Court Opinion

ID: 9480623
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:53:39.60126+00
Date Added: 2024-06-11T17:47:48.391687
License: Public Domain

COFFEY, Circuit Judge,
dissenting in part.
I dissent from parts I., II.A., and III. because the majority has misconstrued Pennsylvania law,1 but I join with the majority in holding that Nohcra is not entitled to future damages even if AM had breached its contract.
The contract at issue in this case primarily involved digging simple trenches through lawns, laying television cable in them, and then restoring the lawns to their original condition. There is nothing “sophisticated” or complicated about digging and filling these trenches, as portrayed by the majority; rather, the trenches merely required the ordinary, physical energy of day labor construction people, not talented craftsmen of any nature. When Nohcra failed to follow the simple backfilling procedures in the specs (tamping the dirt when backfilling) and thus failed to restore the lawns to their original condition (the vast majority of the trenches settled, and there was a great deal of other damage), AM terminated the contract. Nohcra’s shoddy performance constitutes a material breach of contract releasing AM from its obligation under the contract to pay for the work. But even if Nohcra’s performance were not a material breach, under the proper test of Pennsylvania law, it certainly justified AM’s termination of Nohcra according to the satisfaction condition of the contract.
The majority holds, in effect, that a satisfaction contract in a commercial setting is subject to a standard of “commercial reasonableness.” This misinterpretation of Pennsylvania law would emasculate the doctrine of satisfaction and would prohibit a party from canceling a contract for unsatisfactory performance even when such specific satisfaction language is contained in the contract, as the one before us. An objective “commercial reasonableness” standard is not and never has been the law of the state of Pennsylvania regarding satisfaction contracts; nor does it comport with the agreement between the parties. The issue of whether AM properly terminated its contract with Nohcra turns on the proper application of Pennsylvania law to the terms of the agreement between the parties. When that issue is properly resolved, it is clear that AM’s counterclaim should not have been dismissed.
I. NOHCRA’S BREACH OF CONTRACT CLAIM
The majority agrees with the district judge that AM’s termination of the contract and its refusal to pay Nohcra’s progress payment invoices were breaches of contract. I disagree with the trial court’s and the majority’s interpretation of the contract as its language clearly provides AM with not only the discretion but also the authority to terminate the agreement if AM is not satisfied with Nohcra’s performance. Upon termination, the contract clearly provides that no further payments are due until completion of the work, and any claims for progress payments are to be offset by AM’s expenses in finishing the work. AM therefore was entitled to terminate the contract and to withhold further progress' payments.
A. Termination
Paragraph 17 of the contract between AM and Nohcra specifies and delineates a number of conditions that .constitute just cause for AM to terminate the contract. The relevant condition for our purposes is *1015that Nohcra’s performance must satisfy AM:
“Anything herein to the contrary notwithstanding, all work -performed by Subcontractor shall be to the satisfaction of Purchaser. If Purchaser shall be of the good faith opinion that Subcontractor is not properly performing the work in accordance with the terms of this Subcontract, or is delaying other subcontractors of either Purchaser or Customer, or is not adhering to the Progress Schedule, then Subcontractor, upon written notice from Purchaser, shall be deemed to be in breach of this Subcontract_” (Emphasis added.)
The second sentence of this paragraph clarifies what will justify AM’s termination of the contract if “all work performed by [Nohcra was not] to the satisfaction of [AM]”: If AM were to be “of the good faith opinion that Subcontractor is not properly performing the work in accordance with the terms of th[e] Subcontract,” AM had a legal right to terminate the agreement. As will be seen below, AM had more than adequate reason to have such a good faith opinion.
The Underground Installation Procedures, attached and made a part of the contract as Schedule A, describes what constitutes “good installation techniques.” The first requirement was that the installation crews were to use a sod cutter to remove the sod before digging trenches in order that the sod might be reusable. Plaintiff Exhibit 3, page 3-20. If the soil from a trench contained rocks or other debris that would damage the cable, Noh-cra was obligated to install ‘
“a four inch W) layer of sand ... in[] the trench around the cable as a protection pad prior to backfilling.... The trench line is then tamped to prevent settlement and the five-foot (5') length [sic] of sod previously removed are replaced and tamped. The sod should be provided with adequate water and care until the roots have again become permanent.” Id. at 3-22 (emphasis added).
