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T. Ferguson Construction, Inc. v. Seaalaska Corp. (11/15/91), 820 P 2d 1058
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
T. FERGUSON CONSTRUCTION, )
INC., )
) Supreme Court No. S-3648
Appellant, ) Superior Court No.
) 1JU-89-521 Civil
)
v. ) O P I N I O N
)
SEALASKA CORPORATION, )
) [No. 3772 - November 15, 1991]
Appellee. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, First Judicial District,
Juneau, Thomas E. Schulz, Judge.
Appearances: Clifford H. Smith, Mary E.
Guss, Law Offices of Clifford H. Smith,
Ketchikan, for Appellant. Patrick B.
Gilmore, Atkinson, Conway & Gagnon,
Anchorage, for Appellee.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, Compton and Moore, Justices.
BURKE, Justice.
MATTHEWS, Justice, with whom RABINOWITZ,
Chief Justice, joins, dissenting.
This is an appeal from a decision of the superior court
after a bench trial. The court determined that Sealaska
Corporation was justified in withholding a progress payment
due to T. Ferguson Construction Company under two related
construction contracts and awarded damages to Sealaska.
Ferguson appeals. We affirm.
I
The facts of this case are largely undisputed. In late
April 1988, T. Ferguson Construction, Inc. (Ferguson) entered
into three road construction contracts with Sealaska
Corporation. The contracts involved construction and
rehabilitation of logging roads at Tolstoi Bay, Copper
Mountain, and Cabin Creek, three sites on Sealaska land
located on the west side of Prince of Wales Island. In
addition to the roads, the Tolstoi and Cabin Creek contracts
called for construction of "sort yards,"which are used for
the stacking and storage of cut timber. The contracts
emphasized that time was of the essence and established a
completion date of September 15, with a default date of
September 25.
Because Sealaska did not have the permits required to begin
the work at Tolstoi, it directed Ferguson to begin with the
Copper Mountain and Cabin Creek projects first. The jobs
almost immediately fell behind schedule, largely because
Ferguson had inadequate equipment for the projects and
inadequate financial resources to mobilize for the operation.
A dispute also arose as to whether Sealaska was required to
pay per unit of road completed1 or based on Ferguson's bid
schedule.2 Despite the dispute, Sealaska consistently made
"measure-ups" on the twenty-fifth of each month and made
payment based on these measure-ups by the tenth of the
following month.3
In September 1988, the parties entered into an "Agreement
for Termination and Modification of Construction Contracts."
This agreement, effective September 20, terminated the Tolstoi
contract. It also modified the Cabin Creek and Copper
Mountain contracts in several ways. First, as held by the
superior court, "Ferguson, by necessary implication,
acknowledged the correctness of Sealaska's contract
interpretation and method of payment."4 The parties also
agreed that through August 25, Ferguson had earned $205,344.42
on the Cabin Creek contract, but had been paid $278,949.65.
On the Copper Mountain contract Ferguson had earned
$52,992.72, but had been paid $78,530.92. Thus, this new
accord reflected both parties' agreement that Sealaska had
paid Ferguson $99,143.43 more than it was owed. The agreement
specified that $60,000 of that overpayment was an advance made
by Sealaska on September 6 to allow Ferguson to buy three dump
trucks. The rest of the excess apparently arose from
overpayments made by Sealaska intended to alleviate Ferguson's
cash flow problems.
The modification established a new completion date of
November 15 and default date of November 25. Sealaska also
agreed to advance Ferguson another $50,000 in cash. The
agreement specified that the $110,000 from the truck loan and
the cash advance would be paid in equal installments out of
funds due to Ferguson on October 10, November 10, and December
10.5
This modification proved to be short-lived. On October 10,
Thorne Ferguson, Sr., called Sealaska's project manager, Jack
Coady, to inquire whether the September payment had been
mailed and how much it was. Coady indicated that the check
was in the mail and that the amount was $52,000. There was
apparently a dispute over how much was actually due. Although
Coady claimed that Mr. Ferguson then told him that Ferguson
could not or would not continue performing, the court found
that Mr. Ferguson did not make any such statement.
