Mundy v. Louisville & N. R.

TAFT, Circuit Judge (after stating the facts). The controversy which the complainants seek to make in this case is whether proper measurements and classifications of the excavation and embankment done by the complainants under the contract entitle them to uocover a large sum from the railroad company. One of the terms of the contract is that the measurements and classifications of the chief engineer of the defendant, as contained in his final estimate, shall be conclusive of the amount to be paid by the company to the contractors, in the absence of fraud or mistake. It is conceded by both parties that the amount due according to the final estimate has been paid to the contractors, or their order, except §5,581.03, and this sum the company expresses its willingness to pay to those who may be now entitled to have it The authorities leave no doubt that construction contracts, in which the contractor stipulates that the engineer or architect of the owner shall finally and conclusively decide, as between Mm and the owner, what amount of work has been done, and its character, and the amount to be paid therefor under the contract, are legal, and should be enforced. In such cases, after the work has been done, the contractor can recover nothing in excess of the amount found due by the engineer, unless he can make it appear that the engineer’s decision was fraudulently made, or was founded on palpable mistake. Railroad Co. v. Price, 138 U. S. 185, 11 Sup. Ct. 290; Railroad Co. v. March, 114 U. S. 549, 5 Sup. Ct. 1035; Sweeney v. U. S., 109 U. S. 618, 3 Sup. Ct. 344; Kihlborg v. U. S., 97 U. S. 398; Fox v. Railroad Co., 3 Wall. Jr. 243, 9 Fed. Cas. 627 (Case No. 5,010); Lewis v. Railroad Co., 49 Fed. 708; Ranger v. Railway Co., 5 H. L. Cas. 72; Waring v. Railway Co., 7 Hare, 482; McIntosh v. Railway Co., 2 De Gex & S. 758; Hill v. Railway Co., 11 Jur. (N. S.) 192; Scott v. Corporation of Liverpool, 28 Law J. Ch. 230; Herrick v. Railroad Co., 27 Vt. 673; 2 Wood, R. R. 1138 et seq., and cases cited. — 638 — The fact that the contract at bar expressly stipulates that the decision shall not be conclusive in case of fraud or mistake does not vary its construction. The exception would be implied, if it were not expressed. The result is that, before the complainants can establish their right to recover any sum over and above that allowed in the final estimate, they must show that the engineer, in making his estimate, was guilty of fraud, or exhibited such an arbitrary and wanton disregard of the complainants’ plain rights under the contract as to be the equivalent of fraud, or committed errors and mistakes to the complainants’ prejudice so gross and palpable as to leave no doubt in the mind of the court that grave injustice was thereby done to them. We proceed to examine the chief circumstances upon which the complainants rely to make such a case. The chief engineer was Oapt. Cobb, of many years’ experience in railroad engineering, and quite familiar with the country through which the line projected was to be built. His brother-in-law, Capt. Gracey, was interested in having the road built, both because it was supposed to be of advantage to Clarksville, ■ where he lived, and because he owned an iron mine which would be reached by the new line. He showed his interest by subscribing $10,000 for its construction. Cobb made the usual preliminary estimate of the amount of the necessary work and its cost, before the bids were taken. It is urged on behalf of complainants that Gracey’s interest in securing the construction of the road led Cobb to make an unreasonably low estimate in order to induce the Louisville & Nashville Company to undertake the enterprise, and that, having reported such an estimate, he had a strong motive to vindicate his estimate by making the subsequent cost square with it. This is one of those circumstances proper to be considered in weighing evidence adduced to establish fraud, which derives importance from the necessity, if any exists, for explaining the subsequent conduct of the person charged. It suggests a motive for unjust action. That is all. The particular conduct of Cobb, the good faith of which has been chiefly attacked, was Ms classification of the material called “chert” by the complainants, and the first circumstance relied on by complainants is the statements of Cobb as to how he would clássify this material before and after the contract was made. It might be significant of a fraudulent purpose on his part if he deliberately agreed to classify a certain material as loose rock before the bids were made, to induce low bids, and subsequently gave it the much less lucrative classification of earth. But what does the evidence show? Cobb had been engineer in the construction of a railroad in Alabama called the “Birmingham Mineral,” where, under a similar contract, he had classified a material wMch was there called “chert” as loose rock for McTighe, one of the complainants, who was there the contractor. McTighe expressed the opinion to Cobb, after he had gone