2008 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-29-2008

Great Amer Ins Co v. Norwin Sch Dist

Precedential or Non-Precedential: Precedential

Docket No. 07-2441

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Recommended Citation

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Case No: 07-2441

GREAT AMERICAN INSURANCE CO.

 v.

NORWIN SCHOOL DISTRICT

 v.

SHOFF CONSTRUCTION AND DESIGN, INC.

FOREMAN PROGRAM & CONSTRUCTION MANAGERS,

INC.

 Foreman Program & Construction Managers, Inc.,

 Appellant

 

On Appeal from the United States District Court

for the Western District of Pennsylvania

District Court No. 04-cv-01148

District Judge: The Honorable Terrence F. McVerry

 

ARGUED May 20, 2008

Before: SMITH and NYGAARD, Circuit Judges,
The Honorable William H. Stafford, Jr., Senior United *

States District Judge for the Northern District of Florida, sitting

by designation. 

2

and STAFFORD, District Judge*

(Filed: September 29, 2008)

Amy E. Bentz, Esq. (Argued)

James W. Bentz, Esq.

Bentz Law Firm

680 Washington Road

The Washington Center Building

Pittsburgh, PA 15228-0000

Counsel for Great American Insurance Company

David Raves, Esq.

Maiello, Brungo & Maiello

3301 McCrady Road

One Churchill Park

Pittsburgh, PA 15235-0000

Counsel for Norwin School District

Ross A. Giorgianni, Esq. (Argued)

Metz Lewis

11 Stanwix Street

18th Floor

Pittsburgh, PA 15222-0000

Counsel for Shoff Construction and Design, Inc.
3

Mark J. Gesk, Esq. (Argued)

Wayman, Irvin and McAuley

1624 Frick Building 

437 Grant Street

Pittsburgh, PA 15219-0000

Counsel for Foreman Program & Construction

Managers, Inc.

 

OPINION

 

STAFFORD, District Judge.

Third-Party Defendant, Foreman Program &

Construction Managers, Inc. ("Foreman"), appeals from a

judgment entered in favor of Third-Party Plaintiff, Norwin

School District ("Norwin"), on Norwin's breach of contract

claim against Foreman. We vacate the District Court's judgment

and remand to the District Court with directions to enter

judgment in Foreman's favor.

I. FACTS 

Our trek through the factual morass from which this case

arose begins in 2001, when Norwin undertook two public school

construction projects. These two projects spawned, inter alia,

four contracts and two payment bonds, namely: (1) two
 Shoff also procured two performance bonds from 1

GAIC, neither of which is at issue in this case.

4

construction contracts, under which Shoff Construction and

Design, Inc. ("Shoff"), agreed to serve as the general contractor

for the two projects, one for the construction of a new Sheridan

Terrace Elementary School and one for renovations and

additions to Hillcrest Intermediate School, both in North

Huntingdon, Pennsylvania; (2) an architectural services contract,

under which N.J. Cunzolo & Associates, Inc. ("Cunzolo"),

agreed to serve as architect for the two projects; (3) a

construction management services contract, under which

Foreman agreed to perform construction management services

for the two projects; and (4) two payment bonds, one on each 1

project, issued by Great American Insurance Company

("GAIC") as surety on behalf of Shoff as principal and in favor

of Norwin as obligee. 

A. The Norwin-Foreman Construction Management Contract

Norwin and Foreman entered into a construction

management contract (the "CM Contract") on August 20, 2001,

using the American Institute of Architects ("AIA") standard

form B801/Cma–1992, entitled "Standard Form of Agreement

Between Owner and Construction Manager." As noted on the

cover page of the agreement, Form B801/Cma–1992 was

intended to be used in conjunction with the 1992 edition of AIA

standard form B141/Cma, entitled "Standard Form of
5

Agreement Between Owner and Architect." Both forms

incorporated by reference standard form A201/Cma–1992,

entitled "General Conditions of the Contract for Construction"

("General Conditions"). The lump sum fee to be paid Foreman

for its services under the CM Contract was $807,168.00

($391,408.00 for Sheridan and $415,760.00 for Hillcrest).

The CM Contract required Foreman to act as a joint

adviser (with Cunzolo, the architect) to Norwin throughout the

Sheridan and Hillcrest projects. During the pre-construction

phase of the projects, Foreman was required to assist Norwin in

a number of tasks, including selection of the project contractors

and preparation of the construction contracts. Once the

construction contracts were awarded, Foreman was responsible

for administering those contracts in cooperation with Cunzolo

as set forth in Form A201/Cma.

Among other things, Foreman was required to review

Shoff's applications for progress and final payments. Based on

Foreman's observations of the work performed and evaluations

of Shoff's applications for payment, Foreman was required to

certify the amounts to be paid to Shoff by Norwin. As stated in

Article 2.3.11.3 of the CM Contract, Foreman's certification

constituted "a representation to [Norwin] . . . that the Work

ha[d] progressed to the point indicated and the quality of the

Work [wa]s in accordance with the Contract Documents."

Under Article 2.3.11.4, the issuance of a certificate of payment

was not a representation that Foreman had "(1) reviewed
6

construction means, methods, techniques, sequences for

[Shoff]'s own Work, or procedures, (2) reviewed copies of

requisitions received from Subcontractor and material suppliers

and other data requested by [Norwin] to substantiate [Shoff]'s

right to payment, or (3) ascertained how or for what purpose

[Shoff] ha[d] used money previously paid on account of the

Contract Sum." Indeed, Article 4.7 provided that Norwin, not

Foreman, was responsible for furnishing any services necessary

"to ascertain how or for what purposes [Shoff] ha[d] used the

money paid by or on behalf of [Norwin]." In other words,

before issuing a certificate for payment, Foreman was required

to verify the quality and quantity of Shoff's work but not the

appropriateness of Shoff's expenditure of monies. 

B. The Norwin-Cunzolo Architectural Services Contract

Cunzolo and Norwin entered into an architectural

services contract (the "AS Contract") using Form B141/Cma,

the Form intended to be used in conjunction with Foreman's CM

Contract. Like the CM Contract, the AS Contract incorporated

by reference the General Conditions set forth in form

A201/Cma. 

In addition to design services, Cunzolo agreed to perform

construction administration tasks in cooperation with Foreman.

Among other things, Cunzolo—like Foreman—was required

under the terms of the AS Contract to review and certify the

amounts due to Shoff. In particular, at the time of final
7

completion of the projects, Cunzolo was required—under

Article 2.6.14 of the AS Contract—to issue "a final Project

Certificate for Payment upon compliance with the requirements

of the Contract Documents." As stated in Article 2.6.9.1,

Cunzolo's certification constituted "a representation to [Norwin]

. . . that . . . the work ha[d] progressed to the point indicated and

the quality of the Work [wa]s in accordance with the Contract

Documents." Under Article 2.6.9.2, Cunzolo's certification was

not a representation that Cunzolo (1) "made exhaustive or

continuous on-site inspections to check the quality or quantity

of the Work, (2) reviewed construction means, methods,

techniques, sequences or procedures, (3) reviewed copies of

requisitions received from Subcontractors and material

suppliers, or (4) ascertained how or for what purpose [Shoff]

ha[d] used money previously paid on account of the Contract

Sum." Like Article 4.7 in the CM Contract, Article 4.9 in the

AS Contract made it Norwin's responsibility to provide all

necessary services—including auditing services—"to verify

[Shoff's] Application for Payment or to ascertain how or for

what purposes [Shoff] ha[d] used the money paid by or on

behalf of [Norwin]." As was the case for Foreman, Cunzolo

was required to verify the quality and quantity of Shoff's work

before issuing a certificate of payment, but he was not required

to verify the appropriateness of Shoff's expenditure of monies.

C. The Norwin-Shoff Construction Contracts

Norwin and Shoff entered into the Sheridan and Hillcrest
 The General Conditions were effective only to the 2

extent that they were not modified, voided, or deleted by the

Supplementary Conditions. 

 With change orders, the final contract price for the 3

Sheridan project was $3,731,574.00. For the Hillcrest project,

the final contract price was $5,615,267.11.

8

construction contracts (collectively the "Shoff Contracts") on

February 18, 2002, and April 17, 2002, respectively, using the

AIA standard form A101/CMa, entitled "Standard Form of

Agreement Between Owner and Contractor." The Shoff

Contracts specifically incorporated not only form A201/CMa,

containing the General Conditions applicable to construction

contracts, but also document 00800, entitled "Supplementary

Conditions." The contract price of the Sheridan project was 2

$3,750,700.00; the contract price of the Hillcrest project was

$5,422,400.00.3

Each of the Shoff Contracts required Norwin to make

monthly progress payments to Shoff based upon "Applications

for Payment" submitted by Shoff to Foreman and upon

"Certificates for Payment" issued to Norwin by Foreman and

Cunzolo. The amounts requested in each Application for

Payment were required to be based upon a "Schedule of Values"

that allocated the entire contract sum among the various portions

of the work to be done. Upon receipt of an Application for

Payment, Foreman was required to forward the application to

Cunzolo. If Foreman and Cunzolo were both satisfied with the
9

amounts requested in the Application for Payment, they issued

a Certificate for Payment—signed by each—to Norwin. 

