Leo Spear Construction Company, Inc. v. The Fidelity and Casualty Company of New York and Brookfield-Baylor, a Joint Venture

446 F.2d 439, 1971 U.S. App. LEXIS 9166

• Court: Court of Appeals for the Second Circuit
• Decided: July 1, 1971
• Docket: 35696_1
• Status: Published

Opinions

MOORE, Circuit Judge:

This is an appeal from a judgment awarding plaintiff damages under a quantum meruit theory of recovery in the amount of $90,845 plus interest of $5,910.99 and in addition $50,000 damages under a theory involving tortious interference with business relations.

On June 20, 1967, Leo Spear Construction Company (Spear), plaintiff herein, entered into a contract with F. H. Mc-Graw and Company, Inc. (McGraw), the prime contractor in the construction of new student housing at the University of Vermont at Montpelier (the University), wherein Spear as a subcontractor agreed to perform certain work in connection with that construction job for a contract price of $618,000.

In December, 1968, McGraw defaulted in the performance of the prime contract and on December 19, the University chose to terminate McGraw’s contract effective December 29, 1968. The defendant Fidelity and Casualty Company (F & C) was MeGraw’s surety and had issued both payment and performance bonds to the University which bonds were drawn on a form of the Department of Housing and Urban Development. Under the terms of this bond, it was to be void if the contractor, McGraw, made prompt payment to the subcontractors and materialmen.

At the time of McGraw’s default, Spear was faithfully performing its obligations under its subcontract. However, its activities had been thwarted in a number of ways by McGraw. These included Mc-Graw’s failure to provide sufficient winter heat, delays from changes in the pier footing, compaction problems and, as a result of dynamiting operations by McGraw, the cracking of various walls and other concrete structures installed by Spear. Besides necessary corrective work, however, Spear had placed 152,000 out of 164,000 bricks which had to be placed in the project or 92.1%, and he had placed 161,000 out of 163,000 cement blocks or 98.77%.

On December 9, 1968, Spear and one of its suppliers notified the defendant F & C that they were filing a mechanic’s and materialman’s lien respectively. Two days later, Spear again wrote F & C, indicating that it stood ready to cooperate with F & C in completing the project, and asking F & C to outline its position regarding the entire situation.

On January 2, 1969, the University notified F & C to complete the project pursuant to its performance bond. . Thereafter, F & C contracted with Brookfield-Baylor (Brookfield) which was to accomplish this completion. Brookfield was, of course, under no duty to contract with Spear to complete the work covered by Spear’s subcontract, and both defendants seem to have been having doubts about allowing Spear to finish the job because of its questionable financial status. F & C had become aware of Spear’s financial problems as early as December 12, 1968 when it had learned of an all-monies assignment of funds due Spear under the McGraw contract to the Chittenden Trust Company of Burlington, Vermont. Thus on February 5, Phil Scaglione of F & C informed plaintiff that the contract would not be renewed. However, on February 13, Spear’s president, Leo Spear, was told at a conference in New York City that Spear would be allowed to finish the contract and receive its unpaid balance if it could furnish an acceptable bond.

A letter of February 28 confirmed the February 13 arrangement but demanded action within ten days. Difficulties then arose over the terms of the bond. The Aetna Insurance Company agreed to write a bond for Spear on condition that F & C rather than Brookfield-Baylor be ■ the only_obligee, a condition which F & C stated “may be acceptable” in the February 28 letter, and also on condition that F & C rather than Brookfield be the contractor. F & C insisted that while the bond could be written to it, the contract must be with Brookfield. F & C points to various legal problems it might have faced had it assumed the role of contractor. Several days later plaintiff was informed that it would not be hired to complete the work it had started.