The next day Coady and Sealaska's chief engineer, Andy
Mendenhall, flew over the work sites to see if work was
continuing; they observed virtually no activity at either
location. As it turned out, the check had not been mailed out
due to the Columbus Day holiday. Sealaska decided on the
evening of October 11 to withhold the check and so informed
Mr. Ferguson. No work was done on either project after
October 11. The issue at trial was whether Sealaska breached
its contracts with Ferguson by withholding the payment or
whether such withholding was justified.
A bench trial was held in Juneau in July 1989. In a
Memorandum Decision issued August 15, 1989, the superior court
found in favor of Sealaska and assessed damages at $57,449.70
plus interest, costs, and fees.6 Although the court found
that Mr. Ferguson had not told Coady his company was ceasing
performance, it did find that withholding the payment was
justified based on a number of facts known to Sealaska at the
time:
Sealaska knew that the equipment
Ferguson had available was too light for the
work, that there was not enough of it, that
most of the equipment available at either
site was not operable and that very little
progress had been made during the last pay
period so that the work remained behind even
the new schedule. That Ferguson lacked the
necessary resources was not the fault of
Sealaska. Sealaska had already advanced
substantial funds to Ferguson over and above
what Ferguson had earned. Sealaska was under
no obligation to advance further funds,
particularly when it appeared that even with
further advances, Ferguson would probably not
be able to meet the new completion date
agreed to by the parties in the termination
and modification agreement.
The court, therefore, concludes
that Sealaska did not breach the contract
when the October 10, 1988, progress payment
was withheld, but that Ferguson was in breach
of the contract by failing to perform the
work in a timely manner due to a lack of
equipment suitable for the work.
The superior court denied Ferguson's motion for reconsideration,
and this appeal followed.
II
Ferguson appeals and argues that the superior court erred as
a matter of law in finding that Ferguson, rather than
Sealaska, breached the contract.7 The first part of this
discussion thus considers whether Sealaska was justified in
withholding payment in light of the factual determinations of
the superior court. Although Ferguson is at great pains to
characterize the question as one of law, the thrust of its
argument is really that the superior court's factual finding
that Ferguson could not perform was in error. The second part
of this discussion thus considers whether the superior court
clearly erred in its factual determination that Ferguson could
not perform its obligations.
A
Although Sealaska primarily argued that Mr. Ferguson's
repudiation of the contract to Coady justified its withholding
of the payment, the superior court found that Mr. Ferguson did
not repudiate the contract in that phone conversation. The
court went on to hold, however, that "[u]ltimately, it is not
necessary to determine the factual issues of who said what as
between Mr. Coady and Mr. Ferguson on October 8, 9, and 10,
1988, because the issue is whether Sealaska was justified in
withholding the October payment, based on the information then
available to it." The court then found that Sealaska knew
that Ferguson did not have the right equipment to perform its
obligations, that Ferguson did not have enough equipment, that
most of what equipment Ferguson did have was broken, and that
Ferguson's slow progress in the period shortly before Sealaska
withheld the payment put the project behind even the new
schedule agreed to less than three weeks before. The superior
court's factual findings were thus that Ferguson could not
finish the job and that Sealaska knew it.
We have held that "[t]he right to withhold progress payments
is limited to circumstances which clearly warrant it." Arctic
Contractors, Inc. v. State, 564 P.2d 30, 43 (Alaska 1977). We
cited Professor Corbin's explanation of the rationale of this
rule, which concluded:
[A] building contract is a credit
transaction. The builder is risking his
labor and materials on the promise of the
other party to pay an agreed price therefor
in specified instalments. The amount of his
investment, the extent of the credit that
must be given, and the amount of risk
involved are all increased if performance
must go on after a payment has failed.
Id. (quoting 3A A. Corbin, Corbin on Contracts 692, at 271
(1960)).
