PA Federal Business Decisions Volume 11, No. 4

Bridget M. Gillespie and Henry M. Sneath, Business Decisions Editors [Originally published in the Fall 2006 edition of the Pennsylvania Bar Association’s Civil Litigation Update]

Co-obligees Are Indispensable Parties To Breach Of Contract Suit

In Dickson v. Murphy, 2006 U.S. App. LEXIS 25110 (3d Cir. 2006), the Court of Appeals for the Third Circuit evaluated a complex factual scenario regarding multiple parties to an asset purchase agreement. Appellee Murphy had entered into an agreement to purchase the assets of Davis Yacht Sales, Inc. (“Yacht Sales”) and Davis & Dickson Enterprises, Inc. (“Enterprises, Inc.”). Jeffrey Dickson was the sole owner and President of Yacht Sales, the sole owner of Davis & Dickson Enterprises, LLC (“Enterprises, LLC”), and fifty-percent owner of Enterprises, Inc. The other fifty-percent of Enterprises, Inc. was owned by Carson R. Davis, Jr. and Barbara Davis. In turn, Enterprises, Inc. owned one hundred percent of Davis Boat Works, Inc., Carolina Yacht Interiors, Inc., Carolina Welders, Inc., Buddy Davis & Associates, Inc., Mill Landing Marine Maintenance Center, Inc. and Davis Resource Management, Inc. The sellers on the Agreement were all of these corporations, Carson Davis, Barbara Davis, and Dickson.

Dickson was a citizen of Pennsylvania and Yacht Sales was a Pennsylvania corporation. All of the other corporations that signed the agreement were North Carolina corporations, and Murphy, Carson Davis, and Barbara Davis were citizens of North Carolina.

When Murphy decided not to go through with the terms of the Agreement, Dickson and Yacht Sales brought suit in the United States District Court for the Middle District of Pennsylvania solely against Murphy based on diversity of citizenship. The Complaint alleged various fraud, contract and quasi-contract claims against Murphy. Murphy moved to dismiss the complaint for failure to join indispensable parties. The District Court granted Murphy’s motion to dismiss and Dickson and Yacht Sales appealed.

Federal Rule of Civil Procedure 19 determines whether a non-joined party is indispensable and required to be joined in the action. Rule 19 requires a two-part analysis, the first step of which is to determine whether the non-joined party must be joined. If it is determined that the non-joined party is necessary, but joinder is not feasible, the next step is to determine if the non-joined party is indispensable under Rule 19(b). If it is determined that the non-joined party is indispensable under Rule 19(b), the suit must be dismissed.

On appeal, Dickson and Yacht Sales argued that the non-joined parties were not necessary to their action because the non-joined parties had no claims being pursued in the action. However, the court noted that the complaint alleged that Murphy interfered with the business of Davis Boat Works, Inc., a non-joined party, by contacting vendors. In addition, under the terms of the Agreement, the non-joined parties were obligated to conduct their operations according to their ordinary courses of business. As the Complaint alleged breach of contract claims, whether or not the sellers fulfilled their side of the bargain was very relevant to the action. Because the court found that the non-joined parties were co-obligees under the Agreement, it held that they were necessary parties under Rule 19(a). The court then went on to hold that joinder of these necessary parties was not feasible, because joinder of any one of them would defeat complete diversity.

The court next moved to the determination of whether the non-joined parties were indispensable under Rule 19(b). In evaluating the factors required under Rule 19(b), the court found that: Murphy might be subject to numerous identical claims and multiple or inconsistent judgments; that relief could not be shaped so as to lessen prejudice to Murphy; that additional litigation would be inefficient and could lead to inconsistent determinations; and finally, that state court could provide an adequate remedy to the plaintiffs. Based on these findings, the Court held that the non-joined parties were indispensable under Rule 19(b) and affirmed the District Court’s grant of Murphy’s motion to dismiss for failure to join indispensable parties.

Single Demand Letter To Forum Insufficient To Support Personal Jurisdiction

In Staywell Co. v. Wang, 2006 U.S. Dist. LEXIS 60363 (M.D. Pa. 2006), defendant, Roger H. Wang, M.D., entered into a license agreement with FastMark, the predecessor to plaintiff, Staywell Company, pertaining to the use of Dr. Wang’s medical billing computer codes. The agreement called for two separate payments of $125,000 and $90,000. The payments were made to Dr. Wang as scheduled in 2003 and 2004.

