Court Opinion

ID: 1015719
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:37:27.517038+00
Date Added: 2024-06-11T15:12:43.465679
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                             No. 04-1395

MCI CONSTRUCTORS,    INCORPORATED,    a   Delaware
Corporation,

                                                            Plaintiff,

          versus

GREENSBORO, CITY OF, a municipality, organized
under the laws of the State of North Carolina,

                                                 Defendant - Appellee,

          and

HAZEN   AND     SAWYER,   P.C.,   a   New     York
Corporation,

                                                            Defendant,

          versus

NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH,  PENNSYLVANIA, a Pennsylvania
Corporation,

                                  Third Party Defendant - Appellant.

                             No. 04-1729

MCI CONSTRUCTORS,    INCORPORATED,    a   Delaware
Corporation,

                                                Plaintiff - Appellant,

          versus
GREENSBORO, CITY OF, a municipality, organized
under the laws of the State of North Carolina,

                                                  Defendant - Appellee,

           and

HAZEN   AND      SAWYER,   P.C.,   a     New   York
Corporation,

                                                              Defendant,

           versus

NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURGH,  PENNSYLVANIA, a  Pennsylvania
Corporation,

                                                 Third Party Defendant.

Appeals from the United States District Court for the Middle
District of North Carolina, at Greensboro. William L. Osteen,
District Judge. (CA-99-2-1)

Argued:   December 2, 2004                     Decided:   March 15, 2005

Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.

Affirmed in part, reversed and vacated in part, and remanded by
unpublished per curiam opinion.

ARGUED: C. Allen Foster, GREENBERG TRAURIG, L.L.P., Washington,
D.C.; John Michael Gillum, MANIER & HEROD, Nashville, Tennessee,
for Appellants.    George William House, Michael David Meeker,
BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, Greensboro, North
Carolina, for Appellee. ON BRIEF: Eric C. Rowe, David S. Panzer,
GREENBERG TRAURIG, L.L.P., Washington, D.C., for Appellant MCI
Constructors, L.L.C.; Thomas A. Farr, HAYNSWORTH, BALDWIN, JOHNSON
& GREAVES, L.L.C., Cary, North Carolina, for Appellant National
Union Fire Insurance Company.      William P. H. Cary, John M.
DeAngelis,   BROOKS,  PIERCE,   MCLENDON,   HUMPHREY  &   LEONARD,
Greensboro, North Carolina, for Appellee.

                                   -2-
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

                              -3-
PER CURIAM:

          The City of Greensboro, North Carolina entered into a

contract with MCI Constructors, LLC on January 16, 1996, for the

construction of a wastewater treatment plant in Greensboro, for a

cost of roughly $29 million.     Greensboro's City Manager signed the

contract on behalf of the City.      As required by North Carolina law,

MCI obtained a performance bond from National Union Fire Insurance

Company of Pittsburgh, Pennsylvania.            The bond incorporated the

terms of the contract between the City and MCI and guaranteed that

MCI would "well and truly perform" the contract.               The contract

includes Article 16 which provides that Greensboro's City Manager

resolve disputes relating to the performance of the contract and

that the City Manager's decision "shall be final and conclusive"

and "in case any question touching the contract shall arise between

the parties, such . . . decision shall be a condition precedent to

the right of [MCI] to receive any monies under the Contract."

          When    construction      of    the   wastewater     plant    became

substantially delayed, the City terminated the contract, and the

City Manager thereafter acting as "referee" under Article 16 of the

contract, determined that MCI materially breached the contract and

owed the City roughly $13.4 million in damages.

          MCI    commenced   this    action     challenging,    among   other

things, the City Manager's determination. The district court ruled

that the City Manager's determination in favor of the City was

                                    -4-
analogous to the determination of a third party arbitrator, such as

an architect or engineer, and should not be set aside except on a

showing of "fraud, bad faith, or gross mistake."              Because MCI

failed to advance evidence sufficient to prove fraud, bad faith, or

gross mistake, the district court entered summary judgment in favor

of the City.      The district court also entered summary judgment

against the surety, National Union, on its bond.

