Petition — Pennsylvania Department of Transportation v. United States

MAY 2 3 1981

80-1978

No. ALEAA: Sn |

in the Supreme Court of the

Unjted States

October Term, 1980

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF TRANSPORTATION,

Petitioner

¥.

THE UNITED STATES,

Respondent

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF CLAIMS

ROBERT H. RAYMOND, JR.

Assistant Chief Counsel

ROBERT W. CUNLIFFE

Deputy to the Chief Counsel

WARD T. WILLIAMS

Chief Counsel

JAY C. WALDMAN

General Counsel

Attorneys for Petitioner

Office of Chief Counsel

Department of Transportation

Commonwealth of Pennsylvania

Harrisburg, Pennsylvania 17120

(717) 787-2111

Murrelle Printing Co., Box 100, Sayre, Pa. 18840—(717) &88-2244

Question Presented for Review

QUESTION PRESENTED FOR REVIEW

Whether the Court erred by ignoring Court of Claims

Rule 147 (b) when it substituted its findings for the Trial

Judge’s findings on the reasonableness of the State’s settle-

ments of certain claims arising out of a Federal Highway

Administration sponsored highway construction project

when the evidence in the record did not rebut the normal

presumption of correctness of the Trial Judge’s findings?

TABLE OF CONTENTS

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Statement Of Jurisdiction .ccccccsscrvessecscsocesisvsvesesooesosss 1

Statutes and Rules Involved ...........cssssssssssrsesssseeees 2

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APPENDIX A:

Opinion of The United States Court of Claims of

February 25, 1961 cccsoccrcscsscscosscveccccssvsseecccesccszee la

judgment of the United States Court of Claims of

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APPENDIX B:

Opinion of Trial Judge Fletcher of September 27,

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ii

TABLE OF AUTHORITIES

CASES: roan

Davis v. United States, 164 Ct. Cl. 612 (1964) ...... 12

H. & H. Manufacturing Co., Inc. v. United States,

BGS C2. C5. S75. CEG. . ccthesepepeceseeineneneroenne Noone

Hebah v. United States, 456 F.2d 696, 197 Ct. Cl.

729 (1972), cert. denied 409 U.S. 870 (1973) 9

J. D. Hedin Construction Co., Inc. v. United States,

347 F.2d 235, 171 Ct. Cl. 70 (1965) ..........0000 9

Louisiana Department of Highways v. United States,

604 F.2d 1339, 221 Ct. Cl. —— (1979) ......... 9,10

STATUTE:

Federal-Aid Road Act of 1916, Ch. 241, 39 Stat.

355 as amended (23 U.S.C. §§101 et seq.

(| RRR ETERS IESE RIC GAR Cea Sie A ogieie Deans 2,3,4

RULES OF COURT:

United States Court of Claims Rule 147

LUPE ‘< ccscusinencahantndpenptensensonsudaigebediniodinegs 3,6,8,12

Opinions Below and Statement of Jurisdiction 1

OPINIONS BELOW

The opinion of the U. S. Court of Claims has not yet

been reported, and a copy thereof is attached hereto as

Appendix A. The judgment of the U. S. Court of Claims

of February 25, 1981, is also attached hereto as Appendix

A. The prior opinion of Trial Judge Fletcher, filed Sep-

tember 27, 1979, is attached hereto as Appendix B.

STATEMENT OF JURISDICTION

The U. S. Court of Claims filed its opinion and judg-

ment on February 25, 1981. The basis for jurisdiction

of this Court is found in 28 U.S.C. Section 1255(1).

2 Statutes and Rules Involved

STATUTES AND RULES INVOLVED

United States Statutes:

23 U.S.C. §106 (a) :

(a) Except as provided in section 117 of this

title, the State highway department shall submit to

the Secretary for his approval, as soon as practicable

after program approval, such surveys, plans, speci-

fications, and estimates for each proposed project

included in an approved program as the Secretary

may require. The Secretary shall act upon such sur-

veys, plans, specifications, and estimates as soon as

practicable after the same have been submitted, and

his approval of any such project shall be deemed a

contractual obligation of the Federal Government for

the payment of its proportional contribution thereto.

In taking such action, the Secretary shall be guided

by the provisions of section 109 of this title.

23 U.S.C. §120(c):

(c) Subject to the provisions of subsection (d)

of this section, the Federal share payable on account

of any project on the Interstate System provided for

by funds made available under the provisions of sec-

tion 108 (b) of the Federal-Aid Highway Act of 1956

shall be increased to 90 per centum of the total cost

thereof, plus a percentage of the remaining 10 per

centum of such cost in any State containing unap-

propriated and unreserved public lands and nontax-

able Indian lands, individual and tribal, exceeding

5 per centum of the total area of all lands therein,

Statutes and Rules Involved 3

equal to the percentage that the area of such lands

in such State is of its total area, except that such

Federal share payable on any project in any State

shall not exceed 95 per centum of the total cost of

such project.

Rule of the U. S. Court of Claims:

Rule 147 (b)

(b) Trial judge’s report. The court may adopt

the trial judge’s report, including conclusions of fact

and law, or may modify it, or reject it in whole or

in part, or direct the trial judge to receive further

evidence, or refer the case back to him with instruc-

tions. Due regard shall be given to the circumstance

that the trial judge had the opportunity to evaluate

the credibility of the witnesses; and the findings of

fact made by the trial judge shall be presumed to be

correct.

4 Statement of the Case

STATEMENT OF THE CASE

This action, brought by the Commonwealth of Penn-

sylvania, Department of Transportation (State) against

the United States, prayed that the United States, through

its agent the Federal Highway Administration (FHWA),

contribute 90 percent of the cost of certain expenditures

made by the State in 1970. These expenditures were

for settlements of claims brought by a local governmental

authority, the Milford Water Authority (Milford), and

the contractor, the Gasparini Excavating Co. (Gasparini) ,

which claims arose out of the construction of Interstate

Highway 84 (I-84) in northeastern Pennsylvania. The

settlements were in the amounts of $275,000.00 and

$835,000.00, respectively. Trial Judge Fletcher, in an

opinion dated September 27, 1979 awarded $999,551.20

to the State. This case came before the U. S. Court of

Claims on the FHWA’s exceptions to this judgment.

Pursuant to the Federal-Aid Highway Act, 23 U.S.C.

Section 106, the State and the FHWA entered into project

agreements for the construction of 1-84 effective July 5,

1966 and January 23, 1967. Actual construction began

in April, 1967.

In August, 1967, Milford contacted the State, com-

plaining that the highway construction was contaminating

its water supply. Subsequent studies revealed that the

highway construction was indeed the source of Milford’s

water supply contamination, and on December 27, 1967,

Milford filed a complaint in equity in state court asking

for the construction of a filtration system, the revision of

Statement of the Case 5

drainage, damages and “such other and further relief as

may be deemed just and proper.”

Negotiations began in earnest with Milford to fore-

stall the issuance of an injunction and a project shutdown.

The State agreed to restrict Gasparini’s use of “borrow”

excavation sites which might affect the water supply, and

notified Gasparini of this restriction on December 22,

1967.

In May, 1968 the Department ordered Gasparini to

stop work while the Department considered major grading

and drainage revisions to alleviate the conditions causing

contamination of the Milford water supply.

Negotiations proceeded with Gasparini and Milford

to resolve the State’s liability with regard to the impeding

of Gasparini’s operation and the pollution of Milford’s

water supply. Representatives of FHWA were present at

these negotiations but offered no constructive comments.

In August, 1970 the State reached a settlement with

Milford, eliminating the threat of an injunction. And,

the Trial Judge, in his evaluation of this settlement, held,

that the FHWA was obligated to reimburse the State for

90 percent of the $275,000.00.

Similarly, in May, 1970, the State reached a final

settlement with Gasparini, eliminating the threat of litiga-

tion for damages. And, the Trial Judge in his evaluation

of this settlement, held that the FHWA was obligated to

reimburse the State 90 percent of the $835,000.00.

In regard to the Milford settlement, the facts show

that the settlement of $275,000.00 was reasonable and

necessary under the circumstances then existent. Although

a consultant’s report concluded that alternative solutions

6 Statement of the Case

existed (i.e., the construction of a full scale water treat-

ment plant at an estimated cost of $560,000.00, or a re-

design of the drainage system at an estimated cost of

$58,000.00) , these alternatives were either. too costly or

possibly insufficient to effect the desired results. As the

Trial Judge reasoned, the “plaintiff (State) acted reason-

ably in concluding that construction of the holding reser-

voir would be the most reliable cure for the turbidity

problem.” Trial Judge’s opinion at 22, 23 (Appendix,

p. 46a.)

The Trial Judge’s findings are uncontroverted that

the Milford settlement was made for the benefit of the

highway construction project in order to avoid a shut-

down or a major design change in the project. The Trial

Judge found that the turbidity problem was attributable

to the highway construction and the method of resolution

contained in the settlement was reasonable.

The Trial Judge also concluded that the settlement

with Gasparini was a reasonable part of the construction

cost of the highway. Gasparini could have sued the State

for damages in excess of $2,300,000.00. The State’s legal

officials, including the Attorney General, were of the opin-

ion that this claim would be upheld in litigation, litigation

which in its nature would have been exorbitantly ex-

pensive. Instead, as the Trial Judge reasoned, the State

acted in good faith in settling this claim and the settle-

ment was reasonable under the circumstances presented.

The Court of Claims ignored these findings by the

Trial Judge and substituted its own findings, despite the

absence of any reason to rebut the presumptive correctness

of the Trial Judge’s finding as espoused by Rule 147 (b).

Instead, the Court found that the implementation of the

Statement of the Case 7

drainage revision and an earlier order to Gasparini to start

borrow operations in the spring of 1968, would have lim-

ited expenditures to $58,000.00 and $90,000.00, respec-

tively, which in light of FHWA’s 90 percent participation,

would have resulted in federal expenditures of $52,200.00

and $81,000.00. The Court of Claims thus reduced the

judgment of the Trial Judge to $153,200.00.

8 Argument

ARGUMENT

The State submits that the Court of Claims has erred

in ignoring Rule 147(b) of the Court of Claims Rules,

and has thereby so far departed from the accepted course

of judicial proceedings as to call for an exercise of this

Court’s power of certiorari. The Court of Claims’ unwar-

ranted substitution of its findings for those of the Trial

Judge has resulted not only in loss to the State of $866,-

350.00 in Federal-Aid Highways Act funds, but also raises

important questions for all states concerning the circum-

stances under which the FHWA may refuse to reimburse

states for costs incurred in settlement of third-party claims

arising during the course of highway construction.

Rule 147 provides in part:

“(b) Trial judge’s report. The court may

adopt the trial judge’s report, including conclusions

of fact and law, or may modify it, or reject it in

whole or in part, or direct the trial judge to receive

further evidence, or refer the case back to him with

instructions. Due regard shall be given to the circum-

stance that the trial judge had the opportunity to

evaluate the credibility of the witnesses; and the

findings of fact made by the trial judge shall be pre-

sumed to be correct.”

Pursuant to this rule, a Trial Judge’s findings of fact

are presumed to be correct. Although the presumption

does not extend to conclusions of law, it does encompass

findings because of the Trial Judge’s opportunity to hear

the witnesses, to determine the weight to be accorded to

Argument 9

their testimony, and to evaluate both oral and documen-

tary evidence in light of the circumstances presented.

Hebah v. United States, 456 F.2d 696, 197 Ct. Cl. 729

(1972) , cert. denied 409 U.S. 870 (1973).

“A party who undertakes to overcome this presump-

tion must make a strong affirmative showing to the con-

trary.” 456 F.2d at 698. When a case comes to the

Court of Claims, the

{D]efendant [FHWA] has the burden of show-

ing that the Commissioner [i.e., Trial Judge] was

wrong in his factual conclusions. Such a task is far

from slight since we start with the double directive

that due regard must be given to the Commissioner’s

opportunity to judge the credibility of the witnesses

and that his factual findings will be presumed to be

correct. That presumption is dissipated only by a

strong affirmative showing. J. D. Hedin Construc-

tion Co., Inc. v. United States, 347 F.2d 235, 240,

171 Ct. Cl. 70 (1965).

The Court of Claims erred both by ignoring the presump-

tion that the Trial Judge’s findings were correct, and by

disregarding the FHWA’s failure to shoulder its burden

of affirmatively showing that the Trial Judge’s findings

were wrong.

The Trial Judge’s findings recite in detail the circum-

stances surrounding the Milford and Gasparini settlements.

In spite of the FHWA’s allegations of negligence, the Trial

Judge found that the State had not acted negligently but

had responded in a reasonable fashion in settling with

these third parties. In contradistinction to the situation

presented in Louisiana Department of Highways v. United

States, 604 F.2d 1339, 221 Ct. Cl. (1979), where

the state’s counsel admitted that a third-party contractor’s

10 Argument

claim was entirely without merit and that a settlement was

unreasonable, the Trial Judge concluded that there existed

reasonable grounds for belief that the State would have

been liable on the Milford and Gasparini claims.

“Finally, further consideration should be given

to this court’s recent decision in Louisiana Depart-

ment of Highways v. United States, Ct. Cl. No. 129-

76, dated July 18, 1979, 604 F.2d 1339, in which it

is held that in a claim for reimbursement under the

Federal-Aid Highways Act, where the claim is for

costs incurred in settlement of third-party claims

against the state, there must be reasonable grounds

for belief that the state would have been liable on

the third party claims. In the Louisiana case, it was

the opinion of the State’s counsel, concurred in by

the court, that the contractor’s claim was entirely

without merit. The present case differs in that cru-

cial respect. Here, there is ample evidence that, in

the opinion of Pennsylvania’s responsible legal of-

ficials, the Commonwealth of Pennsylvania might

well have been found liable to the third party claim-

ants on the basis of any of several possible legal

grounds had the claims finally gone to litigation.

They determined in good faith that the claims should

be settled, not merely to avoid expensive and trouble-

some litigation, but to avoid the possibility of sub-

stantially greater liability while, as stated above, the

court should be reticent to look behind the assess-

ments of Pennsylvania’s legal c.!icials as to the State’s

liability under Pennsylvania law, I nevertheless con-

clude that their conclusion to settle the claims was

reasonably justified under the unexpected complexi-

ties that had gradually developed.

Argument 11

“While I conclude it was not unreasonable for

Penn DOT to believe that it faced a real danger of

being held liable to the third party claimants, that

potential liability was not grounded on negligence

or unnecessary actions which would excuse the de-

fendant’s contractual obligation to reimburse plain-

tiff for its share of the costs necessary to avoid the

threatened litigation. Given the Act’s presumption

in favor of reimbursement, there must be more than

has been shown here to excuse that obligation. The

Commonwealth of Pennsylvania should have judg-

ment rendered in its favor in the sum of $999,551.-

20, and defendant’s counterclaim for interest should

be dismissed.” (Emphasis added.) (Trial Judge’s

Opinion at 25-26.) (Appendix, pp. 48a-49a.)

The Court itself partly acknowledged these findings,

stating that “the Trial Judge below found, and we con-

cur, that these facts are insufficient to establish design

negligence by the State.”” (Court’s Opinion, at 9.) (Ap-

pendix, p. 13a.) As regards the Gasparini claim, the

Court specifically held that it possessed ‘“‘at least some

merit”. (Jd. at13.) (Appendix, p. 19a.)

It is at this juncture, absent clearly erroneous findings

by the Trial Judge or an affirmative showing of error by

the FHWA, that the Court’s inquiry should have ended.

The Court determined, however, that the Milford and Gas-

parini settlements were unreasonable. As regards the

Milford settlement, the Court submitted that the settlement

was unreasonable because the State failed to act as a

“prudent businessman placed in a similar position”. (Id.

at 12.) (Appendix, p. 16a.) And with the Gasparini

settlement, the Court suggested that the State had acted

unreasonably by not authorizing an alternate borrow site

until August, 1968. (Jd. at 15.) (Appendix, p. 21a.)

12 Argument

These conclusions, however, were founded upon the

Court’s own findings of what a prudent man would have

done under the circumstances, “typically and traditionally

a question of fact.” H. & H. Manufacturing Co., Inc. v.

United States, 168 Ct. Cl. 873, 885 (1965). Thus, the

Court committed error by ignoring Rule 147(b)’s pre-

sumption for the correctness of the Trial Judge’s findings,

and substituted findings unwarranted from the record.

There is also no evidence that the Court’s conclusions

are warranted by any strong affirmative showing from the

FHWA to dissipate the rule’s presumption. Allegations and

innuendo alone are insufficient to abrogate the rule’s scope.

And, “where, as often happens, what appears to be a

sound objection to a finding is answered by an equally

sound explanation in support of it, the presumption will

carry the day.” Davis v. United States, 164 Ct. Cl. 612,

616-617 (1964). Clearly, the Court of Claims had no

justification to substitute its findings for that of the Trial

Judge in this case, and by so doing, it ignored both Rule

147 (b)’s mandate and drastically departed from the ac-

cepted course of judicial proceedings.

