United States District Court, D. Maryland
JJK GROUP, INC., f/k/a John J. Kirlin, Inc., Plaintiff,
VW INTERNATIONAL, INC. and FIRST NATIONAL INSURANCE COMPANY OF AMERICA, Defendants.
THEODORE D. CHUANG, District Judge.
This matter is before the Court on a Motion for Partial Summary Judgment filed by prime contractor Plaintiff JJK Group, Inc. ("JJK"). and cross Motions for Summary Judgment filed by subcontractor Defendant VW International, Inc. ("VWI") and its surety, Defendant First National Insurance Company of America ("First National"). The case involves a government contract for the installation of a "Nurse Call System" in a United States Army medical facility. The issue before the Court is whether JJK is entitled to recover the costs it has incurred in replacing the Nurse Call System as directed by the government, or whether VWI was permitted to refuse to perform the replacement work. The Court has reviewed the pleadings and the briefs and heard oral argument on March 23, 2015. For the following reasons, JJK's Partial Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART, and the Motions for Summary Judgment filed by VWI and First National are DENIED.
The following facts are not in dispute. In January 2003, the United States Army Corps of Engineers, Engineering & Support Center, Huntsville, Alabama (the "Government") entered into an indefinite-delivery/indefinite quantity contract (the "Prime Contract") with JJK. Moore Decl. ¶ 3, ECF No. 32-1; Mot. Partial Summ. J., Ex. 1, ECF No. 32-2. Among other provisions, the Prime Contract contains an Inspection Clause and a Disputes Clause from the Federal Acquisition Regulations ("FAR").
The Inspection Clause makes acceptance of any work "final and conclusive, except for latent defects, fraud, or gross mistakes amounting to fraud, or the Government's rights under any warranty or guarantee." Mot. Partial Summ. J., Ex. 1, at JJK_00430-31; see 48 C.F.R. § 52.246-2(k). The Disputes Clause, FAR 52.233-1, states in relevant part:
(b) Except as provided in the Act, all disputes arising under or relating to this contract shall be resolved under this clause.
(c) "Claim, " as used in this clause, means a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract
(d)(1) A claim by the Contractor shall be made in writing, and, unless otherwise stated in this contract, submitted within 6 years after accrual of the claim to the Contracting Officer for a written decision
(i) The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.
Mot. Partial Summ. J., Ex. 1, at JJK_00445; 48 C.F.R. 52.233-1(b)-(d), (i).
On September 26, 2007, pursuant to the Prime Contract, the Government issued to JJK a task order for the replacement of a Nurse Call System at its Madigan Army Medical Center at Fort Lewis, Washington. Moore Decl. ¶ 4; Mot. Partial Summ. J., Ex. 2, ECF No. 32-2. On or about January 15. 2009. JJK and VWI entered into a Subcontract Agreement (the "Subcontract") for VWI to furnish and install the new Nurse Call System for the amount of $6, 380, 490.00. Moore Decl. ¶ 6; Mot. Partial Summ. J., Ex. 4, ECF No. 32-3. Article 5 of the Subcontract states that the Subcontract includes "[t]he agreement between the Owner [the Government] and General Contractor [JJK], including all general and supplemental conditions, if any." Mot. Partial Summ. J., Ex. 4, at JJK_00549. Article 8, a "Flow-Down Relationship" clause, states that VWI is "bound to JJK in the same way JJK is to the Owner and/or General Contractor (GC) and shall bear all the rights and liabilities with respect to JJK as JJK has with respect to the Owner and/or GC." Id. at JJK_00550. Article 19 of the Subcontract, entitled "Disputes, " states in relevant part:
A. If any such claim or dispute as to which notice is given by the Subcontractor as above provided arises in whole or in part out of the Contract Documents or an act or omission of the Owner or GC, then Subcontractor's rights as to such dispute or claim shall be determined solely by applicable provisions of such Contract Documents including any dispute procedures therein. In the event that it is necessary to commence any action or proceeding against the Owner or GC to implement Subcontractor's rights as above described, then JJK agrees to, in its sole discretion, either initiate such proceeding on Subcontractor's behalf, or permit Subcontractor to initiate such proceeding in JJK's name, upon Subcontractor's written request.... Subcontractor, and its sureties, shall be bound to JJK to the same extent that JJK is bound to Owner and/or GC by the Contract Documents and by any decisions or determinations made under the Contract Documents by any board or arbitration panel.
As required by the Subcontract, First National issued to JJK a performance bond (the "Performance Bond") on behalf of VWI. The Performance Bond stated, in relevant part: "NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION, is such that, if the Principal [VWI] shall promptly and faithfully perform said subcontract, then this obligation shall be null and void; otherwise to remain in full force and effect." Mot. Partial Summ. J., Ex. 5, at JJK_01010, ECF No. 32-3.