On March 8, 2006, Dr. Wang’s California attorney sent a letter to Staywell’s headquarters in Pennsylvania asserting that Staywell had breached the license agreement. The letter demanded $137,023.13 in order to avoid litigation. Staywell rejected Dr. Wang’s demand. Thereafter, on April 14, 2006, Dr. Wang’s California attorney sent a second letter to Staywell’s Texas office increasing his demand to $265,894.77.

In response, Staywell filed suit in federal court for the Middle District of Pennsylvania seeking a declaratory judgment that its products did not infringe Dr. Wang’s copyright. It was not disputed by the parties that Dr. Wang had never resided in Pennsylvania, had professional offices only in Orange County, and had no property, business interests, or employees in Pennsylvania. The parties agreed that Dr. Wang’s sole contact with Pennsylvania was the March 8, 2006 demand letter to Staywell’s Pennsylvania office.

Staywell argued that the March 8, 2006 demand letter was sufficient to effect personal jurisdiction over Dr. Wang under Pennsylvania’s long arm statute. However, the court likened Staywell’s demand letter to “cease-and-desist” letters commonly used by patent and copyright holders noting that almost every court that has considered the issue had held that “cease-and-desist” letters standing alone are insufficient to confer personal jurisdiction.

In rejecting Staywell’s assertions regarding personal jurisdiction, the court noted that Staywell could point to no “wrongful” conduct other than Dr. Wang’s sending of the March 8, 2006 letter. Staywell’s complaint included no allegations that Dr. Wang had engaged in any tortious acts. In the March 8, 2006 letter, Dr. Wang accused Staywell of breaching the license agreement and sought to resolve the matter “without the need for initiating litigation.” The Court held that the threat of legal action did not constitute intentional and wrongful conduct beyond the mere sending of the letter itself. Therefore, the Court granted Dr. Wang’s Motion to Dismiss for lack of personal jurisdiction.

Additional Insurer Is Not An Indispensable Party In Dispute Between Insured And Primary Insurer; Statute Of Limitations Is An Arbitrable Issue

Wausau Insurance Cos., Inc. v. Liguori, 2006 U.S. Dist. LEXIS 64392 (E.D. Pa. 2006), arises out of a motor vehicle accident that resulted in the death of Mark Liguori (“Liguori”). Liguori was driving a minivan in the scope and course of his employment. The minivan was insured by a commercial auto policy issued by Wausau Insurance Companies (“Wausau”) to Liguori’s employer. The policy included an arbitration clause relating to disputed UM/UIM claims. Liguori was also insured under a personal auto policy issued by Nationwide.

Just over one year after the accident, counsel for Liguori notified Wausau of Liguori’s intent to make a claim for UIM benefits. Wausau responded by informing him of the limits available. Approximately 15 years later, Liguori’s counsel demanded arbitration of the UIM claim. Wausau refused Liguori’s request to arbitrate after the lengthy lapse in time and filed an action seeking a declaration regarding Liguori’s claim for UIM benefits. Liguori then filed a petition to compel arbitration in state court naming both Wausau and Nationwide. Wausau removed the petition to federal court. Nationwide refused to consent to removal.

Initially, Liguori argued that the case should be remanded to state court because all defendants had not consented to removal as required. Wausau countered that remand was not appropriate because Nationwide was a nominal party, and therefore, Nationwide’s consent was not required to remove the case.

The district court noted that a nominal party is one that is neither necessary nor indispensable. Although Nationwide may be concerned with the results of the litigation between Liguori and Wausau, Nationwide is not an indispensable party in that litigation. Liguori’s rights under the Wausau policy and Nationwide policy are separate and distinct. The court held that the mere fact that one insurer’s liability may be affected by the existence or absence of coverage on a second insurer’s policy does not mean that the first insurer’s presence is necessary to a determination of the second insurer’s obligations under its policy. Thus, Nationwide was not a nominal party and Liguori’s motion to remand was denied.