Uncontroverted evidence established that Nohcra failed to comply with these Underground Installation Procedures as required under the contract. Nohcra neither saw fit to use sod cutters nor to water the sod that it later replaced; a great deal of the sod that Nohcra installed died because it was not “provided with adequate water and care until the roots . again bec[a]me permanent.” The record shows that Noh-cra even failed to supply its crews with tampers for its small trenches and also failed to buy tampers for the large trenches until shortly before or perhaps even after AM terminated the contract. Indeed, Nohcra’s superintendent instructed the workers to tamp the soil with four-by-fours. Furthermore, Nohcra’s superintendent testified that in some cases it was impossible to tamp the soil because the rocks and other rough material in the soil would have ruined the cable — he clearly paid no attention to the contract requirement of protecting the cable with a sand pad if there were rocks that might damage it. Had Nohcra followed the contract specifications (sand pad), tamping would not have caused a problem. Undisputed evidence, however, established that Nohcra’s slipshod procedure of backfilling without properly compacting the soil (and then hauling away the excess soil) resulted in the vast majority of the trenches settling, some of them egregiously.2 This backfill-ing procedure, combined with the failure to use a protective sand pad in rocky soil (thus endangering a break in the television cable), is sufficient to constitute a material breach of the contract. Moreover, it certainly justifies a subjective good faith belief that Nohcra was “not properly performing the work in accordance with the terms of th[e] Subcontract.”
Nevertheless, in his Findings of Fact and Conclusions of Law, May 19, 1988, the district judge somehow concluded that “Noh-cra performed the work it was assigned in a commercially - reasonable and acceptable *1016manner.”3 Findings of Fact ¶ 33. He then concluded as a matter of law that AM’s termination of the contract “was not done in a good faith belief that it had a reason to terminate the Agreement under paragraph 17 of the Agreement.” Conclusions of Law ¶ 3. The majority recognizes that the issue of whether the dissatisfaction was in good faith is a question of fact under Pennsylvania law, and then states that “[tjhere is no objective standard” for determining whether the dissatisfaction of a party is genuine. Majority Opinion, p. 1011. At the same time, the majority somehow accepts the trial judge’s objective conclusion that AM’s termination of the contract was unreasonable because of Noh-cra’s allegedly commercially reasonable performance.
The majority finds persuasive the district court’s finding that AM failed to give Noh-era notice of its dissatisfaction prior to termination. Neither the contract nor Pennsylvania law, however, requires notice of dissatisfaction prior to termination. Thus the issue of whether AM notified Nohcra of its dissatisfaction is irrelevant to the question of whether AM’s dissatisfaction was genuine. But even if such notice were necessary, the record speaks for itself that there was adequate notice, and the district judge’s finding was clearly erroneous. Nohcra’s own exhibits establish that Nohcra was well aware of AM’s dissatisfaction with Nohcra’s production rate. One exhibit is a letter to Nohcra’s owner about three weeks before termination requesting that Nohcra schedule overtime work in order that it might meet its schedule of forty miles a month. The last paragraph of the letter states: “If the production does not increase, AM will subsidize the Underground Construction effort with whatever means are necessary." Plaintiffs exhibit 47 (emphasis added). I emphasize that this was plaintiffs exhibit — I fail to comprehend how the trial judge could find that Nohcra was unaware of AM’s displeasure. In addition, there is a' tremendous amount of documentary evidence demonstrating that Nohcra was receiving constant complaints from Warner Amex, the cable television franchisee about homeowner complaints: Nohcra left a pile of dirt on a manhole cover and ruined a fence at one home (AM exhibit 27); Nohcra ran a power trencher beside a tree and cut some of its main roots (AM exhibit 37); Nohcra backfilled a trench so poorly that when the owner stepped on it after a rain, he sank two feet — after repeated efforts to get Nohcra to fix the trench, the owners bought topsoil from K MART and fixed it themselves (AM exhibit 58); a seventy-seven-year-old woman repaired some landscaping herself, and she complained that Noh-cra used grass seed rather than sod in restoring her lawn (AM exhibit 62); Nohcra “ripped-up” a five inch drain tile in a lawn and had not yet repaired it a week later (AM exhibit 66); a homeowner was so irate with Nohcra’s poor restoration that he was threatening to “chop up” the television cable (AM exhibit 71); and so forth. Furthermore, the photographs in the record (AM exhibits 55,145-154) show completely unacceptable work — mounds of dirt on top of trenches, soil eroded by rain, sunken trenches, torn-up lawns, and damaged trees. These pictures alone are more than sufficient to establish that Nohcra should have been on constructive notice that its work was not just unsatisfactory but unacceptable. Thus Nohcra had more than adequate notice that AM was dissatisfied with its performance.
