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Rand Construction v. Dearborn Mid-West

May 6, 2013

RAND CONSTRUCTION COMPANY, PLAINTIFF,
v.
DEARBORN MID-WEST CONVEYOR CO., DEFENDANT. AND ARCH ENVIRONMENTAL EQUIPMENT, INC., THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: J. Thomas Marten, Judge

MEMORANDUM AND ORDER

This case arises from an Air Force project for the construction of an automated coal-fueled power plant in Alaska. After installation of a new conveyor system was delayed, the Air Force assessed liquidated damages against the General Contractor. The parties to the present action are subordinate contractors who dispute among themselves where the ultimate responsibility for those damages, and the underlying failure of the conveyor system, should rest. All of the parties have submitted summary judgment motions, which are resolved as provided herein.

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir. 1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir. 1987).

In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

1. Facts Relating to Rand and Dearborn Motions

On April 28, 2009, the Air Force issued Solicitation No. FA 5004-09-R-0007, for the construction of, in pertinent part, a coal conveyor system for an automated coal-fueled power plant. The solicitation required this construction to take place in accordance with the drawings and specifications and to furnish, fabricate, and install all labor, material, equipment, supervision, work and facilities necessary to complete the project. The solicitation provided that all work was to be performed strictly in accordance with the included drawings and specifications.

With regard to V-plows and lift tables, "Part 4 - Design Criteria" of the specifications provided:

4.01 The following design criteria applies: . . . .

I. The Owner will operate the coal handling systems twice daily; however, all components shall be designed for continuous, severe, heavy duty, minimum maintenance, 24 hours per day, 365 days per year operation in a coal-fired power plant environment.

J. The conveyor system shall be designed to minimize spillage.

The Air Force contract does not explicitly quantify the maximum amount of spillage permitted.

The Air Force awarded the prime contract to Three Phase Electrical, Inc. on September 11, 2009. Three days later, Three Phase contracted with Rand to demolish the old conveyor system and install new conveying equipment.

Rand's contract with Three Phase does not explicitly provide for liquidated damages. Section 3.3.1 of that contract provides:

Liquidated damages for delay, if provided for in Section 9.3 of this Agreement, shall be assessed against [Rand] only to the extent caused by the Subcontractor or any person or entity for whose acts [Rand] may be liable, and in no case for delays or causes outside the scope of this Subcontract.

Section 9.3 itself does not expressly provide for liquidated damages. Section 9.1 and 9.3 define the dates of commencement and substantial completion; both contain form instructions to insert relevant dates where appropriate in the available blank spaces. The parties to the contract duly provided these dates by typewritten insertion. Section 9.3 contains the further instruction "Insert provisions, if any, for liquidated damages relating to failure to complete on time." (Italics in original) The space following has been left blank. There are no liquidated damages provisions inserted into the space provided in Section 9.3.

Rand sought bids for design and supply of new conveying equipment to be installed in the utility plant at Eielson Air Force Base. On May 4, 2009, Rand issued a Request for Proposal for subcontract work on the Project, including the coal tripper conveyor. That RFP included portions of the Air Force specifications and requirements for the Project.

Dearborn was given a copy of the solicitation. Dearborn then gave Rand its proposal. In a June 8, 2009 letter, Dearborn wrote:

We are pleased to submit our proposal, one (1) original, one (1) copy and one

(1) electronic copy for the design, fabrication, and delivery of the Material Handling System for the above referenced project.

Our offer is generally in compliance with the specifications issued with the request for proposal dated May 9, 2009 and amendments 1, 2 and 3. Our clarifications and exceptions are listed in Appendix F to our proposal.. Appendix F contains exceptions and clarifications to the specifications. It provides in part:

Section F 52.211-12 - Liquidated Damages

DMW equipment suppliers are not prepared to accept any liquidated damages for delivery delays, as such no provision is made in our bid. Warranties.

DMW will provide replacement goods for defective equipment but removal and installation would be by others.

Rand contracted with Dearborn to provide a plow system for the conveyor, and on October 7, 2009, Rand entered into a Purchase Order Agreement with Dearborn under which Dearborn was to "design and supply a plow conveyor system." The Purchase Order, signed by Dearborn, provides in part:

Indemnification

To the fullest extent permitted by law, the Supplier shall defend, indemnify and hold harmless the Owner and Contractor and agents and employees of any of them from and against claims, damages, losses and expenses, including by [sic] not limited to attorney's fees, arising out of or resulting from performance of the Supplier's Work under this Purchase Order Agreement, by [sic] only to the extent caused in whole or in part by acts or omissions of the Supplier, the Supplier's Sub-suppliers, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge or otherwise reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this paragraph.