Argument 13

CONCLUSION

For the foregoing reasons, Petitioner respectfully

requests that a Writ of Certiorari issue to review the judg-

ment and opinion of the United States Court of Claims

entered in these proceedings on February 25, 1981.

ROBERT H. RAYMOND, JR.

Assistant Chief Counsel

Office of Chief Counsel

Department of Transportation

Commonwealth of Pennsylvania

Harrisburg, Pennsylvania 17120

(717) 787-2111

ROBERT W. CUNLIFFE

Deputy to the Chief Counsel

WARD T. WILLIAMS

Chief Counsel

Jay C. WALDMAN

General Counsel

Attorneys for Petitioner

Opinion, Court of Claims la

APPENDIX A

IN THE UNITED STATES COURT OF CLAIMS

No. 429-75

(Decided February 25, 1981)

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF TRANSPORTATION

v. THE UNITED STATES

Robert H. Raymond, Jr., attorney of record, for plain-

tiff. Robert W. Cunliffe and Edward G. Biester, Jr., of

counsel.

David M. Cohen, with whom was Assistant Attorney

General Alice Daniel, for defendant. Richard ]. Webber

and Francis ]. Locke, of counsel.

Before NICHOLS, KASHIWA and SMITH, Judges.

OPINION

KASHIWA, Judge, delivered the opinion of the

court:

This case comes before the court on defendant’s ex-

ceptions to the recommended decision of Trial Judge

Fletcher, filed September 27, 1979, pursuant to Rule

2a Opinion, Court of Claims

134(h). We must decide whether the trial judge was

correct in concluding the federal government must con-

tribute 90 percent of the actual settlement costs of two

lawsuits arising from highway construction. After con-

sidering the written submissions of the parties and their

oral presentations, we reject the trial judge’s report and

require 90 percent federal participation only to the extent

expressed in this opinion.

Plaintiff Pennsylvania Department of Transportation

(hereafter the State) has brought this suit alleging a

breach by the United States (hereafter defendant) of an

agreement requiring the United States to reimburse the

State for 90 percent of the necessary costs of construction

of Interstate Highway 84 in northeastern Pennsylvania.

Neither party disputes that if reimbursement is owed,

such reimbursement must, under the -“deral-Aid High-

ways Act,’ be at 90 percent of the allowable costs. The

“costs” for which plaintiff seeks 90 percent reimburse-

ment are unbudgeted amounts paid by the State to a util-

ity (Milford Water Authority) and to the road construc-

tion contractor (Gasparini Excavating Company) in settle-

ment of claims by those parties against the State.

In August 1967, several months after the excavation

of the highway began, the utility complained to the Penn-

sylvania Department of Transportation that occasionally

1The statutory framework, now codified at 28 U.S.C. §§101

et seq. (1976), was first enacted in 1916 as the Federal-Aid Road

Act of 1916, ch. 241, 39 Stat. 355. Although numerous successive

road acts have altered minor details of the scheme, the 1916 frame-

work of state expenditure with federal reimbursement has re-

mained intact. For simplicity’s sake, we refer hereafter to the

statutory framework as if it were contained in a single act of

Congress.

Opinion, Court of Claims 3a

excessive amounts of particulate matter had begun to ap-

pear in its reservoirs, clouding the water. This clouded,

or turbid, water was aesthetically displeasing and had an

unpleasant taste. As some of the watersheds which fed

the Milford reservoirs were located within the construc-

tion area, Milford felt the turbidity problem was caused

by the exposure of bare slopes during highway construc-

tion.

The Department of Transportation engaged an en-

gincering firm, Michael Baker, Jr. Inc., to study the rela-

tionship between the turbidity and highway construction.

If the engineers found the turbidity and construction re-

lated, they were to propose solutions to the problem. The

Baker engineering firm subcontracted the consulting re-

port, so the actual engineering study was done by Gannett,

Fleming, Corddry and Carpenter, Inc. (hereafter Gan-

nett). Gannett monitored the turbidity from March 1967

through September 1968. Neither party disputes Gan-

nett’s expertise as engineers, nor the manner in which the

study was conducted.

While Gannett was conducting the study, Milford

filed a lawsuit on December 27, 1967, in a Pennsylvania

state court seeking drainage revisions, monetary damages,

construction of a filtration system, and other relief as the

court should deem appropriate. Resolution of this lawsuit

was apparently stayed while the Gannett study was being

completed.

The Gannett study was issued on October 31, 1968.

The Abstract of the Report adequately summarizes the

conclusions and recommendations of the consulting engi-

neers:

* * * * * *

4a

Opinion, Court of Claims

The source of the turbidity is the excavation for

Interstate Route 84, L.R. 1049, which is being con-

structed approximately one-half mile north of the Mil-

ford water supply reservoirs. The primary source is

the cut slopes of the highway excavation between

Vantine Brook and Vandermark Creek. After heavy

rains, turbid runoff water from this area enters Van-

tine Brook and then infiltrates to the ground water

body which feeds the Milford water supply reser-

voirs. * * *

The turbidity problem can be significantly re-

duced by transporting all drainage from the highway

slopes east of Vantine Brook to Vandermark Greek,

by stabilizing these same highway slopes with seed

and mulch or other means, and by reducing the ve-

locity and thereby the erosion tendency of water dis-

charged to Vantine Brook. The combined use of

these measures would effect a significant reduction

in the turbidity within two years. After this initial

reduction it is expected that operating procedures at

the Milford water supply can provide water of ac-

ceptable quality. [Emphasis supplied. ]

Should the measures described above prove to

be insufficient the paving of infiltration zones along

Vantine Brook or the construction of a clear water

holding reservoir are feasible alternative solutions.

The project costs for a one million gallon steel hold-

ing reservoir would be about $100,000; the total

cost for channel lining cannot be determined without

additional knowledge of the extent of the zones of

infiltration along Vantine Brook. The construction

of a holding reservoir would represent a permanent

Opinion, Court of Claims 5a

improvement to the Milford supply. [Emphasis sup-

plied. ]

Thus, the primary recommendation of the Report was

to redesign the area’s drainage system and to rapidly re-

plant the exposed slopes. This solution was the least ex-

pensive, with an estimated cost of $58,000, and was likely

to provide an acceptable cure to the problem. More ex-

pensive measures, such as a one million gallon holding

reservoir, costing $100,000, or a complete water treat-

ment facility, costing $750,000, would not be necessary

unless the drainage revisions and the replantings did not

cure the problem. The record indicates the State did

design a revised drainage system costing $58,000, but the

revisions were never made.

Copies of the Report were given to Federal Highway

Administration (FHWA) officials on November 6, 1978.

Thereafter, State officials met with counsel for Milford

in an effort to end the lawsuit. Staff members of the

FHWA attended some of the meetings as observers but

did not participate. The State agreed to finance the con-

structions of a 1.5 million gallon steel reservoir and to

provide a five-year water-quality surveillance program.’

The reservoir was not built Instead, by supplemental

agreement, the State agreed to pay Milford $275,000 to

release all claims against the State.

2The 1.5 million gallon reservior was 500,000 gallons in ex-

cess of that which the consulting engineers recommended as an

alternative if the drainage revisions and replantings proved unsuc-

cessful. The record offers no explanation why the State agreed

to construct a reservior 50 percent greater than that thought neces-

sary by the consultants it hired.

3 The turbidity problem cured itself. The water today is of

acceptable quality.

6a Opinion, Court of Claims

The State paid the money to Milford and submitted

a formal request to the FHWA for reimbursement of the

settlement cost as a construction expense under Project

I-84-1(19)46. The FHWA denied federal participation

on August 7, 1970. Thereafter, the State resubmitted the

denied settlement costs as a right-of-way expense under

Project I-84-1(12)46. Apparently not realizing the costs

were being dealt with as construction expenses and had

already been denied, the right-of-way personnel allowed

the settlement costs under the right-of-way project. When

the mistake was discovered, the FHWA recovered the

$275,000 by means of a setoff against moneys owed Penn-

sylvania under other projects. Eventually, this suit fol-

lowed.

Simultaneous with the events involving the Milford

Water Authority, a related dispute arose between the Penn-

sylvania Department of Highways and its construction

contractor, Gasparini. By letter of December 20, 1967,

Gasparini requested the State’s approval of a borrow site*

known as the Olmstead site, beginning in spring 1968.°

This was Gasparini’s first formal request to use this par-

ticular site, although apparently other grading and bor-

row operations had occurred in 1967. The contract spe-

cifications required the State to approve any borrow site

adjacent to the highway or likely to cause pollution of

waterways. The Olmstead site was adjacent both to the

highway and, unfortunately, to Vantine Brook, a feeder

stream into the utility’s reservoirs. Fearful that borrow

4A borrow site is where fill material for grading operations

is excavated.

5 Borrow and fill operations generally cannot be conducted

during winter months in northern climates, as the frozen ma-

terials will not pack properly.

Opinion, Court of Claims 7a

operations at the site would exacerbate the turbidity prob:

lem, the State indicated it would approve the site only

if Milford also agreed to the borrow site. Gasparini

sought, but did not receive, Milford approval. Neverthe-

less, throughout early 1968 the State encouraged Gasparini

to continue to try to gain Milford approval of the Olm-

stead site rather than to direct the contractor to obtain

fill elsewhere. The State finally formally directed Gas-

parini to use alternate borrow sites on August 12, 1968.

Had the State directed the use of alternate borrow sites

by April 1, 1968, additional costs of approximately $90,-

000 above the contract price for borrow would have been

incurred,

By letter of August 20, 1968, Gasparini gave written

notice of its intention to assert a claim for delay based on

the borrow dispute. On February 20, 1970, Gasparini

submitted a delay (and related expenses) claim of $2.3

million. The $2.3 million claim represented the contrac-

tor’s total cost for the entire grading and borrow portions

of the project, net of payments previously received, plus

a $225,000 profit. The contractor computed his costs

not on actual expenditures but, instead, by using artificial

hourly rental (“force account”) rates. By use of the force

account rates, Gasparini’s equipment charges were 300

percent of actual equipment costs.

State highway officials met with Gasparini to resolve

the claim in March and April 1970. As with the Mil-

ford negotiations, FHWA staff members attended the

meetings as observers but did not participate, At the April

meeting, Gasparini offered to withdraw its $2.3 million

claim if the State would pay $846,778, which Gasparini

alleged represented its actual costs for the entire grading

8a Opinion, Court of Claims

and borrow portions of the project, plus a profit of $144,-

000. This proposal did not use the force account rates

to compute equipment costs. The State tentatively ac-

cepted the settlement at the meeting and finalized the set-

tlement by letter later that month. Gasparini was sub-

sequently paid $835,612, of which 90 percent reimburse-

ment is demanded from the United States.

We begin by observing that these settlement costs

exceed the original Project Agreement cost limitations.

Although neither party has cited authority which requires

reimbursement of these unforeseen costs, the defendant

concedes it has a policy of reimbursing unbudgeted settle-

ment costs." On brief, no doubt based on this policy, the

defendant assumes that reimbursement of reasonable settle-

ment costs is required (presumably under the original

Project Agreement) and, instead, addresses itself to the

question of to what extent these settlements were reason-

able. There is nothing in this record which causes us to

reject defendant’s understanding of its obligations. The

majority therefore cannot agree with the suggestion in

“The court’s own research discloses that the FHWA had is-

sued at least one formulation of this policy prior to the date of

this Project Agreement, Paragraph 19 of Policy and Procedure

Manual 21-6.3 (now 23 C.F.R, §635,.120 (1980)). That paragraph

seemingly became a part of this Agreement under a clause incor-

porating ‘‘regulations[,] * * * policies and procedures * * *’’ of

the FHWA even though the paragraph was not then formally a

regulation, See People of the State of California v, United States,

213 Ct. Cl, 329, 338, 551 F.2d 843, 848, cert, denied, 434 U.S, 857

(1977) ; People of the State of California v, United States, 547 F.

2d 1388, 1390 (9th Cir.), cert. denied, 484 U.S, 824 (1977),

Neither party, however, has argued that Paragraph 19 applies to

these settlements. Accordingly, we rest our decision on other

grounds,

Opinion, Court of Claims 9a

the concurring and dissenting opinion that reimbursement

can only be required where a separate formal request has

been made prior to settlement. On these facts, the de-

fendant’s view that it is required to reimburse reasonable

settlement costs under the Project Agreement is sufficient.

Defendant’s decision to limit its reimbursement ob-

ligation to only reasonable settlement costs, we think,

necessarily follows from the statutory scheme (and its

legislative history) establishing the federal highway aid

program. From that scheme,

* * * it is clear that Congress did contemplate

that the Secretary exercise administrative expertise

to see that apportioned funds are not expended on

projects which fail to meet reasonable standards of

cost.

* * * " * *

The Congressional intent is that the Secretary

may exercise his discretion to insure that the roads

are well constructed and safely built at the lowest

possible cost, all in furtherance of the Act * * *,

State Highway Commission of Missouri v. Volpe, 479 F.

2d 1009, 1113-1114 (8th Cir. 1973); see Mahler v. United

States, 306 F.2d 713, 718-719 (3d Cir.) , cert. denied, 371

U.S. 923 (1962). See also Citizens Organized to Defend

Environment, Inc. v. Volpe, 353 F. Supp. 520, 531 (S.D.

Ohio 1972).

A rule requiring federal participation regardless of

reasonableness might well be imprudent where the state

disbursing the moneys bears only a small fraction of the

true costs. Applying a rule of reasonableness to unfore-

seen costs in cases under the Act is consistent with the

10a Opinion, Court of Claims

more general rule requiring that a government contractor

must proceed reasonably in order to recover expenses be-

yond the limitations contained in a cost-reimbursement

contract. E.g., Singer-General Precision, Inc. v. United

States, 192 Ct. Cl. 435, 427 F.2d 1187, 1192 (1970).

We find the defendant’s requirement, that unbudgeted

settlement costs are reimbursable only if reasonable, to

be proper. Indeed the State does not seriously dispute

that only reasonable settlement costs are eligible for fed-

eral participation.

Nor does the State dispute the well-established rule

in this court that a ‘government contractor bears the

‘burden of establishing the fundamental facts of liability,

causation and resultant injury.’” Electronic and Missile

Facilities, Inc. v. United States, 189 Ct. Cl, 237, 253, 416

F.2d 1345, 1355 (1969), citing Wunderlich Contracting

Co. v. United States, 173 Ct. Cl. 180, 199, 351 F.2d 956,

968 (1965); Roberts v. United States, 174 Ct. Cl. 940,

956, 357 F.2d 938, 949 (1966). See also Huerta v.

United States, 212 Ct. Cl. 473, 548 F.2d 343 (1977).

Instead, the State argues as an initial matter that un-

der the Federal-Aid Highways Act actual, or historic, costs

are presumed to be reasonable, This alleged presumption,

the State continues, shifts the ultimate burden of proof

from it as a contractor, see Electronic and Missile Facili-

ties, supra, to the defendant. Thus, once actual costs are

shown in a suit under the Act, the State concludes, reim-

bursement must be made unless the defendant proves the

actual costs are umieasonable, Following this reasoning,

the trial judge below concluded that the defendant failed

in its burden and that reimbursement was appropriate in

the full amount sought by plaintiff.

Opinion, Court of Claims lla

We assume, arguendo, that a presumption for reim-

bursement does arise under the Federal-Aid Highways Act

once actual payment by a state is shown. Cf. Bruce Con-

struction Corp. v. United States, 163 Ct. Cl. 97, 102, 324

F.2d 516, 519 (1963) (in general equitable adjustment

actions, “historical’’ costs are presumed reasonable). In

modern federal civil practice, Federal Rule of Evidence

301 controls the effect of presumptions. It provides:

Rule 301.

PRESUMPTIONS IN GENERAL IN CIVIL ACTIONS

AND PROCEEDINGS

In all civil actions and proceedings not other-

wise provided for by Act of Congress or by these

rules, a presumption imposes on the party against

whom it is directed the burden of going forward with

evidence to rebut or meet the presumption, does not

shift to such party the burden of proof in the sense

of the risk of nonpersuasion, which remains through-

out the trial upon the party on whom it was originally

cast. [Emphasis supplied. ]

Thus, unless Congress has otherwise required the ultimate

burden of proof in cases under the Act to shift to the

Government, F.R.E. 301 requires the ultimate burden to

remain with the State here, the presumption notwithstand-

ing.

Nowhere in the Federal-Aid Highways Act is there

an express requirement that the ultimate burden must shift

once actual costs are shown. Moreover, although the lan-

guage of a statute might implicitly require such a result,

cf., e.g., Griggs v. Duke Power Co., 401 U.S. 424, 432

(1971) (intent of Title VII is to shift burden to employer

12a Opinion, Court of Claims

to disprove discrimination); Albemarle Paper Co. v.