On April 2, 1969, after being informed that the subcontract would not be maintained in effect by F & C and Brookfield, Spear’s men came onto the site and drove off with a truckload of structural tile. Then they returned and started to load a second truck. However, Brookfield obtained a writ of attachment from the Chittenden District Court in Burlington, Vermont and caused the sheriff to seize and chain the truck. Before this action by the sheriff, Brookfield detained Spear’s truck by parking another vehicle in front of the truck and dumping a load of sand in front of it. However, the defendants at no time caused the writ to be entered since the Chittenden District Court found the injunctive remedy to be inappropriate and defendants decided to assert their claim for conversion as a counter-claim in this action. After the determination by the Chittenden Court that no injunction should issue, Spear’s representatives went onto the job site only to find that much of the material which had been in the truck had been removed, notwithstanding that the truck and its contents were still under the control of the sheriff pursuant to the writ. Spear also complains that Brook-field used various equipment belonging to Spear in the course of its work, and that in addition to Spear’s rights were violated when F & C took these actions since such actions violated an agreement of April 2 to preserve the status quo between Spear and Brookfield-Baylor. Brookfield suggests that this agreement, stated to terminate when the controversy was settled, in fact terminated when the Chittenden suit was terminated.

Spear had seven unpaid suppliers on this job, their total claims amounting to $52,173. After commencement of this suit in April, 1969, payment was made by F & C to these suppliers on July 2, 1969. Plaintiff suggests that this payment was unreasonably delayed in that F & C at no time disputed its liability to these materialmen and paid them as per their bills. However, there was some dispute over whether these payments would be made to the materialmen directly or through Spear, since Spear apparently was seeking leverage in an attempt to obtain credit from its materialmen. After these payments were made to the materialmen by joint cheeks written to the materialmen and Spear, some of the suppliers agreed to loan a percentage of these payments to Spear.

I.

Quantum Meruit Recovery

Plaintiff, by an amended complaint, claimed damages under the payment bond on a quantum meruit basis, rather than on the contract. The plaintiff was entitled under Vermont law¹ to make this election under the facts and circumstances of this case. Peist v. Richmond, 97 Vt. 97, 122 A. 420 (1923).

Thus, plaintiff was entitled to recover in this suit the fair and reasonable value to the defendant F & C of the work performed and the materials furnished. ' Gilman v. Hall, 11 Vt. 510 (1839); Silos v. Prindle and Prindle, 127 Vt. 91, 237 A.2d 694 (1968). The District Court carefully examined the various items of damage and proof thereof, viewed the construction site in order to make a more accurate judgment as to the proper amount of damages, and concluded that the fair and reasonable value of the work and material supplied by plaintiff was $674,866.92.

This figure was arrived at as follows:

direct labor charges incurred by plaintiff_________$377,393.49

less amount estimated by district court attributable to increased costs due to McGraw's default on his contractual obligations and amounts attributable to correctional work__________ 27,393.49

direct labor charges benefiting defendant F & C $350,000.00

amounts spent by plaintiff for material for the benefit of defendant 222,327.28

20% addition to labor costs for taxes, insurance, Social Security, pension, health and welfare funds _________ 70,000.00

6% of total for overhead and profit 38,539.64

subtotal ___ _____ $680,866.92

less correctional work to be done ____ 6,000.00

fair value of labor and material furnished____ $674,866.92

This figure was then reduced by $300, representing the value of the material removed from the site by the plaintiff for which the defendant F & C paid the materialmen on July 2, 1969 and by $583,721.92, amounts paid to Spear by McGraw under the contract. This resulted in a net amount due plaintiff of $90,845 plus interest of $5,910.99 for a total of $96,755.99. We believe this computation was supported by the evidence, was not clearly erroneous, and represented a proper application of the legal principles involved.

Defendants suggest that plaintiff failed to establish a case in quantum meruit because there was no testimony as to the fair and reasonable value of the labor and materials furnished, although Spear testified as to his direct costs, and because there was no indication as to what extent these costs were increased by Spear’s own defective workmanship and corresponding need for corrective work and by McGraw’s default on his contractual obligations.

Leo Spear testified as to his opinion of the “total value” of the work performed, giving the figure of $713,-711.44 and justifying it as a cost-plus estimate, supplying the figures for direct costs of materials and labor, together with the 6% figure for overhead and profit. This testimony, together with the Court’s examination of the site, provided a sufficient basis for the Court’s conclusions with respect to the fair market value of such labor and materials before any set-off. In allowing the inspection of the site to influence its determination of value, the Court acted properly, since in no respect did it ignore the other evidence of value, in this case being only the testimony of Leo Spear. Cf. Eisenlohr v. Kalodner, 145 F.2d 316, 318 (3d Cir. 1944), cert. denied, 325 U.S. 867, 65 S.Ct. 1404, 89 L.Ed. 1986 (1945); In re City of New York, 1 N.Y.2d 428, 154 N.Y.S.2d 1, 136 N.E.2d 478 (1956).