Consistent with provisions in both the CM Contract and

the AS Contract, the Shoff Contracts—through Article 9.4.3 of

the General Conditions—provided that the issuance of a

Certificate for Payment constituted "representations made

separately by [Foreman] and [Cunzolo] to [Norwin], based on

their individual observations at the site and the data comprising

the Application for Payment submitted by [Shoff], that the Work

ha[d] progressed to the point indicated and that, to the best of

[Foreman]'s and [Cunzolo]'s knowledge, information and belief,

quality of the Work [wa]s in accordance with the Contract

Documents." Also consistent with the CM Contract and the AS

Contract, Article 9.4.3 of the General Conditions provided that

a Certificate for Payment did not constitute a representation that

Foreman or Cunzolo 

"(1) made exhaustive or continuous on-site

inspections to check the quality or quantity of the

Work, (2) reviewed [Shoff's] construction means,

methods, techniques, sequences or procedures, (3)

reviewed copies of requisitions received from

Subcontractors and material suppliers and other

data requested by [Norwin] to substantiate

[Shoff]'s right to payment, or (4) made

examination to ascertain how or for what purpose

[Shoff] ha[d] used money previously paid on
 Article 5.8 in each of the contracts provided that 4

"[r]eduction or limitation of retainage, if any, shall be as follows

. . ." In the Sheridan contract, the words "[r]educe to 5% at 50%

of work installed" had been added after the word "follows." In

the Hillcrest contract, no reduction or limitation of retainage was

specified. 

10

account of the Contract Sum." 

Until the work was fifty percent (50%) complete, Norwin

was required under Article 5.6.1 of the Shoff Contracts to retain

ten percent (10%) from its monthly payments as security against

Shoff's performance. Article 5.7.1 in each of the Shoff

Contracts provided that, upon "Substantial Completion" of the

work, progress payments were to be modified by adding "a sum

sufficient to increase the total payments to ninety-five percent

(95%) of the Contract Sum, less such amounts as [Foreman]

recommends and [Cunzolo] determines for incomplete Work

and unsettled claims." The Sheridan contract, but not the

Hillcrest contract, defined "Substantial Completion" to mean

fifty percent (50%) completion. The Sheridan contract, but not

the Hillcrest contract, further specified that retainage was to be

reduced to five percent (5%) when the work was fifty percent

(50%) complete. 

4

Using somewhat different language, the Supplementary

Conditions applicable to both contracts addressed the matter of

retainage as follows:
11

9.3.6: The sum or sums withheld by [Norwin]

from [Shoff] shall be 10 percent of the amount

due [Shoff] until 50 percent of the Contract is

completed. When the Contract is 50 percent

complete, one-half of the amount retained by

[Norwin] shall be released to [Shoff], provided

that [Cunzolo] approves the Application for

Payment; and provided further, that [Shoff] is

making satisfactory progress and there is no

specific cause for greater withholding.

9.3.7: The sum or sums withheld by [Norwin]

from [Shoff] after the Contract is 50 percent

completed shall not exceed 5 percent of the value

of completed work based on monthly progress

payment requests. 

Article 6 in the Shoff contracts provided that "[f]inal

payment, constituting the entire unpaid balance of the Contract

Sum, shall be made by [Norwin] to [Shoff] when (1) the

Contract has been fully performed by [Shoff] . . . and (2) a final

Project Certificate for Payment has been issued by [Foreman]

and [Cunzolo]." The parties' responsibilities with regard to final

payment were explained in greater detail in the General

Conditions:

9.10.1. Upon completion of the Work, [Shoff]

shall forward to [Foreman] a written notice that

the Work is ready for final inspection and

acceptance and shall also forward to [Foreman] a

final Contractor's Application for Payment. Upon
12

receipt, [Foreman] will forward the notice and

Application to [Cunzolo] who will promptly make

such inspection. When [Cunzolo], based on the

recommendation of [Foreman], finds the Work

acceptable under the Contract Documents and the

Contract fully performed, [Foreman] and

[Cunzolo] will promptly issue a final Certificate

for Payment stating that to the best of their

knowledge, information and belief, and on the

basis of their observations and inspections, the

Work has been completed in accordance with

terms and conditions of the Contract Documents

and that the entire balance found to be due [Shoff]

and noted in said final Certificate is due and

payable. 

The General Conditions further provided that the final

Certificate for Payment constituted a "representation that

conditions listed in Subparagraph 9.10.2 as precedent to the

Contractor's being entitled to final payment have been fulfilled."

Subparagraph 9.10.2 of the General Conditions provided that

"[n]either final payment nor any remaining retained percentages

shall become due" until Shoff submitted to Cunzolo through

Foreman certain documents, including, inter alia, (1) "an

affidavit that payrolls, bills for materials and equipment, and

other indebtedness connected with the Work for which [Norwin]

or [Norwin]'s property might be responsible or encumbered . .

. ha[d] been paid or other wise satisfied;" and (2) "consent of

surety, if any, to final payment." 

C. The Payment Bonds
 The record contains copies of the two payment bonds. 5

The bond on the Hillcrest project is signed; the bond on the

Sheridan project is not. 

13

As required under Pennsylvania law and Article 11.4.1 of

the Supplementary Conditions, Shoff was required to procure

payment bonds for the two school projects, each in the amount

of one hundred percent (100%) of the contract price. Shoff

obtained the required payment bonds from GAIC. Under 5

paragraph 1 in each of the payment bonds, GAIC and Shoff

agreed to jointly and severally bind themselves to Norwin "to

pay for labor, materials and equipment furnished for use in the

performance of the Construction Contract, which is incorporated

herein by reference." Paragraph 8 in each of the two bonds

states: "By [Shoff] furnishing and [Norwin] accepting this Bond,

they agree that all funds earned by [Shoff] in the performance of

the Construction Contract are dedicated to satisfy obligations of

[Shoff] and [GAIC] under this Bond, subject to [Norwin]'s

priority to use the funds for the completion of the work." 

To obtain the bonds, Charles and Melanie Shoff signed

an "Agreement of Indemnity"—dated July 26, 2001—under

which they agreed to indemnify GAIC for any losses and

expenses arising from issuance of the bonds. In addition, on

March 25, 2004, the Shoffs executed a loan and collateral

security agreement, which provided, inter alia, that "as of the

date of this agreement, there were in excess of $750,000.00 in

accrued debts owed to the equipment, labor and materials

suppliers relating to the [bonded] Projects," and "[the Shoffs]

have requested financial assistance from [GAIC] to enable
14

[Shoff] to meet its financial obligations and complete its bonded

construction projects that have not been terminated." GAIC

obtained a mortgage on the Shoff's personal property as

collateral security on the loan note. 

D. The Payments

Shoff received eighteen (18) progress payments on the

Sheridan project and seventeen (17) progress payments on the

Hillcrest project. For each payment, Shoff submitted

Applications for Payment, designating both the contract sum

earned to date and the amount of retainage—expressed both as

a percentage and a dollar amount—to be subtracted from the

total earned. In each case, Shoff obtained a Certificate of

Payment from Foreman and Cunzolo and received payment from

Norwin with the designated retainage subtracted. At the time of

each payment, Shoff, Foreman, Cunzolo, and Norwin were all

aware of the amounts—in terms of dollars and

percentages—being retained from the payments due. 

On the Sheridan project, Shoff designated ten percent

(10%) retainage on the first six of its Applications for Payment.

On the next nine Applications for Payment, when the work was

fifty percent (50%) or more completed, Shoff designated five

percent (5%) retainage. On Application No. 16, when work

completed to date totaled $3,652,547.49 (ending contract price

was $3,731,574.00), Shoff designated retainage of two and a

half percent (2.5%). On Application Nos. 17 and 18, Shoff

reduced retainage to less than one percent (0.67%).

On the Hillcrest project, Shoff designated ten percent
15

(10%) retainage on the first five of its Applications for Payment.

On the next seven Applications for Payment, when the work was

fifty percent (50%) or more complete, retainage was at or near

five percent (4.75% to 5%). On Application No. 16, when work

completed to date was estimated at a total of $5,649,902.51

(ending contract price was, in fact, $5,615,267.11), Shoff

designated retainage of three and a half percent (3.5%). On

Application No. 17, retainage was reduced to two percent (2%).

Each time Shoff submitted an Application for Payment,

Charles Shoff, as President of Shoff, certified as follows:

[T]o the best of the Contractor's knowledge,

information and belief the work covered by this

application for Payment has been completed in

accordance with the Contract Documents, that all

amounts have been paid by Contractor for Work

for which previous Certificates for Payment were

issued and payments received from the owner,

and that current payment shown herein is now

due.

Shoff's certifications were sworn and notarized. As provided in

Article 9.4.3 of the General Conditions, Foreman had no duty to

"ma[k]e examination to ascertain how or for what purpose

[Shoff] ha[d] used money previously paid on account of the

Contract Sum."

Shoff submitted its final Applications for Payment for

Sheridan on September 4, 2003, and for Hillcrest on November
 The G706 form provided that "[w]henever Surety is 6

involved, Consent of Surety is required."

16

24, 2003. Shoff requested a final payment of $24,961.17 for

Sheridan and $78,362.65 for Hillcrest. On the Sheridan project,

Foreman and Cunzolo both signed the final Certificate of

Payment in the amount of $19,961.17, $5000.00 less than was

requested. On the Hillcrest project, Foreman, but not Cunzolo,

signed the final Certificate of Payment in the amount of

$78,362.65. 