Moody, 422 U.S. 405, 425 (1975) (same), our review

of the relevant legislative history surrounding the initial

passage of the Act in 1916 convinces us that Congress

was concerned that imprudent state action might drain

the federal treasury. E.g., H. Rep. No. 26, 64th Cong.,

Ist Sess. 4-5 (1916); S. Rep. No. 250, 64th Cong., Ist

Sess. 15-6 (1916). See generally Mahler v. United States,

306 F.2d at 719-722. That concern seems inconsistent

with a conclusion that Congress intended the FHWA to

affirmatively disprove the reasonableness of state dis-

bursals exceeding project spending limitations. Also, we

are not unmindful that under the legislative scheme, the

various states actually disburse the money and then seek

reimbursement from the FHWA. Thus, a state seems

far better able to prove the reasonableness of an ex-

penditure than is the FHWA to disprove the reasonable-

ness of the expenditure. For these and other reasons, no

previous federal appellate decision has shifted the ultimate

burden in an FHWA case to the Government. See, e.g.,

People of the State of California v. United States, 213 Ct.

Cl. 329, 551 F.2d 843; Louisiana Department of High-

ways v. United States, 221 Ct. Cl. ——, 604 F.2d 1339

(1979); Mahler v. United States, supra; State Highway

Commission of Missouri v. Volpe, supra; People of the

State of Calfiornia v. United States, 547 F.2d 1388. See

also Massachusetts v. Connor, 248 F. Supp. 656 (D. Mass.

1966). We see no reason to reach a different result to-

day merely because the State wishes it so.

Therefore, since Congress has not otherwise provided,

F.R.E. 301 precludes the shifting of the ultimate burden

from the State of Pennsylvania to the defendant. Since

the defendant met the presumption by offering evidence

Opinion, Court of Claims 13a

that the settlement costs were unreasonable, we now turn

to each settlement to determine its reasonableness.

We begin by rejecting the defendant’s argument that

neither the Milford nor the Gasparini settlements could

be reasonable because both disputes stemmed from the

State’s negligence in design of the highway. We are hesi-

tant to adopt such a broad rule, especially where the

FHWA must itself approve highway design prior to any

construction. On these facts, however, we need not reach

the absolute rule for which the defendant contends. The

trial judge below found, and we concur, that these facts

are insufficient to establish design negligence by the State.

Similarly, we reject the State’s initial argument that estop-

pel lies against the defendant to deny either claim. Noth-

ing in this record convinces us the Government misled the

State. Moreover, the thrust of the State’s argument, that

Arizona Highway Department v. United States, 204 Ct.

Cl. 171, 494 F.2d 1285 (1974), somehow limits the

Government’s right to recover the erroneous payments of

the Milford claim, is incorrect as a matter of law. The

United States has inherent authority to recover sums er-

roneously paid, and it cannot be estopped from doing so

by the mistakes of its officers or agents. Aetna Casualty

& Surety Co. v. United States, 208 Ct. Cl. 515, 520, 526

F.2d 1127, 1130 (1976), and citations contained therein.

With these initial comments, we turn to the central

matter, whether these settlement payments were reason-

able.

Milford Settlement

In arguing that its settlement for $275,000 with the

water utility was reasonable, the State stresses both that

the Milford lawsuit posed an enormous potential liability

14a Opinion, Court of Claims

and that the drainage revisions its own consultants recom-

mended were not guaranteed to solve the turbidity prob-

lem. Since the settlement ended all potential exposure,

the State concludes, the settlement was a fortiori reason-

able. For its part, the defendant asserts that the drainage

revisions and replantings recommended by Gannett if im-

plemented would have controlled the turbidity at a much

lower cost. Thus, the defendant says, any settlement cost

in excess of $58,000, the amount the State concedes the

revisions and replantings would have cost, was unneces-

sary and hence unreasonable."

The true liability that a lawsuit poses is rarely sus-

ceptible of precise quantification prior to final judgment.

Both parties in litigation may encounter unforeseen dif-

ficulties of proof. The skill of opposing counsel and the

resources each side can devote to the conflict may be addi-

tional unknowns. Moreover, no party can be precisely

certain of the interpretation the trier of fact will give to

either the facts or the law. All of these factors are dif-

ficult to quantify and even though free to recognize

frivolous claims, we have been reluctant to second-guess

the decisions of litigating parties and their counsel with

respect to settlements involving claims of at least some

merit. Louisiana Department of Highways, 221 Ct. Cl.

at ——, 604 F.2d at 1347-1348. Our reluctance to sit

7™The Government also argues that under Policy and Proce-

dure Memorandum 30-4, which is applicable to this project, any

settlement costs which exceed the cost of the drainage revisions

and replantings constitute a betterment to the utility and are in-

eligible for federal participation. Under our holding, we need

not reach this contention regarding Policy and Procedure Mem-

orandum 30-4. Moreover, we note the argument also turns on a

determination of whether the revisions and replantings were the

reasonable solution to the turbidity problem.

Opinion, Court of Claims 15a

as a local court on the merits of the Milford claim, how-

ever, does not insulate the eventual settlement from all

scrutiny to determine reasonableness when federal par-

ticipation is sought. Thus, the fact that these sums were

expended to settle litigation is to be considered, but in

no sense is decisive on the issue of their reasonableness.

In Louisiana Department of Highways, supra, the

State of Louisiana had settled a claim with little, if any,

merit. Under Paragraph 19 of Policy and Procedure

manual 21-6.3, which had been incorporated into Lou-

isiana’s Project Agreement, reimbursement would only be

made of settlement costs which were “grounded in con-

tract provisions and specifications and actual costs in-

curred.” In construing this language, we wrote:

* * * the language particularly pertinent to this

case is: ‘the extent to which such settlements are

grounded in contract provisions and specifications

and actual costs incurred.’ Though the wording is

far from clear (and could and should be clarified)

we understand this provision to mean that the Fed-

eral Highway Administration will refuse to partici-

pate if the contractor’s claim is not reasonably,

arguably, or colorably founded in some part of the

contract or the specifications, fairly construed. Con-

versely, the regulation seems to mean that the Fed-

eral Government will not participate in a settlement

of a contractor’s claim which is wholly unmeritorious,

insubstantial or frivolous. We take it to be the de-

liberate policy of the Highway Administration to

discourage the making and settlement of such worth-

less claims by letting it be known in advance that it

will not participate in a settlement—even though the

Federal Government will be liable to share the costs

16a Opinion, Court of Claims

of the litigation if the matter does go to trial. That

policy choice is, of course, one for the Highway Ad-

ministration to make. [221 Ct. Cl. at ——, 604 F.

2d at 1340.]

With that as a predicate, we concluded that, even if Lou-

isiana’s settlement with the contractor was assumed to be

reasonable in a general sense when considering a policy

favoring settlement of litigation, the standard expressed

in Policy and Procedure Manual 21-6.3 demanded that

“Ca] contractor’s claims have more substantiality and

potential merit than the claim involved [there].” Jd.

We think similar considerations are applicable here. At

a minimum, a claim against a state must have some basic

merit to be considered for reimbursement as “reasonable.”

But the mere fact that a claim against a state may have

some legal merit does not mean any possible settlement

of the claim is reasonable. We must also look to wheth-

er the settlement, as made, appears to be reasonable on

all of the facts available to a state at the time of settle-

ment. We have, in other circumstances, characterized

the duty of reasonableness in several ways, but the essence

of the term is that a party must proceed prudently, wisely,

and efficiently. See H & H Manufacturing Co. v. United

States, 168 Ct. Cl. 873, 884-885 (1964); Bruce Construc-

tion Corp. v. United States, 163 Ct. Cl. at 100-101, 324

F.2d at 518-519; Nager Electric Co. v. Uni.cd States, 194

Ct. Cl. 835, 852-853, 442 F.2d 936, 945-946 (1971).

The settlement is reasonable only to the extent it would

have been made “by a prudent businessman placed in a

similar” position. Nager Electric Co., 194 Ct. Cl. at 852,

442 F.2d at 945. See Bruce Construction Corp., 163 Ct.

Cl. at 100-101, 324 F.2d at 518-519.

Opinion, Court of Claims 17a

Here, the Milford settlement for $275,000 was unrea-

sonable in light of the alternative action the State might

have taken to end its potential liability. As its own con-

sultants’ Report demonstrated, the Milford turbidity prob-

lem was likely to have been cured had the State im-

plemented the drainage revisions and replantings costing

$58,000 that it designed following the Report. While

the State is correct that the engineers did not guarantee

this solution, we think the State requires too much.

It is clear from the Report that the engineers con-

cluded the drainage revisions and replantings would pro-

vide an acceptable and workable solution to the turbidity

problem:

XII CONCLUSIONS

* * * * * *

(11) The careful construction [of the drainage

modifications] * * * should result in the gradual

reduction of the turbidity problem at the Milford

reservoirs. They represent the fastest and most

practical solution. It is expected that by following

* * * [this recommendation] the problem can be

reduced sufficiently in about two years to the point

where operating procedures at the reservoirs can

adequately handle the problem. As the slopes of the

highway stabilize, the turbidity problem should

gradually reduce and, after five years, be minimal.

[Emphasis supplied. ]

Further, it is clear that Gannett recommended the drain-

age revisions and replantings as the most reasonable and

economic solution to the problem. In the Report, Gan-

nett exhaustively analyzed the sources of the problem,

proposed solutions and evaluated the effectiveness of each

18a Opinion, Court of Claims

solution, and then compared the various alternatives on a

cost-effective basis. Gannett’s recommendation, based

upon the 18-month study, was that the drainage revisions

and replantings should be implemented and only if the

replantings and revisions failed to control the problem

would it be necessary to explore other more costly alter-

natives. After reviewing this record, we conclude im-

plementation of the drainage revisions and replantings af-

forded the State an opportunity to resolve the Milford

litigation at a far lower cost than the eventual cash set-

tlement the State chose. We find a private businessman

in such a position would have chosen to implement the

drainage revisions and replantings to end the litigation.

We require no less prudence from the State as a public

businessman.

Therefore, we conclude that implementation of the

drainage revisions and replantings at a cost of $58,000

provided the reasonable solution to the Milford litigation.

We hold that defendant must participate only to the ex-

tent of 90 percent of $58,000, or $52,200, in the Milford

settlement.

Gasparini Claim

To justify its Gasparini settlement, the State argues

that it faced a potential liability of $2.3 million for Gas-

parini’s excess borrow costs when the State formally re-

quired the use of an alternate borrow site on August 12,

1968. The defendant counters by asserting either that the

State had an unqualified contract right to reject the Olm-

stead site without liability for excess costs or, alternatively,

if liability existed, that the State unreasonably fail-d to

mitigate the excess costs when it delayed until August 12,

1968, in requiring an alternate site.

Opinion, Court of Claims 19a

Both parties have pled and argued Pennsylvania law

in support of their respective positions on whether the

State would have been found liable had Gasparini pros-

ecuted its claim. After considering the arguments of each,

we conclude the State has met the threshold test we have

established for settlement costs to be reasonable, i.e., there

was at least some merit to the Gasparini claim. See Com-

monwealth, G.S.A. v. Loffredo, 16 Pa. Commonwealth

Ct. 237, 328 A.2d 886 (1974). See also Carbon Con-

struction Co. v. Commonwealth, Department of Trans-

portation, Bd. of Arbitration No. 476 (decision of Sep-

tember 30, 1976). But see Central Penn Industries, Inc.

v. Commonwealth of Pennsylvania, Department of Trans-

portation, 25 Pa. Commonwealth Ct. 25, 358 A.2d 442

(1976). We have considerable doubt, however, that

Gasparini’s settlement proposals accurately reflected the

excess costs incurred solely because of the alternate site

requirement. We leave to another day whether erroneous

assumptions concerning the true date of breach, the proper

allocation of costs to the post breach period, and the prof-

itability of the contractor may themselves render a settle-

ment unreasonable. See, e.g., Boyajian v. United States,

191 Ct. Cl. 233, 239-240, 245-254, 423 F.2d 1231, 1235,

1238-1244 (1970) , and cases cited therein.

As we have already discussed with regard to the Mil-

ford settlement, the State must demonstrate that it pro-

ceeded reasonably in settling the Gasparini litigation.

Reasonableness requires, we think, not only that the State

explore and adopt less expensive alternative means of

terminating the lawsuit other than by outright cash settle-

ment but, also, that the State proceed in a manner so that

its potential liability on claims is kept to a minimum.

20a Opinion, Court of Claims

This record indicates that the State did not formally

request Gasparini to use an alternate site until August

12, 1968, and in fact encouraged Gasparini throughout

early 1968 to continue to seek approval (however un-

likely) of the Olmstead site from Milford. This Gas-

parini did from December 1967 through August 1968.

Milford, during this time, had already sued the State over

the turbidity. The State’s hope that Milford might gratui-

tously approve the Olmstead site and its potential for in-

creased turbidity seems unfounded in light of Milford’s

observable willingness to protect its water supply. More

prudently, the State at some point prior to the scheduled

start of spring 1968 borrow operations should have con-

cluded that no such approval would be forthcoming from

Milford and that another borrow site would have to be

used. Had the State acted, it could have avoided delay.

The State was well aware that any delay in the start of

the spring 1968 borrow operations would greatly increase

the excess costs associated with an alternate site. Pru-

dence dictated that the State make a timely decision so

that delay could be avoided and any excess costs kept to

a minimum. This the State failed to do. Had the State

acted in a timely manner, the record is clear that Gas-

parini’s excess borrow costs would have been significantly

lower than the $846,000 the contractor claimed as a re-

sult of delay until August. The trial judge found, and

we concur, that had the State required an alternate bor-

row site on April 1, 1968, Gasparini would have incurred

additional costs approximately $90,000. The failure of

the State to give such timely direction was unreasonable.

Cf. Astro-Space Laboratories, Inc. v. United States, 200

Ct. Cl. 282, 308-309, 470 F.2d 1003, 1018 (1972) (re-

procurement must occur in a timely manner after default

and mitigation of damages to be reasonable) .

Opinion, Court of Claims 21a

Concurring and Dissenting Opinion

Therefore, we conclude that the reasonable solution

to the borrow site controversy was for the State to direct

the contractor by the start of spring 1968 borrow opera-

tions to obtain borrow elsewhere. Had the State done

this, the contractor’s excess borrow costs would have been

limited to $90,000. We hold that defendant must par-

ticipate only to the extent of 90 percent of $90,000, or

$81,000, in the Gasparini settlement.

Based on the foregoing, we conclude federal par-

ticipation in these settlements is required to the extent

of $52,200 plus $81,000, or $133,200. Judgment of

$133,200 is entered for plaintiff.

NICHOLS, Judge, concurring and dissenting:

I agree with the holding of the panel insofar as it

reduces the award from $999,551.20 to $133,200, but,

respectfully, | would go further and dismiss the petition.

The FHWA contract with the State specified an

amount and stated as follows: ‘“[fJederal funds are ob-

ligated for the project not to exceed the amount shown

herein.” The contract and relevant regulation on the

pertinent date are silent as to what happens in case of

unbudgeted claims, breaking the ceiling if allowed. I

think, in such circumstances, certain requirements are

implied, or are to be met by reformation to effect the real

agreement of the parties. They are, if the State wishes

to pay the claims and be reimbursed, it should obtain

FHWA approval in advance. It is not sufficient to inform

the FHWA officials to attend the settlement negotiations

as observers. The State should have insisted on prompt

22a Opinion, Court of Claims

Concurring and Dissenting Opinion

decisions. In argument before us, State counsel said they

were fearful of an injunction suit (in the case of the Mil-

ford claim) and were aware by past experience how dila-

tory the FHWA would probably be in passing on requests

for unbudgeted funds. I do not consider this excuse ad-

equate. If defendant had failed to rule promptly on ex-

plicit reimbursement requests, thereby delaying the project

and increasing the cost, it would have been liable in breach

damages for failing in its “implied duty of cooperation

and noninterference which is inherent in any contract.”

S. A. Healy Co. v. United States, 216 Ct. Cl. 172, 188,

576 F.2d 299, 306 (1978), and cases cited. But an im-

plied burden on defendant to make a ruling promptly does

not arise until it has a request for one before it.

I do not read Louisiana Department of Highways v.

United States, 221 Ct. Cl. ——, 604 F.2d 1339 (1979)

as the panel does. The opinion of Senior Trial Judge

White, which the court adopts as its own, seems to me to

hold in the concluding portion that the settlement there

involved was “reasonable and in the public interest” but

reimbursement was not allowable because not given ap-

proval by defendant before being paid. The court in its

preliminary per curiam remarks construes the White opin-

ion to view the settlement as prudent to make but not

reimbursable because not ‘“‘grounded in contract provisions

and specifications and actual costs incurred,” a standard

stated in a regulation not argued to be applicable here.

Apparently the regulation was meant to require disallow-

ance of claim settlements even if prudent and reasonable,

if the claim does not meet some objective criteria. But

the court did not disavow the alternative ground stated

in the White opinion and I think it is correct. Defend-

24a Judgment

UNITED STATES COURT OF CLAIMS

No. 429-75

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF TRANSPORTATION

vs.