As Professor Corbin said just prior to the quoted passage,
however, "circumstances alter cases." 3A A. Corbin, Corbin on
Contracts 692, at 271 (1960). The circumstances in this
case are the inverse of the normal situation. Here, the
creditor is the owner rather than the builder. Sealaska
risked a substantial amount of cash on the promise of Ferguson
to finish the Copper Mountain and Cabin Creek projects in a
timely manner. As of its decision to withhold the October
payment of $52,000, Sealaska knew (according to the superior
court) that Ferguson would not be able to discharge its debt
to Sealaska through completion of the project. This
circumstance is, therefore, one which clearly warrants
withholding the payment, for to make the payment would be to
throw good money after bad. See United States v. Buffalo Coal
Mining Co., 343 F.2d 561, 565 (9th Cir. 1965) ("The law does
not require a useless act, particularly where, as here, it
would only enhance the actor's loss.").8
The Restatement (Second) of Contracts notes that
[a]n obligee who believes, for whatever
reason, that the obligor will not or cannot
perform without a breach, is always free to
act on that belief. . . . If he can prove
that his belief would have been confirmed, he
is at least shielded from liability even if
he has failed to give a performance that is
due before that of the obligor or has, by
making alternative arrangements, done an act
that amounts to a repudiation.
Restatement (Second) of Contracts 251 comment b (1981). The
rationale behind this rule is that no plaintiff can collect
damages in an action for breach of contract without first
showing his own willingness and ability to perform. Id. at
254.9
In this case, Sealaska believed that Ferguson would not be
able to perform and acted on that belief. Sealaska
subsequently proved to the court that its belief was correct.10
As a matter of law, the superior court was thus correct in
finding no breach on Sealaska's part, given the factual
holding that Ferguson could not have performed even if payment
had been forthcoming. Without challenging the superior
court's factual determination that it was incapable of
performing or of discharging its sizable debt to Sealaska,
Ferguson cannot tenably argue that Sealaska had a duty to give
it yet another large infusion of cash.11
B
This court will not disturb the trial court's factual
findings unless those findings are clearly erroneous.
Oaksmith v. Brusich, 774 P.2d 191, 195 (Alaska 1989). In
seeking to avoid this deferential standard of review, Ferguson
maintains that it does not disagree with the trial court's
findings of fact:
The appellant agrees with the court's
factual determination that "Ferguson did not
tell Coady or Loescher that it was abandoning
or terminating that contract." It disagrees
with the court's conclusion that Sealaska was
under no legal obligation to pay any contract
sums to Ferguson on October 10. It is the
court's legal conclusion which is incorrect .
. . .
Appellant's Reply Brief at 2. That protestation notwithstanding,
its argument is really factual in nature, concerning whether
Sealaska possessed the knowledge ascribed to it by the trial
judge: "The evidence in the present case is all to the
contrary [as to whether Sealaska was justified in withholding
payment]." Ferguson likewise contends that the trial judge's
finding that it could not perform "flies . . . in the face of
the evidence at trial." Although Ferguson does
not cite to any evidence in the record that it could perform,
it notes that the parties agreed as of September 20, when they
signed the modification agreement and Sealaska advanced
another $50,000, that Ferguson was in compliance with the
contracts. Ferguson argues that nothing occurred between
September 20 and mid-October to change that situation. In
fact, substantial evidence was presented to the trial judge to
allow him to conclude that Sealaska believed Ferguson's
ability to perform had deteriorated in the three weeks after
the signing of the modification agreement, or at least had not
improved to the extent contemplated when Sealaska signed the
modification. Our review of the entire record does not reveal
any evidence that would engender "a firm and definite
conviction . . . that a mistake has been made." Martens v.
Metzgar, 591 P.2d 541, 544 (Alaska 1979); Alaska R. Civ. P.
52(a).
The trial court heard evidence that on or about September
25, five days after signing the modification agreement,
Sealaska learned that Ferguson's backhoe had broken down and
needed to be shipped out for repairs. Without the backhoe,
according to Sealaska's chief engineer, "there was going to be
a major problem maintaining any production at all with Cabin
Creek." Yet, according to the chief engineer, the backhoe
still had not been shipped out for repairs by the time
operations were halted on October 11.
Although the modification agreement contemplated that
Ferguson would acquire three dump trucks with the September 6
loan of $60,000, Sealaska learned subsequently that Ferguson
only acquired two trucks, both of which quickly broke down.