With its final Applications for Payment, Shoff

transmitted affidavits—one each for the two projects—to

Foreman, indicating that all of Shoff's debts relating to the two

projects had been paid. Specifically, on AIA form G706,

"Contractor's Affidavit of Payment of Debts and Claims," Shoff

certified that "payment has been made in full and all obligations

have otherwise been satisfied for all materials and equipment

furnished, for all work, labor, and services performed, and for

all known indebtedness." On the Affidavit forms were boxes for

Shoff to check, indicating whether the "Consent of Surety to

Final Payment" was or was not attached. Shoff checked neither 6

box, and the Consent of Surety to Final Payment was not

attached.

Foreman admitted that it did not obtain the consent of

surety before certifying Shoff's final Application for Payment on

both projects. Foreman explained that it signed and submitted

the Final Certificates for Payment without the consent of surety

because (1) it had not experienced any problems with Shoff on
 GAIC's representative, Joel Beach ("Beach"), testified 7

at trial that, had consent of surety been requested at the end of

the projects, such consent would have been withheld and GAIC

would have instead requested that final payment be sent to

GAIC "because we have had issues on the job." Beach did not

explain why, if GAIC knew about "issues on the job" before the

17

past projects, (2) Shoff's performance on the Sheridan and

Hillcrest projects—both in terms of timeliness and quality—had

been very good, (3) Shoff had met its obligations with regard to

final punch list items, (4) contractors and subcontractors

generally want to be paid promptly, (5) Norwin's board met only

once in a 30-day period to approve and issue payments, (6)

Foreman wanted to get the Final Certificates for Payment "in the

works" so that those certificates could be submitted at the next

school board meeting, and (7) Shoff had indicated that the

surety's consent would be forthcoming.

Unknown to Foreman, and despite certifications and

affidavits to the contrary, Shoff failed to pay all of its debts to

subcontractors and suppliers, resulting in liens that were not

disclosed to Foreman, Cunzolo, or Norwin. Shoff's President,

Charles Shoff ("Charles Shoff"), explained at trial that, while

the payments his company received from Norwin were used to

pay subcontractors and vendors, the jobs "lost $800,000,"

meaning "there wasn't enough money to pay" all of the debts.

Indeed, it appears that some of the subcontractors and suppliers

had begun making claims against the payment bonds before

Shoff made its final Applications for Payment, a fact that was

communicated to neither Foreman nor Norwin. It was not until 7
job was finished, timely notice was not given to Norwin,

Foreman, or Cunzolo.

18

July 1, 2004—many months after Shoff submitted its final

Applications for Payment on September 4, 2003 (Sheridan), and

November 24, 2003 (Hillcrest)—that GAIC informed Norwin

that it had received bond payment claims totaling nearly

$800,000.00, roughly the same amount that Shoff said was

"lost" on the projects. 

II. PROCEEDINGS 

A. The Claims

Invoking the District Court's diversity jurisdiction, GAIC

filed suit against Norwin on August 4, 2004, alleging that

Norwin breached both of the Shoff Contracts by failing to obtain

GAIC's consent before making final payments to Shoff.

According to GAIC, the final payment under each of the

contracts should have been equal to five percent (5%) of the

contract price, the amount of retainage allegedly required at the

time of final payment. As alleged by GAIC, "[Norwin's] failure,

as . . . bond obligee and stakeholder, to obtain [GAIC's] consent

prior to paying Shoff, impaired [GAIC's] security to the extent

that the retainage was improperly paid." Under the doctrine of

equitable subrogation, GAIC sought damages in the total

amount of $467,342.06, an amount equal to five percent (5%) of

the combined Sheridan and Hillcrest contract prices. 

After unsuccessfully moving to dismiss GAIC's
 As conceded at oral argument, the record does not 8

support—and Norwin is not pursuing—claims of

indemnification and contribution against Foreman. Foreman has

not raised—and we do not consider—whether Norwin's breach

of contract claim against Foreman states a proper claim under

Rule 14 of the Federal Rules of Civil Procedure. See e.g.,

American Zurich Ins. Co. v. Cooper Tire & Rubber Co., 512

F.3d 800, 805 (6th Cir. 2007) (explaining that "Rule 14(a) does

not allow a third-party complaint to be founded on a defendant's

independent cause of action against a third-party defendant,

even though arising out of the same occurrence underlying

plaintiff's claim"). 

19

complaint, Norwin filed a counterclaim against GAIC, alleging

that GAIC had breached its responsibility to remedy Shoff's

incomplete and/or defective work. Norwin also filed a thirdparty complaint against Shoff and Foreman, alleging that (1)

Shoff had breached the Shoff Contracts by failing to pay its

suppliers and subcontractors; (2) Shoff had breached the Shoff

Contracts by failing to correct and complete, with the warranty

period, incomplete and defective work; (3) Foreman had

breached the CM Contract by failing to "produce and obtain the

necessary documentation and certify the same with respect to

payments to [Shoff];" and (4) Foreman was negligent in its

provision of construction management services. Norwin

asserted that Shoff and Foreman were either "solely liable to

[GAIC] for any damages allegedly sustained by [GAIC]," or

they were "jointly and severally liable with [Norwin] and/or

liable over to [Norwin] or directly liable for contribution and/or

indemnity." 8
 The copy of the agreement that appears in the record 9

contains the signatures of GAIC's and Norwin's representatives.

The signature line for Shoff is blank. It is undisputed, however,

that Shoff was a party to the agreement. 

20

After answering Norwin's third-party complaint, Foreman

filed a cross claim against Shoff, seeking contribution and

indemnity from Shoff. Shoff in turn filed a cross-claim against

Foreman and a counterclaim against Norwin. For whatever

reason, Cunzolo was left out of the fray.

B. The GAIC-Norwin-Shoff Agreement 

On November 30, 2005, all parties—GAIC, Norwin,

Shoff, and Foreman—filed cross-motions for summary

judgment. Soon after, unbeknownst to both the District Court

and Foreman, the other three parties—GAIC, Norwin, and

Shoff—signed a settlement agreement (the "Settlement 9

Agreement") that provided as follows:

1. Norwin agreed not to oppose GAIC's motion

for summary judgment on the issue of liability.

2. Norwin agreed not to oppose GAIC's motion

for summary judgment on the issue of damages.

Not only did Norwin agree not to contest the

amount requested by GAIC, namely, $467,362.06;

but it also agreed not to assert that those damages

should be reduced by (a) the value of any

collateral taken by GAIC from Shoff; and (b) any
21

monies paid to GAIC by its underwriter Seubert

& Associates, Inc., under the Agency Agreement

or the Surety Profit Sharing Agreement.

3. Shoff agreed to undertake all corrective

measures requested by Norwin. 

4. Norwin agreed to release GAIC from any

liability to Norwin with respect to all bonds

executed by GAIC as surety to Shoff, the

principal, and to Norwin, the obligee, including

all those claims that were asserted and could have

been asserted in the litigation. 

5. Norwin agreed to retain—at no cost to

Norwin—GAIC's counsel after GAIC's

unopposed motion for summary judgment was

granted. GAIC's counsel would then pursue

Norwin's claims against Foreman. Norwin agreed

that it would turn over to GAIC any amounts that

it might obtain from Foreman through judgment

or settlement.

6. Norwin agreed to voluntarily dismiss its claims

against Shoff.

 

7. In the event GAIC's counsel was unable to

obtain a judgment against Foreman on Norwin's

behalf, GAIC agreed "to satisfy of record [GAIC's
22

judgment against Norwin] upon the occurrence of

one of the following: (1) the expiration of sixty

days after the entry of a final, non-appealable

judgment in favor of Foreman; or (2) the

expiration of sixty days after Foreman establishes,

to the satisfaction of GAIC, that Foreman and its

insurance carrier are unable to pay the amount of

any judgment entered in favor of Norwin's claims

against Foreman in this Litigation." This

provision appears to say, and the parties have

since conceded that it means, that Norwin will not

have to satisfy the judgment obtained by GAIC

against Norwin.

8. GAIC, Norwin, and Shoff agreed to cooperate

in the litigation against Foreman.

C. The Rulings

On February 13, 2006, the Magistrate Judge entered a

report and recommendation addressing the four motions for

summary judgment that were filed on November 30, 2005. The

Magistrate Judge did not then know about the GAIC-NorwinShoff Settlement Agreement. Noting that Norwin altogether

failed to respond to GAIC's motion for summary judgment, the

Magistrate Judge recommended that summary judgment be

entered in GAIC's favor on GAIC's claims against Norwin and

on Norwin's counterclaims against GAIC. With respect to

Norwin's and Foreman's cross-motions for summary judgment

(regarding Norwin's third-party claims against Foreman), the

Magistrate Judge recommended that summary judgment be
23

granted in Foreman's favor on Norwin's third-party negligence

claims and in Norwin's favor—as to liability—on Norwin's

third-party breach of contract claims. With respect to Shoff's

motion for summary judgment against Foreman (regarding

Foreman's cross-claims against Shoff), the Magistrate Judge

recommended that summary judgment be entered in Shoff's

favor.

The District Court adopted the Magistrate Judge's report

and recommendation by order docketed March 20, 2006.

Neither the District Court nor Foreman had yet been informed

about the Settlement Agreement. Shoff later withdrew its crossclaim against Foreman, and Norwin and Shoff withdrew their

claims against each other.