THE UNITED STATES

At a Court of Claims held in the City of Washington,

on the 25th day of February, A.D. 1981, judgment was

ordered to be entered as follows:

IT IS ADJUDGED AND ORDERED that plaintiff

recover of and from the United States pursuant to the

court’s opinion entered this date the sum of one hundred

thirty three thousand two hundred dollars ($133,200.00) .

A true copy of record.

In testimony whereof I have hereundo set my hand

and affixed the seal of said Court at Washington, this 25th

day of February, A.D. 1981.

Frank T. Peartree

Clerk, Court of Claims.

Attest: Daniel M. Friedman

Chief Judge.

Opinion, Court of Claims 23a

Concurring and Dissenting Opinion

ant did acknowledge that the FHWA has consistently

contributed to additional (unbudgeted) costs (it deemed)

reasonably incurred. That it has commendably waived

the contract cost ceiling when persuaded the claim was

reasonable, does not mean it waives it when not so per-

suaded. Nor do I think it can be estopped into a waiver

by inaction (laches) of its representatives. Costello v.

United States, 365 U.S. 265, 281 (1961).

It appears to me plaintiff is seeking equitable relief,

whether we deem it reformation of the basic contract or

enforcement of clauses added to it by implication. Where

any obligation it incurs is supposedly to be reimbursed

by the United States up to as much as 90 percent, it owes

the United States a strong obligation in equity, first, to

protect the interests of the United States, and second, to

give it every opportunity to protect its own interests. It

did not do the first, as we find, in the portions of the

opinion I join in, that the settlements were grossly ex-

cessive. It did not do the second: instead of miscon-

struing the silence and nonfeasance of dilatory FHWA

representatives, it should have demanded a decision in a

manner to reach the attention of FHWA highest levels.

He who seeks equity must do equity. Viewing the claim

as equitable, as I do, I do not deem a claimant that had

conducted itself as inequitably as Pennsylvania has here,

can require us still to reconstruct the agreement of the

parties to allow Pennsylvania the small amounts the ma-

jority consider properly allowable. I would let all the

loss lie where it has fallen.

24a Judgment

UNITED STATES COURT OF CLAIMS

No. 429-75

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF TRANSPORTATION

vs.

THE UNITED STATES

At a Court of Claims held in the City of Washington,

on the 25th day of February, A.D. 1981, judgment was

ordered to be entered as follows:

IT IS ADJUDGED AND ORDERED that plaintiff

recover of and from the United States pursuant to the

court’s opinion entered this date the sum of one hundred

thirty three thousand two hundred dollars ($133,200.00) .

A true copy of record.

In testimony whereof I have hereundo set my hand

and affixed the seal of said Court at Washington, this 25th

day of February, A.D. 1981.

Frank T. Peartree

Clerk, Court of Claims.

Attest: Daniel M. Friedman

Chief Judge.

Opinion, Trial Judge 25a

APPENDIX B

IN THE UNITED STATES COURT OF CLAIMS

TRIAL DIVISION

No. 429-75

(Filed: September 27, 1979)

COMMONWEALTH OF PENNSYLVANIA,

DEPARTMENT OF TRANSPORTATION

v.

THE UNITED STATES

Contracts; Federal-Aid Highways Act; reimbursement of

State; litigation between highway contractor, affected

utility, and State; settlement; Federal participation.

Stuart ]. Moskovitz, Assistant Attorney General, at-

torney of record for plaintiff. Robert W. Cunliffe, Deputy

Attorney General and Gerald Gornish, Acting Attorney

General, of counsel.

Richard ]. Webber, with whom was Assistant At-

torney General Barbara Allen Babcock, for defendant.

26a Opinion, Trial Judge

OPINION*

FLETCHER, Trial Judge: This case presents a

claim by the Commonwealth of Pennsylvania Department

of Highways, (hereinafter ‘Penn DOT”), under the Fed-

eral-Aid Highways Act, 23 U.S.C. §§101 et seg. (1970).

Penn DOT insists that it is entitled to reimbursement for

90 percent of certain costs incurred by it in the settlement

of claims by third parties arising out of interstate highway

construction in Pennsylvania.

Under the Federal-Aid Highways Act funds are ap-

propriated and allocated among the states for the purpose

of providing Federal participation in the construction costs

of the interstate highway system. The degree of Federal

participation is determined under a complex statutory

formula which in this case yields a 90 percent Federal

contribution.

Penn DOT had obtained Federal approval evidenced

by Letters of Authorization for the proposed construction

of a portion of Interstate Highway 84 in Northeastern

Pennsylvania under the designation Project No. 1-84-1

(19)46. After Federal approval of the project’s detailed

plans, specifications, and estimates, Penn DOT entered

into project agreements with the Federal Government

under which defendant was obligated to pay 90 percent

of the estimated total cost of the construction and inci-

dental utility and right-of-way expenses. Meanwhile,

Penn DOT had contracted with the Gasparini Excavating

Company (hereinafter “Gasparini” or “contractor”) for

clearing, grubbing, grading, drainage, and structures on

*The trial judge’s recommended decision and conclusion of

law are submitted in accordance with Rule 134 (h).

Opinion, Trial Judge 27a

the project, and Gasparini commenced work on April 25,

1967.

On or about August 8, 1967, the Municipal Water

Authority of the Borough of Milford (hereinafter “Au-

thority” or “MWA”’) contacted Penn DOT complaining

of excessive turbidity in the Authority’s water supply

which was located in reservoirs about one mile from the

highway construction. The Authority expressed the view

that the turbidity problem was the direct result of the

highway construction operations being conducted in the

neighborhood of its reservoirs.

Penn DOT engaged the firm of Gannett, Fleming,

Corddry & Carpenter, Inc. to perform a study and prepare

a report regarding the cause and cure of the above-de-

scribed problem. The study was completed and an En-

gineering or Consultant’s Report thereon was printed and

issued under date of October 31, 1968.

The report concluded that the excavation for Inter-

state 84 was, in fact, the cause of the turbidity in the Au-

thority’s reservoirs. In addition, the report recommended

alternative actions to cure the problem. The report stated

that the surest way to eliminate the contamination of the

water supply would be through the construction of a water

treatment facility at an estimated cost of $560,000. Such

a solution would take several years to complete and would

represent a betterment to the Authority’s facilities. The

second most certain remedy would be the construction of

a one million gallon steel holding reservoir at a probable

cost of $100,000. Such a reservoir would be filled with

water during periods of lesser turbidity and that water

could be used in place of the water from the open reser-

voirs during periods of turbidity. Finally, the least ex-

28a Opinion, Trial Judge

pensive approach to the problem would call for the re-

design of the drainage system coupled with rapid refolia-

tion of the excavations and periodic monitoring of the

water quality in the reservoirs. The cost of such drain-

age revision was estimaied to be $58,000, and the report

stated that the third approach would reduce the turbidity

to a level where “it is expected that operating procedures

at the Milford water supply can provide water of an ac-

ceptable quality.” Both plaintiff and defendant rely on

this Engineering Report and neither has questioned its

accuracy.

Following conferences and an exchange of letters, on

December 21, 1967, the Authority filed a Complaint in

equity in the Commonwealth Court of Pennsylvania

against the Pennsylvania Secretary of Highways, ihe Gas-

parini Excavating Company, and the consulting engineer.

That suit demanded construction of a filtration system,

redesign and revision of drainage, money damages, and

“such other and further relief as may be deemed just and

proper.”

Conferences and negotiations between representatives

of MWA and Penn DOT followed the filing of the Com-

plaint. Also, it appears clear that representatives of the

Federal Highway Administration (FHWA) were aware

of these negotiations and even attended some of the con-

ferences.

Following a meeting on November 27, 1968, a

“Memorandum of Understanding” was prepared and

signed by counsel for both Penn DOT and MWA. The

Memorandum resulted in an agreement dated January 23,

1969 whereby plaintiff agreed to build a 1.5 million gallon

reservoir and to provide a five-year water quality mon-

itoring, or surveillance, program.

Opinion, Trial Judge 29a

The January 23 agreement, however, was suspended

by a later agreement dated August 3, 1970, whereby Penn

DOT agreed to pay MWA $275,000 in return for MWA’s

release of Penn DOT from all claims and a voluntary dis-

missal of its pending court Complaint. At all times,

cognizant representatives of FHWA were aware of the

aforesaid negotiations and agreements between Penn DOT

and MWA, but at no time did they either approve or dis-

approve them.

The Authority has never constructed a holding reser-

voir which might be deemed a permanent improvement to

MWA facilities. In fact, by August 3, 1971, the level

of turbidity had lessened to levels well within the require-

ments of the U.S. Public Health Service with no appre-

ciable difference between the quality of the water up-

stream from the construction and that downstream from

the construction. According to the testimony of a Penn

DOT engineer, this would indicate that the I-84 construc-

tion presently does not contribute any significant turbidity

to the Milford water supply. Of course, it was unknown

at the time of the settlement between the Authority and

Penn DOT that the contemplated corrective measures

would not in fact be needed. Indeed, the experts had

consistently taken a cautious approach. For example,

after outlining a redesign of drainage facilities and a two-

year surveillance program, the Engineering Report, supra,

had this to say:

B. If the program outlined under A above

does not prove effective, it is recommended that a

more elaborate program be undertaken. Specifically,

it would be recommended that if all infiltration

zones cannot be isolated and if the turbidity problem

must be solved at the Milford reservoirs, the Penn-

30a

Opinion, Trial Judge

sylvania Department of Highways should consider

participating with the Municipal Authority of the

Borough of Milford in the construction of a holding

reservoir which would be filled with water during

times when there is no turbidity and which would

supply water to the system when both the present

reservoirs are turbid.

The cost of such a holding reservoir was estimated

to be about $100,000, plus the continuing costs of under-

taking the recommended surveillance program. Mean-

while, as a consequence of the pollution of the Authority’s

water supply, Penn DOT had become concerned about the

contractor’s previous choice of a site for obtaining bor-

row’ for highway grading. The contractor’s choice had

1 Pertinent contract provisions relating to borrow operations

are as follows:

(a) Specifications, Section 3.5.3

The obtaining of borrow pits shall be the contractor’s

responsibility.

“eee

Where the contractor desires to obtain borrow adjacent

to the highway, written approval of the engineer shall be

secured, * * *

ene

(ce) Specifications, Section 1.7.13

** * The contractor shall take all necessary precautions

to prevent damage to all overhead and underground struc-

tures, and to protect and preserve property within and ad-

jacent to the project and shall be responsible for damage

thereto. Special care shall be exercised by the contractor in

the prosecution of the work in order to avoid interference

or damage to any operating utilities or plants; however,

where there is any possibility of interference or damage, the

contractor shall make satisfactory arrangements with the

Opinion, Trial Judge 3la

been a property near the highway known as the Olmstead

site which was adjacent to Vantine Brook, a feeder stream

for the Authority’s reservoirs. In order to avoid the pos-

sibility of further contamination of the Authority’s water

supply, Penn DOT directed that Gasparini could use the

Olmstead site only if approved in advance by MWA.

Gasparini was never able to obtain such approval from

the Authority. After some delay, Gasparini was able to

find another borrow site at a more distant location. This

change resulted in increased hauling costs, and caused

further construction delay. When that site was exhausted,

additional borrow was still needed. In addition, the bor-

row at this alternative site was of lesser quality than that

at the Olmstead site so that it became necessary to man-

ually remove stones from the material, an unanticipated

responsible officers or with the owners of the utilities or

plants; covering the necessary precautions to be used as

safeguards during the performance of the work by the con-

tractor. These arrangements shall be made before said work

is started and shall be subject to the approval of the engineer,

which approval shall not be considered as releasing the con-

tractor from any responsibility for the acts of himself or his

employees or representatives.

eee

(d) Specifications, Section 1.7.19

The contractor shall take sufficient precautions to pre-

vent pollution of streams, lakes, and reservoirs with fuels,

oils, bitumens, calcium chloride or other harmful materials.

He shall schedule and conduct construction operations to

prevent when necessary, and otherwise minimize, pollution

of streams, etc., with sediment or other harmful materials.

The areas of erosive land exposed by construction opera-

tions at any one time which may cause subsequent water

pollution, are subject to the approval of the Engineer.

32a Opinion, Trial Judge

operation, again causing delay and increased cost. These

cumulative delays resulted in shifting the construction

schedule into the winter months during which little ac-

tivity was possible, thus causing further delay and ex-

pense.

On February 4, 1970, Gasparini presented a claim

for additional costs predicated on the aforesaid delays and

increased borrow costs. Two alternative claims were pre-

sented. One was for $2,300,000 which was the amount

to be sought if litigation ultimately became necessary.

The other, for a lesser amount, represented the figure

for which Gasparini would be willing to settle. The dif-

ference in amounts was based primarily on a difference

in accounting method. The higher amount based claims

for equipment cost on accepted book rates for rental. The

lesser amount represented actual costs which were docu-

mented by the contractor and which, pursuant to an audit

by Penn DOT, were found to aggregate over $835,000.

As indicated previously, throughout the negotiations

with the Authority and Gasparini, the FHWA representa-

tives were kept fully informed at all levels. They were

invited to and attended meetings where the claims of the

Authority and the contractor were discussed. Yet, at

none of these meetings did the FHWA representatives

express an opinion for or against the potential settlements,

and this refusal to offer guidance or any adverse comments

caused the Department to conclude that FHWA had no

objection to the settlements either with MWA or Gas-

parini.

The ultimate question now before the court would

seem to be this: Under what circumstances, if any, may

the FHWA refuse its agreed participation in costs which

Opinion, Trial Judge 33a

were unanticipated at the time of the contract between the

Federal and State Governments but which nonetheless

were incurred by the State in connection with a Federal-

Aid Highway project?

Considering the complexity and unpredictability of

iiighway construction projects, and in the light of the con-

flicts inherent in an arrangement wherein one party (the

state) manages the construction project while another

party (the Federal Government) pays the bulk of the

cost, one would have expected that in the fifty-odd years

of Federal-Aid roadway projects this issue would have

been confronted and fully resolved. So far as I can deter-

mine, however, it has not been so resolved, at least in the

context of this case.

An answer to the question requires, initially, a brief

review of the workings of Federal-Aid Highway projects.

Under the Federal-Aid Highways Act, supra, after Con-

gressional appropriation of highway funds, those funds

are apportioned among the states. States then generate

highway proposals which are submitted to the Secretary

of Transportation for approval. The Secretary is then

required to review the proposal applying criteria estab-

lished by Section 109 of the Act. If the project is ap-

proved, the state then develops and submits detailed

“plans, specifications, and estimates” for final approval

by the Secretary. The Act specifies that approval of those

detailed plans shall create “a contractual obligation of the

Federal Government for the payment of its proportional

contribution thereto.” (Sec. 106(a)). Thereafter, the

State and Federal Governments execute formal Project

Agreements. In the present case, there was one agreement

covering the acquisition of rights-of-way and another

covering the actual highway construction. Those Project

Agreements state, in pertinent part:

34a Opinion, Trial Judge

The State, through its Highway department, -

having complied, or hereby agreeing to comply, with

the terms-and conditions set forth in (1) Title 23,

U.S. Code, Highways, (2) the Regulations issued

pursuant thereto by the Secretary of Commerce and,

(3) the policies and procedures promulgated by the

Federal Highway Administrator relative to the above

designated project, and the Bureau of Public Roads

[now the Federal Highways Administration] having

authorized certain work to proceed as evidenced by

the date entered opposite the specific item of work,

Federal funds are obligated for the project not to

exceed the amount shown herein, the balance of the

total cost being an obligation of the State. Such

obligation of Federal funds extends only to project

costs incurred by the State after the Bureau of Public

Roads authorization to proceed with the project in-

volving such costs. | z

Although the percentage of Federal participation may

vary as between projects, in the instant case, the Federal

reimbursement share is established by Sec. 120 of the Act

to be “90 per centum of the total cost thereof.”

Federal participation in a project after the signing

of the Project Agreements typically seems to be quite lim-

ited. It is the state which purchases required right-of-

way, arranges utility adjustments, enters into contracts

with the companies that will perform the construction,

and which generally oversees all aspects of construction,

independently making all necessary decisions, routine and

otherwise. There may be occasional Federal site inispec-

tions and Federal reviews and approvals of vouchers for

costs incurred by the state. Where, as in the present case,

unanticipated problems arise, officials of the FHWA may

Opinion, Trial Judge 35a

be drawn more closely into the decision-making process.

However, as shown by the facts here, their role can some-

times be merely one of passive observation.

At the finish of construction, the Act calls for Fed-

eral inspection of the finished project followed by final

payment of the Federal share of the balance of cost upon

approval by the Secretary.

The plaintiff contends essentially that where the

claimed costs have arisen in connection with a Federal-

Aid Highway Project and have been actually incurred by

the State, the inquiry is at an end, and the FHWA must

contribute its proportionate share of such costs. While

there is considerable merit to this contention,’ on balance

it appears overly simplistic.

2 As previously stated, the Act deems approval of the ‘‘ plans,

specifications, and estimates’’ to create a ‘‘contractual obligation

of the Federal Government for the payment of its proportional

contribution thereto.’’ (Sec. 106 (a)). The degree of Federal

participation is established by Sec. 120 of the Act which in this

case sets the Federal participation at ‘‘90 per centum of the

total cost thereof.’’