The result was that "[p]rogress never increased any
appreciable amount that was contemplated under the
modification agreement. And, in fact, for the rest of the
time that Ferguson worked at Cabin Creek, he essentially still
had one operable dump truck governing the speed of the
operation, which resulted in no improvement in efficiency."
The court also heard testimony that by the time the payment
would have been late--October 15--Sealaska knew as well that
Ferguson's compressor was broken, that its employees had left
the job site, and that Ferguson had allowed two $15,000
performance bonds, required by the contract, to lapse.
All of these facts, known to Sealaska, were largely
undisputed. Sealaska's project manager testified that in his
opinion Ferguson would never have finished the job with the
money remaining under the contract. Without denying the
problems that arose subsequent to the September 20 agreement,
Thorne Ferguson, Sr., testified that he could have finished
the job, but it would have been "tight." Ferguson's expert
witness also testified that Ferguson could have finished.
But, both Ferguson and his expert based their views on changes
in the operation that Ferguson was about to make when work was
halted.
As the expert testified,
[I]nstead of trying to operate two
spreads that were only 70 or 80 percent
complete, [Ferguson's] game plan was to
consolidate those spreads. So they would
have had some spares. He would have more
availability and better efficiency. And so
this estimate is based upon those
improvements in the operation. And, of
course, the day of the famous fly over
[October 11], he was actually kind of making
some progress toward that, because instead of
trying to limp along with equipment that
didn't work, he was fixing his equipment.
This new game plan came, however, more than five months into a
project that Ferguson had originally estimated would take
about two months, and almost three weeks after the
modification agreement, which only extended the completion
date by eight weeks. The superior court thus had ample reason
to conclude that Ferguson would not have been able to complete
the contract.
AFFIRMED.
MATTHEWS, Justice, with whom RABINOWITZ, Chief Justice,
joins, dissenting.
Under our case law, progress payments can be withheld
only when clearly warranted by the circumstances. Arctic
Contractors, Inc. v. State, 564 P.2d 30, 43 (Alaska 1977). The
parties modified their contract on September 20, 1988. A little
more than three weeks later Sealaska decided to withhold a
payment which it had promised to make under the agreement as
modified. The trial court found that this was justified
based on the information then available
to [Sealaska]. Sealaska knew that the
equipment Ferguson had available was too
light for the work, that there was not enough
of it, that most of the equipment available
at either site was not operable and that very
little progress had been made during the last
pay period so that the work remained behind
even the new schedule.
None of these reasons were the reasons given by
Sealaska's decision maker, Loescher, for withholding the payment.12
Importantly, Loescher indicated that the late September measure-
up monitoring Ferguson Construction's progress "seemed to go
okay." Withholding of progress payments is justified only if the
withholding party actually relies on the circumstances which
clearly warrant that action. United States v. Heyward-Robinson
Co., 430 F.2d 1077, 1085-86 (2d Cir. 1970). (In that case, the
appeals court upheld an instruction requiring that the jury find
the prime contractor actually relied on the reason which the
court found justified withholding payment.). I conclude,
therefore, that the findings made by the trial court do not
support its conclusion that the withholding of the payment by
Sealaska was justified. Accordingly, I would reverse the
judgment.
_______________________________
1.Such payment would be based on "measure-ups": Sealaska
measured the linear distance of completed road, multiplied
that by the contract rate, then deducted for any deficiencies
in performance to arrive at a payment figure. The contract
rate for both the Cabin Creek and Copper Mountain contracts
was about $135,000 per mile.
2.This method would be based on payment for each
component of the work, rather than length of road completed.
3.Both contracts specified that "Sealaska shall make best
efforts to pay Contractor on the tenth (10th) day of each
month. Payment shall be considered late if received after the
fifteenth (15th) day of the month."
4.Concerning payments, the agreement said:
Contractor agrees that the measure-up
date for determining the amount of work
satisfactorily completed is on or about the
25th day of each month, with payment for
satisfactory work completed to be made on or
about the 10th day of the following month, as
set forth in said contracts.