By motion filed April 18, 2006, GAIC requested entry of

judgment against Norwin in the total amount of $701,456.38,

which amount included $467,342.06, plus "attorney's fees, costs,

and other damages under the Public Contractor and

Subcontractor Payment Act, 62 Pa. C.S.A. § 3931." The next

day, Norwin filed a motion for entry of judgment against

Foreman, arguing that Foreman was "liable over" to Norwin for

the summary judgment granted to GAIC on March 20, 2006, a

judgment purportedly requiring Norwin to pay $467,342.06,

plus "attorney's fees, costs, and other damages." Norwin

thereafter responded to GAIC's motion for entry of judgment by

stating that it would not contest the amounts sought by GAIC,

"so long as the Court enters Judgment in its favor and against

Foreman in the same amount, as requested in Norwin's Motion

for Judgment." 
24

Foreman first learned about the GAIC-Norwin-Shoff

Settlement Agreement at a status conference held before the

Magistrate Judge on April 18, 2006. Foreman thereafter filed a

counter-motion to GAIC's and Norwin's motions for entry of

judgment, asserting that the District Court's previous order

granting summary judgment to Norwin against Foreman should

be vacated based on the secret Settlement Agreement. Foreman

also moved to amend its affirmative defenses to Norwin's thirdparty claims. Specifically, Foreman sought leave to add three

affirmative defenses, one each based on: (1) GAIC's agreement

to forebear from executing on its judgment against Norwin,

thereby relieving Norwin from having to pay any damages; (2)

Norwin's failure to mitigate damages; and (3) GAIC's and

Norwin's agreement, which purportedly released or extinguished

Norwin's claims against Foreman.

In a memorandum order dated June 8, 2006, the

Magistrate Judge noted as follows:

Great American and Norwin argue that Foreman

is liable over to Norwin for the amount that

Norwin owes Great American. However, the

Court has not determined what the amount is that

Norwin owes Great American and, even if they

[Great American and Norwin] were to

unequivocally agree upon an amount, such an

agreement would not be binding upon a third

party. Moreover, that argument appears to be

based on an indemnity theory which, as explained

above, is not the basis for Foreman's liability.
25

The Magistrate Judge accordingly dismissed Norwin's motion

for entry of judgment as premature and deferred GAIC's motion

for entry of judgment, stating that the motion "will be

considered by the Court if and when Norwin unconditionally

consents to the entry of judgment against it." The Magistrate

Judge also denied Foreman's motion to amend its affirmative

defenses on the ground that the proposed amendment would be

futile. In the Magistrate Judge's words: "[B]ecause Foreman's

liability to Norwin is based on Foreman's breaches of its

contractual obligations and not on a theory of indemnification,

the provisions of the Agreement would not have made any

difference in this case." Finally, the Magistrate Judge denied

Foreman's counter-motion to set aside the district court's March

20 order regarding the parties' cross-motions for summary

judgment. According to the Magistrate Judge, "the issue of

liability has been established and all that remains to be

determined is the amount of damages." 

On June 19, 2006, GAIC filed an amended motion for

entry of judgment against Norwin. In its amended motion,

GAIC requested entry of judgment in the amount of

$467,342.06, plus prejudgment interest. After Norwin advised

the District Court that it did not oppose the motion, the District

Court entered an order dated September 1, 2006, directing entry

of judgment in favor of GAIC and against Norwin "in the

amount of $467,342.05 [sic] together with prejudgment

interest."

On June 20, 2006, Norwin filed an amended motion for

entry of judgment against Foreman, this time requesting

judgment in the amount of $467,342.06 plus interest. As he did
26

with Norwin's earlier motion for entry of judgment, the

Magistrate Judge dismissed the amended motion as premature.

Norwin thereafter filed a motion for summary judgment on

damages, arguing that Foreman owed $467,342.05, the amount

of the judgment already entered in GAIC's favor and against

Norwin. On November 13, 2006, the Magistrate Judge

recommended that Norwin's motion for summary judgment as

to damages be denied. The Magistrate Judge wrote:

Norwin cannot sustain this burden [of proving its

damages] by referring to a judgment entered

against it, with its consent, by Great American.

Although Great American and Norwin can agree

to Norwin's liability, such an agreement is not

binding on third parties. Nor can Norwin succeed

by proffering an agreement reached between other

parties when Foreman has presented testimony

that Norwin will not be making payments to Great

American as a result of this agreement.

The District Court later adopted the Magistrate Judge's report

and recommendation and denied Norwin's motion for summary

judgment as to damages. A jury trial on damages was scheduled

to begin on April 16, 2007.

As the case proceeded toward a trial on Norwin's

damages, Norwin and Foreman filed a number of motions in

limine. On April 5, 2007, the District Court ruled on these

motions, ordering, among other things, that (1) neither party

would be permitted to introduce the GAIC-Norwin-Shoff

Settlement Agreement into evidence, the agreement being
27

"irrelevant to the merits of the instant dispute;" (2) Norwin

could introduce evidence of the judgment in favor of GAIC and

against Norwin, as well as evidence of the retainage amounts

paid to Shoff, in order to establish its damages; (3) Foreman

would not be permitted to argue that, because Norwin would

never have to pay the GAIC judgment, Norwin suffered no

damages; (4) Foreman would be permitted to introduce evidence

to establish that Norwin failed to mitigate its damages; and (5)

Norwin would not be permitted to present evidence regarding

Foreman's insurance coverage. In essence, the District Court

concluded that, "[t]o put Norwin in the same position that it

would have been had Foreman performed [the CM Contract]

properly, the Great American judgment against Norwin must be

satisfied." The District Court determined—in other words—that

"the entry of judgment against Norwin is sufficient evidence of

its damages." 

Several days before trial began, Foreman submitted an

offer of proof regarding evidence that it wished to introduce at

trial. On the morning of trial, the District Court addressed

Foreman's offer of proof by ruling that Foreman could not

introduce (1) the Settlement Agreement to show bias or

prejudice on the part of "any witnesses who are employees,

agents, or representatives of the signatories to the said

settlement agreement;" (2) evidence that Norwin's damages were

caused by Shoff's alleged misrepresentations; (3) evidence that

Norwin caused its own damages by failing to abide by the

provisions of the Shoff Contracts; (4) evidence that Norwin

breached its CM Contract with Foreman by assigning rights

under that contract to Great American; and (5) the deposition

testimony of Superintendent Boylan, indicating that Norwin
28

expected that "not one dime of school district money would be

used toward payment of the judgment [in favor of GAIC]." At

the same time, the District Court granted Norwin's motion in

limine to exclude all evidence (1) that Shoff breached its

contract with Norwin and/or committed fraud; (2) that Norwin

failed to mitigate its damages by not pursuing claims against

Shoff; (3) that Norwin failed to mitigate its damages by not

contesting the amount of damages claimed by GAIC; and (4)

that GAIC had a potential, but speculative, right of recovery

against Shoff through a security interest granted to GAIC by

Charles and Melanie Shoff. 

During trial, over Foreman's objection, the District Court

took judicial notice of the uncontested judgment entered against

Norwin in the amount of $467,342.05. Norwin's business

manager testified that the amount of the judgment was equal to

the amount of the retainage (5%) that was improperly released

to Shoff. Other than introducing the certified payment

applications documenting the release of the five percent (5%)

retainage, Norwin presented no other evidence of its damages.

Indeed, when instructing the jury, the District Court stated: "The

Court has taken judicial notice of the judgment in favor of Great

American Insurance Company against Norwin School District.

Therefore, Norwin School District need not produce any other

formal proof of the existence or amount of its damages." Not

surprisingly, the jury returned a verdict in favor of Norwin and

against Foreman in the amount of $467,347.05, plus six percent
 The jury awarded $467,347.05, which is five dollars 10

more than the figure used in the September 1 judgment.

Apparently, no one complained about the jury's error.

 The district court exercised jurisdiction pursuant to 28 11

U.S.C. §§ 1332(a) and 1367. Appellate jurisdiction exists under

28 U.S.C. § 1291.

 Although Foreman appealed from the order granting 12

Shoff's motion for summary judgment against Foreman,

Foreman has abandoned its appeal against Shoff. Foreman not

only failed to address the Shoff ruling in its appellate brief, but

it also advised this Court at oral argument that it was not

pursuing its appeal against Shoff.

29

(6%) interest from July 1, 2004. On April 19, 2007, consistent 10

with the jury's verdict, the District Court entered judgment in

favor of Norwin in the amount of $467,347.05, plus six percent

(6%) interest from July 1, 2004. This timely appeal followed.11

III. DISCUSSION

In its notice of appeal filed May 10, 2007, Foreman

stated that it was appealing from (1) the judgment entered on the

jury's verdict; (2) the ruling on summary judgment docketed

March 20, 2006, granting summary judgment in favor of GAIC

against Norwin, in favor of Norwin against Foreman (as to

liability), and in favor of Shoff against Foreman; (3) the order 12

docketed September 1, 2006, entering judgment in favor of

GAIC and against Norwin in the amount of $467,342.05; and

(4) the order docketed April 5, 2007, on motions in limine.
30

Because this is a diversity case, we apply the substantive law of

Pennsylvania. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-80

(1938).

A. Contract Interpretation

The Pennsylvania Supreme Court summarized

Pennsylvania law as it relates to contract interpretation in

Murphy v. Duquesne University, 777 A.2d 418 (Pa. 2001).

 The fundamental rule in interpreting the

meaning of a contract is to ascertain and give

effect to the intent of the contracting parties. 

The intent of the parties to a written agreement

is to be regarded as being embodied in the

writing itself. The whole instrument must be

taken together in arriving at contractual intent. 

Courts do not assume that a contract's language

was chosen carelessly, nor do they assume that

the parties were ignorant of the meaning of the

language they employed. When a writing is

clear and unequivocal, its meaning must be

determined by its contents alone. 