Also before the court was Wausau’s motion for summary judgment wherein Wausau argued that Liguori’s claim was barred by the statute of limitations which was not an arbitrable issue and thus should be decided by the District Court. The District Court looked to the arbitration clause in the policy and compared it to the leading case in Pennsylvania dealing with the arbitrability of UIM disputes, Brennan v. General Accident Fire & Life Insurance Corp., Ltd., 574 A.2d 580 (Pa. 1990). The Brennan court found “no limit [in the arbitration clause] to the jurisdiction of the arbitrators over what issues may be submitted.” Brennan at 583. The clause at issue was nearly identical to the Brennan clause, thus the court followed Brennanrather than other opinions interpreting more narrow arbitration clauses. The court also rejected Wausau’s argument that the statute of limitations involves a matter of public policy that should not be arbitrated, thus the issue could be resolved in arbitration.

Court Dismisses Claims Against Insurer’s Holding Company And Claims For Bad Faith

In Totty v. Chubb Corporation, et al., 2006 U.S. Dist. LEXIS 61013 (W.D. Pa. 2006) (Ambrose, J.), the Western District was asked to consider a motion for summary judgment filed by defendant insurers to dismiss plaintiff’s claims for breach of contract and bad faith based upon a homeowner’s insurance policy.

Plaintiff resided in a 100-year old home in Pittsburgh, Pennsylvania. She was issued a policy of insurance which provided coverage for plaintiff’s residence and its contents, subject to the policy’s terms and conditions.

On or about September 9, 2002, plaintiff submitted a property loss notice indicating that her dwelling had been damaged by vibrations from construction equipment used by the City of Pittsburgh in July 2002 to resurface her street. The alleged damage listed included cracked walls, damaged doorframes and plumbing leaks. The notice also indicated that it appeared the right side of the dwelling was sinking.

Property adjuster Tim Cusick was assigned to investigate and handle plaintiff’s claims. He obtained an engineering report which concluded that the damage to plaintiff’s home was not the result of vibration related damages (the “Ruddick Report”). Based upon this report, Mr. Cusick sent a letter to plaintiff on November 19, 2002 denying coverage for the structural property damage portion of plaintiff’s claim. Plaintiff did not respond to this letter. On December 17, 2002, Cusick wrote a follow-up letter reiterating his position.

On December 23, 2002, Cusick received a letter from plaintiff dated December 10, 2002, indicating she was having the Ruddick Report reviewed by an architect and a structural engineer. She also notified him that she was retaining her own experts and counsel to pursue her claim. For the next ten months, plaintiff and her counsel corresponded with Mr. Cusick regarding their opposing positions.

On November 10, 2003, Mr. Cusick sent a letter to plaintiff’s counsel stating he was closing the file for her failure to provide any documentation supporting another cause of loss. Approximately four months later plaintiff filed her lawsuit. After she filed suit and over three years after the alleged damage occurred, plaintiff produced an expert report which concluded that the vibratory waves from construction equipment caused the damage to her home. Defendant Great Northern hired another expert to respond to plaintiff’s expert. Great Northern’s second expert again disputed that the damage was a result of the vibration.

The first issue addressed by the court was whether or not Chubb Corporation (“Chubb”) should be a defendant in the case. This issue arose because defendant Great Northern was a Chubb affiliate. The court held, however, that the evidence failed to support plaintiff’s claim that Chubb acted as the insurer in the case. To the contrary, the evidence showed that the policy identified Great Northern as the insurer. Chubb was not mentioned anywhere in the substantive terms of the contract, and plaintiff failed to offer any evidence that Chubb was the alter ego, de facto insurer, or agent of Great Northern. Great Northern even admitted that it was the insurer. In addition, the court found that the fact that Chubb provided loss adjustment services for Great Northern was insufficient to make it a party to each underlying insurance contract. Id. at *17. Therefore, the court granted defendant Chubb’s motion for summary judgment.

The second issue in the case was whether the damage caused to plaintiff’s residence was covered under her homeowner’s insurance policy. Great Northern argued that even accepting plaintiff’s theory of causation, the loss fell within the policy’s “earth movement” and “structural movement” exclusions and therefore, was not covered. Great Northern also argued that plaintiff failed to produce evidence showing a casual link between the July 2002 vibrations and specific structural damage.