On or about September 15, 2011, after VWI had installed the Nurse Call System, the Government signed a "Project Close-Out Final Acceptance Form." Moore Decl. ¶ 9; Mot. Partial Summ. J., Exs. 6-7, ECF No. 32.3. However, during the one-year warranty period following completion, which ended on August 2, 2012, the Government made demands for various repairs under the Prime Contract's warranty provision. Moore Decl. ¶¶ 10-11. On November 7, 2012, the Government emailed to JJK a lengthy list of issues that had been noted during the warranty period but remained outstanding. Moore Decl. ¶ 12; Mot. Partial Summ. J., Ex. 8, ECF No. 32-3. Among the problems identified were situations where "no new calls can be seen on the system, " and where "[e]ithcr the staff cannot hear the patient, or the patient cannot hear the staff." Id. at JJK_00049. Notably, the Medical Center had received a letter "from a patient that experienced what they felt was a failure of the nurse call system that possibly endangered her husband's life." Id. at JJK_00050.
VWI and its subcontractor performed corrective work on the Nurse Call System between January and April 2013. Moore Decl. ¶ 14. The Government, however, reported continuing deficiencies in the Nurse Call System, including "many system errors, lockups, and failures, " Moore Decl. ¶¶ 15-17; Mot. Partial Summ. J., Ex. 10, at JJK_00649, ECF No. 32-4, and revoked its prior acceptance on May 24, 2013, partly on grounds of unresolved warranty issues and partly on grounds that it had discovered previously unknown latent defects. Moore Decl. ¶¶ 15-17; Mot. Partial Summ. J., Ex. 11. ECF No. 32-A. In its letter to JJK entitled "Notice of Latent Defect, Revocation of Acceptance, and Demand for Delivery of a New System DACA87-03-D-0008 Task Order 0033 for the Nurse Call System at Ft. Lewis. WA." the Government stated that it "discovered post-acceptance that the nurse call system exhibits recurring unreliability because of internal system defects" that "represents a continuing danger to the safety of the patients at the facility." Mot. Partial Summ. J., Ex. 11, at JJK_00652. Because of "the severity of the life-safety situation, " the Government revoked acceptance and instructed JJK to provide, within seven days of receipt of the letter, a corrective plan to deliver a "new, replacement system that will satisfy all task order requirements at no additional cost to the Government." Id.
JJK forwarded the letter to VWI the next day, along with its own letter stating that "The subject nurse call system is entirely within VWI's scope of work" and that, consequently, "Kirlin expects VWI to respond to, and comply with, the Government's May 24 letter." Mot. Partial Summ. J., Ex. 12, at JJK_00656, ECF No. 32-4. VWI responded on June 7, 2013, stating: "Without a new subcontract agreement, or an explicit withdrawal of the acceptance of work under Subcontract Agreement 75033-27[, ]... VWI cannot continue to bear the full responsibility for refuting the Government's claim of latent defects and/or correction of other deficiencies." Mot. Partial Summ. J., Ex. 14, at JJK_00661, ECF No. 32-4.
In a follow-up letter sent on June 12, 2013, the Government stated that based "upon the considered professional opinion of our engineers;" it had concluded that "the system is non-repairable." Moore Decl. ¶ 22; Mot. Partial Summ. J., Ex. 15, at JJK_00663, ECF No. 32-4. Pursuant to the FAR Disputes Clause, it ordered JJK to "immediately provide your specific commitment by 4:00 PM Central Time 14 June 2013 to replace the system at no additional cost to the Government" with a "fully operational system that meets or exceeds all elements of the existing task order, " and took the position that failure to do so would be considered a "repudiation of the contract." Id. JJK forwarded the Government's letter to VWI the following day and requested VWI's written confirmation that it would replace the system. Mot. Partial Summ. J., Ex. 18, ECF No. 32-4. On June 14, 2013, JJK sent a letter to the Government expressing its disagreement with the Government's position that there was a latent defect in the system, but confirming its intent to comply with the Contracting Officer's order. Mot. Partial Summ. J., Ex. 19, ECF No. 32-4. In a letter to JJK sent on the same day, however, VWI stated that it could not "blindly accept the unilateral position that it is financially liable to replace the system because the company does not have enough information to determine whether it is at fault - or could be at fault - for the issues raised by JJK or the Government:' Mot. Partial Summ. J., Ex. 20, at JJK_00706, ECF No. 32-4.
In response, JJK stated that although the Government's revocation of acceptance due to a latent defect required it to take the same action with respect to the Subcontract, JJK was "aware of the factual, contractual and legal defenses that might be available" to both VWI and JJK, and that if either incurred additional costs as a result of the Government's order, JJK "intend[s] to submit (and will permit VWI to submit as a pass-through) a request for equitable adjustment, and a subsequent claim if necessary." Mot. Partial Summ. J., Ex. 23, at JJK_00718-19, ECF No. 32-5.
After continued negotiations, VWI confirmed at a November 25, 2013 meeting that it refused to perform the replacement work. Moore Decl. ¶ 37. Thus, on December 13, 2013, JJK sent letters to both VWI and First National, stating that VWI was in default under Article 15 of the Subcontract and demanding that First National cure the default. See Mot. Partial Summ. J., Exs. 32-33, ECF No. 32-5. Article 15 provides that default occurs if VWI "fail[s] in the performance or observance of any of the covenants, conditions, or other terms of this Subcontract." Mot. Partial Summ. J., Ex. 4, at JJK_00550. JJK then entered into a subcontract with a different company, SimplexGrinnell, which ...