In claims against any person or entity indemnified under the paragraph above by an employee of the Supplier, the Supplier's Sub-suppliers, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under the preceding paragraph shall not be limited by a limitation on amount or type of damages, compensation or benefits by or for the supplied or Supplier's Sub-suppliers under workers' or workmen's compensation acts, disability benefits or other employee benefit acts.

Lawrence Grant (of Rand) and Jim Smothers (of Dearborn) discussed the schedule for delivery. Rand cites Grant's deposition testimony stating that he explicitly spoke to Smothers the about the assessment of liquidated damages for late delivery, and that Smothers told him that Dearborn was excluding liquidated damages due to delivery delays. According to Dearborn, Smothers told Grant that Dearborn believed the proposal expressly disclaimed liquidated damages.

On or about November 19, 2009, Dearborn issued its Purchase Order No. 09-76178-024-00 to Arch Environmental to supply certain specified equipment, parts, manuals, drawings, calculations, design review and guaranty.

Arch supplied equipment to Dearborn including five of its standard V-plows and lift beds, and Dearborn in turn supplied these to Rand. Rand knows of no other manufacturers' standard V-plow system on the market, other than the one supplied by Arch.

Shortly before the old conveyor system was shut down, Dearborn's Lloyd Sanders emailed Rand's Larry Grant in response to concerns about delays in transporting the conveyor system, indicating its understanding that the proposal excluded damages for delays.

Today is June 7th, less than one week prior to the shutdown. We will proceed immediately, but note that a two week time table puts you at the end of your install window. I am recommending that the customer be advised that this change creates a very serious risk to completing the change over within the 10 day shutdown. I also recommend that a request be made for an appropriate schedule extension to include this change. Please note that as stated in our proposal, DMW will not be responsible for delays caused by this addition.

The facts establish that the contract between Rand and Dearborn is comprised of Dearborn's June 8 proposal and the October 7, 2009 Purchase Order. As part of its design and supply services to Rand, Dearborn solicited and received a quote from Arch for a multi-plow system with lift tables and controls, and Dearborn issued a purchase order to Arch to design and supply plows for the project. Arch's standard V-plow was the only such standard-design V-plow on the market.

The power plant at Eielson Air Force Base was shut down in mid-June of 2010, so that Rand could remove the existing conveying equipment and then install the new conveying equipment supplied by Dearborn. Rand Construction was responsible for the installation and adjustment of the equipment. Arch designed and supplied the plows to Dearborn as part of Dearborn's services to Rand on the Project.

On or about June 26, Rand tried to start the new conveying equipment. According to Grant, the new conveying equipment failed to perform - serious coal "back-up" and spillage problems occurred. An Air Force official told Grant the system was "unacceptable, we've got to remedy it."

Dearborn objects to Grant's testimony, on the grounds that the assertion requires expert testimony, and Grant has not been designated as an expert witness. It further argues that some spillage was contemplated by the parties, as the system contemplated a design which would "minimize" spillage. Dearborn alleges that Rand failed to properly adjust the return V-plow, allowing coal spilling onto the return belt to travel to the tail pulley and become trapped between the belt and pulley causing the belt to mis-track and stop.

Dearborn supports this claim by citing Grant's deposition, but does so by misconstruing the testimony. At one point, Grant was asked if Rand had tried to repair the conveyor to prevent coal from getting into the tail pulley, and he responded that "We made adjustments to it [but] they were still not adequate." In context, Grant did not direct this fault at Rand, but at the system itself. He clearly testified that Rand could not adjust the problem away because the conveyor "wasn't able to run long enough to make any adjustments" without becoming stuck.

When counsel suggested this meant the system "was so sufficiently far out of adjustment that it was not serving its purpose," Grant explicitly denied this, saying "That's not fair." He explained that the slack in an empty conveyor prevented adequate adjustments before starting the system with a full load. And the system could not be adjusted incrementally because of the speed of the spill:

We were only able to run at the beginning for a very few seconds before there was enough coal on the belt to go up and around the tail pulley. There wasn't enough time to make adjustments on there. We're talking less than a minute that the conveyer was running.

Because the only basis for Dearborn's allegation of fault by Rand is Grant's testimony taken out of context, the court denies the requested finding.