          On appeal, MCI contends (1) that the district erred in

requiring MCI to submit its claims first to the City Manager; (2)

that the district court erred in applying a standard of "fraud, bad

faith, or gross mistake" to review the City Manager's decision; and

(3) that MCI was denied procedural due process when the City

Manager acted arbitrarily and when the district court subsequently

decided   the     City's   claims   based   on   the   City     Manager's

decisionmaking authority, which in MCI's view amounts to "a taking

of property without any process whatsoever."       Independent of the

issues raised by MCI, National Union contends that the claim

against it on the bond was barred by a one-year contractual-

limitations period or a three-year statute-of-limitations period.

National Union also challenges the judgment against it because it

was not given the opportunity "to perform as surety" and complete

the contract, thereby reducing the damages which were based on

inflated costs.

                                    -5-
            We affirm all the rulings of the district court except

its   application      of   the   "fraud,        bad   faith,    or   gross    mistake"

standard, which it applied to review the decision of the City

Manager.     On    that     issue,    we    reverse     and     remand   for    further

proceedings.      We conclude that since the City Manager signed the

contract for the City and in essence was adjudicating his own

performance, rights, and liabilities under the contract, North

Carolina law requires that the City Manager's performance be

measured by a standard of objective reasonableness "based upon good

faith and fair play" -- a standard that must be read into the

contract    so    as   to   prevent    the       contract     from    being    rendered

illusory.    Accordingly, we affirm in part, reverse and vacate in

part, and remand to the district court for further proceedings

consistent with this opinion.

                                            I

            MCI commenced this diversity action against the City and

the City's engineer, alleging claims for breach of contract, breach

of warranty, quantum meruit, negligent misrepresentation, wrongful

termination, and declaratory relief that the City's termination of

the contract was wrongful.           The City filed a motion to dismiss as

well as a counterclaim for breach of contract.                        It also filed a

third-party claim against National Union on its bond.                     Pursuant to

motions filed by the parties, the court dismissed most of the

claims, concluding that Article 16 of the contract was "broadly

                                           -6-
worded" and required that "all disputes regarding the fulfillment

of the contract by MCI go to the City Manager."

            The parties submitted their claims to the City Manager,

and on April 16, 2002, the City Manager ruled that the City had

properly terminated MCI "for cause" and rejected MCI's claim that

the   termination   was   "for     convenience."     MCI   returned   to    the

district court and moved to vacate the decision for "evident

partiality" under the Federal Arbitration Act and sought to enjoin

further    proceedings    before    the   City   Manager   with   respect    to

damages.    The district court rejected MCI's claims and ruled that

the proceedings before the City Manager were controlled by North

Carolina law, not the Federal Arbitration Act.

            After the City Manager conducted hearings on damages, he

rendered a decision on February 5, 2003, concluding that "MCI

Constructors shall pay to the City of Greensboro the sum of

$13,377,842.73."    On receipt of this decision, MCI filed a second

amended complaint to add claims for fraud, conspiracy, and "fraud

on the court."

            Thereafter on the City's motion for summary judgment, the

district    court   found   that     "there   is   no   legally   sufficient

evidentiary basis for a reasonable jury to find that the City

Manager's decision was influenced by fraud, bad faith, or gross

mistake" and that "MCI [is left] with no further viable claims."

The court also granted the City's motion for summary judgment

                                      -7-
against National Union as surety.       On MCI's Rule 59 motion for a

new trial, MCI renewed its objection to the application of the

fraud standard for reviewing the City Manager's decision and

argued, for the first time, that Article 16 in fact operated as a

"satisfaction clause," which would render the contract illusory and

therefore unenforceable.     The district court denied this motion.

From the district court's final judgment, this appeal followed.

                                  II

             MCI contends first that the district court erred by

"requiring MCI to submit issues to [the City Manager] that the

Contract did not allow [the City Manager] to decide."           As a

consequence, the City Manager allegedly exceeded the authority

conferred on him because, as MCI argues, the contract did not

empower him to decide issues concerning the City's breach of the

contract or the propriety of the City Manager's own conduct; it

only allowed him to render decisions regarding MCI's performance.