In determining whether the earth movement exclusion applied, the court relied upon the Pennsylvania Supreme Court’s decision in Steel v. Statesman Insurance Company, 607 A.2d 742 (Pa. 1992), which decided that an earth movement exclusion similar to the one at issue in this case, was ambiguous. Thus, the Supreme Court held that the earth movement exclusion barred coverage for damage from earth movement due to natural events only. Therefore, the court in Totty held that the earth movement exclusion in the Great Northern policy barred coverage for damage from earth movement due to natural events only. Because plaintiff’s evidence, if believed by the fact-finder, would support a conclusion that her home was damaged as a result of the vibrations from road construction equipment, Great Northern’s motion for summary judgment on the basis of the earth movement exclusion was denied. Id. at *23.

With respect to the structural movement exclusion, the court had to decide whether any settlement or cracking was sufficient to trigger the structural movement exclusion regardless of cause. Plaintiff contended that the term “settling” as used in her policy was only intended to exclude damage caused by the normal, gradual, readjustment of building materials as a result of normal design deficiency or soil conditions and not to exclude damage precipitated by sudden non-natural occurrences such as the vibrations from road construction equipment outside her home.

The court noted that the Pennsylvania appellate courts have not directly addressed the structural movement exclusion at issue. Thus, the court had to predict how the Pennsylvania courts would rule. Relying on decisions of the lower courts and on courts from other jurisdictions, the court concluded that because the structural movement exclusion was reasonably susceptible to different interpretations, it was ambiguous and must be construed in favor of the insured. Accordingly, the court held that the term “settling” in the structural movement exclusion did not encompass damage precipitated by a sudden, non-natural occurrence such as the vibrations from the compactor outside the plaintiff’s home. Id. at *29. Thus, genuine issues of material fact existed as to causation and that portion of defendant’s motion for summary judgment was also denied.

Defendant also argued that the breach of contract count should be dismissed because plaintiff failed to produce any expert testimony showing a causal link between the vibrations and specific structural damage to her home. Therefore, Great Northern argued that plaintiff could not establish she sustained any damages as a result of these vibrations. The court disagreed finding that plaintiff had produced sufficient expert evidence to create a genuine issue of material fact on causation and damage. Id. at *31.

Finally, Great Northern moved to dismiss plaintiff’s bad faith claim on the basis that plaintiff failed to establish by clear and convincing evidence that the company acted in bad faith by denying her claim. The court agreed. The court found that the evidence supported Great Northern’s position that it had a reasonable basis to deny the claim. Moreover, plaintiff failed to produce evidence to support her claim that Great Northern’s investigation was inadequate. Lastly, the court held that even if Great Northern did not have a reasonable basis for denying the claim, no evidence existed that the company knew of or recklessly disregarded this lack of reasonable basis in denying the claim. Id. at *41.

–Contributed by Kelly A. Williams, Esquire, Houston Harbaugh, Pittsburgh, PA;

Insurance Broker Not Liable To Insured For Not Immediately Notifying Insurer Of Issuance Of Additional Insured Certificate

In Asousa Partnership v. Manufacturers Alliance Insurance Co., 2006 U.S. Dist. LEXIS 71391 (E.D. Pa. 2006), the court was asked to decide whether the Bankruptcy Court correctly decided against the debtor, Asousa Partnership (“Asousa”), in its adversary action. Asousa, as part of its voluntary petition under Chapter 11 bankruptcy, filed an adversary action against Manufacturers Alliance Insurance Company (“MAICO”), Chapel Insurance Associates (“Chapel”) and Kaminsky Insurance Agency (“Kaminsky” and together with Chapel “C&K”).

The adversary action arose out of a dispute regarding insurance coverage for property owned by Asousa. Asousa rented the property to a tenant which caused damage to the property so as to leave it in a condition that it could not be rented again. Asousa sought coverage from MAICO for the damage caused by the tenant. Initially, MAICO denied coverage arguing that Asousa was not named as an additional insured under the policy it issued to the tenant of the Asousa property. Asousa, however, provided to MAICO copies of documents entitled Evidence of Property Insurance and Certificate of Liability Insurance which indicated that it was in fact an additional insured. The policy and certificates were procured by C&K.

The insurance certificates were originally provided to Asousa by Wayne McFarland, an employee of C&K. C&K did not seek MAICO’s prior approval to issue the certificates, nor did it notify MAICO once the certificates were issued. Wayne McFarland was subsequently fired once it was discovered that Asousa had been named as an additional insured without the consent of MAICO.