 Only where a contract's language is

ambiguous may extrinsic or parol evidence be

considered to determine the intent of the parties. 

A contract contains an ambiguity if it is

reasonably susceptible of different constructions

and capable of being understood in more than

one sense. This question, however, is not
 It bears noting that all four of the parties to the various 13

construction contracts—Shoff, Cunzolo, Foreman, and

Norwin—participated in the decision to gradually reduce the

retainage below five percent (5%). Shoff submitted

Applications for Payment with the reduced retainage amounts

31

resolved in a vacuum. Instead, contractual

terms are ambiguous if they are subject to more

than one reasonable interpretation when applied

to a particular set of facts. In the absence of an

ambiguity, the plain meaning of the agreement

will be enforced. The meaning of an

unambiguous written instrument presents a

question of law for resolution by the court.

Id. at 429-30 (internal quotation marks and citations omitted). 

We exercise plenary review over questions of contract

interpretation. Local Union No. 1992 v. Okonite Co., 189

F.3d 339, 341 (3d Cir. 1999).

1. Reduction of Retainage

An issue central to this case is whether GAIC's consent

was required before retainage fell below five percent (5%) of

the combined final prices of the two projects. The contracts

provided that GAIC's consent was required before "final

payment." Norwin and GAIC contend that the contracts

required Norwin to retain a full five percent (5%) of the total

contract prices until the time of final payment, at which time

GAIC's consent was purportedly required. Foreman argues 13
listed; Foreman and Cunzolo both certified the Applications for

Payment with the reduced retainage amounts; and Norwin paid

Shoff amounts that clearly reflected the reduced retainage. 

32

otherwise. The District Court never addressed the issue,

assuming, instead, that an amount equal to five percent (5%) of

the total contract prices was a proper measure of what the final

payment should have been.

We begin with the Hillcrest contracts. The relevant

language in the Shoff Contract–Hillcrest ("Hillcrest Contract")

provided as follows: 

5.6 Subject to the provisions of the Contract

Documents [namely, the Shoff Contract plus the

General and Supplementary Conditions], the

amount of each progress payment shall be

computed as follows:

5.6.1. Take that portion of the Contract Sum

properly allocable to completed Work as

determined by multiplying the percentage

completion of each portion of the Work by the

share of the total Contract Sum allocated to that

portion of the Work in the Schedule of Value, less

retainage of ten percent (10%). . . .

5.6.2 Add that portion of the Contract Sum

properly allocable to materials and equipment

delivered and suitably stored at the site for
33

subsequent incorporation in the completed

construction . . . , less retainage of ten percent

(10%).

. . . . 

Article 5.6 of the Hillcrest Contract thus set the amount of

retainage applicable to progress payments at ten percent (10%).

As provided in Article 5.7 of the Hillcrest Contract, the

amount of retainage was subject to modification:

5.7 The progress payment amount determined in

accordance with Paragraph 5.6 shall be further

modified under the following circumstances:

5.7.1 Add, upon Substantial Completion of the

Work, a sum sufficient to increase the total

payments to ninety-five percent (95%) of the

Contract Work, less such amounts as the

Construction Manager recommends and the

Architect determines for incomplete Work and

unsettled claims.

While it appears that Article 5.7.1 required the eventual release

of one-half of the amounts previously retained, i.e., one-half of

the ten percent (10%) retainage, the timing of the release was

left unclear because the Hillcrest Contract failed to define the

phrase "Substantial Completion of the Work." 

Article 5.8 of the Hillcrest Contract provided that "[i]f it
34

is intended, prior to Substantial Completion of the entire Work,

to reduce or limit the retainage resulting from the percentages

inserted in Subparagraphs 5.6.1. and 5.6.2 above, and this is not

explained elsewhere in the Contract Documents, insert here

provisions for such reduction or limitation." Because no

percentage was inserted in Article 5.8 of the Hillcrest Contract,

we look "elsewhere in the Contract Documents" for guidance.

Indeed, in the Supplementary Conditions, retainage was

specifically addressed as follows:

9.3.6: The sum or sums withheld by [Norwin]

from [Shoff] shall be 10 percent of the amount

due [Shoff] until 50 percent of the Contract is

completed. When the Contract is 50 percent

complete, one-half of the amount retained by

[Norwin] shall be released to [Shoff], provided

that [Cunzolo] approves the Application for

Payment; and provided further, that [Shoff] is

making satisfactory progress and there is no

specific cause for greater withholding.

9.3.7: The sum or sums withheld by [Norwin]

from [Shoff] after the Contract is 50 percent

completed shall not exceed 5 percent of the value

of completed work based on monthly progress

payment requests. 

The first sentence in Article 9.3.6 made very clear that

ten percent (10%) retainage was required until the project was

fifty percent (50%) complete. The words "shall be 10 percent"

were unequivocal. The second sentence in Article 9.3.6
35

provided that, when the project was fifty percent (50%)

complete, and with certain provisos, one-half of the amounts

previously retained "shall be released." Such release

presumably served to increase the total payments to Shoff to

ninety-five percent (95%) of the then-completed work, leaving

Norwin with five percent (5%) retainage at the fifty percent

(50%) completion mark.

In addressing the sums to be withheld after the work was

fifty percent (50%) complete, Article 9.3.7 did not use the "shall

be" language that was used in Article 9.3.6. Instead, Article

9.3.7 provided that retainage "shall not exceed 5 percent" after

the project was fifty percent (50%) complete. While the words

"shall be 10 percent" drew a bright line, permitting no variation

in the amount of retainage before the work was fifty percent

(50%) complete, the words "shall not exceed 5 percent" left

room for a range of retainage values—capped at five percent

(5%)—after the work was fifty percent (50%) complete. 

The Supplementary Conditions were expressly

incorporated into, and constituted a vital part of, the Hillcrest

Contract. Like the General Conditions, the Supplementary

Conditions supplied details that were not contained in the

Hillcrest Contract itself. With respect to retainage, the detail

provided by the Supplementary Conditions was not inconsistent

with any other provision in the Hillcrest Contract. We must,

accordingly, give effect to the retainage provision contained in

the Supplementary Conditions. As noted above, that provision

stated that "[t]he sum or sums withheld by [Norwin] from

[Shoff] after the Contract is 50 percent completed shall not

exceed 5 percent of the value of completed work." We cannot
 Our conclusion is buttressed by Article 9.10.2 of the 14

General Conditions, which addresses the conditions precedent

to final payment as follows: "Neither final payment nor any

remaining retained percentage shall become due until the

Contractor submits to the Architect through the Construction

Manager" certain documents. The phrase "any remaining

retained percentage" suggests that the percentage of retainage at

the time of final payment could vary. 

36

assume that the language used in the retainage provision was

chosen carelessly; we cannot ignore the difference in meaning

between the words "shall not exceed" and the words "shall be;"

and we cannot distort the unambiguous meaning of the words

"shall not exceed." Applying—as we must—the rules of

contract interpretation, we conclude that the Hillcrest Contract

did not require five percent (5%) retainage at the time of final

payment. Thus, after the projects were more than fifty percent 14

(50%) complete, Foreman and Cunzolo were permitted to certify

payments with less than five percent (5%) retainage, and Norwin

was permitted to make payments to Shoff with less than five

percent (5%) retainage, all without the consent of surety. 

We are not persuaded otherwise by the arguments of

Norwin and GAIC. According to Norwin and GAIC:

By stating that sums withheld "shall not exceed 5

percent," Paragraph 9.3.7 is consistent with

Paragraph 9.3.6 of the General [sic] Conditions

and the payment provisions in the contracts

themselves which directed that first 10% and then
37

5% shall be retained. In no way did Paragraph

9.3.7 overrule the clear directive that retainage

shall be 5%.

In fact, there was no "clear directive" in the Hillcrest Contract

that retainage "shall be 5%" at the time of final payment.

Indeed, the only directive concerning a reduction in retainage

appeared in Article 9.3.7 of the Supplementary Conditions, and

that directive did not specify that retainage "shall be" five

percent (5%) until the project was complete.

Nor are we persuaded by Norwin's and GAIC's

suggestion that the words "shall not exceed" should be construed

to mean "shall be." The use of different language to address the

same or similar issue—namely, retainage—strongly implies that

a different meaning was intended. In fact, it would have been

quite easy to draft the requirements for retainage, both above

and below the fifty percent (50%) completion mark, using the

same "shall be" language. The same language was not used,

however; and we must assume that the choice of different words

was deliberate. See, e.g, Penncro Assocs., Inc. v. Sprint

Spectrum, L.P., 499 F.3d 1151, 1156-57 (10th Cir. 2007) (noting

that, "[w]hen a contract uses different language in proximate

and similar provisions, we commonly understand the provisions

to illuminate one another and assume that the parties' use of

different language was intended to convey different meanings");

Taracorp, Inc. v. NL Industries, Inc., 73 F.3d 738, 744 (7th Cir.

1996) (noting that "when parties to the same contract use such

different language to address parallel issues . . ., it is reasonable

to infer that they intend this language to mean different things");

see also Commonwealth v. Berryman, 649 A.2d 961, 969 (Pa.
 We note that a surety is not necessarily without 15

protection when a construction contract makes retainage

permissive rather than obligatory. A surety, for example, can

protect itself by issuing a notice to the obligee that the contractor

is in default and/or that claims have been made against the

surety. Such notice places the obligee in the role of a

stakeholder, with a duty to protect the surety by withholding

payments to the contractor. See, e.g., American Ins. Co. v.

