex-

isting building were turned over from

time to time, by Providence to Manhat-

tan for renovation.

19. On May 3, 1971, it was discov-

ered that the explosion-proof receptacles

(FX-115, p. 328) which were required

in the new operating rooms in Building

A had been defectively and dangerously

installed, thereby delaying occupancy un-

til the defects could be corrected. This

meant that Providence had to continue

to use the operating rooms in the exist-

ing building which to some extent dis-

rupted Manhattan’s renovation of the

existing building. There were further

problems with the emergency generator,

but the work continued through May

1972, in connection with renovations in

the existing building.

20. The various witnesses at the trial

attempted to allocate periods of delay

which prolonged the ultimate completion

of the project. However, the Court

finds it impossible to affix periods of

delay with any degree of accuracy, ex-

cept with respect to the emergency gen-

erator, the explosion-proof receptacles

and the bedlight fixtures. There is

some evidence that Providence delayed

completion of the project through a lack

of coordination in turning over parts of

the existing building to Manhattan.

There is other evidence that Providence

was conscientious in providing access to

the existing building but necessarily was

at times delayed in view of the recog-

nized commitment to keep the hospital

operational. It is apparent that Manhat-

tan and Ernst underestimated the diffi-

culties inherent in this renovation under

the contract conditions.

21. Representatives of the various

parties attempted to assess the responsi-

bility for delay on others than them-

selves. Every witness testified that

there was some overlap with respect to

the delays experienced and the cause

therefor. They further testified that

the delays were due to various causes, as

to a portion of which some defendants

admittedly could not be held responsible.

Sewage Ejection Pump

{3] 22. The plans and specifica-

tions for the project provided for the

sewage outflow line serving the hospit '

to be placed underground beneath the

44a

1012

floor of the Building B addition. An

electric sewage ejection pump was to be

installed for the purpose of lifting or

pumping the sewage up to the level at

which it could be discharged into the

municipal sewer lines. By November

1968, Manhattan had completed the ex-

cavation for the basement of Building B

(an area approximately two hundred

feet by fifty feet by ten feet deep) and

the reinforcing steel for the pilings and

had in place the pile caps, the walls and

the underground piping. Manhattan

was now ready to pour the basement

floor. At this time, McCauley directed

that the pouring be held up. The build-

ing engineer for Providence had belated-

ly realized that, by running the sewage

line through the basement rather than

under the floor, the sewage could be

made to flow out of the hospital by

gravity and that the need for the ejec-

tion pump could be eliminated along

with its resulting cost and operating and

maintenance expense. (PX 3, Tr.

2116-2123)

23. On November 14, 1968, Manhat-

tan was requested by McCauley to pro-

pose a change in the contract price for

eliminating the pump and changing the

sewage line to a gravity flow system.

Had the gravity flow arrangement been

originally designed by McCauley, it

would have been less expensive than the

underground pipe and pump system.

However, the work had progressed so

far at the time the change was proposed

that it would then have cost more to

change the design to a gravity-flow line

than it would have cost to proceed with

installation of the pump. Manhattan

and its plumbing subcontractor submit-

ted to McCauley a proposal for the

change on December 11, 1968. That

proposal was disapproved for the reason

that it did not coincide with an estimate

made by one of McCauley’s consulting

engineers. The proposal was resubmit-

ted on February 21, 1969. Manhattan

was notified on March 25, 1969, that the

proposal was rejected. Manhattan was

then permitted to resume its work and

387 FEDERAL SUPPLEMENT

to install the pump as originally de-

signed. (MX 244, Tr. 2116-2123)

24. Installation of the sewage ejec-

tion pump system was stopped on No-

vember 14, 1968, and resumed again on

March 25, 1969. Thus, there was a de-

lay of some 131 days in the installation

of the sewage system. Manhattan re-

quested an extension on its contract of

131 days because of this delay, but its

request was denied by the architect. At

trial, Manhattan insisted that it was en-

titled to this extension. Fairbanks-

Morse joined Manhattan in this position.