As to these items of set-off, Leo Spear candidly presented the only evidence of their existence. He admitted that added expense has been incurred by McGraw’s failure to properly coordinate the activities of subcontractors, by its failure to provide heat in the winter, by inadequate compaction and by dynamiting damages caused by McGraw. Spear also admitted that certain corrective work was necessary because of his own fault and gave an estimate of the cost of doing the corrective work yet to be finished. F & C suggests that because Spear did not attach a dollar value to each of these items, and presented no proof thereon, the total damages cannot be ascertained. However, based on Spear’s testimony, the District Court was entitled to make a fair determination of the value which should be attributable to these factors, and the Court did this, reducing the direct labor item of damages to $350,000 to reflect increased labor costs due to these factors and subtracting from the total value of labor and material supplied by plaintiff, $6,000 to cover costs of correctional work still to be done.²

We conclude that while the evidence did not lend itself to any exact determination of the damages involved, the verdict as rendered was a fair estimate based on the testimony and other evidence and as such we uphold the District Court’s determination of damages on the quantum meruit ground of recovery.

II.

Interference With Business Relations

On the other hand, we believe that no relief whatever is appropriate against either defendant on the “interference with business relations” theory of recovery. In Pierce Ford Sales v. Ford Motor Company, 299 F.2d 425 (2d Cir.), cert. denied, 371 U.S. 829, 83 S.Ct. 24, 9 L.Ed. 2d 66 (1962), this Court rejected such an attempt by a Vermont automobile dealer who sought damages under this interference-with-business-expectancies theory based on Ford’s refusal to allow the plaintiff there to sell its dealership to a third party at a price Ford regarded as excessive thereby reversing the determination of the District Court.

Section 766 of the Restatement of Torts (1939) provides in part:

“ * * * one who, without a privilege to do so, induces or purposely causes a third person not to (b) enter into or continue a business relation with another is liable to the other for the harm thereby caused.”

In Pierce, this Court held § 766 inapplicable because it found that Ford had a privilege to take steps to protect the financial soundness of its dealers and therefore was justified in refusing to accept a new dealer who was being forced to purchase at an excessive price. In this case, we think that F & C was privileged to withhold payment to Spear’s suppliers pending determination as to Spear’s status and resolution of the controversy as to who was entitled to possession of the material Spear had left on the construction site. The evidence shows that Spear, because of its financial plight, apparently sought ways to induce its suppliers to extend credit to it by accepting less than full payment from F & C and allowing Spear to have the remainder. As such it resisted attempts by F & C to deal directly with these suppliers. In so doing, Spear contributed at least as much as did F & C to the delay in paying the materialmen.

Recovery under § 766(b) based on the delay in paying subcontractors is also inappropriate because there is no proof that F & C acted for the purpose of preventing Spear from dealing with third parties. F & C had no interest in so doing but it did have an interest in effecting payment to the materialmen in such a way as to foreclose any future claims of liability against it by the ma-terialmen and by Spear for the material involved. This was complicated by the fact that some of this material for which payment to the materialmen was delayed was removed by Spear from the construction site. Indeed, it might well be inferred that F & C’s conduct in delaying payment was merely to induce Spear to return the material which Spear had removed from the site to “protect ourselves” (A. 168) which presumably was to deter defendants from engaging another subcontractor to finish Spear’s part of the job. It is clear then with respect to the delay in payment that F & C acted to protect its legitimate interests and not for the purpose of injuring Spear’s relations with third parties.

In addition to the “unreasonable delay,” the District Court cited two other factors said to constitute interference with business relations. They were: (1) not permitting plaintiff to complete the subcontract, and (2) improperly attaching plaintiff’s truck which contained materials Spear sought to remove from the construction site. As to the first factor, defendants were under no duty whatever to continue Spear on the job which it began with McGraw. As to bad faith negotiations, Spear suggests F & C strung him along in order to appease the University which was friendly to Spear. However, the facts indicate that F & C made clear its doubts about the wisdom of continuing Spear on the job from early February, and the only possible basis for an inference of bad faith came in March when it refused to modify its conditions for a bond from Aetna, and may have withheld its final decision not to hire Spear for a few days after such decision was made. Delay for this short period was de minimis and in any event justifiable as an attempt by defendants to guarantee themselves a financially stable subcontractor. Similarly, as to the alleged improper attachment of the plaintiff’s truck, and expropriation of materials contained therein, whether or not this was improper or in violation of any agreement between Spear and defendants, there was no showing that this rather trivial incident in any way prevented Spear from dealing with anyone else. Further, the fundamental question of who as between Spear and defendants were properly entitled to possession of the material in question was open to doubt,³ and plaintiff and defendants each clearly acted not in order to prevent the other from dealing with third persons but in order to safeguard its own rights to such materials. Thus, the only remedy for either party was an action in conversion.