Asousa eventually settled its claims with MAICO but continued with its claims against C&K for negligence and negligent misrepresentation. The Bankruptcy Court concluded that Asousa failed to prove both of its claims against C&K and therefore entered judgment in favor of C&K. C&K appealed, and the District Court affirmed.

As to Asousa’s negligence claim, the District Court agreed that Asousa failed to prove the “actual injury” and “causation” elements of the claim. Asousa argued that it suffered damage by MAICO’s denial of coverage, which was caused by C&K’s failure to notify MAICO of its issuance of the certificates. The record indicated that although C&K did fail to notify MAICO of the certificates, once MAICO denied coverage, Asousa promptly sent to MAICO a copy of the certificates demonstrating the additional insured status. The District Court held that once MAICO became aware of the certificates and failed to acknowledge Asousa’s additional insured status, any negligence by C&K was no longer the cause of any damage to Asousa.

Additionally, no damages were alleged in the complaint to have occurred between the period of time that C&K failed to notify MAICO of the issuance of the certificates and the time Asousa provided MAICO with the certificates showing its additional insured status. Therefore, no actual damages related to C&K’s negligence were proved by Asousa.

The District Court also rejected Asousa’s argument that its claim for negligent misrepresentation was wrongly decided. The court noted that since the certificates listed Asousa as an additional insured, the certificates were an “unequivocal assertion that [Asousa] was a named insured.” Because the court held that Pennsylvania agency law under the circumstances required the insurer to accept the certificates as evidence of additional insured status, there was no misrepresentation. Thus, no claim for negligent misrepresentation existed.

“Rat Zapper” Patent Infringement Claim Limited To Literal Infringement

In Agrizap, Inc. v. Woodstream Corporation, 2006 U.S. Dist. LEXIS 76451 (E.D. Pa. 2006), defendant moved for partial summary judgment on plaintiff’s patent infringement claims. For the reasons set forth below, the court granted defendant Woodstream Corporation’s (“Woodstream”) motion in part and denied it in part.

In 2000, Woodstream contacted plaintiff Agrizap, Inc. (“Agrizap”) about the possibility of the two parties entering into a marketing and distribution agreement for Agrizap’s Rat Zapper product. The Rat Zapper is a rodent control device that consists of a plastic canister with a metal plate at the bottom and an electrical charge that ultimately kills the rodent. An oral marketing and distribution agreement was established between the two parties whereby Agrizap would manufacture and deliver Rat Zappers to Woodstream and Woodstream would distribute them to various retailers under a Woodstream label. Id. at *3-4.

Agrizap alleged that it discovered in early 2004 that Woodstream was manufacturing and marketing its own electronic rat trap. Consequently, Agrizap asserted that it was harmed by confusion in the retail market and that its ability to sell its goods in the marketplace would be undermined if Woodstream continued to sell its electronic rat trap. Id. at *3. Specifically, Agrizap alleged that six of its patent claims were infringed by Woodstream’s product. In an earlier opinion, the court determined the claim constructions for these six claims. See Agrizap, Inc. v. Woodstream Corp., 431 F. Supp.2d 518, 525-532 (E.D. Pa. 2006).

Woodstream’s motion for summary judgment was based on the argument that its traps did not infringe upon the claims at issue either literally or under the doctrine of equivalents. Additionally, Woodstream argued that Agrizap was prohibited from claiming infringement under the doctrine of equivalents because of prosecution history estoppel. Id. at *4.

To determine whether Woodstream’s electronic rat traps literally infringed upon Plaintiff’s Rat Zapper, the court examined each patent claim at issue to determine whether or not Woodstream’s product fell within the scope of the asserted claims as properly interpreted in its previous opinion. Specifically, the court had to determine whether each limitation of the asserted claim was met by Woodstream’s traps exactly. Id. at *8-9.

Noting that there were no broad rules because of the intensely factual nature of the inquiry, the court examined each of the claims at issue and compared the properly construed claims to the Woodstream device. The court also considered each party’s expert opinions as to whether the Woodstream device met each claim limitation literally. With respect to each claim, the court concluded that a genuine issue of material fact existed as to whether the Woodstream device met each claim limitation. Id. at *9-37. Thus, Woodstream’s motion for partial summary judgment based upon literal infringement was denied.