over the Clarksville Mineral line, that the same mateiial would be found on it, and asked him how it would be classified. Cobb said he did not think the Birmingham chert would be found on the Clarksville line, but that if it was it would be classified as loose rock, as it was at Birmingham. Clearly there was no deception here, — 639 — unless the fact is that the Birmingham and Clarksville materials are identical. There is a conflict upon this point, but the great weight of the evidence shows a marked difference between the two. Again, it is charged that Cobb frequently agreed, during the progress of the work, to classify this so-called chert as loose rock. The evidence in regard to these statements is quite conflicting, and yet the differences are not incapable of reconciliation. J. H. MeTighe, one’of the complainants, was their chief witness. He says that the word to “classify” a material is to place it either in the loose-rock or solid-rock class; that when any material is to be treated as earth, under the specifications, it is not called “classified material.” His further examination disclosed that when a percentage of a material was put in the loose-rock class he considered it classified. There is no doubt that the contractors were constantly complaining of the difficulty of excavating this chert, and insisting to Cobb that it should be classified as loose rock. There is no doubt, also, that Oobb agreed to give them a fair-classification. They probably understood this to mean that he would give them a classification by which a good percentage of the chert should be rated as loose rock. Oobb testifies that he said he would give them a fair classification under the specifications. MeTighe admits that he frequently referred to the specifications as his guide. Oilier witnesses for complainants say that he only assured them that they would not lose money by the work. Oobb says that especial complaint was made of the classification of Neblett, assistant engineer in charge of the south-end division or residency and the Vanleer Spur, and that he agreed 10 go over the work, and himself classify the material; that he did so, and raised the percentage of loose rock,-—a statement which does not seem to be contradicted in the record. On the whole case, we ill ink it reasonably clear that Cobb’s assurances to the contractors were that he would give a reasonable and fair classification of the material, rather than that he would give them any specific percentage of loose rock. The extravagant statement of the bill, and of one or two of complainants’ witnesses, that he agreed to classify all chert as loose rock, falls of its own weight, and is entirely at variance with the course of the complainants in continuing the work under estimates from month to month in which a large per cent, of the chert was classified as ear-fib. Oobb admits that he instructed his assistants that they should classify nothing of the chert as loose rock, except so much of it as was boulders, or detached masses of rock measuring over one cubic foot In size. This is said to be a gross violation of complainants’ rights under the contract “Earth” nas defined by the contract to be “clay, sand, gravel, loam, decomposed rock and slate, stone and boulders containing less than one cubic foot, indurate clay, cement, gravel, and all other material of any earthly kind.” “Loose rock” was defined to be “all boulders and detached masses of rock measuring over one cubic foot, and legs than one cubic yard; also slate, coal, shale, soft friable sandstone, and soapstone, and all other materials except solid sandstone and limestone in place, and those described above as earth; also stratified stone in layers six inches thick and under, separated by — 640 — strata of clay.” Now, if this chert, so-called, was made up of boulders or pieces of rock mixed in with clay, decomposed rock, or other material of an earthy kind, then the earthy material was to be classified as earth, and boulders or detached rock masses or stones were to be classified as earth or loose rock, as each boulder or mass of rock was less or greater in size than one cubic foot. If chert did not contain earthy material in any substantial quantity, then, under the residuary phrase of the loose-rock clause, it should have b”een classified—all of it—as loose rock. What, then, was this Clarksville chert? There is much evidence in the record to show the difficulty with which it could be worked. Except as this may reflect on the question whether the material is earthy, or not, it has no relevancy to the discussion. There is nothing in the contract authorizing the court or the engineer to classify material according to the difficulty of handling it. It may have been—it doubtless was —the intention of the parties so to define the classes of material that the earth class should contain materials more easily excavated than loose rock, but we must presume that, for the very purpose of avoiding a discussion as to difficulty in handling, specific description of the different materials was inserted. The