MCI CONSTRUCTORS, INC. v. Hazen and Sawyer, PC

Citations: 310 F. Supp. 2d 754; 2004 U.S. Dist. LEXIS 4886; 2004 WL 615649Docket: 1:99 CV 00002, 1:02 CV 00396

Court: District Court, M.D. North Carolina; March 10, 2004; Federal District Court

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MCI Constructors, Inc. and MCI Constructors, LLC, both Delaware corporations, are plaintiffs in a legal case against Hazen and Sawyer, P.C., a New York corporation, and the City of Greensboro, North Carolina. The case involves motions for summary judgment concerning the City’s claims against National Union Fire Insurance Company related to a construction contract for the T.Z. Osborne Wastewater Treatment Plant, initiated on January 16, 1996. Under the contract, MCI was required to secure a performance bond valid for one year post-substantial completion, which National Union provided, incorporating the contract's terms.

The City terminated MCI's contract on June 17, 1998, following delays, and notified National Union of this termination. In response, the City demanded payment under the bond and later joined National Union in litigation on May 5, 2000. However, claims against National Union were dismissed due to lack of subject matter jurisdiction, citing a disputes clause in the MCI-City contract that mandated resolution through the City Manager before litigation could commence. A Certificate of Substantial Completion was issued on May 31, 2001, after additional work by replacement contractors, and on February 5, 2003, the City Manager awarded $13,377,842.73 in damages against MCI.

On February 11, 2003, the City demanded payment under a bond from National Union but did not receive the amount claimed. Consequently, the City brought National Union into the litigation on March 11, 2003. Both parties have filed motions for summary judgment regarding the City's claims. Summary judgment is appropriate when there is no genuine issue of material fact, allowing the moving party to receive judgment as a matter of law, as outlined in Federal Rule of Civil Procedure 56. The burden is on the moving party to show the absence of factual disputes, while the nonmoving party must present specific facts demonstrating a genuine issue for trial. The court must view facts favorably for the nonmoving party but requires the dispute to be both material and genuine.

National Union seeks summary judgment on two claims from the City: 1) breach of contract for failing to honor a Damages Award of $13,377,842.73 issued by the City Manager on February 5, 2003; and 2) alternatively, breach of contract resulting in a potential loss exceeding $16,000,000. National Union argues that the contract includes a limitations period that bars the City's suit and that the suit is also barred by the applicable statute of limitations.

In North Carolina, clear contract language indicates the parties' intentions. If unambiguous, the contract's meaning is a legal question for the court. A contract is deemed ambiguous only if it is reasonably susceptible to multiple interpretations. The contract in question pertains to the "30MGD Expansion and Upgrade of the T.Z. Osborne Wastewater Treatment Plant, Phase III, Contract 1," which was between MCI and the City, with National Union's performance bond incorporating its terms.

National Union's motion for summary judgment regarding the City's counterclaims is influenced by the language of MCI's contract with the City, specifically Section 5.1.1 of the Supplementary Conditions, which mandates that the performance bond remain valid for at least one year following the issuance of the Certificate of Substantial Completion. National Union argues that this provision establishes a one-year validity period for the bond, implying that the City's lawsuit, initiated on March 11, 2003, is barred since it would need to have been filed within a year of May 31, 2001, the date of substantial completion. In contrast, the City claims that the clause merely delineates the timeframe during which claims can accrue, not a limitation on when suits may be filed. The City posits that damages occurring within one year post-substantial completion are covered, but those arising thereafter are not. The City asserts it made a timely demand on the bond following MCI's termination for cause in a letter dated June 17, 1998. The City further contends that the one-year bond validity aligns with the correction period outlined in Section 13.12.1 of the Standard General Conditions, which provides that the contractor must rectify any defects within a year of substantial completion. The court finds the City's interpretation persuasive, rejecting the notion that the clause creates a limitations period. It highlights the impracticality of requiring the City to sue simultaneously while asserting a claim, especially if damage occurs at the end of the correction period. Ultimately, the court concludes that the contract does not impose an ambiguous limitations period, leading to the denial of National Union's summary judgment motion on this issue.

In North Carolina, the statute of limitations for breach of contract claims is three years, beginning from the date the promise is broken. National Union argues that the City’s claim is barred since it arose after the expiration of this period, triggered by MCI's termination on June 24, 1998. However, the applicability of the statute to governmental entities is crucial. The doctrine of 'nullum tempus occurrit regi' allows municipalities and the state to pursue claims beyond standard limitation periods, but not all governmental functions qualify for this protection. Distinctions are made between 'governmental' functions, which benefit from this doctrine, and 'proprietary' functions, which do not. Governmental functions involve actions taken on behalf of the state to promote public welfare, while proprietary functions involve municipal activities for profit. The City claims its lawsuit against National Union is a governmental function linked to the construction of a publicly funded wastewater treatment plant, which serves to enhance public health and welfare. Although the service is fee-based, this does not necessarily classify it as a proprietary function. The City’s actions appear to be in the public interest, without intent for profit.

