Moore and Friendly, Circuit Judges, and Bryan,*fn* District Judge.
Appellant, Chester A. Pearlman (hereinafter, Trustee), is the Trustee in Bankruptcy of Dutcher Construction Corporation (Dutcher) which was adjudicated a bankrupt on August 30, 1956. Appellee, Reliance Insurance Company (Reliance) is an insurance corporation organized under the laws of Pennsylvania.
On April 13, 1955, Dutcher contracted with the United States of America, Corps of Engineers, to perform construction work relating to the Saint Lawrence Seaway as provided in contract No. DA-30-023-eng-339. In the contract was a provision for "Changed Conditions." Pursuant to 40 U.S.C.A. § 270a Dutcher procured payment and performance bonds, in the respective amounts of $879,137.20 and $1,098,921.50, with Dutcher as principal and Reliance as surety.
Because of unforeseen construction difficulties, Dutcher was unable to complete the work within the required time and the Corps of Engineers terminated the contract with Dutcher's consent on April 11, 1956. The work was satisfactorily completed by another firm.
At the same time, Dutcher ran into financial difficulties and could not pay all its debts. In compliance with its bond obligations, Reliance paid $349,172.81 to laborers and materialmen satisfying all of Dutcher's debts for labor and materials supplied to the Saint Lawrence project.
The government had withheld from the monthly progress payments to Dutcher $87,737.35 as a retainage fund provided for in the prime contract. Prior litigation between these parties determined that Reliance was entitled to this fund. Pearlman v. Reliance Insurance Company, 371 U.S. 132, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962).
The difficulties which prevented Dutcher from performing the contract in the allotted time also resulted in the actual cost of work done by Dutcher exceeding the estimated cost by a substantial amount. Under date of May 19, 1958, the Trustee presented a claim against the United States (Corps of Engineers) "for additional costs incurred in connection with the performance of the [contract]." The basis of the claim was stated to be that Dutcher had encountered "changed conditions" as specified in the contract and that
"the material encountered was far more difficult to excavate than was to be expected, as well as more difficult to handle. Furthermore, it was not suitable for haul road construction nor for hauling over when placed in embankment or wasted in spoil areas. * * *"
The Trustee asserted that this "constituted Changed Conditions within the meaning of Article 4 of your form of Contract" and that the "Government represented and agreed that under such a situation an Article 4 Change Order would be negotiated."
In addition, the Trustee asserted that, irrespective of Changed Conditions, the Government had represented and warranted to Dutcher that the material was of a certain type and suitable for certain purposes; that the material was not as warranted; and that consequently Dutcher was entitled to reimbursement for the additional costs. The letter also stated that the Trustee had reason to believe the Corps of Engineers knew that before entering into the contract with Dutcher, the material was not as represented.
Pursuant to the "Changed Conditions" clause of the prime contract and its being "in the best interest of the Government to modify said contract in certain particulars," a Change Order dated October 6, 1960, was negotiated wherein "the total estimated contract price [was] increased by the lump sum amount of $185,687.46," in order to reflect the "payment for the increased cost of performance of the contract resulting from the changed conditions. * * *"
The Change Order made specific reference "to Article 4, 'Changed Conditions,' of your Contract No. DA-30-023-eng-339, dated 13 April 1955" and called for acceptance by Dutcher's Trustee. The Trustee accepted in an endorsement which read "The foregoing modification of said contract is hereby accepted." Reliance also agreed that its bond would cover the contract as modified.
In addition, the time of performance of the contract was "extended to and including 11 April 1956." This released liquidated damages in the amount of $11,000 previously withheld from earned contract moneys and retained by the Government by reason of Dutcher's failure to complete the performance within the originally required time. Finally, as the Change Order constituted final settlement of the claim, ...