weight of the evidence shows that a large part of the so-called chert was of earthy material, as defined by the contract The witnesses for the company say that the material is made up of clay in which are mixed boulders or pieces of flint varying much in size. Several witnesses for the complainants say that the material is rotten or decomposed limestone, with flint masses interspersed through it Now, rotton limestone seems to be included in the term used in the earth clause of the contract "decomposed rock.” But it is not material how the weight of the evidence may be upon this point, unless it shall appear that it is so overwhelmingly with the complainants as to give reasons for thinking that Cobb’s judgment was biased, partial, and consciously unjust. The parties agreed that Cobb should decide this very point He has decided it When it appears that the evidence to sustain his conclusion is strong and creditable, the fact that the court might, by a nice weighing of all the evidence, reach a different conclusion, is not of importance. Having, with good reason, decided that chert was largely composed of earthy material, his instructions to his assistants not to classify any chert as loose rock, except that part of it composed of boulders or detached masses of rock exceeding one cubic foot in size, were in accordance with a proper and legal construction of the specifications, and cannot now be made the subject of complaint. Much was said in the brief and argument of counsel for complainants concerning a custom prevailing in the execution of such railroad contracts as this one, by which the engineer exercises an equitable discretion in his classification to depart from the letter of the specifications, and to allow the contractor quantities of material under the higher classes based on the difficulty of the work. That evidence of custom may be introduced to show authority of an agent, or to throw light upon the construction of. a contract, is well settled. Before it can have any effect, however, the evidence must disclose a custom reasonable, notorious, and well — 641 — defined. Insurance Co. v. Waterman, 6 U. S. App. 549, 4 C. C. A. 600, 54 Fed. 839. And no custom is permitted to prevail over the express words of the contract. Smith v. Society,1 65 Fed. 765. We think the evidence relied on does not show a certain and well-defined custom, and that the custom claimed is in conflict with the terms of the written contract. Of course, the classification of material cannot be mathematically exact, in the construction of railway works. The engineer must use his judgment or discretion in estimating the percentage of loose rock or earth in any excavation; but that he may, under the terms of a contract like the one here, deliberately ignore the specifications, and substitute for them loose and undefined considerations of equity and justice, in fixing the amount to he paid for different materials, cannot be conceded. But suppose such a custom were to prevail; it would amount only to a permission to the engineer to depart from the specifications, or not, as he should deem proper; otherwise it would not he a discretionary power. How can the contractors complain if. in the exercise of such discretion, he adheres to the specifications? Another circumstance relied upon by the complainants to show that the final estimate of Cobb should not be regarded as conclusive is that he made a material reduction in the measurements, and a material change in the classifications, as they appeared in the monthly estimates for July and August. Each monthly estimate contained a statement of the entire work done under the contract, in units of quantity and class, from the beginning. Deducting the amount shown in the previous monthly estimate gave the work done during the current month. The record shows that the amount of work credited to the contractors by the estimate given at the end of July, 1891, was greater in money value by some §20,000 than that allowed in the final estimate; and this although the work done in August, 1891, to complete the job, was not inconsiderable. This calls for explanation. The line was divided into three residencies or divisions. The south end and the Vanieer Spur were in charge of Assistant Engineer Neblett. The north end was divided between Assistant Engineers Grundy and Mills. When the July estimate was returned, Cobb says that ho became convinced that the loose rock returned on the north end was an over classification. He (hereupon went over Grundy’s residency with him, and in detail discussed his classification, learning from him that he had not adhered to the specifications, in deciding what was to be classed as loose rock, but had exercised what he regarded as an equitable discretion to soften the harshness of the specifications in the contractor’s favor. He returned 55,608 yards of loose rock and 102,581 yards of earth excavated on his residency. Cobb reduced the loose rock to 29,585 yards, and increased the earth to 128,331,-—a reduction in money earned by the contractor of about $6,565. In