Furthermore, the third parties with whom plaintiff was prevented from dealing are difficult to ascertain. While the theory of the District Court points to unnamed persons who would have engaged Spear to do work but for the defendants’ activities, normally § 766 contemplates third parties whose identities are much less vague and speculative.

The proof is virtually undisputed. Upon the record as a whole in our opinion, the standards for the imposition of damages for tortious interference have not been met.

In view of the fact that we have found the acts of defendants not to constitute the tort of interference with business relations, it is unnecessary for us to consider the question of the proper allocation of responsibility between the two defendants for the acts alleged.

The judgment against F & C in the amount of $90,845 plus $5,910.99 interest is affirmed; that portion of the judgment against F & C and Brookfield-Baylor for $50,000 is reversed.

Judgment, therefore, should be entered in favor of Spear in the amount of $90,-845 plus interest of $5,910.99. Costs to the appellee.

1 . In this diversity action brought in the State of A'ermont, the law of that State governs our decision herein. Erie Ry. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The defendant E & C suggests that because this bond was drawn on a H.U.D. form, it should be subject to federal law applicable to suits under the Miller Act, since these bonds are “in substance” like Miller Act bonds. While in construing such bonds in accordance with Vermont law, it may be useful to refer to Miller Act cases from other jurisdictions because of the similarity of the forms, we note that even Miller Act cases are decided pursuant to state, rather than federal law. Continental Casualty Company v. Schaefer, 173 F.2d 5 (9th Cir.), cert. denied, 337 U.S. 940, 69 S.Ct. 1517, 93 L.Ed. 1745 (1949).

2 . Defendants contend in effect that in the absence of a Vermont case it is reasonable to conclude that Vermont would adopt as a proper interpretation of bonds of this sort the theory that they exclude damages “outside the contract” (damages caused by the defaulting contractor’s acts or omissions other than failure to render payments due subcontractors). See L. P. Friestedt Co. v.. U. S. Fireproofing Co., 125 F.2d 1010 (10th Cir. 1942); Arthur N. Olive Co. v. United States, 297 F.2d 70 (1st Cir. 1961). However, whether or not this be so, we believe that no damages “outside the contract” were included in the award herein since the quantum meruit recovery was reduced as described in the text. This fact is not changed simply because this reduction was made on the independent basis that such items did not benefit the defendant and therefore were not properly included under a quantum meruit theory.

3 . The subcontract between McGraw and Spear provided that it was subject to the conditions of the general contract which in turn provides (§ 25(c)) :

“All material and work covered by partial payments made shall thereupon become the sole property of the Owner, but this provision shall not be construed as relieving the Contractor from the sole responsibility for the care and protection of the materials * * *."

In accordance with 9A V.S.A. § 2-401, title to the goods passed to defendants as McGraw’s assigns in accordance with the contract between McGraw and Spear. Yet possibly under 9A V.S.A. § 2-702 (1), Spear had the right to withhold delivery except for cash upon McGraw’s apparent insolvency, depending on whether Spear’s storage of these goods on the construction site constituted a delivery to McGraw. Even if it had been a delivery to McGraw, Spear might have been justi-tified in removing the goods in order to fulfill his responsibility for “the care and protection of the materials * * It is unnecessary for us to resolve this question of who was entitled to possession in order to demonstrate that neither party necessarily acted in bad faith in claiming such right.

As to the agreement between Spear and E & O relating to these materials, it was ambiguous as to when it would expire, and may reasonably have been interpreted by P & C to have expired upon the refusal of the Chittenden Court to grant an injunction, although perhaps the more likely interpretation was that the material would not be touched until that Court had determined the right to title on the merits.