In addition to this statutory language, the legislative history

of the Act lends some support to the plaintiff’s position. The

debates during the initial passage of the Act in 1916 reflect a

concern with striking a balance between the protection of state

independence in roadway construction and protection of the Fed-

eral Treasury against wasteful state spending. Those debates

suggest that the Federal purse was thought to be adequately

protected by the Act’s provisions granting the Secretary of Ag-

riculture (then administering the Act) the authority to review

plans and refuse approval of those projects not meeting Federally

established standards. In addition, the final inspection provision

allowed the Secretary to witkaold approval of future projects in

states which failed to meet those standards in the execution of

36a Opinion, Trial Judge

The first weakness in plaintiff’s preliminary conten-

tion is that it appears to ignore the well-settled rule

that the FINWA may limit its participation in costs in-

curred by way of Policy and Procedure Memoranda

(PPM) which are incorporated by reference into the

Project Agreements. People of the State of California v.

United States, 213 Ct. Cl. 329, 551 F.2d 843 (1977)

(PPM limiting Federal participation in right-of-way ac-

quisitions to fair market value rather than cost-of-replace-

ment held binding on State); People of the State of Cali-

fornia v. United States, 547 F.2d 1388 (9th Cir. 1977)

(PPM limiting Federal participation in interest payments

on condemnation awards to that amount accrued during

the first 30 days from deposit in court held binding on

-

State.) oe, “engages

While the Ninth Circuit decision directly addressed

only the question of whether the PPM was enforceable

by the FHWA, in reaching that conclusion, the court dis-

cussed the broader issue stating:

The interpretation sought by the State would

prevent the Secretary . . . from making any evalua-

tion as to the reasonableness of the costs of construc-

tion or from promulgating regulations reasonably

designed to limit such costs. Certainly, Congress

must have intended that the statutory obligation to

pay 90 percent of the total cost must include some

corresponding right to impose reasonable limitations

upon such costs, rather than leave the Federal Trea-

projects. Further protections of the Federal purse were apparent-

ly not then considered to be necessary or even desirable. S. Rep.

No. 250, 64th Cong., 1st Sess. See generally, Mahler v. United

States, 306 F.2d 713 (3d Cir. 1962).

Opinion, Trial Judge 37a

sury at the mercy of unfettered discretion by the

State as to what expenditures may be made and

charged accordingly. 547 F.2d at 1390.

Similar reasoning was applied in Commonwealth of

Massachusetts v. Connor, 248 F. Supp. 656 (D. Mass.

1966) where Massachusetts sought by way of mandamus

to force approval by the Secretary of a reimbursement

voucher. The voucher represented the cost of a Federal-

Aid Highway right-of-way as determined by a condemna-

tion proceeding jury verdict. In refusing to grant man-

damus relief, the court stated:

Certainly the duty, if any, of the Secretary to

approve the state’s voucher in the present case is not

a ministerial one. The Secretary must make a de-

cision as to whether the claim presented is a proper

one. Certainly it cannot be contended that he is

bound to accept without question any claim in what-

ever amount Massachusetts wishes to make. 248 F.

Supp. at 659.

The above cases are well-grounded in common sense.

Absent some clear statutory or contractual statement to

the contrary, it must be assumed that the intent of Con-

gress and of the contracting parties was that the FHWA

should, and does, retain some discretion to refuse par-

ticipation in unreasonable costs incurred by the state.’

Another possible interpretation of the agreement be-

tween Penn DOT and the FHWA arises from certain lan-

3 Indeed, even Pennsylvania seems to recognize this when, in

its reply brief it fails to reassert the argument that the FHWA

lacks such discretion, and seems to argue only that the FHWA

must participate in ‘‘reasonable’’ costs.

38a Opinion, Trial Judge

guage of the Project Agreements. That language, stating

that ‘Federal funds are obligated for the project not to

exceed the amount shown herein,” would appear at first

blush to establish a cost reimbursement ceiling. From

that language it could be argued that, absent prior con-

tractual approval of a specific cost, the FHWA is under

no obligation to reimburse the state for that cost.‘ In the

present case, the settlements were neither included within

the initiai project agreements, nor were they approved as

subsequent projec: modifications.

There are, however, problems with that interpreta-

tion. The language of the Project Agreements does not

so clearly establish a maximum reimbursement amount

that it cannot be interpreted in the light of contrary evi-

dence. See Scherr & McDermott, Inc. v. United States,

175 Ct. Cl. 440, 360 F.2d 966 (1966). Also, such an

interpretation would seem in conflict with the language

of the Federal-Aid Highways Act discussed above and

would depart from the administrative practice of FHWA

which does not require prior approval of costs, but rather

allows an evaluation of the cost after it has been incurred.’

*See for example, the recent decision in Louisiana Depart-

ment of Highways v. United States, Ct. Cl. No. 129-76, —— F.

2d ——, decided July 18, 1979, which may well reflect this view

by indicating that, because certain unanticipated costs were not

contractually approved by the FHWA, the FHWA was not liable

for participation despite a finding that the state had acted rea-

sonably and in the public interest by incurring the costs in ques-

tion.

5 Closely related to the issue here is the question of the weight,

if any, to be accorded the final decision of the FHWA denying

reimbursement. It could possibly have been argued (but was not)

that the function of this court under the cireumstances here pres-

ent is limited to a review of the FHWA’s determination only

Opinion, Trial Judge 39a

Here, Penn DOT orally sought advance FHWA ap-

proval of the settlements and urged quick action to avoid

possible rejection by the third parties. In addition FHWA

representatives were kept fully informed. They were in-

vited to and attended most, if not all, of the meetings

where the third parties’ claims were discussed. They

offered no guidance one way or the other, but voiced no

objections, causing Penn DOT representatives reasonably

to conclude that FHWA in fact had no objections. None-

theless, several years later FHWA issued its decision deny-

ing the requested participation.

While neither of the parties has attempted to char-

acterize the agreement herein, it seems to me, reading the

statute and the project agreements together, that it can

best be described as a specialized type of percentage-of-

cost contract. Consequently, the rules generally applicable

to cost reimbursement type contracts would seem ap-

plicable here.

As a general matter, the costs to be reimbursed under

a cost-type contract are actual costs, not reasonable costs.

Charles A. Burton, Inc. v. Durkee, 162 Ohio 433, 123

for possible arbitrary or capricious action. Such an argument,

however, could be disposed of quickly. The decision of the FHWA

is nothing more than a statement of position by one of the con-

tracting parties. In the absence of some statutory or contractual

provision for dispute resolution elsewhere, authority is vested in

this court by the Tucker Act, 28 U.S.C. Sec. 1491, to render its

decision de novo. Under these circumstances, it is clear that the

decision of one of the contracting parties (the FHWA) carries

no special weight in this court’s disposition of the case. See,

Southwest Welding and Mfg. Co. v. United States, 188 Ct. Cl.

925, 413 F.2d 1167 (1969). In fact, the court’s task is to deter-

mine whether the FHWA’s refusal to participate in the settle-

ments was itself a breach of the contract.

40a Opinion, Trial Judge

N.E. 2d 432 (1954), 17 Am. Jur. 2d, Contracts Sec. 349.

This court has held that actual or historical costs are pre-

sumed reasonable. Nager Electric Co. v. United States,

194 Ct. Cl. 835, 442 F.2d 936 (1971), Bruce Construc-

tion Co. v. United States, 163 Ct. Cl. 97, 324 F.2d 516

(1963).

In this case, there is no question but that the claimed

costs of settlement were actually incurred. Since those

costs are presumed reasonable, the burden rests with the

defendant to justify its non-participation through persua-

sive evidence of fraud, misrepresentation, negligence, or

some other affirmative proof of unreasonable behavior

on the part of the plaintiff. See, James, Burdens of Proof,

47 Va. L. Rev. 51 (1961). To hold otherwise would

encourage the Federal Government to sit idly by, as it

did here, secure in the knowledge that the State must af-

firmatively justify the incurring of any unanticipated costs.

This burden rests upon the defendant despite the presence

in the Project Agreements of a clause purporting to estab-

lish a cost ceiling because “[t]he general rule with respect

to a [cost reimbursement] contract, unless it is clearly

negatived, is that the Government assumes the risk of ex-

penses beyond the estimated price which are not due to

unreasonable conduct by the contractor.” Singer-General

Precision v. United States, 192 Ct. Cl. 435, 446, 427 F.

2d 1187 (1970), citing Wyman-Gordon Co., 59-2 BCA

para. 2344 ASBCA No. 5100. See also Lykes Bros. SS

Co. v. United States, 198 Ct. Cl. 312, 459 F.2d 1393

(1972) holding that the burden of proof does not neces-

sarily follow the burden of pleading. In my opinion,

defendant has not succeeded in discharging its burden

of proving negligent conduct or other unreasonable be-

havior on the part of Penn DOT.

Opinion, Trial Judge 4la

In this connection it is important to bear in mind

that all of the unanticipated costs here claimed were

expended by plaintiff in the settlement of actual and

potential legal actions. Of course, it cannot be the task

of this court here to decide the probable outcome of some

hypothetical litigation in the Pennsylvania courts between

Penn DOT and MWA or Gasparini. Had those disputes

gone to trial in Pennsylvania, Penn DOT would have

been found to be either liable or not liable for specific

reasons. There would be no gray area. Those disputes,

however, did not go to trial in Pennsylvania, and MWA

and Gasparini were neither present nor represented at

the trial of the present case. Since the disputes were set-

tled without trial, this court surely cannot be called upon

to determine the probable outcome of any hypothetical

local litigation. Instead, one should test the reasonable-

ness of the settlements, by making a determination which

must take into account factors more than the relative

merits of the disputants’ legal positions. One factor to

be considered is the public policy which favors settlement

of legal disputes thereby decreasing the burden on limited

judicial resources. From the perspective of the parties,

settlements will preserve their personal and financial re-

sources, reduce acrimony, and improve the prospects for

satisfactory future relationships between the parties.

Finally, of course, settlements eliminate the uncertainties

always attendant upon any trial. All of these considera-

tions are difficult to quantify, and even though free to

recognize frivolous claims, courts should be reticent to

“second-guess” the decisions of litigating parties and their

counsel with respect to matters which involve claims

having potential merit. See Louisiana Department of

Highways v. United States, supra. Despite the criticisms

42a Opinion, Trial Judge

expressed by the Auditor General of Pennsylvania in his

letter of July 20, 1970, to the Secretary of Transporta-

tion,’ (finding 40) I am persuaded by the record in this

case that Penn DOT’s actions in this regard were not negli-

gent in the legal sense and that the firm belief of the At-

torney General (finding 38) that the claims had merit was

correct.

In sum, where unanticipated costs arise in connection

with an approved Federal-Aid Highway project and the

Federal Government refuses to participate in those costs,

the state must prove that such costs were actually incurred

and that they arose out of a federally approved project.

Such evidence establishes a prima facie case for reim-

bursement. Since under those cimcumstances the statute

creates a presumption in favor of payment, the burden

then must fall upon the Federal Government to justify

non-payment through proving a breach by the plaintiff.

If there are no contract provisions, PPMs for example,

limiting the Federal obligation, then the Government must

affirmatively prove that the state expenditure was unrea-

sonable.

The defendant’s first affirmative defense to payment

of its proportionate share of the unanticipated costs is that

all of the additional costs were incurred as a result of

the damage to the Milford Water Authority and that such

damage was a result of negligence on the part of the plain-

tiff’s employees. In support of this contention, defend-

ant introduced documentary evidence suggesting that cer-

tain Pennsylvania officials were of the opinion that Penn

®It should be noted that during his testimony at the trial

of this case, Mr. Casey appeared to retract, or at least consider-

ably soften, his earlier criticisms of Penn DOT’s actions.

Opinion, Trial Judge 43a

DOT acted negligently in the design and construction of

the highway because the State had received notice of the

- possibility of harm to the Authority’s reservoirs. See

findings 37-40. However, the only direct evidence of no-

tice to Penn DOT, is contained in a letter from the Au-

thority to Penn DOT dated December 27, 1965. That

letter stated:

We have been advised by our engineer, that he

does not believe that the construction of this highway

will affect our springs or the probable locations of

the veins of water leading to the springs.

However, there is always a possibility that if

there were deep cutting or blasting done in the event

[sic] of these veins, the supply of water to these

springs could be disrupted.

Negligence, of course, will not be presumed, and in

my view it has not been established by the evidence in

this case. Aside from some opinions of Pennsylvania

officials rendered several years after the effect of the con-

struction on the reservoirs became known, there remains

only the letter quoted above which in a rather awkward

way appears to conclude that damage to the reservoirs or

water supply was not likely.

It should also be noted that the location and design

of the highway had been previously approved by the de-

fendant itself which apparently did not recognize the pos-

sibility of contamination of the Authority’s reservoirs lo-

cated less than a mile from the construction.

Finally, the defendant suggests nothing that could and

should have been done differently. It seems clear that,

in order to avoid participation in unanticipated costs in-

curred in connection with highway construction, the de-

44a Opinion, Trial Judge

fendant must show that the cost to it would have been

less had the acts complained of not taken place. Here

there is no evidence showing that the highway could

have been built without incurring the cost of eliminating

the contribution of the highway’s construction to unac-

ceptable turbidity in the Authority’s reservoirs.

The defendant makes the alternative argument that,

even if the Federal Government 1s obligated to contribute

to the cost of the settlement between the Commonwealth

of Pennsyivania and the Milford Water Authority, that

obligation is limited to the cost of a drainage revision, a

substantially lesser cost than the actual settlement amount.

In support of this argument, defendant first relies on

its Policy and Procedure Memorandum (“PPM’’) 30-4

as limiting its participation to that portion of the MWA

settlement which does not represent a “betterment” to the

Authority’s preexisting facilities.

There remains no doubt that the Federal Govern-

ment’s reimbursement obligation may be limited by its

Policy and Procedure Memoranda which are incorporated

by reference into the terms of the Project Agreements be-

tween the State and Federal Governments.’ People of the

7 Of course, only those regulations which are in effect at the

time of the making of the contract can be incorporated by refer-

ence. Sundstrand Turbo v. The United States, 182 Ct. Cl. 31,

389 F.2d 406 (1968). The PPM at issue here was issued on Oc-

tober 15, 1966, after the date of the Secretary’s approval of the

‘‘plans, specifications, and estimates’’ and after the effective date

of the Project Agreement covering construction, The plaintiff

addresses this issue only by once characterizing this PPM as

‘*after-the-fact,’’ without explanation. For the purposes of this

decision, it is not necessary to decide whether this PPM was, in

fact, incorporated into the contract. It will be assumed arguendo

that it was.

Opinion, Trial Judge 45a

State of California v. United States, 213 Ct. Cl. 329, 551

F.2d 843 (1977). PPM 30-4 states that the Federal reim-

bursement share for utiity adjustments shall be limited to

the total cost incurred less any portion which represents

a “betterment” to the utility. Defendant contends that

plaintiff, if entitled to some compensation is entitled to

only the cost incurred in the settlement less the difference

between the cost of a drainage revision and the cost of

the holding reservoir because in the Government’s view

the surplus over the drainage revision cost represented a

betterment and was so described by the consultants in

their Report.

“Betterment” is defined by PPM 30-4 to mean “any

upgrading made solely for the benefit of and at the elec-

tion of the utility, not attributable to the highway con-

struction.” In the context of this case, however, plain-

tiff is entitled to full reimbursement if the holding reser-

voir reasonably appeared to be the minimum necessary

cure for the damage caused by the highway construction.*

Defendant points to opinions contained in the con-

sultants’ Report to the effect that a drainage revision could

be effectuated quickly and would significantly reduce the

turbidity problem. The consultants, however, specifically

advised that such measures might not prove to be suf-

ficient, and if insufficient, other more costly cures would

8 The defendant repeatedly and correctly points out that the

holding reservoir was never actually constructed by the Milford

Water Authority. This fact, however, should be of no comfort

to defendant. All that is necessary is that the plaintiff reason-

ably believed the holding reservoir to be necessary at the time

the decision to settle was made, Sundstrand Turbo v. United

States, supra. All are blessed with 20-20 vision hindsight but

few can claim the same of their foresight.

46a Opinion, Trial Judge

have to be effectuated. The Report found that construc-

tion of a water treatment facility might become necessary.

The alternative of the holding reservoir “would cost less

than half as much as the treatment plant and could repre-

sent a nearly 100 percent effective solution to the tur-

bidity problem.” Consultants’ Report p. 61. In addition,

the consulting engineers never attempted to design a drain-

age revision. That task fell to Mr. Finn, Pennsylvania’s

Construction Engineer for the project, and his group of

engineers. His uncontroverted testimony was that they

were unable to design a practical drainage revision.

