APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 73-1487).
Gibbons, Garth, Circuit Judges, and Mitchell H. Cohen,*fn* District Judge. Gibbons, Circuit Judge, dissenting.
This appeal by Westinghouse Electric Supply Co. (Westinghouse), the assignee of a subcontractor, questions the validity of two setoffs claimed by the general contractor and allowed by the district court in an action in which Westinghouse sought to collect the balance which the general contractor owed to the subcontractor.
The general contractor, Andrichyn & Schnabel, Inc. (Andrichyn), contracted with the Commonwealth of Pennsylvania to renovate portions of the Pennhurst State School and Hospital. Joseph Zangrilli & Sons (Zangrilli) subcontracted with Andrichyn to do the electrical work on this project. Zangrilli later assigned its rights under the subcontract to Westinghouse. Westinghouse then began this diversity action against Andrichyn and its bonding company, Fidelity and Deposit Company of Maryland, to collect the balance due to Zangrilli and thus to it as Zangrilli's assignee.
After a non-jury trial, the district court entered judgment in favor of Westinghouse in the amount of $16,928.24 plus interest. Westinghouse took this appeal to contest two setoffs in favor of Andrichyn which the district court permitted.*fn1
The first contested setoff was in the amount of $26,360.31. It represents the net expense incurred by Andrichyn in purchasing certain automatic switches required by the Commonwealth. In order to explain the dispute between Zangrilli and Andrichyn concerning this item, it is first necessary to describe certain provisions in the contract between Andrichyn and the Commonwealth and in the subcontract between Andrichyn and Zangrilli.
Andrichyn's contract with the Commonwealth included detailed plans and specifications for the work to be performed on the Pennhurst project. However, that contract also permitted the Secretary of the Department of Property and Supplies to make "such alterations in the plans and specifications . . . as may be considered necessary or desirable, from time to time, to fully and perfectly complete the construction . . . ." That contract provided, in addition, that when changes ordered by the Commonwealth increased the contractor's expenses, "a fair and equitable sum shall be agreed upon, in writing, by negotiation between the contractor and the duly authorized representatives of the Bureau, before such work is begun." If the parties were unable to agree on a price, the contract permitted the Commonwealth to "direct the Contractor to do such extra work on a force account basis." The contract specified how the contractor's compensation for materials, labor, and equipment was to be calculated when the Commonwealth invoked the force account provision of the contract.
Unlike Andrichyn's contract with the Commonwealth, which was detailed and more than 200 pages long, Zangrilli's agreement with Andrichyn was a one-page form contract to which a few typewritten words and sentences were added. Under that contract, Zangrilli agreed "to furnish all labor, material, and equipment to complete electrical work in its entirety. . . required in the erection of Emergency Renovations, Pennhurst State School & Hospital, Spring City, Pa. . . . in accordance with plans and specs. . . ." (Italics added; italized words and letters are those which were typed on the printed form contract.)
The original plans and specifications for the Pennhurst project called for the installation of certain manual switches. However, the Commonwealth later directed that automatic switches be installed. The district court made the following undisputed findings of fact with respect to the events which ensued:
In order to negotiate the adjustment with the Commonwealth, Andrichyn requested Zangrilli to submit its additional charges for the change. The subcontractor wished to be relieved from purchasing the automatic switches. Eventually on January 27, 1971 by letter (Exhibit P-1), Zangrilli and Andrichyn agreed that Andrichyn would purchase the switches, and Zangrilli would install the same, for which Andrichyn would receive a credit from Zangrilli of $15,500.00. The parties stipulated at trial that this sum was later increased by agreement to $17,000.00. By reason of this agreement, Zangrilli did not have to purchase either the manual switches (as originally required), or the automatic switches required under the "change-order". The letter of January 27, 1971 (Exhibit P-1) further stated:
The acceptance of this credit by this office [Andrichyn] is subject to the approval of the Department of Property and Supplies [Commonwealth of Pennsylvania].
6. Andrichyn and the Commonwealth failed to agree as to the proper adjustment for the change concerning the switches, and the Commonwealth directed the change-order on a "force account basis".
7. Zangrilli was advised by Andrichyn that the switch changes were to be on a "force account basis". By letter dated May 7, 1971, Zangrilli advised Andrichyn that it would not provide the automatic switches on a "force account", and would only proceed "under a fixed sum basis". (Exhibit D-9).
8. Pursuant to the agreement between Andrichyn and Zangrilli, Andrichyn purchased the automatic switches. The total cost to Andrichyn for the automatic switches was $40,455 (purchase price - $40,280 plus storage and unloading - $175). Eventually, under contract procedures for work done on a "force account", the Commonwealth allowed Andrichyn $14,094.69 additional for the change from manual to automatic switches. The difference between the amount allowed of $14,094.69 and the actual cost of purchase of $40,455 is $26,360.31. This sum Andrichyn claims as a credit chargeback to Zangrilli. Zangrilli concedes only $17,000 based on (a) the agreement (Exhibit P-1) as orally amended, and (b) Zangrilli's refusal to proceed on a "force account basis" (Exhibit D-9). This disputed difference is $9,360.31.
In the district court, Andrichyn argued that it should be allowed to set off the sum of $26,360.61 against the amount it owed to Zangrilli. Westinghouse, on the other hand, maintained that the force account provisions of the general contract were not binding on Zangrilli and it therefore argued that a setoff of only $17,000 should be allowed, thereby arguing that the award of damages to Westinghouse should be increased by $9,360.31.
The district court agreed with Andrichyn. It wrote:
The plans and specifications of the general contract would seem to encompass the contractual specifications as to procedures for adjusting change-orders. Consequently, the subcontractor could not unilaterally declare that it would not be bound by a "forced account" change-order direction from the Commonwealth.
I have, therefore, concluded that Zangrilli would be liable to Andrichyn for the difference between that which Andrichyn paid for the automatic switches and that which the Commonwealth allowed, being the sum of $26,360.31. . . .
We have concluded that the district court did not err in permitting a setoff in the amount of $26,360.31.
As we noted above, the district court permitted the $26,360.31 setoff because it believed that the subcontract between Zangrilli and Andrichyn incorporated the force account provisions contained in the general contract. In this appeal, both of the parties have also focused upon the terms of the original subcontract between Zangrilli and Andrichyn. We believe, however, that the rights and duties of Zangrilli and Andrichyn with respect to the switches are governed in the first instance, not by their original subcontract, but by the letter-agreement into which they entered on January 27, 1971. See pp. 4-5 supra. In our view, that agreement superseded the original subcontract insofar as the switches were concerned; it unconditionally shifted the duty to purchase the switches from Zangrilli to Andrichyn; and it obligated Andrichyn to accept $15,500 (later increased to $17,000) from Zangrilli as payment in full for purchasing the switches - provided that the Commonwealth agreed to increase its payments under the general contract by that amount.
The very terms of the January 27 agreement indicate that that agreement constituted immediate satisfaction and discharge of the parties' previous contractual duties with respect to the switches. Under Pennsylvania law and general contract law, a subsequent agreement has this effect only if that is the parties' intent. Marine Towing Co. v. Fairbanks, Morse & Co., 225 F. Supp. 467, 473 (E.D. Pa. 1963); Advanced Management Research Inc. v. Emanuel, 439 Pa. 385, 390-91, 266 A.2d 673, 675-76 (1970); Hydro-Flex, Inc. v. Alter Bolt Co., Inc., 223 Pa. ...