the case of Mills, Gobi) went over his division with him, and in comparing amounts, Mills admitted that he had overclassified the loose rock in the “big cut” which was on his residency, and that he had — 642 — given Cobb the wrong amounts, in calling his figures for loose rock. It turned out, moreover, from Mills’ own written confession, that he had destroyed his own note book, because it would not verify his returns, and that he was unable to make a correct final estimate. Cobb then took Grundy, and went over Mills’ division himself, made all the measurements, and reclassified the work, and made his final estimate. Complainants employed two engineers to go over the work, to make measurements and classifications; and their figures, as a whole, greatly exceed Cobb’s. The company also employed two engineers to go over the work, and their measurements and classification are quite far below Cobb’s. The latter make two estimates, the one based on a strict classification, according to the specifications, and the other on a so-called equitable classification, in which the definition's of "earth” and "loose rock” in the contract are not exactly followed. Both estimates show much less money earned by the contractors than Cobb’s final estimate. On the whole case, there is nothing at all to impeach the good faith of Cobb in making his final estimate. He did say to the contractors that he would recommend the payment of some $16,000 more than his final estimate by the company to them, because the specifications worked harshly against them, on condition that they would accept it as a finality. He says this was in accordance with his practice of requiring the contractors to live up to the specifications, and of then relieving them from any hardship by recommending to the company the payment of a lump sum in addition to the estimate made according to the contract,—a practice much more reasonable and safe than the one which the complainants here seek to establish as a custom. The contract specifically provided that the engineer, in making his final estimate, should not be bound by quantities in the monthly estimates; so that, in revising the entire work, Cobb was only doing what the contract contemplated; and, as no bad faith or palpable error appears in his measurements and classification, we think that the final estimate must be regarded as conclusive, except in the respects now to be discussed.. In the course of the work, Mundy, one of the complainants, who was also a subcontractor, absconded, leaving many creditors. Complainants gave a chattel mortgage to secure a considerable indebtedness. Both occurrences led to attachments and injunctions, which much embarrassed’ complainants in the fulfillment of the contract. In an adjustment between the attaching creditors, the company, and the complainants, it was arranged that Cobb should draw the amount due on each monthly estimate, and then pay out the same to the subcontractors, material men, and other creditors, on the order of complainants. This was done. It was very important to the company that the subcontractors and laborers should be paid, so that the work might progress, and several provisions of the original contract were evidently inserted to prevent interruptions from a failure of the principal contractors to pay their debts. Thus the principal contractors, to promote good order among the laborers, bound themselves in the contract to give assurance to the laborers — 643 — of full payment of their wages. It is further provided that if, out of any monthly estimate paid to the contractors, they fail to pay the wages of the laborers for that month, it shall be at the discretion of the engineer thereafter to provide for the payment of the laborers for each month out of the estimate for the month, according to such rule as he shall prescribe. When the July estimate was made up by the assistant engineers, and signed by Gobb, he expressed the opinion that it was an excessive allowance, and would have to be reduced. This came to the ears of the contractors, who visited Gobb, and said that they did not wish to give orders in favor of subcontractors on the basis of a monthly estimate, when, by a final estimate, it might appear that they had paid more than the subcontractors were entitled to. Cobb says he was then of opinion that the reduction could not be enough to lead to such a result, assured them of this, and even guarantied that Guinn and Shippey might safely be paid some $2,500. It also appears that he thought the August estimates would have to be reduced, and that he then had reasonable ground to suspect that Mills’ work was wholly unreliable. “Nevertheless, he went on with payments to subcontractors on the orders of the principal contractors to the extent of $12,114.72 more than his final estimate showed to be due to them from the principal contractors. Some question is made of the sufficiency of the evidence to show that the overpayments by the complainants to their subcontractors amounted to so large a sum. McTighe, who testifies positively to the sum