The district court failed to make a finding in the record regarding the question of whether AM was in fact genuinely dissatisfied with Nohcra’s performance. Rather than focusing on the genuineness of AM’s dissatisfaction, the trial judge’s findings indicate that he applied an objective “commercial reasonableness” standard to AM’s dissatisfaction with Nohcra’s performance. To the contrary, the Pennsylvania law of satisfaction contracts applies a subjective standard to a party’s dissatisfaction, thus such an objective consideration *1017of whether Nohcra met the requirements of the contract is erroneous; the only relevant issue is whether AM was genuinely dissatisfied with Nohcra’s work. Because the majority in its misapplication of Pennsylvania law has compounded the district court’s error, a brief overview of the Pennsylvania law on satisfaction contracts is necessary.
Jenkins Towel Service, Inc. v. Tidewater Oil Co., 422 Pa. 601, 223 A.2d 84 (1966), is the leading Pennsylvania case on satisfaction contracts. Jenkins Towel Service [hereinafter Jenkins] contracted to sell Tidewater Oil Company [hereinafter Tidewater] a piece of property for a service station. The contract required permits for cuts in the curb to allow access into the service station from, the street. The city refused to issue permits for curb cuts as large as those required under the contract, and Jenkins subsequently offered an alternative plan to Tidewater. Because the alternative plan failed to meet the requirements of the contract, Tidewater terminated the agreement. The court implied a satisfaction contract from the requirement in the contract that Jenkins obtain permits as required by Tidewater. In considering Tidewater’s dissatisfaction, the court said:
“Such [satisfaction] contracts are not strangers to the law of Pennsylvania and have been considered by us on numerous previous occasions. We have consistently held that where a contract provides for performance by one party to the satisfaction of the other, ‘the test of adequate performance is not whether the person for whom the service was rendered ought to be satisfied, but whether he is satisfied, there being, however, this limitation, that any dissatisfaction on his part must be genuine and not prompted by caprice or bad faith.’ (Emphasis in Orgl.) Kramer v. Phila. Leather Goods Corp., 364 Pa. 531, 73 A.2d 385 (1950); Burke v. Daus. of Holy Redeemer, 344 Pa. 579, 26 A.2d 460 (1942); Singerly v. Thayer, 108 Pa. 291, 2 A. 230 (1885).” (Emphasis added.)
422 Pa. at 606, 223 A.2d at 86. The trial court had found that Tidewater’s termination of the contract “was not made in bad faith, was not capricious and was not motivated by dissatisfaction with any provision of the contract” but was motivated only by Jenkins’ failure to perform as required. Id. As in Jenkins, the issue in the instant case “is not whether [AM] ought to be satisfied, but whether [AM] is satisfied.” Id. (Quoting Kramer v. Phila. Leather Goods Corp., 364 Pa. 531, 73 A.2d 385 (1950)) (emphasis in original); AM’s dissatisfaction was with Nohcra’s failure to perform in accordance with the clear and unambiguous terms of their contract, not with the language of the contract itself.
The majority of cases following Jenkins, both state and federal, have-found that a party who terminated a satisfaction contract did so with sincere dissatisfaction. Aster v. BP Oil Corp., 412 F.Supp. 179 (M.D.Pa.1976), aff'd, 549 F.2d 794 (3d Cir.1977) (seller of land failed to provide satisfactory sewage system as required by sales contract); Canonsburg Supply & Equipment Co. v. John Deere Industrial Equipment Co., 388 F.Supp. 135 (W.D.Pa.1975) (retail dealer’s performance failed to satisfy John Deere); Marine Transport Lines, Inc. v. Publicker International, Inc., 303 F.Supp. 423 (E.D.Pa.1969) (the cleanliness of tanks in a ship failed to satisfy charterer’s inspector). Indeed, I have found only one Pennsylvania case dealing with satisfaction contracts in which a party’s dissatisfaction was held to be in bad faith. In the following case, Commonwealth of Pennsylvania, Department of Property and Supplies v. Berger, 11 Pa.Cmwlth. 332, 312 A.2d 100 (1973), the dissatisfied party deliberately brought about an unsatisfactory situation in an unsuccessful attempt to break a lease.