United States, 62 Fed. Cl. 151, 155 (2004) (noting that, under

the doctrine of equitable subrogation, "notice [by the surety] that

the contractor is in default and that the surety is invoking its

rights to the remaining contract proceeds converts the [obligee]

to a stakeholder with duties to the surety," allowing the surety to

sue the obligee for recovery of contract funds owed but not yet

38

Super. Ct. 1994) (recognizing the rule that, when different

language is used in parallel provisions of a statute, the

provisions are intended to mean different things). In plain

terms, by using the words "shall not exceed" instead of "shall

be," Article 9.3.7 of the Supplementary Conditions set a ceiling

on the monies to be retained during the second half of the

project; it did not "direct" that retainage be five percent (5%) at

the time of final payment. 

We are also unconvinced by Norwin's and GAIC's

protection-of-the-surety argument. According to Norwin and

GAIC, the only reasonable construction of the contract

documents is a construction that affords meaningful security and

protection to the surety—and that purportedly means requiring

five percent (5%) retainage at the time of final payment. As 15
paid). If, as GAIC's representative testified, GAIC knew before

the projects were completed that there were "issues on the job,"

GAIC could have protected itself by notifying Norwin.

39

the case law makes clear, however, the Court may not rewrite

the contracts to provide protections that the contracts did not

themselves provide. See, e.g., Meeting House Lane, Ltd. v.

Melso, 628 A.2d 854, 857 (Pa. Super. Ct. 1993) (noting that "the

parties have the right to make their own contract, and it is not

the function of a court to rewrite it or to give it a construction in

conflict with the accepted and plain meaning of the language

used"). 

Norwin and GAIC cite three cases in support of their

argument that Norwin "had no discretion" to reduce retainage

below five percent (5%) prior to final payment. Prairie State

Nat'l Bank of Chicago v. United States, 164 U.S. 227 (1896);

Nat'l Sur. Corp. v. United States, 118 F.3d 1542 (Fed. Cir.

1997); Transamerica Premier Ins. Co. v. United States, 32 Fed.

Cl. 308 (1994). None of the cited cases involved the issues

and/or the contract terms that are before this Court. In Prairie

State National Bank, 164 U.S. at 230-40, the Supreme Court

considered the relative priorities of parties competing for

retainage held by the government under a construction contract.

In National Surety Corp., 118 F.3d at 1545, the Federal Circuit

held that, by improperly releasing retainage in violation of clear

contractual terms, the government incurred liability to the

surety. In Transamerica Premier Insurance Co., 32 Fed. Cl. at

313-16, the Court of Federal Claims held that the government

was liable to the surety for payments that the government

wrongly issued to the contractor after the government was put

on notice regarding the contractor's financial inability to

complete the contract. To be sure, in each of these cases, the

courts recognized, as a general proposition, that contract

retainage serves to protect not only the obligee but also the
40

surety. None of these cases, however, supports Norwin's and

GAIC's assertion that, under the terms of the Contract

Documents at issue here, Norwin was required to retain five

percent (5%) of the contract price until the time of final

payment.

The Sheridan Contract differed from the Hillcrest

Contract in one important respect: namely, the words "[r]educe

to 5% at 50% of work installed" were inserted in Article 5.8 of

the Sheridan Contract to explain any "[r]eduction or limitation

of retainage." In contrast, no provision for reduction or

limitation of retainage was inserted in Article 5.8 of the Hillcrest

Contract. We must decide whether the added insertion in the

Sheridan Contract leads to a different conclusion regarding the

amount of retainage that was required at the time of final

payment. 

In construing the Sheridan Contract, we must consider

the entirety of the contract documents, including the

Supplementary Conditions; and we must read the contractual

provisions to avoid ambiguities if possible. Masters v. Celina

Mut. Ins. Co., 224 A.2d 774, 115 (Pa. Super. Ct. 1966). We

must also keep in mind that specific provisions ordinarily

control more general provisions. In re Alloy Mfg. Co.

Employees Trust, 192 A.2d 394, 396 (Pa. 1963).

Here, the words inserted in Article 5.8 of the Sheridan

Contract—"[r]educe to 5% at 50% of work installed"—must be

read in conjunction with the more detailed retainage provisions

contained in the Articles 9.3.6 and 9.3.7 of the Supplementary

Conditions. By themselves, the words "[r]educe to 5% at 50%

of work installed" were ambiguous. For example, those words

could have meant that any limitation—or ceiling—on retainage

was reduced to five percent (5%) at the fifty percent (50%)

completion mark, or those words could have meant that
41

retainage was reduced to, and would remain at, five percent

(5%) at and after the fifty percent (50%) completion mark. Any

ambiguity was eliminated, however, if the words were

considered in conformity with the more detailed Supplementary

Conditions. The Supplementary Conditions provided that, while

retainage was to be reduced to five percent (5%) when work was

fifty percent (50%) complete, retainage was thereafter to be

capped at five percent (5%). If the words "[r]educe to 5% at

50% of work installed" were construed to mean that retainage

was limited to, or could not exceed, five percent (5%) after the

project was fifty percent (50%) complete, the words would be

consistent with the clear provisions contained in Articles 9.3.6.

and 9.3.7. So construed, the insertion did nothing more than

provide, in broad terms, what the Supplementary Conditions

provided more explicitly. 

In sum, we find that the Supplementary

Conditions—specifically Articles 9.3.6 and 9.3.7—controlled

the matter of retainage on both the Sheridan and the Hillcrest

projects. Because the Supplementary Conditions did nothing

more than place a five percent (5%) ceiling on retainage once

the projects were fifty percent (50%) complete, we

conclude—as to both projects—that five percent (5%) retainage

was not required at the time of final payment, that GAIC's

consent was not required before retainage could be reduced to

amounts less than five percent (5%), and that Foreman,

accordingly, did not breach its contract with Norwin by failing

to obtain GAIC's consent before certifying Shoff's progress

payment applications reflecting retainage of less than five

percent (5%).

2. Consent of Surety

Article 9.10.2 of the General Conditions provided that

"[n]either final payment nor any remaining retained percentage
 The record establishes that Foreman's project 16

managers were well aware that the surety's consent was needed

as part of the close-out documentation. 

42

shall become due until the Contractor submits to the Architect

through the Construction Manager . . . consent of surety, if any,

to final payment." Foreman now argues—asit argued before the

district court—that the Contract Documents required Shoff to

submit the consent of surety if, and only if, the surety reserved

such right in the bond documents. In this case, the bond

documents were silent as to any consent-of-surety requirement.16

In support of its argument, Foreman cites Exchange

National Bank of Chicago v. United States Fidelity & Guaranty

Co., No. 81C7119, 1985 WL 2123, *1 (N.D. Ill. July 25, 1985).

In that case, the court construed a contract provision stating that

"[n]either the final payment nor the remaining retained

percentage shall become due until the Contractor submits to the

Architect . . . consent of the surety, if any, to final payment." Id.

The court concluded that the contract provision itself did not

require the surety's consent to final payment. Instead, the court

determined that the words "if any" in the phrase "consent of

surety, if any, to final payment" indicated that a consent-ofsurety requirement must be found elsewhere, perhaps in the

bond documents. Id.

We know of no other court that has followed the decision

in Exchange National Bank. Nor are we persuaded to follow the

decision ourselves. Indeed, we conclude that the words "if any"

in the phrase "consent of surety, if any, to final payment" were

meant to qualify the word "surety," meaning that, if and when a

surety was involved, the surety's consent to final payment was
 We note that AIA Form G706, entitled "Contractor's 17

Affidavit of Payment of Debts and Claims," stated that

"[w]henever Surety is involved, Consent of Surety is required."

Although AIA Form G706 was used in this case, the form was

not incorporated into the Contract Documents and was,

therefore, not binding on Foreman.

43

required. Here, a surety—GAIC—was involved, and GAIC's 17

consent to final payment was required. See Capital Indemnity

Corp. v. Price Municipal Corp., No. 2:99cv0141, 2002 WL

818064 (D. Utah April 25, 2002) (assuming, without discussion,

that the surety's consent to final payment was required when the

contract provided that "final Application for Payment shall be

accompanied . . . by . . . consent of the surety, if any, to final

payment"). 

3. Final Payment

Because the Shoff Contracts required the consent of

surety to "final payment," we must consider the meaning of the

words "final payment." Unfortunately, the contract documents

provided no clear definition of those words. Article 6 of the

Shoff Contracts provided that final payment constituted "the

entire unpaid balance of the Contract Sum." Article 9.10.1 of

the General Conditions provided that the final Certificate of

Payment should state "the entire balance found to be due the

Contractor." Article 9.10.2 of the General Conditions provided

that "[n]either final payment nor any remaining retained

percentage shall become due until . . . consent of surety, if any,

to final payment" was obtained. In essence, the contract

documents allowed "final payment" to mean whatever the final

Certificate of Payment said it was. 

Foreman contends that, as to the Hillcrest project, "final

payment" was $78,362.65, the amount requested by Shoff on the
44

Final Application for Payment. That amount equaled the

difference between the final contract price ($5,615,267.11) and

the total amounts previously paid ($5,536,904.46). Shoff's Final

Application for Payment was certified by Foreman and paid by

Norwin on December 16, 2003. The check issued by Norwin on

that date was marked "FINAL." We agree with Foreman that

"final payment" on the Hillcrest project was $78,362.65. 