Under all of these circumstances, it is my opinion

that the plaintiff acted reasonably in concluding that con-

struction of the holding reservoir would be the most re-

liable cure for the turbidity problem and since that prob-

lem was entirely attributable to the highway construction,

it would not represent a betterment to the Authority’s

existing facilities.”

Defendant then proceeds to argue that the FHWA

is not obligated to participate in the cost of the settlement

with the Gasparini Construction Company. In support

of this contention, defendant says that no claim by Gas-

parini would have arisen but for the plaintiff’s negligence

in causing the turbidity problem. Having previously

concluded that the turbidity problem was not negligently

caused, an argument based upon the contrary conclusion

clearly cannot be accepted. In addition, however, there

® As an alternative argument for limiting Federal reimburse-

ment to the cost of a drainage revision, the defendant contends

that, quite apart from the PPM limitation, it was unreasonable

for the plaintiff to agree to build a holding reservoir. This con-

tention is essentially the same as that raised by the principal argu-

ment and is necessarily resolved the same way.

Opinion, Trial Judge 47a

is an element not present in the Milford Water Authority

settlement claim but present in the Gasparini claim. It

raises a subsidiary issue of whether the defendant’s par-

ticipation is foreclosed by Penn DOT’s alleged fraud or

misrepresentation. The defendant points to letter opin-

ions by the Attorney General of Pennsylvania and his

deputy stating their belief that the State would be liable

to Gasparini because the State’s failure to inform the con-

tractor of the possibility that the construction might cause

contamination to the water supply of MWA amounted to

fraud or misrepresentation.

This contention must fail in the light of the limited

evidence of prior knowledge of such possible contamina-

tion on the part of Penn DOT. As previously stated, the

defendant presented only a letter from the Authority to

Penn DOT and that letter concluded in effect that the

highway construction was unlikely to contaminate the Au-

thority’s water supplies. Such knowledge would hardly

require Penn DOT to inform the contractor of the pos-

sibility of contamination.

The defendant also claims that it is not liable for its

share of the cost of the Gasparini settlement because un-

der the terms of the contract between Pennsylvania and

Gasparini, Pennsylvania had the right to refuse approval

of borrow sites. Hence, defendant says since Pennsyl-

vania by refusing to approve the Olmstead site was merely

exercising a contractual right, it was not liable to Gas-

parini for the resulting delay. Thus, in defendant’s view,

the settlement payment was gratuitous and the Federal

Government need not participate in gratuitous payments.

The plaintiff, of course, interprets the applicable specifica-

tion differently because it believes that the right to reject

a borrow site under section 1.7.19 dealt only with con-

48a Opinion, Trial Judge

siderations of possible erosion after completion of the

work and not with the effect of the borrow operation dur-

ing the construction period.

Here again, the resolution of this issue is not for this

court’s determination of whether Penn DOT had a con-

tractual right under Pennsylvania law to refuse approval

of the Olmstead borrow site. To repeat, the basic task

for this court is to determine whether the Federal Gov-

ernment has shown that it was unreasonable, in light of

the complexities involved, for Penn DOT to enter into

the settlement with Gasparini. In my opinion, defendant

has failed to carry that burden.

Finally, further consideration should be given to this

court’s recent decision in Louisiana Department of High-

ways v. United States, Ct. Cl. No. 129-76, dated July 18,

1979, F.2d , in which it is held that in a claim

for reimbursement under the Federal-Aid Highways Act,

where the claim is for costs incurred in settlement of third-

party claims against the state, there must be reasonable

grounds for belief that the state would have been liable

on the third party claims. In the Louisiana case, it was

the opinion of the State’s counsel, concurred in by the

court, that the contractor’s claim was entirely without

merit. The present case differs in that crucial respect.

Here, there is ample evidence that, in the opinion of Penn-

sylvania’s responsible legal officials, the Commonwealth

of Pennsylvania might well have been found liable to the

third party claimants on the basis of any of several pos-

sible legal grounds had the claims finally gone to litiga-

tion. They determined in good faith that the claims should,

be settled, not merely to avoid expensive and troublesome

litigation, but to avoid the possibility of substantially

greater liability. While, as stated above, the court should

Opinion, Trial Judge 49a

be reticent to look behind the assessments of Pennsyl-

vania’s legal officials as to the State’s liability under

Pennsylvania law, I nevertheless conclude that their con-

clusion to settle the claims was reasonably justified un-

der the unexpected complexities that had gradually de-

veloped.

While I conclude it was not unreasonable for Penn

DOT to believe that it faced a real danger of being held

liable to the third party claimants, that potential liability

was not grounded on negligence or unnecessary actions

which would excuse the defendant’s contractual obligation

to reimburse plaintiff for its share of the costs necessary

to avoid the threatened litigation. Given the Act’s pre-

sumption in favor of reimbursement, there must be more

than has been shown here to excuse that obligation. The

Commonwealth of Pennsylvania should have judgment

rendered in its favor in the sum of $999,551.20, and de-

fendant’s counterclaim for interest should be dismissed.

FINDINGS OF FACT

1. This action arises out of the Federal-Aid High-

way Act, 23 U.S.C. Secs. 101 et. seg. (1970). Under

that Act, the Federal Government assumes a proportion-

ate share of the costs incurred by the several states in the

construction of Interstate Highway projects. In this case,

the applicable Federal participation, as determined under

§120(c) of the Act, was “90 per centum of the total cost

thereof.”

2. Section 106 of the Federal-Aid Highway Act

provides in part:

>

50a Opinion, Trial Judge

Section 106. Plans, specifications, and estimates

(a) Except as provided in section 117 of this

title the State highway department shall submit to the

Secretary for his approval, as soon as practicable

after program approval, such surveys, plans, speci-

fications, and estimates for each proposed project

included in an approved program as the Secretary

may require. The Secretary shall act upon such sur-

veys, plans, specifications, and estimates as soon as

practicable after the same have been submitted, and

his approval of any such project shall be deemed a

contractual obligation of the Federal Government for

the payment of its proportional contribution thereto.

In taking such action, the Secretary shall be guided

by the provisions of section 109 of this title. [Em-

phasis supplied. ]

1

3. Effective January 23, 1967, defendant, acting

through the Bureau of Public Roads (now the Federal

Highway Administration) , (hereinafter “FHWA ) issued

a Letter of Authorization for construction of Federal Aid

Project No. I-84-1 (19) 46, a segment of Interstate High-

way 84 in Northeastern Pennsylvania. A similar Letter

of Authorization had previously been issued for acquisi-

tion of rights-of-way and for utility readjustment expenses

incident to the construction.

4. Plaintiff, Pennsylvania Department of Trans-

portation (hereinafter “plaintiff” or “Penn DOT”) con-

tracted on April 18, 1967, with Gasparini Excavating

Company (hereinafter “Gasparini” or “the contractor’)

for the grading and drainage of the aforesaid portion of

I-84. The contract period was 275 working days and the

estimated price was $3,047 ,572.94.

Opinion, Trial Judge 5la

5. Thereafter, plaintiff and defendant entered into

two Federal-Aid Project Agreements, each of which pro-

vided, in part:

The State, through its Highway Department,

having complied, or hereby agreeing to comply, with

the terms and conditions set forth in (1) Title 23,

U.S. Code, Highways, (2) the Regulations issued

pursuant thereto by the Secretary of Commerce and,

(3) the policies and procedures promulgated by the

Federal Highway Administrator relative to the above

designated project, and the Bureau of Public Roads

having authorized certain work to proceed as evi-

denced by the date entered opposite the specific item

of work, Federal funds are obligated for the project

not to exceed the amount shown herein, the balance

of the estimated total cost being an obligation of the

State. Such obligation of Federal funds extends only

to project costs incurred by the State after the Bureau

of Public Roads authorization to proceed with the

project involving such costs.

6. Gasparini commenced the physical construction

of the project on April 25, 1967.

Claim of Milford Water Authority

7. In early August 1967, the Milford Water Au-

thority (hereinafter the “Authority” or “MWA”) con-

tacted plaintiff, indicating MWA’s belief that the excava-

tion and grading operations taking place on the project

were adversely affecting the Authority’s water reservoirs,

especially after periods of heavy rain. The problems being

encountered included discoloration of the water, turbidity,

deterioration in the potability of the water (citing one

occasion when a sample from the East Reservoir did not

52a Opinion, Trial Judge

meet the recommended limits of the Pennsylvania Depart-

ment of Health with respect to color, turbidity, and iron

content), possible effects on clothing, and problems with

contamination of distribution mechanisms.

8. Penn DOT engaged the firm of Gannet, Fleming,

Corddry & Carpenter, Inc. to perform a study and prepare

a report regarding the cause and cure of the above-de-

scribed problem. The study was completed and an en-

gineering or consultant’s report thereon was printed and

issued under date of October 31, 1968.

9. The report concluded that the excavation for

Interstate 84 was, in fact, the cause of the turbidity in the

Authority’s reservoirs. In addition, the report recom-

mended alternative actions to cure the problem. The re-

port stated that the surest way to eliminate the contamina-

tion of the water supply would be through the construc-

tion of a water treatment facility at an estimated cost of

$560,000. Such a solution would take several years to

complete and would represent a betterment to the Author-

ity’s facilities. The second most certain remedy would be

the construction of a one-million gallon steel holding re-

servoir at a probable cost of $100,000. Such a reservoir

would be filled with water during periods of lesser tur-

bidity and that water could be used in place of the water

from the open reservoirs during periods of turbidity.

Finally, the least expensive approach to the problem

would call for the redesign of the drainage system coupled

with rapid refoliation of the excavations and periodic

monitoring of the water quality in the reservoirs. The

cost of such drainage revision was estimated to be $58,-

000, and the report stated that the third approach would

reduce the turbidity to a level where “it is expected that

Opinion, Trial Judge 53a

operating procedures at the Milford water supply can pro-

vide water of an acceptable quality.” Both plaintiff and

defendant rely on this Engineering Report and neither has

questioned its accuracy.

10. Prior to the issuance of the above-described

report, meetings had been arranged between MWA and

Penn DOT officials. A memorandum of October 6, 1967

to Mr. H. Poulson, Deputy Chief Engineer, from A. V.

Cesare, Civil Engineer, describes a meeting of October 5,

1967, attended by Pennsylvania Deputy Attorney Generals

John Rezzolla and Robert Cunliffe, as follows:

As you requested, I attended a meeting on Thurs-

day, October 5, 1967 in John Rezzolla’s office to

discuss the complaint concerning the possible con-

tamination of the Milford Reservoirs by our High-

way Construction on L. R. 1012-14.

Unfortunately, the complainants did not appear

and Rezzolla called the meeting off. We did, how-

ever, discuss the problem at length with John Rez-

zolla, Robert Cunliffe, and Joseph Jendrejewski from

District 4-0.

Some of the pertinent results of this discussion

were:

1. The rough grading is completed and the fine

grading and seeding will be completed within a week

or ©9 within the controversial area. Since this is only

a grading project and the paving contract will not be

let for several years, an injunction would have no

serious effect on the immediate progress of the work.

2. Apparently the complainants had a study

made by a geologist from Pennsylvania State Univer-

sity which indicates that our project may be con-

taminating this reservoir.

54a Opinion, Trial Judge

3. Our own soils people feel that we could

possibly be contaminating the reservoir.

4. John Rezzolla feels that we should have a

complete study made by a competent hydraulic en-

gineer to support our position either way. We agree

with this necessity. The District will explore this

further and be in contact with our office.

11. Thereafter, in a letter of October 17, 1967,

Robert G. Bartlett, plaintiff's Secretary of Highways,

wrote the following to the MWA:

This will acknowledge receipt of your letter of

October 11, 1967, advising me that the Board of

Directors of the Municipal Authority of the Borough

of Milford have directed their Solicitor to institute

injunction proceedings against the Department of

Highways and its contractor in order to protect its

water supply.

Please be advised that representatives of our

District Engineer’s Office in Dunmore, our Chief

Engineer’s Office and our Chief Counsel were to

meet with your Solicitor on October 5, 1967, at the

Chief Counsel’s Office.

If the Solicitor would have attended this meet-

ing, he would have learned that the contractor had

ceased excavating and grading operations in this area

because he is now at grade. The only operations

now being carried on are those which will be of bene-

fit to the Authority if the cause of the turbidity is

the highway cut, namely, seeding and mulching and

drains. Paving is not to take place until 1969, The

Solicitor would also have learned that this Depart-

ment has ordered a study by Hydraulic Engineers

Opinion, Trial Judge 55a

to determine if the turbidity is being caused by the

Highway cut and if so, what corrective steps can be

taken to insure that the Authority receives the same

quality of water it had in the past.

When this study has been completed, we will be

in touch with the Authority to advise them of the

findings. In view of the aforementioned facts, we

do not believe that the Authority should seek a rem-

edy in equity at this time.

Thank you for your best wishes for my tenure

in office, and I assure you that the Authority will

receive the cooperation of the Department of High-

ways if it is established that we are causing the al-

leged damage.

12. On December 27, 1967, the Authority filed in

the Commonwealth Court of Pennsylvania a Complaint

in Equity demanding construction of a filtration system,

redesign and revision of drainage, money damages and

“for such other and further relief as may be deemed just

and proper.” At the time the complaint was filed, ex-

cavation and grading in the pollution-causing area had

ceased and the road was up to grade. The remaining

work was of a type which actually would reduce but not

cure the pollution problem.

13. A summary of the conclusions of the consulting

engineers appears at the beginning of the Engineering Re-

port as follows:

ABSTRACT

Turbidity in the water supply reservoirs of the

Municipal Authority of the Borough of Milford could

result in the supplying of water to customers with a

quality less than that recommended by the Pennsyl-

56a

Opinion, Trial Judge

vania Department of Health. The turbidity, which

occurs after periods of heavy precipitation, is a sus-

pension of very fine material. The East Reservoir

is affected by turbidity more often and for longer

periods of time than the West Reservoir.

The source of the turbidity is the excavation for

Interstate Route 84, L. R. 1049, which is being con-

structed approximately one-half mile north of the Mil-

ford water supply reservoirs. The primary source is

the cut slopes of the highway excavation between

Vantine Brook and Vandermark Creek. After heavy

rains, turbid runoff water from this area enters Van-

tine Brook and then infiltrates to the ground water

body which feeds the Milford water supply reser-

voirs.

The construction drawings for Interstate Route

184 in the Vantine Brook and Sawkill Creek water-

sheds indicate that the highway design meets recog-

nized standards and practices.

The turbidity problem can be significantly re-

duced by transporting all drainage from the highway

slopes east of Vantine Brook to Vandermark Creek,

by stabilizing these same highway slopes with seed

and mulch or other means, and by reducing the velo-

city and thereby the erosion tendency of water dis-

charged to Vantine Brook. The combined use of

these measures would effect a significant reduction in

the turbidity within two years. After this initial

reduction it is expected that operating procedures at

the Milford water supply can provide water of ac-

ceptable quality.

Should the measures described above prove to be

insufficient, the paving of infiltration zones along

Opinion, Trial Judge 57a

Vantine Brook or the construction of a clear water

holding reservoir are feasible alternative solutions.

The project costs for a one million gallon steel hold-

ing reservoir would be about $100,000; the total

cost for channel lining cannot be determined without

additional knowledge of the extent of the zones of

infiltration along Vantine Brook. The construction

of a holding reservoir would represent a permanent

improvement to the Milford supply.

The construction of Interstate Route 84 will not

cause a significant change in the yield of the Milford

water supply and has not significantly affected the

storage capacity of the contributing ground water

aquifer.

Future roadway salting for Interstate Route 84

may cause a slight increase in the chloride content of

the Milford water supply, but is not expected to cause

the chloride content to approach or exceed the maxi-

mum concentration recommended by the Pennsylva-

nia Department of Health.

14.. The report describes MWA’s physical plant as

consisting of two reservoirs, designated West and East,

each of which is fed primarily by an enclosed spring. The

average daily demand on the water supply system is 200,-

000 gpd (gallons per day), and peak demand is estimated

at 500,000 gpd. The combined storage capacity of the

two reservoirs is 550,000 gallons. Total yield from the

springs which feed the reservoirs is estimated as 1,750,-

000 gpd.

15. Occurrences of turbidity in each of the reser-

voirs were monitored from May 1967 to September 1968.

The turbidity appeared within eight hours after a heavy

58a Opinion, Trial Judge

rain, primarily in the East Reservoir, although the West

Reservoir had traces of turbidity on occasion. The tur-

bidity lasted from one to several days after a rainfall.

Only one water sample, taken on August 25, 1967, showed

a quality which did not meet the recommended limits of

the Pennsylvania Department of Health, and that condi-

tion occurred in the East Reservoir only.

The Report discusses alternative solutions to the tur-

bidity problem and, with respect to highway drainage,

stated in part:

(1) Highway drainage. Changing the drain-

age pattern at the highway will have the greatest

effect on reducing that turbidity which has been fol-

lowing natural drainage paths and then infiltrating

through the stream bottom or banks. It will have

limited value in reducing that turbidity which may

be traveling entirely along an underground route.