Indeterminate rules have led courts to more effectively match case facts than to apply formal standards. North Carolina courts have not determined if operating a wastewater treatment plant constitutes a governmental function, and other states have varied in their classifications of such operations. Some cases, such as City of Northglenn v. City of Thornton (1977) and Johnson v. City of Atlanta (1968), provide contrasting views on whether waterworks and sewer systems are proprietary or governmental. The distinction is rooted in state sovereignty, with each state developing its own interpretation. North Carolina cases offer some clarity; for instance, Fawcett v. Town of Mt. Airy (1903) indicated that public water system operations are linked to health and safety, suggesting a governmental role. Similarly, in State ex rel. State Art Museum Bldg. Comm'n v. Travelers Indemnity Co. (1993), the court deemed the creation of an art museum a governmental function due to its provision of cultural and educational resources. Given that health and safety are also involved in wastewater treatment, the court concludes that the City was acting in a governmental capacity, leading to the denial of National Union's motion for summary judgment.

The City has also moved for summary judgment against National Union based on a City Manager's award. The court must determine if there is a genuine issue of material fact regarding the enforceability of this award, referencing previous decisions that allow court review of City Manager actions for bad faith or gross mistake.

The court referenced Elec-Trol, Inc. v. C.J. Kern Contractors, Inc., establishing that when parties agree for an architect or engineer's determination to be final, they are bound by it unless fraud or gross mistake indicating bad faith is present. Although the current case involves a City Manager instead of an architect or engineer, the same standard applies. The court identified that for summary judgment, the inquiry revolves around whether any evidence suggests bad faith or mistake. MCI, aware of the potential conflict of interest in designating the City Manager as a referee, cannot contest the City Manager's partiality given their contractual agreement. However, partiality that leads to bad faith decisions remains unacceptable. MCI presented claims of the City Manager's bad faith and mistakes, including alleged improprieties in decision-making. The court concluded that the evidence provided by the City regarding fraud or bad faith was insufficient as a matter of law, leading to the grant of summary judgment in favor of the City. Consequently, the City was awarded $13,377,842.73 from National Union, plus interest from February 5, 2003. National Union's motion for summary judgment was denied. MCI's attempts to prove the City Manager's decision was tainted were met with the City’s motions to exclude this evidence. On January 21, 2004, the court found no sufficient basis for a jury to conclude the City Manager's decisions were influenced by fraud, bad faith, or gross mistake.

The City Manager's award serves as a complete defense to MCI's claims, resulting in judgment for the City on all claims against it. The court finds the City Manager's award binding and enforceable, awarding judgment to the City on its first counterclaim as well. The court acknowledges its prior opinion from March 24, 2000, which did not require claims for breach of warranty and negligent misrepresentation to be submitted to the City Manager. Upon further review and evidence, the court now concludes that these claims fell within the City Manager's authority, thus leaving MCI without viable claims. The court orders a judgment in favor of the City, including a monetary award of $13,377,842.73 plus interest from February 5, 2003, marking the resolution of all issues between the City and MCI.

Additionally, the court notes the interpretation by Robert DiFiore, the Project Manager, which is considered but not binding. The Standard General Conditions outline the engineer's authority to issue clarifications and interpretations, though this authority is limited to resolving disputes to prevent construction delays. The distinction between governmental and proprietary functions is discussed regarding sovereign immunity, with the court referencing the doctrine of nullum tempus, which allows the government to pursue claims to protect public interests. The difficulty in distinguishing between governmental and proprietary operations is acknowledged, referencing North Carolina case law that highlights the confusion in this area.

Maintenance of public roads and highways is generally a governmental function, with the exception of streets and sidewalks, which are classified as a ministerial or proprietary function. This exception, while considered 'illogical', is consistently applied in the jurisdiction. Regarding National Union's motion for summary judgment, mere joint and several liability between MCI (the obligor) and National Union (the surety) does not automatically impose liability on National Union for the bond. The City Manager's award against MCI can be reviewed for bad faith or mistake, paralleling the court's review of National Union's secondary liability. The court also dismisses National Union's argument that the City improperly engaged a replacement contractor instead of allowing National Union to fulfill the contract. It underscores that the primary duty of a performance bond is to ensure performance for the benefit of the City (the obligee), not the surety. According to N.C. Gen. Stat. 44A-26, performance bonds are intended to protect contracting bodies from financial hardship. National Union's claim of being denied the chance to complete the project lacks support from the statutory language, as the contract gives the City the right to complete the work if the contractor violates its provisions.