On the other hand, the court granted Woodstream’s motion for summary judgment under the doctrine of equivalents. The court explained that the doctrine of equivalents applies if the accused device “performs substantially the same function in substantially the same way to obtain the same result.” Id. at *39. However, the doctrine of prosecution history estoppel may bar a patentee from asserting the doctrine of equivalents.

Prosecution history estoppel may occur when a narrowing amendment to a patent claim is made to satisfy any requirement of the Patent Act. This narrowing amendment gives rise to a presumption that the patentee surrendered any subject matter between the original claim and the amended claim. Thus, the patentee surrenders any equivalent within the scope of the original claim and the amended claim. A narrowing amendment may occur when either: (1) a preexisting claim limitation is narrowed by amendment or (2) a new claim limitation is added by amendment. The patentee, however, may overcome this presumption by showing that the alleged equivalent could not reasonably have been described at the time the amendment was made, or that the alleged equivalent was tangential to the purpose of the amendment, or that the equivalent was not foreseeable (and thus not claimable) at the time of the amendment.

Id. at *39-40.

Agrizap did not challenge that its amendments to the patent gave rise to estoppel but argued the presumption was overcome by the tangential relationship circumstance. Agrizap asserted that the amendments to its patent claims were made to overcome prior art references that utilized simple electronic components rather than the microprocessor/software based system which was the equivalent in question.Id. at *41.

After examining each claim and the evidence, the court concluded that Agrizap could not rebut the presumption established by prosecution history estoppel because the purpose of Agrizap’s narrowing amendments bore more than a tangential relationship to the equivalents in question. Id. at *52. The court rejected Agrizap’s attempts to rebut the presumption based on a broad discussion that the amendments were made for the purpose of distinguishing the patents from the prior art references and that the prior art references did not have any relation to a microprocessor based system, which was the equivalent at issue. The court stated “this broad approach to comparing the purpose of the amendments to the equivalents in question is inappropriate. The fact that the equivalents are not within the prior art does not automatically lead to the conclusion that they are tangential to the purpose of the amendment.” Id. at *52-53.

To the contrary, the court deemed it necessary to examine the precise purpose of each amendment and not just the generalized purpose that they were made to avoid prior art references. The court also explained it was necessary to examine the equivalents within the Woodstream trap in connection with each amendment rather than just examining the Woodstream trap as a whole. Id. at *53. Based on this examination, the court found that the purpose of the amendments and the related equivalents “were far from tangentially related, rather they were directly related.” Id. Therefore, the court held that Agrizap could not rebut the presumption of prosecution history estoppel and was prohibited as a matter of law from claiming infringement under the doctrine of equivalents. As a result, the court granted summary judgment on the doctrine of equivalents in favor of Woodstream. Id. at *54.

–Contributed by Kelly A. Williams, Esquire, Houston Harbaugh, Pittsburgh, PA;

Subcontractor For Computer Services Survives Motions For Summary Judgment On Its Breach Of Contract, Unjust Enrichment And Promissory Estoppel Claims

In Aquatrol Corporation v. Altoona City Authority, et al., 2006 U.S. Dist. LEXIS 62243 (W.D. Pa. 2006), defendant Altoona City Authority (the “Authority”) entered into a contract with Defendant G.M. McCrossin Inc. (“McCrossin”) to upgrade the computer system at five of the Authority’s water treatment plants in connection with “Y2K” concerns. In turn, McCrossin entered into a subcontract with Aquatrol in January 1999 for the installation, configuring and upgrading of software computers at five water treatment plants in accordance with specifications prepared by Gwinn, Dobson & Foreman, Inc. (“GD&F”), the Authority’s consulting engineer. In exchange, McCrossin agreed to pay Aquatrol $140,849.00. Id. at *2-3.

Aquatrol did not complete the project by the December 31, 1999 deadline but continued to work on the upgrades in 2000. On November 20, 2000, a representative of GD&F sent a letter to McCrossin stating that “if the upgrades were not completed in accordance with applicable specifications as of December 31, 2000, GD&F would be eliminating this portion of the work from the Project contract and would be issuing a change order-credit in the amount of $147,489.00.” Id. at *4-5. In response, Aquatrol recommended that the Authority’s computers be replaced with newer computers. In exchange, Aquatrol requested an additional $53,000.00 associated with installing the new computers but provided that the total contract price would not be due until successful completion of the work at all five facilities. Id. at *5.