             The district court ruled that the language of Article 16

of the contract "is broadly worded" and "requires that all disputes

concerning the fulfillment of the contract by MCI go to the City

Manager."*    Article 16 thus "acts as a condition precedent to MCI's

     *
      Article 16 of the contract provides:

     City Manager to be Referee:

     To prevent disputes and litigations, the City Manager
     shall in all cases, determine the amount, quality, and

                                  -8-
recovery of payment under the contract, but the condition precedent

does not, as MCI argues, act as a limit on the scope of the claims

which must be submitted to the City Manager."

            The City Manager rendered a decision first that the

City's termination of MCI was for the delays in the project and

therefore   was    for   cause.   This   was   plainly   a   determination

concerning "the amount, quality, and acceptability of the work" as

well as "the fulfillment of the Contract on the part of the

Contractor."   Likewise, the City Manger's determination of damages

went directly to the cost of completion, the liquidated damages,

and to the contract itself, which also falls within the scope of

Article 16.       Under Article 16, the City Manager is entitled to

determine "the amount, quality, and acceptability of the work and

materials which are to be paid under the contract."          In view of the

expansive nature of Article 16, the City Manager was properly given

the issues he decided as a condition precedent to further action

and we affirm on this issue.      See, e.g., Rodgers Builders, Inc. v.

     acceptability of the work and materials which are to be
     paid for under the contract; shall determine all
     questions in relation to said work and supplies, and the
     performance thereof; and shall in all cases decide every
     question which may arise relative to the fulfillment of
     the Contract on the part of the Contractor. His estimate
     and decision shall be final and conclusive, and in case
     any question touching the Contract shall arise between
     the parties, such estimate and decision shall be a
     condition precedent to the right of the Contractor to
     receive any monies under the Contract.

                                   -9-
McQueen, 331 S.E.2d 726, 731 (N.C. Ct. App. 1985) (illustrating

that North Carolina courts interpret such clauses broadly).

            In reaching its conclusion, the district court stated

that "the City and MCI are two sophisticated and competent parties

who selected the City Manager to determine issues relating to

payment    for    work   performed   and    other    issues     relating    to    the

fulfillment of the contract. . . .                  The court cannot act in

contravention to the terms of the contract to let MCI out of what

it perceives is a bad deal."         We agree.

                                      III

            MCI next contends that the district court erred in

holding    that    under    North    Carolina       law   the    decision    of    a

contractually designated referee must be upheld in the absence of

a showing of "fraud, bad faith, or gross mistake."               MCI argues that

the City Manager's decision had to be measured under a standard of

reasonableness.      According to MCI, North Carolina law writes into

every contract the implied covenant of good faith and fair dealing.

Moreover, to prevent Article 16 from being illusory -- based on one

party to the contract determining its own benefits and liability --

the City Manager's decisions had to be evaluated under an objective

standard of reasonableness defined by this good faith and fair

dealing.    In sum, MCI asserts that the district court erred in

requiring it to show "fraud, bad faith, or gross mistake" and in

                                      -10-
requiring direct proof of "fraudulent intent" with respect to the

City Manager's decision.

           The district court did indeed rule that "the law in North

Carolina allows MCI to have a court review the City Manager's

decision   for    bad    faith    or    gross   mistake."       Principally,    the

district court relied upon two North Carolina cases in reaching its

determination as to the governing standard. See Elec-Trol, Inc. v.

C.J. Kern Contractors, Inc., 284 S.E.2d 119, 121 (N.C. Ct. App.

1981); Welborn Plumbing & Heating Co. v. Randolph County Bd. of

Educ., 150 S.E.2d 65, 69 (N.C. 1966).

           We agree with MCI that the district court applied an

improper standard under North Carolina law. The cases on which the

district court relied construed contractual provisions in which the

parties to the contract referred disputes to a third party, who was

not a party to the contract.            See Elec-Trol, 284 S.E.2d at 120-21

(illustrating that the third-party referee was an architect);

Welborn,   150    S.E.2d    at    68-69      (same).    These    cases   thus   are

distinguishable from the case at hand where the referee, the City

Manager, was also the one who signed the contract on behalf of the

City and was responsible for seeing to its performance by the City.

