APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 73-00640)
Before Hunter, Sloviter and Wisdom,*fn* Circuit Judges.
Appellants, Joseph L. Muscarelle, Inc. ("Muscarelle") and American Insurance Company ("American"), appeal from a judgment of the district court of New Jersey awarding appellee, Dravo Corporation ("Dravo"), $227,461.93 plus interest. The appellants contend that Dravo is not entitled to the judgment because it did not comply with the terms of the bond upon which the court's award was based. The appellants argue, in the alternative, that even if the judgment is correct, they have a right of contribution against one of their co-defendants, Martin Mechanical Corporation ("Martin"), for the loss. They also urge this court, should we affirm the district court's judgment, to modify the amount of interest included in that award.
We need not rule on appellants' second and third contentions for we reverse, in part, on the first. Appellee failed to comply with the notice provisions of the payment bond and therefore was not entitled to payment under it. It was also not entitled to judgment under its alternative contract theories. Accordingly, we reverse that part of the district court's judgment which enters an award against Muscarelle and American. The district court's judgment against Martin is affirmed.
The facts of this case were set forth by the district court in an August 9, 1974 Letter Opinion and Order. As recited by the district court, "Defendant, Hollis Urban Renewal Corporation ("Hollis"), a wholly owned subsidiary of defendant, Ideal Toy Corporation ("Ideal"), entered into a contract with (a general contractor) Muscarelle for the erection of a manufacturing plant." American Insurance Co. was to serve as general surety on the project and it issued both a payment bond and performance bond to Hollis for the construction work.*fn1
After the submission of bids, the general contractor, Muscarelle, entered into a subcontract with Robert B. Kerris, Inc. ("Kerris") for the installation of heating, ventilating, air conditioning and plumbing systems. The subcontract provided that Kerris use only Dravo ventilation units in the project. See Dec. 21, 1971 revised subcontract, p. 1, reprinted in Appendix at 75a-84a. In accordance with this provision, Kerris submitted a written order to Dravo for the purchase of the units. The order provided for the purchase of the ventilation units, including start-up services, at a net price of $224,000. Dravo conditioned its acceptance of the order, however, on an approval by its Credit Department. See Exhibit K, reprinted in Appendix at 101a.
Dravo's credit department sought a guaranty from the general contractor, Muscarelle, before it would approve Kerris' purchase order. Muscarelle declined to issue a guaranty. Instead, it referred Dravo to Martin which, because of its close relationship to Kerris, agreed to assure payment on the Kerris-Dravo contract.*fn2 On February 23, 1972, Philip W. Balsam, President of Martin, sent the following letter to James A. Davidson, the Credit Manager of Dravo:
In consideration of your acceptance of (the Kerris) order, we hereby guarantee payment by the purchaser in accordance with the terms thereof, and upon default by the purchaser, we will make payment.
We intend to be legally bound hereby.
Exhibit F, reprinted in Appendix at 171a. Martin, thereby, agreed to serve as the special guarantor on the Kerris-Dravo contract, while American would serve as the general surety for the construction project.
Dravo delivered the equipment to Kerris; Kerris, in turn, installed it in the building. As provided under its subcontract with Muscarelle, Kerris submitted monthly requisitions to Muscarelle for partial payments based upon the value of the work completed during that period. With each requisition, Kerris submitted an affidavit stating that it had fully paid all suppliers and that there were no claims outstanding.
In actuality, Kerris had not been paying its supplier. By September 26, 1972, Dravo had made its last delivery to Kerris, but had not been paid for any of the units. In January, 1973, Kerris filed its last requisition to Muscarelle. Once again, it certified that all of its suppliers had been paid; and once again, it failed to pay Dravo.
On February 19, 1973, Dravo sent a letter to Ideal, with copies to Muscarelle, Martin and Kerris,*fn3 notifying them of Kerris' failure to make payments and demanding payment on the account. The letter stated in part:
The balance of our account with the R. B. Kerris, Inc. is $226,506.00 in connection with the above project. This amount has been outstanding since October 31, despite the fact that Mr. Kerris has been paid at least a portion of this money by the general contractor, Joseph L. Muscarelle, Inc. ... We are willing to negotiate any and all backcharges, but we feel that the following conditions should apply:
1. We wish to attempt to settle all of the alleged backcharges at once.
2. We wish to receive now, payment in an amount consistent with the total contract less the alleged back charges. Following the settlement of these backcharges and the completion of the contract, we would expect to receive the agreed upon balance.
Therefore, please be advised that start-up service on the units furnished by Dravo to Ideal Toy Company will not be performed according to schedule. We have no intention of providing this service until an agreement has been made concerning payment and we have received that payment.... I am sorry that we must assume this attitude, but we feel that we ...