The Authority responded to Aquatrol’s December 12, 2000 letter on January 4, 2001 through its solicitor David Halpern. In this letter, Mr. Halpern indicated that the cost of the personnel required to bring the system into compliance with the applicable specifications had been part of the original contract and that the Authority was unwilling to absorb any additional costs. Mr. Halpern then went on to make additional demands with respect to the project. Aquatrol rejected the Authority’s proposal due to the Authority’s refusal to pay for Aquatrol’s employees’ labor and expenses. Id. at *7. On May 16, 2001, the Authority issued a credit change order deleting the total value of Aquatrol’s scope of the project from McCrossin’s contract.

On November 13, 2003, Aquatrol filed a Complaint against McCrossin and the Authority. The first count of the Complaint was breach of contract against McCrossin, while the second and third counts against the Authority were for unjust enrichment and promissory estoppel. Defendants moved for summary judgment.

McCrossin first argued that its subcontract with Aquatrol was rescinded and replaced by a subsequent contract between Aquatrol and the Authority. Aquatrol countered that the Authority was a third-party beneficiary to the underlying subcontract between McCrossin and Aquatrol and thus had no authority to rescind the contract. The court noted that little case law exists on the issue of the ability of a third party to rescind a contract and that there is no Pennsylvania case on point. After examining the cases from other jurisdictions, the court held that a third-party beneficiary cannot rescind a contract. Id. at *19. Additionally, the court determined that a genuine issue of material fact existed regarding whether Aquatrol rescinded the contract. Id.

McCrossin’s second argument for summary judgment was that Aquatrol could not recover for breach of contract without demonstrating that the Authority was in fact satisfied with Aquatrol’s performance. McCrossin supported this argument by relying on contract language which required Aquatrol to “furnish all material, labor, equipment and services as necessary for the complete and satisfactory installation of specifications sections as listed [in the contract documents] prepared by Guinn, Dobson & Foreman, Inc.”Id. at *25. The Pennsylvania Supreme Court has 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.” Id. (quoting Jenkins Towel Service, Inc. v. Tidewater Oil Co., 223 A.2d 84, 86 (Pa. 1966)) (emphasis added by Aquatrol court). Aquatrol argued, however, that the contract was ambiguous regarding whether the work had to be done to the satisfaction of the Authority or to the satisfaction of the engineer, GD&F. The court agreed that an ambiguity existed. Moreover, the court found that even if the contract language was clear that approval of the Authority was required, a genuine issue of material fact remained regarding whether the Authority withheld its approval in good faith. Id. at *27-28.

Finally, the court rejected McCrossin’s argument that since it had no control over the Authority’s actions it could not be held liable to Aquatrol for any breach of the subcontract. To the contrary, the court found that there was no reason why McCrossin, the party to the subcontract, could not be held liable for breaching that contract. Id. at *34. Therefore, the court denied McCrossin’s motion for summary judgment.

The Authority argued that it was entitled to summary judgment because it was not enriched by Aquatrol’s work and because there was an express contract governing the engagement. The latter argument was denied based upon the court’s earlier finding that there was a genuine issue of material fact regarding whether Aquatrol and the Authority entered into a direct contract. Id. at *35. The court also held that there was a genuine issue of material fact regarding whether the Authority was unjustly enriched. Pennsylvania law provides that where a third party benefits from a contract entered into between two other parties, the third party’s retention of the benefit without paying any compensation to the aggrieved contracting party will not be unjust if the party enjoying the benefit did not contract directly with or mislead the subcontractor.Id. at *37. Thus, the real issue becomes whether the property owner had direct dealings with the subcontractor, which caused the subcontractor to perform work. Id. The court again held that the facts of the case raised an issue regarding whether or not the Authority mislead Aquatrol by encouraging it to continue working for purposes of remedying certain problems. Id. at *38.

The Authority also moved for summary judgment on Aquatrol’s promissory estoppel claim based upon the January 4, 2001 Halpern letter which it argued contained no promise that Aquatrol would be paid for anything other than a satisfactory result. The court found that Aquatrol presented sufficient evidence of detrimental reliance to get beyond the summary judgment stage of the case and denied the Authority’s motion for summary judgment. Id. at *40.

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