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February 18, 1982


The opinion of the court was delivered by: Getzendanner, District Judge.


This is an action by Blackhawk Heating & Plumbing Co., Inc., a general contractor ("Blackhawk"), to recover $2,870,000 against Seaboard Surety Company ("Seaboard") under a performance bond issued by Seaboard covering work to be performed by a subcontractor, Power Engineering Company, Inc. ("Power").*fn1 There is diversity of citizenship and this court has subject matter jurisdiction.

On August 6, 1965 Blackhawk had entered into a written contract ("Prime Contract") with United States General Services Administration ("GSA"). Under the Prime Contract Blackhawk was to perform certain air-conditioning and remodeling work at a GSA building in Chicago (the "Project"). The original amount of the Prime Contract was $4,983,000. It was understood that Blackhawk would employ numerous subcontractors to perform work at the Project. Under the Prime Contract Blackhawk was responsible for scheduling the work for itself and its subcontractors so that the Project was completed on time.

On October 6, 1965 Blackhawk entered into a subcontract ("Subcontract") with Power. Under the Subcontract, for the total sum of $787,000, Power was to perform all of the electrical work called for in the GSA's plans and specifications for the Project. Power was also to furnish and supply certain material and equipment, including, among other things, a combination light fixture air diffuser unit that was referred to in the lighting fixture specifications as a Type A electrical fixture ("Type A Fixture"). There were some 8,000 Type A Fixtures to be installed on the Project. The acquisition and installation of the Type A Fixtures represented approximately $200,000 of the Subcontract's price. The Subcontract required Power to perform its obligations in strict accordance with the requirements of the Prime Contract.

Power was required to provide a performance bond in an amount equal to the amount of the Subcontract. On October 22, 1965 Power applied to Seaboard for the required performance bond. Under the terms of this application (Seaboard Ex. 62), Power agreed to furnish Seaboard with such information as Seaboard may request from time to time concerning the contract covered by the bond and the work thereunder. Power further agreed that Seaboard had the right to examine its books and records.

On October 22, 1965 Seaboard as "Surety" issued a performance bond in favor of Blackhawk as "Owner." The bond provided, inter alia, that

  The Surety hereby waived notice of any alteration
  or extension of time made by the Owner.
    Whenever [Power] shall be, and declared by Owner
  to be in default under the [Sub]Contract, the
  Owner having performed [its] obligations
  thereunder, the Surety may promptly remedy the
  default, or shall promptly
  1) Complete the [Sub]Contract in accordance with
  its terms and conditions, or
  2) Obtain a bid or bids for submission to Owner
  for completing the [Sub]Contract in accordance
  with its terms and conditions, and upon
  determination by Owner and Surety of the lowest
  responsible bidder, arrange for a contract between
  such bidder and Owner, and make available as work
  progresses (even though there should be a default
  or a succession of defaults under the contract or
  contracts of completion arranged under this
  paragraph) sufficient funds to pay the cost of
  completion less the balance of the contract price;
  but not exceeding, including other costs and
  damages for which Surety may be liable hereunder,
  the amount set forth in the first paragraph
  hereof. The term "balance of the contract price,"
  as used in this paragraph, shall mean the total
  amount payable by Owner to [Sub]Contractor under
  the [Sub]Contract and any amendments thereto, less
  the amount properly paid by Owner to
  (Seaboard Ex. 63).

Neither the performance bond, nor the application therefor, expressly provided that Seaboard was entitled to any notice from Blackhawk of Power's progress under the Subcontract or notice of Power's default.

During the course of the Project four major delays occurred which extended the Project completion date: (1) a delay by the GSA in turning over certain fan rooms to Blackhawk so that work could proceed; (2) a delay caused by the GSA relating to defective ductwork drawings; (3) a delay by Power and GSA in the furnishing of an acceptable lens for the Type A Fixture; and (4) a delay by Power in the supplying of an acceptable air diffuser boot for the Type A Fixture. The delays caused by GSA overlapped with the delays related to the Type A Fixture.

During the period that Blackhawk was attempting to obtain adequate revised ductwork drawings, there was considerable correspondence between Blackhawk and GSA as to the need for the revisions and the information necessary for the revisions to be made. One of the positions taken by the GSA was that it was unable to provide revised ductwork drawings without an approved Type A Fixture. Blackhawk rejected this argument and was of the opinion that an approved fixture was not needed to revise the ductwork drawings. Mr. Machata, Blackhawk's President, described the GSA's position as "a felonious defense" that gave him "no problem."

Blackhawk was of the opinion that GSA's failure to provide revised ductwork drawings was delaying the overall progress of the work on the Project and that approval of a Type A Fixture was not necessary for the drawings to be revised. However, Blackhawk also wrote a number of letters to Power in 1966 in which it claimed that Power's failure to obtain approval of the Type A Fixture was delaying overall job progress on the Project. For instance, on September 14, 1966 Blackhawk's superintendent on the Project wrote to Power:

    On 26 August 1966, approval was refused for the
  use of the combination light fixture and air
  diffuser, submitted by you for use on this
  project. This disapproval was based upon your
  submittal of air data and built-in air volume
  control and flow pattern control, which does not
  meet with the requirements of the Contract
    There has been no indication of any real effort
  on your part to resubmit this material as required
  by the Specifications, in order to obtain the
  approval for the fixtures and air terminals you
  propose to use.
    Your continued failure to submit a fixture as
  required is continuing to delay the progress of
  this project. Any result in assessment of
  liquidated damages, due to your actions, you will
  be held wholly accountable for. Please submit
  required material in approved form as quickly as
  possible. (Seaboard Ex. 27).

Despite these formal protests, it was clear to the court that Blackhawk was only making a paper record. On January 3, 1967 Machata wrote to Ray Murphy, president of Power, concerning the Type A Fixture:

    Enclosed please find letters from the General
  Services Administration dated December 19, 1966
  and December 21, 1966, in regard to the
  above-noted fixtures. As you know, many
  Government-caused delays have obstructed progress
  on this job to date, and we feel we can establish
  such delays, and Governmental responsibility
  therefore, without too much difficulty.
    It could certainly hurt our position, however,
  if the fixture has not been approved prior to the
  resolution by the Government of the design
  problems which are now hindering our progress. We
  have been informed that the Government is coming
  out with new ductwork drawings in the immediate
  future. Thus, while there has been no hurry to have
  the fixture approved in the past in the light of
  Governmental delays, we must gain such approval in
  the near future.
    I do not know how involved you have become in
  this problem, but I'm sure you can see the
  critical nature of this approval and I trust it
  will receive your ...

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