5.It is not clear what, if any, provision was made
concerning the overpayments Sealaska had made. Apparently,
the overpayments were for work completed by Ferguson but not
yet compensable under Sealaska's measure-up procedure. Thus,
they may have been taken into account in calculating amounts
owed after subsequent measure-ups.
6.The sum came from $57,001.98 that Sealaska had paid to
Ferguson in excess of the amount earned, plus $447.72 over the
contract price required to complete the projects.
7.Our review of questions of law is de novo. Langdon v.
Champion, 745 P.2d 1371, 1372 n.2 (Alaska 1987).
8.Cf. Mayer v. Alexander & Baldwin, Inc., 532 P.2d 1007,
1009 (Haw. 1975) ("When time is of the essence or a delay has
become so serious as to justify discharge of the contractor,
an owner may assume control of the work, cause it to be
completed, and hold the contractor for his reasonable
expenditures if in excess of the unpaid balance of the
contract price."); Prince v. R.C. Tolman Constr. Co., 610 P.2d
1267, 1268 (Utah 1980) ("[W]here a subcontractor is failing to
perform on a contract, the main contractor may step in and
complete what has to be done, and the defaulting party is
entitled to receive payment for only that part of the work
actually performed.").
9.See also 11 S. Williston, Williston on Contracts 1313
(W. Jaeger 3d ed. 1968) ("Every consideration of justice
requires that . . . inability to perform should immediately
excuse the innocent party from performing, or preparing to
perform, nor is any technical rule violated if the excuse is
allowed.").
10.Ferguson argues very briefly that Sealaska never
demanded adequate assurance before it withheld payment.
Section 251 of the Restatement (Second) of Contracts concerns
the obligee's right to demand adequate assurance and was
embraced by this court in L.E. Spitzer Co. v. Barron, 581 P.2d
213, 216 (Alaska 1978) (citing 1974 tentative draft of
Restatement (Second) of Contracts). Even assuming the absence
of any demand for assurance, Ferguson errs in implying that
Section 251 creates a requirement for such a demand. Rather,
it "affords [the obligee] the opportunity, in appropriate
cases, to demand assurance of due performance and thereby
avoid the uncertainties that would otherwise inhere in acting
on his belief." Restatement (Second) of Contracts 251
comment b (1981) (emphasis added); cf. Howard S. Lease Constr.
Co. v. Holly, 725 P.2d 712, 716 (Alaska 1986) (contractor
entitled to withhold part of progress payment if it feels
subcontractor has not substantially performed, but runs risk
of guessing wrong as to whether performance was substantial
and whether amount withheld was appropriate).
Ferguson complains, also very briefly, that Sealaska did not
give the notice of default required by the contracts. To the
extent this fact has any bearing on the case, a letter on
October 12, 1988, from Sealaska's attorney to Ferguson's
attorney seems to meet the requirement. That letter
specifically notes Sealaska's observation that work had for
all intents and purposes ceased at the construction sites and
its discovery that Ferguson had allowed required letters of
credit to lapse. This letter was transmitted three days
before the October payment would be considered late. Rather
than cure these defaults, or give any indication that they
would cure the defaults, Ferguson in fact ceased all activity
at the construction sites and sent its employees home.
11.The superior court's holding that Ferguson was in
breach as of October 10 is technically incorrect, but the
error is harmless. Although Ferguson's inadequate performance
to that date justified Sealaska's withholding of the payment,
Ferguson had until November 25, the termination date of the
contract, to cure its failure before it was "in breach." See
Restatement (Second) of Contracts 235 comment b (1981) ("Non-
performance is not a breach unless performance is due."). In
any event, Ferguson ceased work and filed suit on November 21,
which amounted to a "definite and unconditional" repudiation
of the contract. See Holiday Inns of America v. Peck, 520
P.2d 87, 89 n.3 (Alaska 1974) (quoting 4 A. Corbin, Corbin on
Contracts 959 (1951)). At that point, having not performed,
Ferguson was in breach.
12. Loescher described three reasons for his
decision:
(1) Coady's statement that Ferguson had told him
that Ferguson was quitting the job;
(2) Ferguson had let the performance bonds lapse;
and
(3) Ferguson would have owed Sealaska more money
than was owed to Ferguson had the payment been made.
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