The contribution of the latter type of turbidity move-

ment is considered to be minor, however. Changing

the drainage pattern of the runoff from the highway

areas would be the most effective way to prevent tur-

bid water from flowing over previous drainage chan-

nels and moving toward the Authority’s reservoirs.

It is not considered practical, however, to take all

of the drainage which is now designed to be dis-

charged to Sawkill Creek and Vantine Brook and

convey it to another stream. The areas adjacent to

Sawkill Creek and to the west of Vantine Brook have

small percentages of silt and clay particles and, based

on filed observations, the contribution of turbidity

from these areas probably is small. It is felt, there-

fore, that these areas could be drained as presently

designed. Care should be taken at the discharge

Opinion, Trial Judge 59a

points of the drains to reduce scouring by protection

at the ends of culverts and by allowing the runoff

water to flow over a few hundred feet of forest-

covered land before it enters the water courses. In

no case should high velocity water be discharged

directly into the streams or directly onto bare soil.

% * * * * * *

The initiation of the drainage change described

above, as soon as possible, should result in a sig-

nificant improvement in the turbidity problem. At-

tention should be paid to all details to insure that

all areas in the section are drained away from Van-

tine Brook. This work should result in an improve-

ment both during the construction period and during

the period while the highway slopes are stabilizing.

* * * * * * *

The redesign and construction of highway drain-

age to carry runoff water from the area east of Van-

tine Brook to Vandermark Creek is a potential solu-

tion which could be carried out immediately. This

measure would have relatively few uncertainties, few

operation 2° d maintenance problems, and could sub-

stantially reduce the turbidity problem at the Milford

supply.

* * * * * * *

Since quick results and economy are important

considerations in the solution of the turbidity prob-

lem, revisions to the highway drainage and imme-

diate work toward the stabilization of the highway

slopes have advantages over the other methods pro-

posed, even though there is some uncertainty that a

complete solution to the turbidity problem will be

60a Opinion, Trial Judge

obtained. Observation of the turbidity problem can

continue as this work progresses. It is possible that

the turbidity problem will reduce sufficiently so that

operating procedures at the Milford reservoirs can

deal with the problem satisfactorily. If the problem

does not diminish, then more definite measures can be

taken, such as construction of a holding reservoir or

a water treatment plant. Neither of these solutions

could be effected rapidly. Either would make per-

manent improvements to the water system beyond

what is needed to solve the turbidity problem related

to the construction of Interstate Route 84.

* * * * * * *

The most certain way to solve the present tur-

bidity problem at the Milford reservoir is to construct

a complete water treatment plant and to treat therein

all water supplied to the Milford water system.

* * * * * * *

If the methods outlined in Conclusions 8 through

10 are to be followed [including drainage revision],

samples of water should be taken at the Milford res-

ervoirs after each heavy rain . . . If, however, no

improvement is observed, this will indicate a need

for more elaborate facilities, such as a holding reser-

voir in the Milford system or a water treatment plant.

16. The formal “Recommendations” in the Report

were as follows:

A. It is recommended that a program be under-

taken at once in an attempt to economically solve the

turbidity problem. Specifically, it is recommended

that:

Opinion, Trial Judge 6la

(1) The drainage facilities outlined in this re-

port be redesigned and constructed to carry highway

drainage east of Vantine Brook to Vandermark Creek.

(2) Highway drainage outlets in the Vantine

Brook and Sawkill Creek watersheds be constructed

at such locations and in such a manner that discharge

velocities are reduced and, wherever practicable,

drainage water transported over forested areas or in

protected channels.

(3) The stabilization of highway slopes be

started as soon as possible and checked periodically

to determine its effectiveness with the objective of

taking whatever measures are required to insure an

effective vegetative cover.

(4) For the next two years, the water in the

Milford reservoirs and in Vantine Brook at the reser-

voirs be sampled after each heavy rain, or during the

occurrence of turbidity, to determine the effectiveness

of the drainage changes and slope stabilization.

(5) Additional dye tests be conducted to try

to determine the routes of infiltration to the Milford

supply.

B. If the program outlined under A. above

does not prove effective, it is recommended that a

more elaborate program be undertaken. Specifically,

it would be recommended that if all infiltration zones

cannot be isolated and if the turbidity problem must

be solved at the Milford reservoirs, the Pennsylvania

Department of Highways should consider participat-

ing with the Municipal Authority of the Borough of

Milford in the construction of a holding reservoir

62a Opinion, Trial Judge

which would be filled with water during times when

there is no turbidity, and which would supply wa-

ter to the system when both the present reservoirs

are turbid.

17. In a meeting of November 6, 1968, the repre-

sentatives of plaintiff, defendant, and Gasparini discussed

the contractor’s status in the light of the turbidity prob-

lem. Copies of the October 31, 1968, consulting En-

gineering Report were distributed.

18. On November 27, 1968, a meeting was held

between representatives of plaintiff and of the Authority.

A “Memorandum of Understanding” was drafted and

signed by Mr. John Rezzolla, Chief Counsel for Penn

DOT, and Mr. Robert Kayton, counsel for the Authority.

In the Memorandum, the plaintiff agreed to provide, at

its expense, a one and one-half million gallon holding

reservoir and to implement a five-year monitoring pro-

gram.

19. The Memorandum of Understanding was formal-

ized and incorporated into an agreement dated January

23, 1969. The Agreement confirmed the undertaking of

the plaintiff to build a 1.5 million gallon reservoir, and

provided for a five-year surveillance program. The reser-

voir was to be completed by July 1, 1970.

However, on August 3, 1970, an Agreement was en-

tered into between plaintiff and the Authority superseding

the prior Agreement of January 23, 1969. In the 1970

Agreement Penn DOT agreed to pay the Authority $275,-

000. In return the Authority agreed to release Penn DOT

from its promises made in the 1969 Agreement and to

withdraw its court Complaint.

Opinion, Trial Judge 63a

Although representatives of FHWA were aware of

these negotiations and agreements, they were never for-

mally approved or disapproved by FHWA.

20. The Authority has never constructed a holding

reservoir which might be deemed a permanent improve-

ment to MWA facilities. In fact, by August 3, 1971, the

level of turbidity had lessened to levels well within the

requirements of the U. S. Public Health Service with no

appreciable difference between the quality of the water

upstream from the construction and that downstream

from the construction. According to the testimony of a

Penn DOT engineer, this would indicate that the I-84 con-

struction presently does not contribute any significant tur-

bidity to the Milford water supply. Of course, it was

unknown at the time of the settlement between the Au-

thority and Penn DOT that the contemplated corrective

measures would not in fact be needed.

The Gasparini Claim and Olmstead Borrow Site

Dispute

21. By letter dated December 20, 1967, Gasparini

requested plaintiff’s approval of a borrow site’ as follows:

Reference is made to Item 5, Borrow Excava-

tion, on the subject project.

Pursuant thereto, the Gasparini Excavating Com-

pany, Inc. intends to obtain the required Borrow Ma-

terial from an area located right of Stations 1515-+

to 1520+ adjacent to the project right of way.

1**Borrow’’ is soil or rock material used to fill depressions

and build embankments when the exeavation obtained from the

highway project itself is of insufficient quantity for the purpose.

For the highway in question, the borrow needed by Gasparini,

and found at the Olmstead site, was soil rather than rock.

64a Opinion, Trial Judge

Your permission is requested to allow the con-

tractor to commence Borrow Excavation prior to the

completion of required Class I Excavation on the

project.

* * * * * * *

22. The site described in the December 20, 1967,

letter was owned by a Mr. and Mrs. Olmstead and was

commonly referred to as the ‘Olmstead site.”” When the

contractor bid the project, he had anticipated using the

property as a borrow site. Tests of the Olmstead borrow

material had shown that it was satisfactory for the pur-

poses of the contract. Further, the borrow source of the

Olmstead property was sufficiently removed from the

highway so as not to affect the aesthetics of the highway

or interfere with construction operations. Unfortunately,

the Olmstead property was adjacent to the Vantine Brook,

a feeder stream for the reservior. Because of the potential

for increased pollution of the reservior from borrow ex-

cavation at the location the Authority and Penn DOT dis-

cussed whether or not Gasparini should be denied the use

of that site.

23. Gasparini’s request of December 20, 1967, was

its first formal request for a borrow site.”

24. The following contract provisions, in pertinent

part relate to borrow operations:

(a) Specifications, Section 3.5.3

The obtaining of borrow pits shall be the con-

tractor’s responsibility.

** *

2Such a request was required to be made in writing before

the State’s approval would be given.

Opinion, Trial Judge 65a

Where the contractor desires to obtain borrow

adjacent to the highway, written approval of the en-

gineer shall be secured. * * *

(b) Specifications, Section 3.5.4.

Additional excavation material obtained within

the highway limits, beyond the approved cross-sec-

tion, in lieu of Borrow Excavation, will be measured

and paid for at the lower contract unit price per

cubic yard for either Class I Excavation or Borrow

Excavation.

All suitable excavation shall be used in embank-

ment within a grading section, except as otherwise

specified, before any Borrow Excavation will be al-

lowed, and deductions will be made from any ma-

terials in embankments outside of the approved cross-

sections, except as otherwise provided. If the con-

tractor desires to waste excavated material and pro-

vide borrow to replace it for his own convenience,

or provide excavation in lieu of borrow, he may do

so only after obtaining the written approval of the

engineer and satisfactory arrangements have been

made for the measurements and disposal of the ma-

terial.

* * *

(c) Specifications, Section 1.7.13

* * * The contractor shall take all necessary pre-

cautions to prevent damage to all overhead and un-

derground structures, and to protect and preserve

property within or adjacent to the project and shall

be responsible for damage thereto. Special care shall

be exercised by the contractor in the prosecution of

the work in order to avoid interference or damage

66a

Opinion, Trial Judge

to any operating utilities or plants; however, where

there is any possibility of interference or damage,

the contractor shall make satisfactory arrangements

with responsible officers or with the owners of the

utilities or plants; covering the necessary precautions

to be used as safeguards during the performance of

the work by the contractor. These arrangements

shall be made before said work is started and shall

be subject to the approval of the engineer, which

approval shall not be considered as releasing the con-

tractor from any responsibility for the acts of him-

self or his employees or representatives.

*_* *

(d) Specifications, Section 1.7.19

The contractor shall take sufficient precautions

to prevent pollution of streams, lakes, and reservoirs

with fuels, oils, bitumens, calcium chloride, or other

harmful materials. He shall schedule and conduct

construction operations to prevent when necessary,

and otherwise minimize, pollution of streams, etc.,

with sediment or other harmful materials.

The areas of erosive land exposed by construc-

tion operations at any one time, which may cause

subsequent water pollution, are subject to the ap-

proval of the Engineer. The location, operation and

final condition of areas or pits from which borrow

material is obtained is subject to the approval of the

Engineer in order that erosion after the completion

of the work will not result in water pollution and

that water will not collect or stand therein, unless

the borrow pit is appropriate to serve as a lake for

recreation or other purposes,

Opinion, Trial Judge 67a

25. In a letter of December 22, 1967, plaintiff

conditioned its approval of the requested Olmstead bor-

row site upon the following condition:

As this area is within the watershed of the Mil-

ford Water Co. approval must be secured that no

contamination to their present supply will result from

the excavation and removal of this material and

written confirmation of this approval furnished to

the Department by the Water Company.

26. Gasparini was unable to obtain the MWA’s ap-

proval for use of the Olmstead site. Despite this fact,

Gasparini continued in 1968 to seek plaintiff's uncondi-

tional approval of the site. Plaintiff’s position was reaf-

firmed in its letter of May 6, 1968, to Gasparini stating:

** * As in our letter of December 22, 1967,

you are reminded of the fact that removal of material

from the referenced areas may result in subsequent

involvements with the Milford Water Authority.

In view of your awareness of the possible con-

sequences, the Department’s approval of your request

for permission to proceed with the above noted Bor-

row Excavation is conditional upon the understanding

that such approval in no way relieves you of your

responsibility for damage claims as set forth in Sec-

tion 1.7.19. Form 408, dated 1960.

27. Though Gasparini did attempt to locate other

borrow sites during the spring of 1968, and was assisted

by plaintiff in the search, the attempted location of an-

other site was predicated on Gasparini’s unwillingness to

select a site less convenient (and hence more costly to

use) than the Olmstead site. Mr. Finn of Penn DOT esti-

68a Opinion, Trial Judge

mated that use of a less convenient borrow site might

double Gasparini’s cost of obtaining borrow. Gasparini’s

estimated contract price for borrow excavation had been

in the neighborhood of $90,000.

28. Because of the problem of freezing of embank-

ment materials, it was Gasparini’s intent to postpone the

start of borrow operations until the spring of 1968. In

Northern Pennsylvania where the highway project was lo-

cated, soil embankment operations cannot be carried out

efficiently in the winter months. The dispute over the

Olmstead site did not therefore cause any delay to Gas-

parini until late March or early April when the danger

of prolonged freezing was reasonably past. Nonetheless,

as of June 28, 1968, Gasparini still had not chosen an

alternative borrow site, and Gasparini’s attorney wrote

plaintiff on that date, stating in part:

As you know, we are hastily approaching the

time when Gasparini must utilize the intended bor-

row area,

29. By letter of July 23, 1968, to the contractor,

plaintiff agreed to the contractor’s request that it obtain

additional excavation in lieu of borrow by widening the

cut slopes of the highway. The letter also stated:

Since this additional excavation material will be

obtained from within the limits of the highway, the

basis of payment must be in accordance with Section

3.5.4(1), Form 408, 1960 which provides that it

“be measured and paid for at the lower contract unit

price per cubic yard for either Class I Excavation or

Borrow Excavation.”

We wish to emphasize that the use of the refer-

enced additional excavation may be at your option.

Opinion, Trial Judge 69a

It is not the intent of this approval to in any way

deprive you of the opportunity to obtain the neces-

sary borrow material under the terms and provisions

of contract Item No. 5, Borrow Excavation.

30. Gasparini was unwilling, however, to use ex-

cavation from widened cut slopes at the contract price for

Class I excavation. Penn DOT therefore directed Gas-

parini to do so, by letter of August 12, 1968, stating, in

part:

It is of principal concern to the Department

that the continued progress of the referenced project

be maintained so as to insure completion of all work

in time to permit scheduled future paving contracts.

It also has become increasingly apparent that

the circumstances which have influenced your will-

ingness and ability to provide the necessary borrow

excavation at the contracted unit price cannot be re-

solved in time to avoid a considerable delay to the

project.

Therefore, when the progress of construction re-

quires additional excavation material, you are here-

by authorized and directed to utilize such suitable

material as can be obtained by widening the cut

slopes between approximate stations 1468+50 and

1475+00 Eastbound, Rt. in accordance with revised

construction cross-sections with which you will be

provided.

** *

Since the widening of the referenced slope area

is at the direction of the Department, equitable com-

pensation for any necessary additional clearing will

be acknowledged by the Department.

70a Opinion, Trial Judge

31. On August 20, 1968, Gasparini first gave a

written notice to plaintiff of its intention to assert a claim

for delay based on the borrow dispute. The notice re-

ferred to Section 1.9.9 of the contract specifications pro-

viding as follows:

Neither the contractor nor the surety shall be

entitled to present any claim or claims to the Secre-

tary or to the Board of Arbitration of Claims named

in the contract, either during the prosecution of the

work or upon completion of the contract, for addi-

tional compensation for any work performed which

was not covered by the approved drawings, speci-

fications and/or contract, or for any other cause,

unless he or it shall have given the Secretary due no-

tice in writing of his or its intention to present such

claim or claims as hereinafter designated; provided,

however, that the contractor or his surety shall not

be denied the rights to present any claim which is

based on differences in measurements or errors of

computations which are not disclosed until prepara-

tion of the final certificate.

The “due notice in writing” as required above,

must have been given to the Secretary of Highways

or the engineer within ten (10) days of the time the

contractor performed such work or any portion there-

of, should have performed such work or any portion

thereof, or was impeded or prevented from doing

such work or any portion thereof by the Department

of Highways, its authorized representative or anyone

else; that is to say the contractor must give due no-

tice in writing ten (10) days from the inception of

the claim as a condition precedent to presenting ihe

claim.

Opinion, Trial Judge 71a

32. Gasparini did utilize excavation material ob-

tained from widening of cut slopes during 1968. When

the source was exhausted in 1969, plaintiff obtained bor-

row material from a site owned by a Mr. and Mrs. Myers

adjacent to the highway. The use of the Myers’ borrow

caused Gasparini to incur increased hauling costs over

those expected from the Olmstead site, and since the

Myers’ borrow was more coarse than the Olmsteads’, it

became necessary to have workmen manually clear stones

from the material.

Settlement with Gasparini Excavating Co., Inc.

33. A meeting was held on February 4, 1970, at

Gasparini’s request, to discuss its claim against Penn DOT.

Gasparini’s claim was for additional costs based on al-

leged delays attributable to the unavailability of the Olm-

stead borrow site and the suspension of certain construc-

tion operations pending the outcome of negotiations be-

tween Penn DOT and MWA. The contractor requested

an acknowledgement by plaintiff that its claim was justi-

fied. Plaintiff’s District Construction Engineer, John M.