Again citing Grant's testimony, Dearborn asserts the relative success of the system, by asserting that it conveyed some 20 tons of coal into Bin 1 on June 26, 2010, while generating only spillage of about eight to ten five-gallon buckets. Again, this fails to fairly set forth Grant's testimony. Grant stated that at the end of the day, the system had delivered "[s]everal tons" into Bin 1 after the testing had been completed, but that "[w]e never made it far enough to get hardly any coal in Bin 2." More importantly, the problem with the spillage was not its absolute amount but its effect -- "It would still spill quick enough that we couldn't run more than about a minute before it shut down" automatically.

Lloyd Sanders, the Project Manager of Dearborn, prepared a time line of the events giving rise to this lawsuit. Sanders wrote to Arch the day after the test run stating that the system "cannot run with the coal trapped as the table jams up with coal." Sanders indicated in an October 8, 2010 letter that the plows and lift tables did not function as specified, in that the lift tables and plows failed to properly remove material from the conveyor belt.

Robert Shelton, Dearborn's liaison and field representative, helped with the installation of the system, although the agreement between Rand and Dearborn provided that installation and erection of the equipment would not be performed by Dearborn. In his deposition, Shelton agreed that the system's performance during the start up "[w]as not acceptable." Shelton also testified that there "was no problem with the installation" of the Arch V-Plow and lift tables, and that Rand "did a very good job" in installing the system. Shelton testified that the root cause of the problem was the plow angle.

According to Jesse Sanchez, the Project Engineer for Dearborn, the original V-Plow system did not work as intended.

After consultations between the Air Force and Rand, Arch delivered a new V-Plow and lift tables. When these were installed, they succeeded in eliminating spillage. The new plow system effectively and efficiently moved the coal to the bunkers. The Air Force accepted the new system on July 7, 2011.

On August 5, 2010, the Air Force sent to Three Phase an Amendment of Solicitation/ Modification of Contract. In addition to assessing $766,000.00 in liquidated damages against Three Phase, the Amendment provided:

The reason for this contract unilateral modification is as follows:

1. To exercise the government's right to access [sic] liquidated damages from the contractor for 10 days of contractor caused delay by not delivering a operating coal delivery system at the end of the 13 day plant shutdown performance period.

Dearborn sent the Amendment to Arch on October 8, 2010. The cover letter to the Amendment stated:

Attached please find the Government's Liquidated Damages assessed against Three Phase Electric for the delays in providing an operating coal plow conveyor system. The delay is the result of the lift tables and plows not functioning as specified at the end of the original shutdown. The lift tables and plows failed to properly remove material from the conveyor belt. Liquidated Damage letter from Eielson AFB attached.

On or about July 7, 2011, the new conveying system was operational, eliminated spillage and was accepted by Rand and the Air Force.

To make the new system operational, Rand incurred expenses totaling $216,546.03 for labor, material and subcontract costs. However, the expense report does not separate labor and travel expenses that were incurred due to the revision of the system, from labor and travel expenses that would have been incurred regardless of whether Rand chose to replace the original equipment with revised equipment.

Rand has incurred, and will continue to incur, attorneys fees as the result of the events referenced in this lawsuit. Rand has not paid Dearborn $316,600.00 of the contract price.

2. Facts Related to Arch's Motion

Arch is a small bulk materials conveying equipment supplier that has sold various pieces of equipment to Dearborn over the years. It has approximately 25 employees. Arch is not an engineering firm, and currently has no engineering department and has no engineer on staff, although it has employed engineers in the past.

In the late 1990s, Arch developed a diverter V-plow for the carrying side of the conveyor belt at customer request to divert boron. In total, Arch has supplied its diverter plow to a half dozen customers since it was developed.

A large part of Arch's business is the bulk conveyance of coal, specifically belt cleaners, skirting, seals and miscellaneous other products. Some 30% of its business is conveyor belt cleaning products -- scrapers and return plows. Arch makes two different belt plows: a return V-plow (which diverts material off of both sides of the belt), and an angle or single plow (which diverts material off only one side). A return plow mounts onto the return side of a conveyor belt to clean the belt in order to protect the tail pulley. Prior to the Alaska Air Force project, Arch's diverter v-plow was never used for moving coal.

Dearborn is a major player in the bulk conveying industry, with in-house engineers whose job it is to perform design calculations. It had previously bought equipment from Arch, and had used a purchase order containing its standard terms and conditions.

Dearborn sent Arch the complete Air Force Solicitation for the project, including the project specifications and original bid package. The Solicitation including the provision for daily liquidated damages.

In May, 2009, Dearborn first contacted Arch about the Alaska project. On October 28, 2009, Dearborn wrote:

We have project in house for the Eielsen AFB in Alaska - At this time, we are looking into the possibility of using your ...


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