In Commonwealth of Pennsylvania, Department of Property and Supplies v. Berger, 11 Pa.Cmwlth. 332, 312 A.2d 100 (1973), the Pennsylvania Department of Public Welfare (DPW)4 agreed to lease two floors of a high-rise apartment building *1018from the Bergers (the owners of the building) for office space. The DPW knew it could not use the space if constructed as planned, but the lease agreement provided for revisions at the lessor’s expense (upon DPW’s approval). Shortly after the lease was signed, a new secretary was appointed to head up the DPW. Not wanting the leased premises, he decided to try to break the lease by waiting until construction was complete and then making unreasonable demands for revisions. Thus when the Bergers submitted revised plans to DPW and repeatedly sought approval, the DPW gave no response. When the Bergers could wait no longer and still complete the construction within the time limits of the contract, they completed the two floors as originally planned and notified DPW that the premises were ready for occupancy. At this time the Commonwealth requested that the two floors be gutted and the newly installed walls, kitchens, and bathrooms, including the plumbing, be removed. The Commonwealth then attempted to terminate the lease because the Bergers refused to rebuild the finished apartments. The Bergers subsequently filed a breach-of-contract claim with the Board of Arbitration of Claims,5 which awarded damages to the Bergers. The Commonwealth appealed to the Commonwealth Court of Pennsylvania.
Under the lease agreement, no rent was due until construction was completed to the satisfaction of DPW. Thus on appeal, DPW argued that it owed no rent because the premises were never completed to its satisfaction. The court found to the contrary that
“DPW knew that the floors involved were designed for apartment use, that they were being so constructed and that some changes and alterations were to be made so that they would be usable by the DPW. In fact, a plan for such alterations was drawn up but never submitted to the Bergers. The DPW decided instead to break the lease and sought to accomplish this result by preparing new plans as if only the shell of the building was involved, completely ignoring apartment walls, kitchens, bathrooms and closets.”
312 A.2d at 105. The court concluded that the Commonwealth’s dissatisfaction was not in good faith because its motive was improper; the DPW’s dissatisfaction was contrived.
Berger is a clear example of the kind of egregious conduct required under Pennsylvania law to find that a party’s dissatisfaction is in bad faith. For AM’s conduct to be as egregious as the Commonwealth’s, AM would have had to cause Nohcra’s malfeasance deliberately. As indicated above, however, the record clearly establishes that Nohcra’s failure to comply with the contract specs was deliberate. Thus AM did not bring about the unsatisfactory situation.
The most recent Pennsylvania case to construe satisfaction contracts is Stern v. Vic Snyder, Inc., 325 Pa.Super. 423, 473 A.2d 139 (1984). Stern bad entered an employment contract with Vic Snyder, Inc. that allowed for termination if the corporation became dissatisfied with Stern’s performance. At trial, the judge instructed the jury to determine first whether Vic Snyder, Inc. was in fact dissatisfied, and if so, whether that dissatisfaction gave them a right to terminate the contract. The appellate court found the instruction to be in error because “[t]he jurors were not instructed to determine whether the dissatisfaction was sincere or genuine.” The court ordered a new trial.6
The trial judge’s treatment of AM’s good faith is analogous to the erroneous jury *1019instruction in Stern because as fact finder, he is guilty of applying the wrong standard to the evidence. Indeed, the trial judge’s approach to the issue was more erroneous in that the judge failed to decide whether AM was in fact dissatisfied, let alone whether the dissatisfaction was subjectively sincere rather than contrived.
The legal theory of the above cases is that Pennsylvania law allows for the termination of satisfaction contracts unless it can be demonstrated that the dissatisfied party has an improper motivation. In the instant case, Nohcra failed to present one scintilla of evidence demonstrating improper motivation on the part of AM much less submit any plausible theory of an improper motivation;7 in fact, the record sets forth an abundance of evidence (failure to use sod cutters, failure to water sod, crevices in improperly filled trenches, failure to tamp soil, failure to protect cable with a sand pad, and so forth) that should be construed to provide a valid motivation.