Finn, originally rejected the request, stating that Penn

DOT’s evaluation would consider such factors as the con-

tractor’s responsibilities to other parties and properties

under the contract specifications, as well as the contrac-

tor’s evident failure to efficiently prosecute the work

within the allotted working time, subsequent to the peri-

ods during which they contend the delays and restriction

occurred. Thereafter on February 20, 1970, Gasparini

submitted a formal, written claim for an equitable ad-

justment of $2,314,017.25.

34. A second meeting with Gasparini was held on

March 25, 1970, to discuss the contractor’s claim. At a

72a Opinion, Trial Judge

third meeting held April 9, 1970, Gasparini presented an

alternative proposal based on actual cost records plus a

profit of 10 percent. Though plaintiff did not initially

concede any liability, its representatives met in closed ses-

sion following the contractor’s presentation, and tenta-

tively concluded that it would pay Gasparini an equitable

adjustment based on actual costs plus a profit. Gasparini

confirmed its willingness to enter into such an agreement

by letter of April 10, 1970. Settlement with Gasparini

was concluded when Penn DOT agreed by its letter of

April 28, 1970, to pay Gasparini an equitable adjustment

based upon actual costs plus a 10 percent profit. The

adjusted total payment to Gasparini for which Penn DOT

here seeks 90 percent reimbursement from defendant is

$835,612.45

35. Gasparini’s claim for $2,314,017.25 was based

on the following breakdown:

Opinion, Trial Judge

DAMAGES FOR

GRADING AND DRAINAGE DELAYS

METHOD NO. 2

BASED ON JOB COSTS AND ACCEPTED EQUIPMENT

CHARGES AND ALLOWABLE PERCENTAGES

73a

ADJUSTMENT

TO DEC. 1, 1969 ALLOWABLE

NOV, 30, 1969 TO COMPLETION COST PER CENT TOTAL COS1

20%

LABOR $ 953,349.78 $ 25,700.00 $ 979,049.78 $ 195,809.96 $1,174,859.74

EQUIPMENT 2,175,292.82 31,500.00 2,206,792.82 2,206.792.82

PROTECTIVE

EQUIPMENT 14,362.17 3,500.00 17,862 17 17,862.17

FUEL 71,090.88 2.500,00 73,590.88 73,590.88

15’:

MATERIAL 216,772.73 216,772.73 32,515.91 240,248.64

INTEREST we. oe 33,000.00

$3,430,868.38 $ 63,200.00 $3,494,068.38 $ 228,325.87 $3.755.304.25

TOTAL COST $3.755.394.25

PAID BY ESTIMATE

EQUITABLE DAMAGE ADJUSTMENT

_= 1.441.377.00

$2.314.017,25

74a

Opinion, Trial Judge

36. Gasparini’s alternative claim for actual costs

plus profit, in the amount of $846,777.90, was based on

the following breakdown:

DAMAGES FOR

GRADING AND DRAINAGE DELAYS

METHOD NO. 1

BASED ON GASPARINI EXCAVATING COMPANY, INC, JOB-COST RECORDS

ADJUSTMENT

DEC, 1, 1969 TO

TO NOV. 30, 1969 COMPLETION

TOTAL COST

LABOR $ 953,349.78 $25,700.00

EQUIPMENT 585,980.32 35,000.00

FUEL 71,090.88 2,500.00

MATERIAL 216,772.73 -

MISCELLANEOUS 25,686.49 4,000.00

OVERHEAD 219,737.09 4,200.00

$2.072,617.29 $71,400.00

$ 979,049.75

620,980.32

73,590.88

216,772.73

29,686.49

223,937.09

$2,144.017.29

NOTE:

ACTUAL COST

ACTUAL INCOME

ACTUAL LOSS

ANTICIPATED PROFIT

($1,441,377.00 X 10%)

EQUITABLE DAMAGE ADJUSTMENT

$2.144,017.29

__1.441,377.00

$ 702,640.29

$ 846,777.90

Should the Department agree to accept the above method for equitable

adjustment, the Contractor hereby further agrees to make Gasparini Ex-

cavating Company, Inc, Job-Cost Records available to the Department.

Opinion, Trial Judge 75a

37. Penn DOT sought a legal opinion from Robert

W. Cunliffe, Pennsylvania Deputy Attorney General, as

to the legal basis for a payment to Gasparini. By memo-

randum of April 20, 1970, Mr. Cunliffe, who had moni-

tored the disputes with MWA and Gasparini from their

inception, gave the following legal opinion:

It is our opinion that the Department would be

held liable for damages to the contractor on his con-

tract in an action before the Board of Arbitration

of Claims for the following reasons:

1. The 408 Specifications state that the Depart-

ment shall approve all borrow pits. By letter of

December 22, 1967, from the Department to the con-

tractor, the latter was required to obtain the approval

of the Milford Water Company for his borrow pit

on the Olmstead property. The Department thus

breached the contract by interjecting a third-party not

contemplated by the specifications.

2. The Department knew before the contract

was let that problems could develop as to the water

supply of the Milford Water Company. It failed to

give the contractor notice of this possibility or to in-

sert any special requirements in the proposal. Under

the holding of the Board of Arbitration of Claims in

the case of Langenfelder vs. Pennsylvania Depart-

ment of Highways, on a project on I-81 Cumberland

County, the Department would be found liable to the

contractor because of fraud and misrepresentation.

3. The contractor ran into an unforeseen con-

dition when the underground water became disturbed.

By reasonable inspection prior to bidding he could

not have discovered this.

76a Opinion, Trial Judge

38. Similarly, on July 2, 1970, William C. Sennett,

the Attorney General of the Commonwealth of Pennsyl-

vania, wrote Mr. Robert P. Casey, the Auditor General

of the Commonwealth of Pennsylvania, as follows:

In the instant case, the Department of Highways

knew prior to advertising for bids that some damage

could be caused to the water supply of the Milford

Water Authority. They failed to reveal this fact to

the bidders or to the successful bidder at the time

of award. The Department's failure to take action

to assure there would be no damage resulted in the

Authority filing an injunction against the Common-

wealth and the contractor, although the contractor

was not at fault. In the case of C. J. Langenfelder

& Son, Inc. v. Commonwealth, Board of Arbitration

of Claims, Docket No. 151, the Board decided that

the plans and soil profile furnished by the Depart-

ment to the contractor constituted a warranty and

representation that the conditions to be encountered

on the project would be as therein indicated. As

the conditions were not indicated, the Department

committed an actionable wrong. Since in the instant

case, the Department had notice that the water sup-

ply of the Authority might be affected and failed to

so advise the bidders, it committed an actionable

wrong as in Langenfelder, supra, where it withheld

the Soils Survey Report.

39. Plaintiff’s failure to act on the MWA’s notice

is also described in Mr. Finn’s memorandum of April 28,

1970:

Also deserving of comment, we believe, is the

fact that the possible detrimental effects of the pro-

posed construction on the Milford Water Authority’s

Opinion, Trial Judge 77a

facilities were made known to the Department during

the design stages of the project. The failure to

recognize and acknowledge this fact and incorporate

definite, adequate precautions in the project design

imposed construction conditions on the District Con-

struction Unit and the Contractor which were all but

impossible to correct or prevent and accomplish the

proposed construction at the same time.

40. A letter dated July 20, 1970, to the Secretary

of Transportation from Robert P. Casey explains the con-

clusion of the latter that plaintiff was negligent in its

construction of the project in question.

The Department of the Auditor General has

carefully reviewed your letter of July 9, 1970 con-

cerning the above matter.

The first point made in your letter is intended

to refute our statement that your department was

negligent in the construction of Interstate 84 in the

area of the water supply of Milford Water Authority.

On this point I refer you to an agreement entered

into between the Department of Highways and the

Municipal Authority of the Borough of Milford dated

January 23, 1969 wherein on page 2 the following

language appears:

“Whereas, Commonwealth admits that the con-

struction of said Interstate Highway 84 caused the

said conditions of turbidity and impurity, .. .”

That agreement contains the signature of V. W.

Anckaitis, Deputy Secretary of Highways.

78a Opinion, Trial Judge

Further proof of the negligence of the Depart-

ment of Highways can be found in the contents of

the memorandum dated April 20, 1970 from Robert

W. Cunliffe, Deputy Attorney General, to P. W.

Amos, Assistant Chief Engineer, Bureau of Construc-

tion. Referring to the equitable adjustment to the

contract with the contractor, Mr. Cunliffe stated, “It

is our opinion that the Department would be held

liable for damages to the contractor on his contract

in an action before the Board ofAbritation of Claims

for the following reasons:

1. ... the Department thus breached the con-

tract by interjecting a third party not contemplated

by the specifications.

2. The Department knew before the contract

was let that problems could develop as to the water

supply of the Milford Water Company. It failed to

give the contractor notice of this possibility or to in-

sert any special requirements in the proposal. Under

the holding of the Board of Arbitration of Claims in

the case of Langenfelder vs. Pennsylvania Depart-

ment of Highways, on a project on I-81, Cumberland

County, the Department would be found liable to the

contractor because of fraud and misrepresentation.”

Further substantiation of the allegation by this de-

partment that the Department of Highways was negligent

in the construction of this highway can be found in a

memorandum dated April 28, 1970 prepared by Thomas

J. Harrington, District Engineer in charge of the Scran-

ton office, and John M. Finn, Assistant District Engineer

in charge of construction. On the third page of that

memorandum the following language appears in the sec-

ond last paragraph:

Opinion, Trial Judge 79a

“Also deserving of comment, we believe, is the

fact that the possible detrimental effects of the pro-

posed construction on the Milford Water Authority’s

facilities were made known to the Department dur-

ing the design stages of the project. The failure to

recognize and acknowledge this fact and to incor-

porate definite, adequate precautions in the project

design imposed construction conditions on the Dis-

trict Construction Unit and the Contractor which

were all but impossible to correct or prevent and ac-

complish the proposed construction at the same time.”

Finally, with respect to the allegation by this depart-

ment that the Department of Highways was negligent in

the construction of this project, we refer you to the July

2, 1970 opinion of Attorney General William C, Sennett.

The Attorney General stated that “Since in the instant

case, the Department had notice that the water supply of

the Authority might be affected and failed to so advise

the bidders, it committed an actionable wrong as in

Langenfelder, supra, where it withheld the Soils Survey

Report.”

The opinion of the Attorney General clearly places

the fault for any damage to the Milford Water Authority

water supply on the Department of Highways.

The second point in your letter deals with the set-

tlement by the Department of Highways for one-third of

the amount claimed by the contractor, to wit $2,400,000,

and infers that your department did an excellent job for

the taxpayers in making that settlement. It must be

pointed out that the original contract for the project called

for a total payment of $3,047,572.94. Payments to date

on this contract amount to $3,841,091.34, which includes

80a Opinion, Trial Judge

a payment over and above the original contract price of

$769,000 on account of the negligence of the Department

of Highways in delaying the contractor in completion of

that project. In addition, the January 23, 1969 agreement

signed by your department with the Milford Water Au-

thority, which is presently being negotiated, could cause

an additional payment of $300,000. In view of these

figures, it is difficult for me to see your logic that your

department’s action in this matter was to the benefit of

the taxpayers of Pennsylvania.

With regard to the third point contained in your

letter that your department has never considered payment

of $2,000,000 to the Milford Water Authority for dam-

ages caused by the negligence of the Department of High-

ways, this will advise you that Mr. Harold C. Poulson, an

engineer with the Department of Highways, personally

advised William H. Smith, Chief Counsel of this depart-

ment, and Thomas P. Kennedy, Assistant Counsel, that

if the Department of Highways had to comply with the

terms of the agreement of January 23, 1969 referred to

above and construct a 114 million gallon reservoir, con-

duct a surveillance program of the Milford Authority wa-

ter supply and then construct a filtration plant, the total

cost could exceed the figure of $2,000,000.

In view of the error made by the engineers in the

Department of Highways regarding the effect by the con-

struction on the Milford Water Authority supply of wa-

ter, your statements that you know of no basis on which

the subcontractors could file a claim, and that you ex-

pect reimbursement from the Federal Highway Admin-

istration for its share of the additional cost, is at best not

reassuring.

Opinion, Trial Judge 8la

Representatives of the Department of the Auditor

General thoroughly reviewed all the circumstances and

facts, including an examination of documents in the pos-

session of your department, with representatives of the

Department of Highways both in Harrisburg and in the

Scranton Office. The allegations in my letter of July 2,

1970 concerning the negligence of your department were

based upon that review and the facts disclosed by exam-

ination of your files.

* * *

41. During his testimony at trial, Mr. Casey was

shown a letter dated December 27, 1965, in which the

MWA advised plaintiff that the highway construction was

not expected to affect MWA’s supply. The letter stated:

We have been advised by our engineer, that he

does not believe that the construction of this highway

will affect our springs or the probable locations of

the veins of water leading to the springs.

However, there is always a possibility that if

there were deep cutting or blasting done in the event

[sic] of these veins, the supply of water to these

springs could be disrupted.

Mr. Casey stated that he could draw no firm conclusions

about the letter because he did not know what other sub-

sequent correspondence or events might reveal an updated,

contrary view. He further observed that “‘latitude has got

to be granted to people in the position of those designing

and constructing highways.” He believed that a “fair

amount of discretion” must be given to the “difficult

judgment calls” confronting people who design and con-

struct highways.

82a Opinion, Trial Judge

Plaintiff's Claim For Federal Participation

42. A state highway department’ may enter into a

settlement or otherwise commit itself to additional ex-

penditures with or without prior Federal approval. If the

highway department does so without prior Federal ap-

proval, the FHWA will examine the settlement to deter-

mine the extent to which Federal participation is justified.

43. If a state highway department desires advance

Federal approval, it should make such a request by sub-

mitting a written recommendation for FHWA’s considera-

tion and approval. Plaintiff did so in the instant case

only orally. However, throughout the negotiations with

the Authority, the FHWA was kept fully informed on

all levels. They were invited to and attended all meetings

where the claims of the Authority and the contractor were

discussed. Despite being deliberately invited to these

negotiation sessions, they refused to offer guidance one

way or the other. At none of these meetings were there

ever any objections voiced by the FHWA regarding the

manner in which the settlements were proceeding. This

refusal to offer guidance caused Penn-DOT to conclude

that there would be no objections to the settlements.

44. By letter dated March 21, 1969, to the FHWA,

plaintiff described the factual basis for its settlement with

the MWA. By letter of July 1, 1969, the FHWA re-

sponded, requesting information with regard to the legal

basis for liability of plaintiff to the MWA. Plaintiff re-

sponded to this request on August 11, 1969. Additional

information was sought by the FHWA in March 1970,

and supplied in May 1970.

45. The FHWA denied participation in the MWA

settlement on August 7, 1970. After a subsequent con-

Opinion, Trial Judge 83a

ference with plaintiff’s representatives, the FHWA agreed

to reevaluate its position. Further information was de-

veloped in 1971 and 1972. During the same period, the

FHWA was evaluating plaintiff’s claim for participation in

the settlement with Gasparini.

46. On January 23, 1973, the FHWA discovered

that plaintiff’s August 28, 1970, voucher claiming reim-

bursement of 90 percent of the $275,000 settlement with

the MWA had been paid. A letter to plaintiff of that date

demanded a credit for that amount:

On August 7, 1970, in a letter to Mr. David

Sims, we advised that Federal-aid participation would

not be extended to cover costs concerning the Milford

Water Authority. However, Penn DOT initiated a

Modified Project Agreement and Progress Voucher

No. 23 on August 28, 1970 claiming reimbursement

for $275,000 under Right-of-Way Project I-84-1 (12) -

46 [another highway project]. The reimbursement

was for Claim No. 5100945, the Municipal Authority

of Milford. Reimbursement was inadvertently per-

mitted by this office on October 1, 1970.

Since the costs were declared ineligible for Fed-

eral-aid participation under the construction project,

reimbursement should not have been requested or

paid under the right-of-way project. Although Penn

DOT’s appeal submission of January 28, 1972 is still

undergoing review and reconsideration, our official

position at this time must remain as stated in our

letter dated August 7, 1970. Therefore, please is-

sue a credit for $275,000 on Project I-84-1 (12) 46.

84a Opinion, Trial Judge

47. Plaintiff did not issue the demanded credit. On

December 20, 1973, the FHWA deducted the disallowed

amount from another voucher of the plaintiff.

48. By letter of December 18, 1974, the FHWA

denied all participation in the settlement with Gasparini,

and offered to participate only to the extent of 90 percent

of $58,000 in settlement with the MWA. Defendant’s

offer was rejected by plaintiff, which thereupon filed the

instant action in this court.

CONCLUSION OF LAW

Upon the foregoing findings of fact and opinion

which are adopted by the court, the court concludes as a

matter of law that plaintiff is entitled to recover, and

judgment in its favor is hereby entered in the sum of $999,-

551.20. Defendant’s counterclaim for interest is dis-

missed.