above stated, gave details in respect to but two or three of his subcontractors,- -presumably, because lie was not inquired of as to the rest The sum overpaid to these particular subcontractors was only about 25 per cent, of the amount stated by Mm to be the aggregate of complainants’ overpayments. He was not cross-examined upon the subject, and no ground appears for discrediting Ms positive testimony concerning the aggregate amount. The engineer by the provisions in the contract, and by the subsequent arrangement between the company, the complainants, and their creditors, was given authority to act for the company in securing payments by the complainants to their subcontractors and laborers. When, therefore, he gave the complainants assurances that the monthly estimates would not be so reduced by the final estimate as to make it possible that payments to their subcontractors on the basis of the monthly estimates should turn out to be over-payments, the company became estopped to claim such a reduction of the monthly estimates as would subject the principal contractors to loss thereby. It is suggested that the principal contractors knew of the over-classification and overmeasurement. There is nothing to show this. They claimed then, and they claim now, that justice was not done them, even in the monthly estimates, in respect either of classification or measurement, Again, it is pressed upon us that in returning the final estimate the engineer was an arbitrator; that he did not more represent the company than the contractor in making it; and, therefore, that the company could not be estopped by his act in the capacity of arbi — 644 — trator, any more than a party to a lawsuit could be estopped by a misleading judgment of a court, which the same court should subsequently reverse. It may be doubted whether the engineer occupies the position of indifference between the parties which this argument assumes. In a leading case in England (that of Banger v. Railway Co., 5 H. L. Cas. 72), a controversy arose as to the conclusiveness of the decision of the engineer of the company upon a disputed point arising in the execution of a construction contract, by the terms of which the engineer was finally to decide it. It was sought to impeach the decision on the ground that the engineer was a shareholder in the company. The House of Lords held that this could not be done, because he did not hold an indifferent position between the parties, and they both knew this when the contract was made. He was not a judge, but the representative of one party, in whose decision the other had been willing to acquiesce, and had stipulated to do so. Of course, such a stipulation carries with it an implied condition that the agent of the company shall be guilty neither of fraud nor gross mistake; but, by his assumption of a quasi judicial function, his employer does not cease to be responsible for his acts in that capacity, because it is well settled that his failure to act, or his fraud in acting, estops the company from relying on the condition of the contract that money shall only be due under the contract upon his certificate. Waring v. Railway Co., 7 Hare, 482; McIntosh v. Railway Co., 2 De Cex & S. 758. We are clearly of opinion that the respondent company is estopped to claim any reduction from the July and August estimates which will involve the contractors in loss due to the making of payments to subcontractors on the basis of the monthly estimates. It follows that on this account the complainants are entitled to recover $12,114.72. It appears to be conceded that, by a mistake, the complainants were not allowed, in the final estimate, $170 for clearing the middle division of the line, upon which their work was subsequently stopped, and $675.42 for extra work not covered by the contract. Only $200 was claimed for extra work in the bill; but the complainants should have leave from the circuit court to amend their bill to accord with the undisputed evidence. The amounts due the complainants, therefore, are as follows: Due by final estimate.......................................... $ 5,531 03 Clearing ...................................................... 170 00 Extra work.................................................... 675 42 Overpayments to subcontractors................................ 12,114 72 $18,491 17 These amounts should bear interest from the date of the final estimate. It is claimed by the respondent company that notices of attachments and assignments served upon them make it dangerous for them to pay this sum to complainants. They may be protected by bringing in all persons claiming an interest in the fund as parties to the action; and the decree to be entered below should provide that a payment of the sum due into the registry of the court, with interest until the day of payment, will satisfy the same. The de — 645 — cree of the circuit court is modified in accordance with this opinion. The costs of appeal will be divided. The costs in the circuit court wiil be taxed to the railroad company. 13 C. C. A. 284.