McNally Wellman Co., a Div. of Boliden Allis, Inc. v. New York State Elec. & Gas Corp.

Citation63 F.3d 1188
Decision Date18 August 1995
Docket NumberNo. 1650,1650
Parties27 UCC Rep.Serv.2d 289 McNALLY WELLMAN COMPANY, A DIVISION OF BOLIDEN ALLIS, INC., Plaintiff-Counter-Defendant-Appellee, v. NEW YORK STATE ELECTRIC & GAS CORPORATION, Defendant-Counter-Claimant-Appellant. Docket 94-9273.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Michael Guararra, New York City (Huber Lawrence & Abell, of counsel), for defendant-counter-claimant-appellant.

John R. Dingess, Pittsburgh, PA (Kirkpatrick & Lockhart, of counsel), for plaintiff-counter-defendant-appellee.

Before: MESKILL, McLAUGHLIN and LAY, * Circuit Judges.

MESKILL, Circuit Judge:

This case requires us to construe a contract clause excluding incidental and consequential damages under New York law. McNally Wellman Company, a division of Boliden Allis, Inc. (McNally), brought this diversity action to recover on a construction contract between its predecessor, Dravo Corporation, 1 and New York State Electric & Gas Company (NYSEG), for the sale of six spillway gates and other equipment for a dam project. NYSEG filed counterclaims seeking recovery of the costs it incurred from McNally's delay in delivering the gates. The United States District Court for the Northern District of New York, Munson, J., found that the terms of the contract, as interpreted under New York's Uniform Commercial Code (UCC), prevented NYSEG from recovering on its counterclaims, and entered summary judgment in McNally's favor. We affirm.

BACKGROUND

NYSEG's Upper Mechanicville Spillway Project involved the refurbishment of a dam in Upper Mechanicville, New York. NYSEG hired McNally to supply the six spillway gates for the dam, together with other embedded parts and a hydraulic operating system, and the two parties signed a written contract memorializing their agreement on June 17, 1988. The contract provided that McNally would deliver the first pair of gates by November 28, 1988, the second pair by June 3, 1989, and the third pair by September 1, 1989. Performance by the last of these dates was considered necessary to ensure completion of the entire project by May 20, 1990, the termination date of NYSEG's construction permit with the Federal Energy Regulatory Commission (FERC). McNally received progress payments under the contract following the delivery of each of the gates, which were 111 feet long and weighed approximately 500,000 pounds. McNally took no responsibility for on-site assembly or installation or any future maintenance of the gates. NYSEG, for its part, conducted an independent evaluation of Ellwood City Iron & Wire Company (Ellwood), McNally's choice of subcontractor responsible for the fabrication of the gates, and explicitly approved McNally's choice.

McNally's selection of Ellwood proved unfortunate, for the subcontractor experienced financial and labor difficulties that ultimately delayed delivery of the gates. McNally's project manager, Robert Rice, first informed NYSEG that Ellwood would be unable to meet the original delivery schedule on January 18, 1989. The parties then agreed to two revisions to the delivery schedule. NYSEG's project manager, Richard Potts, consented to the revisions, realizing that if delivery was made under the original schedule NYSEG would have to store the gates for several months until the project was ready for their installation. Under the second revision the delivery of all gates was to be completed by September 18, 1989, and Potts informed Rice that this final delivery date was the latest acceptable to avoid a delay in the overall project.

Although McNally in turn informed Ellwood of the revised delivery dates, Ellwood failed to produce the gates as scheduled. On March 29, 1989 Ellwood, experiencing cash-flow problems, threatened to take workers off the gates unless McNally made a substantial progress payment, even though Ellwood's contract required McNally to make payments only on shipment of each gate. McNally eventually yielded to Ellwood's demand, agreeing on April 14 to pre-pay $74,000 in return for a security interest in the gates and Ellwood's promise not to remove workers from the job. NYSEG meanwhile became increasingly concerned with Ellwood's productivity, and on April 24, 1989 NYSEG invoked paragraph 90.2 of McNally's contract to require McNally to furnish 24-hour labor to put the work back on schedule. Paragraph 90.2 states in pertinent part:

If progress of the Work is such that in the opinion of Engineer its completion within the Contract time appears improbable, due allowance having been made for extensions of time as set forth above, Contractor, if Engineer so directs, shall proceed with the work day and night, Sundays and Holidays, furnishing a full force of men and foremen for all overtime work until work is back on schedule, and in such case, Contractor shall have no claim for extra costs, expenses or changes thereby occasioned.