           When    one    party    to    a   contract   is   designated    in   the

contract to decide finally the issues about whether the contract

was breached, the contract, without more, becomes illusory, because

the performance of the contract is determined by the party alleging

                                         -11-
that the contract was breached.       On this, Professor Williston

observes:

     Promises to render a performance satisfactory to the
     other party, or to pay for performance if it is
     satisfactory to the promisor, are common in contracts.
     It has been questioned whether an agreement in which the
     promise of one party is conditional on his own or the
     other party's satisfaction contains the element of a
     contract -- whether the agreement is not illusory in
     character because conditioned upon the whim or caprice of
     the party to be satisfied.       Since, however, such a
     promise   is   generally   considered   as  requiring   a
     performance which must be satisfactory to him or her in
     the exercise of honest judgment, such contracts have been
     almost universally upheld.

13 Williston On Contracts § 38:21, at 458-60 (4th ed. 2000)

(footnotes omitted) (citing for this proposition, among other

cases, Fulcher v. Nelson, 159 S.E.2d 519 (N.C. 1968)).

            Given this understanding, the general rule in North

Carolina, where a contract confers on one party a discretionary

power affecting the rights of the other party, is that such a

contract is not illusory so long as its interpretation is exercised

in an objectively reasonable manner based upon good faith and fair

play. See, e.g., Mezzanotte v. Freeland, 200 S.E.2d 410, 414 (N.C.

Ct. App. 1973), cert. denied, 201 S.E.2d 410 (N.C. 1974).        This

rule has been applied generally "[w]here, from the language of the

contract, it is doubtful whether the parties intended that one

party should have the unqualified option to terminate it in case of

dissatisfaction or whether the intention was to give the right to

terminate only in the event of dissatisfaction based upon some

                               -12-
reasonable ground."    Fulcher v. Nelson, 159 S.E.2d 519, 522 (N.C.

1968) (internal quotation marks and citations omitted).         In such a

case, "the contract will be construed as not reposing in one of the

parties the arbitrary or unqualified option to terminate it."        Id.

(internal quotation marks and citations omitted).

           Accordingly, we conclude that the standard to be applied

in this case to review the City Manager's decision is not "fraud,

bad faith, or gross mistake" but rather is an objective standard of

reasonableness based upon good faith and fair play.         We therefore

reverse this ruling, vacate that part of the judgment which depends

on it, and remand this portion of the case to the district court

for further proceedings consistent with this opinion.

                                   IV

           Finally, MCI contends that the way the district court

referred claims to the City Manager and then subsequently decided

those claims based on the City Manager's rulings denied MCI of

procedural due process. MCI argues that the City Manager's actions

made a mockery of the due process guarantee, and therefore the

district court improperly and without notice dismissed all of MCI's

claims   based   solely   upon   the    City   Manager's   decisionmaking

authority.   In essence, the district court concluded that the

issues raised by MCI were covered by the reference to the City

Manager because they related to the fulfillment of the parties'

contractual obligations.

                                  -13-
          We find MCI's claim without merit.     As this court has

stated in another contract case involving a city government, "there

manifestly are no federal constitutional issues posed by a simple

dispute over the construction of a [contract] and that is all there

is to the case."   Heath v. Fairfax, 542 F.2d 1236, 1238 (4th Cir.

1976) (per curiam) (holding that the plaintiffs' claim which was

based on a city's failure to pay them the salary allegedly provided

for by a contract did not rise to the level of a due process

violation).   For there to be a due process violation, the City must

have acted to deprive an individual of life, liberty, or property.

There is no such deprivation here when it is grounded on the

contractual language agreed to by the parties. "The mere fact that

a city is a municipal corporation does not give to its refusal to

perform a contract the character of a law impairing its obligation

or depriving of property without due process of law." McCormick v.

Oklahoma City, 236 U.S. 657, 660 (1915).

          Accordingly, we affirm on this claim by MCI.

                                 V

          National Union independently challenges the district

court's judgment against it alleging that the City's action was not

filed within the one-year limitation period provided for by the

contractual language and, alternatively, that the City's claim was

filed beyond the three-year statute of limitations provided by

North Carolina law. Finally, National Union contends that the City

                                -14-
first and materially breached the bond by precluding National Union

from performing upon MCI's termination and by expending more than

double the uncontroverted evidence of the reasonable cost to

complete.   We address these claims in turn.