In light of the foregoing, this issue should be remanded to the district court for a determination of whether AM’s dissatisfaction was in fact genuine. Because Noh-cra failed to establish this key element of an improper motivation, the record speaks most eloquently in reciting that AM did not breach the contract. In order to find that AM’s dissatisfaction was prompted by bad faith, convincing evidence must clearly demonstrate an improper motivation.
B. Withholding of Progress Payments
Clear and unambiguous language in the contract authorizes AM to withhold progress payments upon termination of the contract:
“In the event of termination as provided in ‘B’ above, Purchaser ... may finish the work by any method that Purchaser deems expedient. In such case, Subcontractor shall not be entitled to further payment until the completion of the work. If such expense shall exceed any unpaid balance of the Contract price, Subcontractor shall pay the difference to Purchaser.”
Paragraph 17 (Emphasis added). This provision justifies AM’s withholding 'further progress payments until the project was certified as completed to their' satisfaction. And if AM incurred expenses in finishing work billed by Nohcra, AM is entitled to offset its expenses. The majority ignores this provision of the contract, however, and, in effect, rewrites the contract to require full payment of any claims at the time of termination and to delete the contract requirement of final approval before final payment. Their justification for this reformation appears to be the trial judge’s finding that Nohcra’s failure to meet the contract rate of production (forty miles per month) and to build a workable system was due to circumstances beyond its control— circumstances such as problems in locating other underground utilities (gas, telephone, electric, and water).
The majority’s apparent justification for redrafting the contract ignores the fact that Nohcra had represented itself as an expert in handling the location of underground utilities in the area. Moreover, Nohcra’s representation in paragraph 9 of the contract is an express assumption of the risk of pre-existing problems such as difficulties in locating underground utility lines:
“Subcontractor represents that it has made (prior to the execution hereof) a careful examination of the nature and location of the work, the general and local conditions prevailing at the construction site, has discovered all other matters which may in any way affect the work, and waives any right to make any claims for loss or damage or use the same as an excuse for its non-performance.” (Emphasis added.)
Nohcra’s representation and waiver precludes it from raising a foreseeable problem “which may in any way affect the work ... as an excuse for its non-performance.” Nohcra should have been in the best position to foresee its problems with underground utility locations because it knew the area and represented that it had experience in working with the utility com*1020panies. Thus, the adverse conditions that impress the majority fail to excuse Noh-cra’s performance or to justify a reformation of the contract. Consequently, neither terminating the contract nor withholding the progress payments put AM in breach of the contract, and Nohcra has no damages under either cause of action.
II. NOHCRA’S DAMAGES FOR WORK PERFORMED
Paragraph 4 of the contract, entitled PROGRESS PAYMENTS, provides for periodic payments during the course of the contract:
“A. Not more frequently than weekly, Subcontractor may submit to Purchaser, for initial approval, a work report on Purchaser’s forms, setting forth the amount of units completed during the period covered together with all necessary supporting documentation. Upon initial approval, Subcontractor can invoice for said work which Purchaser shall pay within thirty (30) days after receipt, ninety (90%) percent of the amount invoiced.
B. Final payment of all monies due Subcontractor hereunder shall be made within sixty (60) days after completion and final acceptance of the work by the Field Supervisor of Purchaser evidenced by a final certification(Emphasis added.)
This language clearly indicates that AM’s supervisor’s signature on work reports certifies AM’s initial approval only, thus allowing Nohcra to claim a progress payment for the amount of work reflected on the work progress report. Paragraph 18, FINAL INSPECTION, ACCEPTANCE, AND PAYMENT, provides that “[t]he amount due to Subcontractor as the final payment shall not be made until final inspection and acceptance of the work by [Warner Amex] and [AM].... After final inspection and approval of the work by [Warner Amex] and [AM], final payment shall be made by [AM] to Subcontractor for that portion of the system inspected and accepted.” Paragraph 21 also indicates an expectation of a “final acceptance” in the requirement that Nohcra carry insurance on all aspects of its work until “final acceptance of the work.” The cited language clearly demonstrates that the invoices for progress payments did not entitle Nohcra to full payment of the contract price until final acceptance.