As to the Sheridan project, Foreman argues that no "final

payment" was ever made. In support of its argument, Foreman

points to the $5,000.00 that was "retained" from Shoff's final

Application for Payment. Indeed, Shoff requested a final

payment of $24,961.17, the difference between the final contract

price ($3,731,574.000 and the total amounts previously paid

($3,706,612.83). While Foreman certified the amount requested

by Shoff, Norwin paid Shoff only $19,961.17 (by check dated

November 26, 2003). According to Foreman, Norwin withheld

the $5,000.00 for uncompleted work. The record is otherwise

silent about what alerted Norwin to the need to withhold a

portion of the certified amount. 

That Norwin withheld $5,000.00 from the amount

requested by Shoff in its final Application for Payment does not

change the fact that the final Certificate of Payment reflected a

"final payment" of $24,961.17, the remainder of what was owed

under the Sheridan Contract. Foreman certified final payment

in the amount of $24,961.17, and—under the Contract

Documents—that certification constituted a representation that

the consent of surety had been obtained. Thus, for purposes of

the consent-of-surety requirement on the Sheridan project, "final

payment" was $24,961.17. 

B. Breach

Foreman contends that the District Court erred in
45

entering summary judgment in Norwin's favor on the issue of

Foreman's liability for breach of contract. The Magistrate Judge

recommended that Norwin's motion for summary judgment be

granted on the basis that there were "no genuine issues of

material fact that Foreman failed to provide close-out

documents, including the Consent of Surety." The District

Court adopted the Magistrate Judge's recommendation regarding

Foreman's liability for breach of contract. Because breach of a

contract is essentially a question of contract interpretation, our

review is plenary. St. John Mortgage Co. v. United States

Fidelity and Guar. Co., 897 F.2d 1266, 1268 (3d Cir. 1990).

Foreman admits that it failed to obtain GAIC's consent

before it certified Shoff'sfinal Applicationsfor Payment. Under

Articles 9.10.1 and 9.10.2 of the General Conditions, Foreman

was required to obtain GAIC's consent as a condition precedent

to final payment to Shoff. By issuing final Certificates of

Payment without such consent, Foreman clearly breached the

terms of the contract documents. 

Foreman contends that, because Norwin itself breached

the terms of the contracts, Norwin should not be permitted to

demand Foreman's strict adherence to the contractual terms.

Foreman refers specifically to Norwin's act of issuing final

payment to Shoff on the Hillcrest project without first obtaining

Cunzolo's certification. The Magistrate Judge rejected this

argument, stating, without explanation, that "Great American's

damages were not the result of Norwin's failure to obtain

Cunzolo's certification for the Final Payment Application on the

Hillcrest project." The Magistrate Judge did not mention that,

as to the final Certificate of Payment, the contract documents

treated Cunzolo and Foreman alike; both were required to

certify that all conditions precedent to final payment—which

included having the consent of surety—had been fulfilled. 
46

In practice, Cunzolo apparently did not review the closeout documentation before reviewing and certifying Shoff's final

Applications for Payment. According to Hank Tkacik

("Tkacik"), the Cunzolo representative responsible for signing

the various Applications for Payment, Foreman did not forward

the close-out documentation to Cunzolo because of its volume.

Thus, Tkacik's review of the final Applications for Payment did

not include verification that all of the close-out documentation

had been submitted. The procedure used on both projects was

as follows: (1) Foreman would review the Applications for

Payment, certify payment, then send the certified Applications

for Payment to Norwin; (2) upon receipt of the certified

Applications for Payment, Norwin would notify Tkacik, who

would go to Norwin's offices to sign the Applications; and (3)

Norwin would then issue payment to Shoff. Tkacik had no

recollection about why he failed to sign the final Application for

Payment on the Hillcrest project. He stated that, consistent with

his certification on the Sheridan project, he would have signed

the final Application for Payment on Hillcrest because Shoff's

work had progressed to a point entitling it to final payment. 

We are unconvinced that the District Court erred in

rejecting Foreman's attempt to excuse its breach by pointing to

Norwin's failure to obtain Cunzolo's signature before issuing

final payment on the Hillcrest project. Norwin, Cunzolo, and

Foreman all apparently acquiesced in a procedure that resulted

in Foreman's being the only party that, in fact, reviewed the

close-out documentation. Foreman cannot now complain about

a procedure that it endorsed. 

C. Damages

Foreman challenges a number of the District Court's

evidentiary rulings with respect to damages. This Court

generally reviews evidentiary decisions for abuse of discretion;
47

however, to the extent an evidentiary decision involves a legal

component, this court's review is plenary. Inter Med. Supplies,

Ltd. v. EBI Med. Systems, Inc., 181 F.3d 446, 464 (3d Cir.

1999). An erroneous evidentiary ruling will be considered

harmless if "it is highly probable that the district court's [ruling]

did not affect [the party's] substantial rights." Becker v. ARCO

Chem. Co., 207 F.3d 176, 179 (3d Cir. 2000).

Among other things, Foreman challenges the District

Court's motion-in-limine ruling that entry of judgment against

Norwin in GAIC's first-party action was admissible in Norwin's

third-party action as evidence of damages caused by Foreman.

At trial, consistent with its ruling in limine, the District Court

took judicial notice of the uncontested judgment against Norwin

in the amount of $467,342.05, then instructed the jury as

follows: "The Court has taken judicial notice of the judgment in

favor of Great American Insurance Company against Norwin

School District. Therefore, Norwin School District need not

produce any other formal proof of the existence or amount of its

damages."

We note initially that Foreman was not a party to the

uncontested judgment against Norwin. Accordingly, the

judgment was not binding on Foreman. The Magistrate Judge

correctly explained what the District Court failed to recognize:

"Norwin cannotsustain th[e] burden [of proving its damages] by

referring to a judgment entered against it, with its consent, by

Great American. Although Great American and Norwin can

agree to Norwin's liability, such an agreement is not binding on

third parties." 

Furthermore, the amount of the judgment was the

unchallenged product of GAIC's and Norwin's behind-thescenes Settlement Agreement. Norwin agreed not to oppose

GAIC's motion for summary judgment in the amount of
 There may have been other meritorious defenses as 18

well. For example, GAIC's actual damages would be less than

$103,323.82 if the evidence revealed that GAIC was not

prejudiced by the unauthorized release of final payments to

Shoff. In National Security Corp., the court explained that, if

the unauthorized payments "were expended for the purposes of

the contract so that the extent of the surety's subsequent

performance was reduced thereby, any injury to the surety would

to that extent be mitigated." Id. at 1548 (concluding that a

surety seeking money damages for an obligee's improper release

of funds must establish prejudice); Ramada Devel. Co. v. United

States Fidelity & Guar. Co., 626 F.2d 517, 521 (6th Cir. 1980)

48

$467,362.06; in return, GAIC agreed not to seek satisfaction of

the judgment from Norwin unless Norwin first obtained a

judgment and received payment from Foreman. From Norwin's

perspective, it mattered little, if at all, what amount was plugged

into an uncontested judgment that required no payment from

Norwin's pockets. 

Indeed, knowing that it would never have to pay the

judgment, Norwin had little incentive to challenge the amount

of damages sought by GAIC. That amount, moreover, was

subject to at least one meritorious defense that Norwin never

raised. Norwin could have challenged, for example, GAIC's

erroneous interpretation of the contract language. As we have

already explained, the contract documents did not require

GAIC's consent before retainage was reduced to amounts less

than five percent of the total contract prices. GAIC's consent

was required before "final payment;" and—for consent-of-surety

purposes—"final payment" was $78,362.65 on the Hillcrest

project and $24,961.17 on the Sheridan project. The combined

total of improperly released payments was thus 

$103,323.82, not $467,362.06. Norwin was certainly free to 18
(noting that a compensated surety is not entitled to pro tanto

discharge following improperly released retainage unless the

surety experiences some injury, loss or prejudice). Here,

Charles Shoff stated during his deposition that the payments his

company received from Norwin were used to pay subcontractors

and vendors. Shoff also stated that the projects lost

approximately $800,000—roughly the amount GAIC had to pay

on the bonds. Such deposition testimony tends to demonstrate

that GAIC's bond payments were the result of project losses and

not the result of Norwin's improper release of the final

payments.

 While we agree that the $467,362.05 judgment was an 19

improper measure of damages for purposes of Norwin's suit

against Foreman, we reject Foreman's argument that the District

Court erred in entering the $467,342.05 judgment in GAIC's

first-party action against Norwin. We cannot fault the District

Court for entering summary judgment against Norwin when

Norwin raised no opposition to the motion and, indeed,

expressly advised the District Court that it did not oppose entry

of the $467,342.05 judgment. Norwin picked its own poison in

that regard.

49

agree to an inflated judgment, but that inflated judgment was not

an appropriate—or relevant—measure of damages caused by

Foreman. Clearly, the District Court abused its discretion in 19

admitting GAIC's uncontested judgment as evidence of damages

caused by Foreman.

Not only did the District Court admit, over Foreman's

objection, the uncontested judgment as the sole evidence of

Norwin's damages; it also denied Foreman'srequest to introduce

evidence to challenge that judgment. By doing so, the District

Court, in effect, directed a verdict against Foreman in an amount
 We note that, among other differences, there was no 20

assignment of Norwin's breach-of-contract claim to GAIC. As

stated by the District Court in its order on motions in limine:

"There is no assignment provision in the settlement agreement

and there is no evidence of record that any such assignment

[from Norwin to GAIC] took place." 