                                       A

            Section 5.1.1 of the contract between the City and MCI,

for which National Union provided the performance bond, provides:

     Performance Bond -- in an amount not less than 100% of
     the total amount payable to the Contractor by the terms
     of the Contract as security for the faithful performance
     of the work. Bond must be valid until one year after the
     date of issuance of the Certificate of Substantial
     Completion.

National Union contends that by these terms, the bond was only

valid for one year and therefore that any suit filed on it more

than one year after issuance of the certificate of substantial

completion was barred.     According to National Union, the one-year

period   commenced   on   May    31,   2001,   when   the   Certificate   of

Substantial Completion was issued, and suit was not filed until

March 11, 2003.

            We conclude that National Union misconstrues the import

of the statutory language on which it relies.                The statutory

language does not provide a contractual limitations period within

which to commence suit.         Rather, it describes the period during

which the bond is "valid."       Such a provision, surely, extends the

bond from not only the construction period, but also to the end of

one year after construction.       Thus, if some part of the work fails

                                    -15-
within the one year after completion, the bond would provide

coverage.

            Accordingly, we affirm the district court's ruling in

rejecting this theory.

                                     B

            National Union also contends that the action against it

was barred by the North Carolina statute of limitations contained

in § 1-52 of the North Carolina General Statutes.             Because this

statute begins to run on the date a promise is broken, see Penley

v. Penley, 314 S.E.2d 51, 62 (N.C. 1985), National Union contends

the City's action is barred three years after June 24, 1998, the

date of MCI's termination.

            The City contends that even if National Union is correct

about its dates and about when a cause of action against it may

have accrued, the statute of limitations does not run "against the

king," i.e. the municipality as an agency of the State.              Rowan

County Bd. of Educ. v. United States Gypsum Co., 332 S.E.2d 648,

653 (N.C. 1992).       In general terms, this doctrine permits a

municipality or the State to file an action beyond the time period

prescribed by the State's statute of limitations.

            While National Union recognizes this principle, it argues

that the State and its municipalities are protected under it only

with   respect   to   governmental    functions   and   not    proprietary

functions.    See Rowan County, 418 S.E.2d at 654.       While National

                                 -16-
Union may be correct in that proposition, it cannot demonstrate

that the City's actions in constructing a wastewater treatment

plant were proprietary, as opposed to governmental.       The Rowan

court defined these terms as follows:

     Any activity of the municipality which is discretionary,
     political, legislative, or public in nature and performed
     for the public good in behalf of the State, rather than
     for itself, comes within the class of governmental
     functions. When, however, the activity is commercial or
     chiefly for private advantage of the compact community,
     it is private or proprietary.

Id. at 373 (citation omitted).       It is readily apparent that in

constructing a wastewater treatment plant, the City was promoting

and protecting the health, safety, security, and general welfare of

its citizens in this case.   See Ex rel. State Art Museum Building

Comm'n v. Travelers Indemnity Co., 432 S.E.2d 419, 422 (N.C. Ct.

App. 1993). Accordingly, we agree with the district court that the

City's counterclaim against National Union was not barred by North

Carolina's statute of limitations governing contracts.

                                 C

     Finally, National Union contends that it should not be liable

on the bond because it was not given the opportunity of performing

upon MCI's termination.   National Union argues that effectively it

should have been given the opportunity to find a replacement

contractor.

          This argument, however, ignores the fact that the City

had a specific contractual right by virtue of Article 5, § 15.2.4,

                                -17-
to complete the performance of the work itself, and it exercised

that right.   As a bond is to be read in light of the contract it

secured, see, e.g., RGK, Inc. v. United States Fidelity & Guaranty

Co., 235 S.E.2d 234 (N.C. 1988), the bond had to be read in light

of this contractual provision which authorized the City to "take

possession of the work and . . . finish the work as owner deem[s]

expedient."   Accordingly, we also affirm the district court in

rejecting this argument.

                                VI

          In sum, with respect to the standard applied by the

district court in reviewing the City Manager's decisions on the

contract, we reverse and vacate the judgment insofar as it depends

on application of this standard. In all other respects, we affirm.

                                      AFFIRMED IN PART, REVERSED AND
                                      VACATED IN PART, AND REMANDED

                               -18-