Ernst also insisted at trial that it was

entitled to an extension of 131 days with

the delay being attributed to Providence

and McCauley. Both McCauley and

Providence argued that the extension

was properly denied.

25. It is true that there was a delay

of 131 days in the installation of the

sewage system and that this particular

delay resulted from the failure of Provi-

dence and McCauley to decide promptly

which sewage system would be used.

However, the Court does not find that

this delay caused a corresponding delay

of 131 days in the completion of the

project as a whole. According to his

testimony (EX 244), Manhattan’s own

Vice President, Mr. Roberts, originally

had felt that this 131 days could have

been absorbed within the contract’s time

limit for the job. Although Mr. Roberts

later changed his mind, the Court shares

his original thoughts to the extent that

with proper supervision and coordination

by Manhattan and McCauley, this entire

time could have been absorbed. How-

ever, the fact is that it was not ab-

sorbed. Providence is the one who orig-

inally came up with the idea of the

gravity system, and this caused the stop-

page of this phase of the work. While

it is impossible to determine to a cer-

tainty the number of days delay which

this problem caused in the ultimate com-

pletion of the job, suffice it to say that

such delay, as there was, was caused by

Providence. The Court feels therefore

that one-half of this 131 days is as accu-

45a

E. C. ERNST, INC. v. MANHATTAN CONST. CO. OF TEX.

1013

Cite ax 387 F.Supp. 1001 (1974)

rate an estimate as can be made of the

actual resulting delay, that 65 days of

delay should be charged against Provi-

dence and that Providence should not be

paid liquidated damages for that period.

Explosion-Proof Receptacles

{[4] 26. The specifications provided,

in part:

“Receptacles:

“Explosion-proof receptacles in oper-

ating rooms and hazardous area shall

be flush mounted, 125 volt, 20 amps, 3

pole (grounding) with armored cord

grip plug for each receptacle, polished

chrome finish, Hubbell No. 24309 and

No. 24312 cap.” (PX 3, pg. 18-26;

Tr. 499)

“Type of Installation:

(e) All work installed in Operating,

Delivery and Emergency Rooms and

areas containing combustible anesthet-

ics shall be in accordance with re-

quirements of the National Electric

Code for Class I Group C installation

of all equipment within five feet of

the floor. Other equipment in areas

shall comply with N.F.D.A. No. 56.”

(PX 3, p. 18-6; Tr. 499)

“Standards of Materials and Work-

manship:

“All materials shall be new and shall

be listed as approved by the Under-

writers’ Laboratories, Inc., in every

case where a standard has been estab-

lished for the particular type of mate-

rial in question. All work shall be ex-

ecuted in a workmanlike manner and

shall present a neat and mechanical

appearance when completed.” (PX 3,

pg. 18-3)

27. An explosive-proof receptacle, of

the type involved in this litigation, is a

device consisting of three principal

parts. The largest part is a heavy cast-

steel, cube-shaped box fitted with screw-

out plugs for attachment to electrical

conduits at various points. The box is

hollow, and one side has a threaded

opening three inches in diameter. Into

this threaded opening is screwed a cast-

steel collar, the threaded portion of

which is approximately 1½ inches long.

On the outer end of the collar is a

flange plate 4', inches in diameter and

1, inch thick. The outer face is ma-

chined perfectly flat, and it has four

threaded holes for the attachment of the

third part. The third part of the device

has a heavy cast-steel face plate, the out-

er face of which is chrome plated and

the inner face is machined so as to seal

against the face of the flange on the col-

lar. On the inner side of the ace plate

is a sealed can-type unit containing the

electrical contact portion of the recepta-

cle. When assembled, four screws pass

through holes in the face plate and into

the holes in the collar flange, making an

airtight sea! between the machined faces

of each. The face plate contains the fe-

male portion of the receptacle, into which

a specially-designed male plug may be

inserted. (EX 706; EX 511)

28. The codes referred to in the spec-

ifications quoted above require the use

of explosion-proof receptacles for all in-

stallations in operating rooms and simi-

lar areas below the level of five feet

above the floor in order to eliminate the

risks of explosion and fire

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