50

that not only was unsupported by the contract language but

may also have been unsupported by the facts. 

In particular, Foreman wanted to introduce evidence to

prove that, in fact, Norwin suffered no damages at all and that

Norwin received the benefit of its bargain at no more than the

contract price. See Ferrer v. Trustees of Univ. of Pennsylvania,

825 A.2d 591, 609 (Pa. 2002) (explaining that damages for

breach of contract are typically measured by the non-breaching

party's expectation interest, the interest—that is—in having the

benefit of its bargain by being put in as good a position as it

would have been in had the contract not been breached). In

rejecting Foreman's request to introduce the Settlement

Agreement as evidence that Norwin would never have to pay a

dime to GAIC, the District Court concluded that "it is not

necessary for Norwin to actually pay the judgment to suffer

'actual damages' or to maintain its damages claim against

Foreman." The District Court based its conclusion on two

Pennsylvania cases, Ammon v. McCloskey, 655 A.2d 549 (Pa.

Super. Ct. 1995), and Gray v. Nationwide Mutual Insurance Co.,

223 A.2d 8 (1966), both of which involved assignees who

stepped into the shoes of assignors to bring suit against third

parties who caused damage—in tort—to the assignors in

amounts determined by juries in contested proceedings. No

such circumstances exist in this case.20

In Gray, the plaintiff brought suit against an insured for
51

personal injuries resulting from an automobile accident. The

insurance company undertook the defense and a jury verdict in

excess of the policy limits was returned in the plaintiff's favor.

After the insurance company paid the policy limits, the plaintiff

demanded the unpaid balance of the judgment from the insured.

The insured then assigned to the plaintiff his right to assert a bad

faith claim against the insurer. The assignment agreement

provided that, regardless of the outcome of a bad faith action,

any obligation of the insured to the plaintiff would be satisfied.

The plaintiff, as assignee, then brought suit against the insurer.

After the trial court dismissed the assignee's bad faith claim

against the insurer, the plaintiff appealed. 

When the Gray case reached the Supreme Court of

Pennsylvania, the first issue addressed was whether the insured

was required to pay the balance due on the judgment as a

prerequisite to a bad faith action against the insurer. In deciding

that no such actual payment was required, the supreme court

explained that, among other things, adoption of a non-payment

rule would 

prevent[] an insurer from benefiting from the

impecuniousness of an insured who has a

meritorious claim but cannot first pay the

judgment imposed upon him. . . . Were payment

the rule, an insurer with an insolvent insured

could unreasonably refuse to settle, for, at worst,

it would only be liable for the amount specified by

the policy. To permit this would be to impair the

usefulness of insurance for the poor man. 

Id. at 10 (internal quotation marks and citation omitted). The

supreme court also noted that "such [non-payment] view

recognizes that the fact of entry of the judgment itself against

the insured constitutes a real damage to him because of the
52

potential harm to his credit rating." Id.

In Ammon, a passenger who was injured in an automobile

accident sued the driver of the vehicle. The driver's lawyer

failed to raise a meritorious defense at trial, and a substantial

judgment—on a jury verdict—was entered against the driver in

favor of the passenger. The driver fired his lawyer, then

retained new counsel who negotiated a settlement between the

driver and the passenger. In exchange for the passenger's

promise not to execute the judgment against the driver, the

driver assigned to the passenger the driver's claim for legal

malpractice against the driver's former lawyer. Relying on

Gray, the Ammon court held that actual payment of the

judgment by the driver was not a prerequisite to the assignee's

legal malpractice claim against the lawyer. The court explained:

"The lawyer occupies no less a fiduciary relationship to the

client than an insurer occupies with respect to its insured, and

the judgment entered against a client constitutes no less a real

damage than the entry of a judgment against an insured." Id. at

553.

We are unpersuaded that the non-payment view adopted

in Gray (and followed in Ammon) applies in this case. In Gray,

the defendant in the original action (the insured) suffered a

litigated judgment, the amount of which resulted, in part, from

the alleged tortious conduct of the defendant in the second

action (the insurance company that defended the original

action). The insured satisfied the judgment by assigning to the

plaintiff the insured's right of action against the insurance

company. Fashioning a rule to fit the circumstances, the

Supreme Court of Pennsylvania would not permit the insurance

company to raise as a defense in the second action the insured's

non-payment of the judgment because, to do so, would reward

the insurance company whose tortious conduct contributed to
 Norwin's "pay-twice" argument was first advanced to 21

the District Court before the Settlement Agreement was

executed. The District Court entered summary judgment months

after the Settlement Agreement was executed, without being

informed that, pursuant to the terms of the Settlement

Agreement, Norwin would never have to pay any monies twice.

At oral argument, this panel pointed out that, by failing to

inform the District Court about the changed circumstances,

Norwin caused the District Court to enter summary judgment

based, in part, on misrepresentations.

53

the harm suffered by the insured. The circumstances in Ammon

were similar. In contrast, the original defendant in this

case—Norwin—agreed to entry of an uncontested judgment, all

the while knowing that it would never have to pay the judgment

from its own pockets. The defendant in the second

action—Foreman—did not participate in or have any knowledge

of the agreement that resulted in the uncontested judgment. The

Gray rule simply does not fit the circumstances here, and the

District Court's reliance on those cases was misplaced. 

In its breach of contract action against Foreman, Norwin

was required to prove that it did not get the benefit of its

bargain. Foreman was entitled to defend by showing otherwise.

That Norwin had no obligation to pay GAIC any monies for the

two school projects was relevant to the issue of Norwin's

damages, and Foreman should have been permitted to introduce

evidence to that effect. The District Court abused its discretion

by ruling to the contrary.

In its motion for summary judgment, Norwin argued to

the District Court that the "[d]amage incurred by the School

District is the amount that it is required to pay twice resulting

from Foreman's failure to obtain consents of surety." In fact, 21

the record is devoid of evidence that Norwin has been, or ever
 Norwin's counsel did not mention that the judgment 22

against Norwin will be satisfied—without Norwin's having to

pay one dime—once Norwin's action against Foreman is

resolved. The effect, if any, on the school's credit rating will be

brief. 

 We note, moreover, that even though Norwin failed to 23

complain about defective and non-conforming work within the

one-year post-completion maintenance bond period, Shoff

nevertheless made the needed repairs—at no cost to Norwin—as

the Settlement Agreement required.

54

will be, under an obligation to pay any amounts twice for its

school projects. At oral argument before this panel, Norwin's

counsel was asked to explain what damages Norwin suffered.

Counsel did not reiterate the "pay twice" argument. She,

instead, responded by saying that there was a judgment against

Norwin that could affect the school's credit rating. She gave 22

no other explanation for Norwin's damages. 

When a District Court has abused its discretion in

admitting, or not admitting, evidence, and has affected a party's

substantial rights in doing so, we ordinarily remand the case to

the District Court for further proceedings. Here, we see no need

for remand. To succeed on its breach-of-contract claim against

Foreman, Norwin was required to prove that it was damaged,

that it did not receive the benefit of its bargain. We have said

that Norwin cannot rely on GAIC's uncontested judgment to

prove that it was damaged by Foreman. For the same reasons,

the effect—if any—of that judgment on Norwin's credit rating

also cannot be attributed to Foreman. In addition, the record

establishes that Norwin has not paid, and will not be required to

pay, anything to GAIC. The record is otherwise devoid of

evidence that Norwin did not get exactly what it bargained

for—two completed school projects at the contract price.23
55

Because the record establishes that Norwin suffered no damages

as a result of Foreman's breach, we think a remand would be

fruitless.

IV. CONCLUSION

The facts in this case are singular, the case history

bizarre. Briefly, Foreman breached its contract with Norwin by

certifying final payment on two construction projects without

obtaining the consent of surety. Such breach left Norwin

exposed to potential damages. The issue of Norwin's damages

was tried before a jury, but the District Court's evidentiary

rulings precluded a fair trial for Foreman. Consequently, the

results of that trial—both the District Court's judgment on

damages as well as the jury's verdict upon which the damages

judgment was based—cannot stand. The record, moreover,

contains no evidence to establish that Norwin was, in fact,

damaged by Foreman's breach. Accordingly, we will vacate the

jury's verdict and the District Court's judgment and will remand

to the District Court with directions to enter judgment in

Foreman's favor.

NYGAARD, Circuit Judge, dissenting

Because the majority’s conclusion collides with the plain

language of the contract, I must dissent. I shall be brief:

In ruling that Norwin did not have any actual damages,

the majority relies heavily upon a settlement agreement between

Norwin and Great American that was properly excluded in an

evidentiary ruling by the District Court because it was not

relevant to the matter between Norwin and Foreman. Moreover,

Great American’s conditional forbearance of its judgment
56

against Norwin did not negate Norwin’s obligation to satisfy the

judgment. The result reached by the majority now allows

Foreman to escape the consequences of its breach, leaving either

Norwin or Great American to suffer the damages. 

Moreover, the majority posits that, even if damages had

been awarded, the amount of damages could not exceed the

“final payment” made by Norwin to the contractor. I think the

majority misinterprets the language of the contract. The contract

required Foreman to obtain the consent of Great American

before releasing the final payment and retainage. The majority

misinterprets the contract to conclude that Great American’s

authority was limited to signing off only on the final payment.

In so doing, the majority misapprehends an important factual

basis for the damages.

Because, in my view, the majority has erred and the

District Court was correct, I must respectfully dissent.