■ Notwithstanding the contract language, the trial judge improperly awarded Nohcra $172,123.62 as if the work performed before AM’s termination of the contract were certified as completed. He based this award on Nohcra’s exhibit 1, which consisted of weekly work progress reports summarizing the work performed each week and invoices that merely reflected the contract price of the work reported to justify partial payments. The judge concluded that because AM’s supervisors signed some of these work reports, they “were approved by AM and constitute admissions on its part that the work was performed according to the contract and that Nohcra was entitled to payment.” Memorandum Opinion and Order at 2, 1989 WL 44364 (Apr. 24, 1989).
Even if I were to agree with the majority that Nohcra is entitled to compensation for the work performed, the trial judge’s broad, overly expansive use of Nohcra’s Exhibit 1 is erroneous as a matter of law in light of the clear and unambiguous language of the contract. Nohcra has never alleged that it has obtained final inspection and approval of its work. Thus, even if we were to agree with the trial judge’s findings, which we do not, only ninety percent of the invoices is owed to ¡Nohcra, and that amount must be offset by AM’s cost in repairing and restoring Nohcra’s work up to specs.
III. AM’S COUNTERCLAIM
Uncontroverted evidence established that Nohcra failed to obtain the proper equipment necessary for backfilling trenches according to the specs, and as a result thereof, most of the trenches settled (some as much as two feet (24") in depth). Whether that generated “an excessive number of homeowner complaints,” or whether Noh-cra’s work was commercially reasonable, is irrelevant to the issue of whether AM suffered loss in repairing and replacing Noh-cra’s work. Paragraph 14(A) of the contract was a guarantee by Nohcra that its *1021work would remain in conformance with the requirements of the contract for a period of one year, and that Nohcra would reimburse AM if AM incurred expenses because of defects. Because the trial judge erroneously dismissed AM’s counterclaim for restitution, AM was not allowed to demonstrate its actual expenses from repairing and replacing Nohcra’s work. AM’s counterclaim for restitution should be reinstated, and at the new trial, AM should be allowed to establish damages in accordance with paragraph 14(A) of the contract.
CONCLUSION
I would vacate the decision of the district court and remand for a new trial because of the trial judge’s misapplication of Pennsylvania law. At the new trial, the judge must apply Pennsylvania law to determine whether AM’s dissatisfaction was in fact genuine, whether AM in fact owes Nohcra ninety percent of the progress payment invoices, whether and in what amount AM incurred damages as a result of repairing and replacing Nohcra’s defective work, and whether AM is entitled to damages under its counterclaim. I respectfully dissent.

. As the majority recognize, Pennsylvania law controls the breach of contract claim in accord-anee with the parties’ choice of law under the contract.

. The assertion in Nohcra’s brief that “Nohcra would have had no incentive to [haul away the dirt] because it is in fact much harder to haul excess material away than it is to tamp it back into the hole” fails to contradict the testimony that Nohcra in fact did haul the dirt away.

. The record does not indicate the extent of AM’s expenses in re-constructing and backfilling Nohcra’s trenches because the trial court dismissed AM’s counterclaim and did not permit AM to establish its damages.

. The Department of Property and Supplies acted for DPW after the initial negotiations for the lease.

. The opinion does not indicate why the Bergers filed their claim with the Board of Arbitration of Claims rather than in court, but I assume Pennsylvania law requires filing claims against the Commonwealth as administrative claims before that tribunal.

. This case was resolved in In re Vic Snyder, Inc., 50 B.R. 631 (E.D.Pa.1985), a bankruptcy proceeding. The issue turned on conflicting testimony about the motive in terminating Stern. While the court did not accept Vic Snyder, Inc.'s rationale for termination as valid, it recognized that the corporation was genuinely dissatisfied. The court did not need to "inquire into the reasonableness of the dissatisfaction." Id. at 636.

. Nohcra failed to allege an improper motive in its pleadings, and it raised a "scapegoat" theory for the first time at oral argument (it claimed that AM terminated Nohcra to assuage Warner Amex’s dissatisfaction with AM). Nohcra waived this theory by not raising it at trial.