Because the subcontract between McNally and Ellwood did not contain a provision similar to paragraph 90.2, however, McNally was unable to force Ellwood to undertake production on a 24-hour basis. Ellwood subsequently made another demand for an advance payment from McNally, and kept its workers off the job for several weeks until this second dispute was resolved.

These delays forced NYSEG and McNally to revise the delivery schedule on two subsequent occasions, each anticipating delivery of the final gate in September 1989. When representatives of NYSEG, McNally and Ellwood met to assess progress on August 30, after delivery of only four gates, Ellwood's representative stated that his company was being liquidated in early October but intended to deliver the last two gates by September 12. This prediction also proved unrealistic, and McNally subsequently terminated its contract with Ellwood. This decision forced McNally to bring a replevin action to obtain possession of gates five and six from Ellwood, and to hire another company, Western Pennsylvania Steel Fabrication, to complete the gates. As a result, NYSEG did not receive the fifth gate until December 26, 1989 and the sixth gate until February 2, 1990. 2

NYSEG claims the delay in delivery of each of the gates caused it to incur costs, most significantly the expense of maintaining the subcontractor responsible for the gates' installations at the project during the winter months. Importantly, however, the delays did not prevent NYSEG from completing the project prior to the termination date on its FERC construction permit or force it to incur additional costs (other than the installation subcontractor's standby costs) to meet that deadline, and NYSEG further concedes that all six gates were manufactured as warranted under McNally's contract.

Thereafter, NYSEG refused to make its final payment to McNally, contending that the delivery delays constituted a breach of their contract, and further assessed to McNally the standby costs incurred by the installation subcontractor. In response McNally invoked paragraph 360 of the contract. This special provision, added as an addendum by McNally and amended and approved by NYSEG, reads in pertinent part:

In no event and not withstanding [sic] any other provision of this Contract shall Contractor be liable for any special, incidental, indirect, or consequential damages, or for any damages of a similar nature arising out of or in connection with this Contract, ... regardless of whether any such liability shall be claimed in contract, equity, tort (including negligence) or otherwise. By way of example of the foregoing limitation of liability, but without limiting in any manner its scope or application, Contractor shall not be liable for all or any part of any of the following, no matter how claimed ...: loss of profit or revenue, ... cost of capital, ... loss or reduction of use or value of any facilities ... or increased costs of operations or maintenance. The limitation of liability contained in this Article shall be effective without regard to Contractor's performance or failure or delay of performance under any other term or condition of this Contract, including those contained in any warranty article.

In any case where Contractor is supplying only design and components and is not responsible for erection of the equipment, all costs related to the assembly and erection of the equipment in the field shall be deemed special, indirect, incidental or consequential and shall in no case be the responsibility of Contractor. This clause is not intended to supercede [sic] the rights of Owner [NYSEG] to require the Contractor to bear all costs and expenses of corrective work under the warranty.

Unable to reach an agreement on payment McNally filed this diversity action for $469,416.40 plus interest under theories of breach of contract and quantum meruit. NYSEG counterclaimed, seeking $872,793.09 as damages for the costs it allegedly incurred as a result of McNally's delays.

The case followed a somewhat tortuous path during which the district court addressed the various legal issues now also raised in this appeal. In sum, the district court first found that paragraph 360 exonerated McNally from liability for NYSEG's delay costs, but directed discovery on the issue of whether any of the common law exceptions to "no-damage-for-delay" clauses, as set forth in Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 502 N.Y.S.2d 681, 493 N.E.2d 905 (1986), rendered paragraph 360 unenforceable. After the conclusion of this additional discovery NYSEG amended its counterclaims to assert that McNally breached a fundamental obligation under the contract and acted in bad faith. The district court then rejected these common-law claims by concluding that because the contract involved the sale of goods, it was governed by Article 2 of the UCC and not the common law, and further determined that paragraph 360 was enforceable under the UCC. Reaffirming its earlier finding, the district court...

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