Hess Oil Virgin Islands Corp. v. UOP, Inc.

• Decision Date: 18 November 1988
• Docket Number: 84-2521,Nos. 84-2419,s. 84-2419
• Parties: HESS OIL VIRGIN ISLANDS CORP., a United States Virgin Islands Corporation; Federal Insurance Company, a New Jersey Corporation; and Insurance Company of North America, a Pennsylvania Corporation, Plaintiffs-Appellants, v. UOP, INC., a Delaware Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1197

861 F.2d 1197

HESS OIL VIRGIN ISLANDS CORP., a United States Virgin Islands Corporation; Federal Insurance Company, a New Jersey Corporation; and Insurance Company of North America a Pennsylvania Corporation, Plaintiffs-Appellants, v. UOP, INC., a Delaware Corporation, Defendant-Appellee.

Nos. 84-2419, 84-2521.

United States Court of Appeals Tenth Circuit.

Nov. 18, 1988.

James T. Ferrini (Clausen Miller Gorman Caffrey & Witous, P.C., Chicago, Ill., and Knight Wagner Stuart Wilkerson & Lieber, Tulsa, Okl., John J. Witous, Richard D. Wagner, Margaret J. Orbon and Lisa Marco Kouba, of counsel, were also on the brief), for plaintiffs-appellants.

Arthur R. Karstaedt, III, Denver, Colo. (John R. Trigg, Denver Colo., was also on the brief), for defendant-appellee.

Before HOLLOWAY, Chief Judge, BARRETT, Circuit Judge, and SAM, District Judge ^*.

HOLLOWAY, Chief Judge.

This diversity action was brought by Hess Oil Virgin Islands Corporation ("HOVIC"), and the Insurance Company of North America ("INA") and Federal Insurance Company ("FIC"), as subrogees to recover damages for an oil refinery fire on St. Croix in the Virgin Islands in 1973. Defendant Universal Oil Products, Inc. ("UOP") is an owner of patented processes and developer of a hydrobon desulphurization process which it licensed to HOVIC. Plaintiffs asserted three theories of recovery: breach of contract, breach of express and implied warranties, and negligence. The court bifurcated the action and tried the issue of liability first. The jury returned a verdict for UOP on the contract and warranties claims, and a verdict for plaintiffs on the negligence claim. After the damages trial, the jury found UOP 70% negligent and HOVIC 30% contributorily negligent.

Subsequent to the liability trial and prior to the damages trial, the trial court granted UOP's motion for partial summary judgment, holding that HOVIC had contractually exculpated UOP from liability for consequential damages and limited liability for UOP's negligence to the amount necessary to rebuild the refinery. As a result of the court's order limiting damages, plaintiffs recovery for damages was reduced by nearly 7.5 million dollars. The plaintiffs were awarded $4,009,359 by the jury as the total cost to rebuild the refinery. The trial court in its Judgment Order, entered judgment for plaintiffs for $1,166,638, with interest, after reducing the jury award $199,874 which was in excess of the proofs of loss submitted by HOVIC for property loss, and further reducing the award by 30% which represented HOVIC's percentage of negligence, and then crediting UOP with sums paid in settlement by former defendants. Plaintiffs (hereinafter "HOVIC") appeal the damages award and denial of attorney's fees, and UOP appeals the finding of liability.

I.

HOVIC and UOP entered into several contracts and agreements which related to the development of a distillate desulphurizer, designated a DD4. The agreements included an Engineering Agreement, a Guarantee Agreement, and a Service Agreement. The Engineering Agreement related to the DD4 and obligated UOP to furnish engineering specifications which HOVIC and the general contractor would be required to follow. The Engineering Agreement contained a limitation on liability in Article 7, which read in part as follows:

(a) UOP warrants that the work and services performed by it under this agreement shall, with respect to each Unit, be performed in accordance with accepted engineering standards accepted by the U.S. Petroleum Refining industry. UOP's total liability for breach of the foregoing warranty, if any, or otherwise for any losses, damages, claims or demands arising out the work and services performed by it under this agreement, shall be limited in total to one-half of the payments made to UOP by REFINER....

(e) UOP shall not be responsible or liable for (i) defective material and equipment, or (ii) property damage or bodily injury arising out of the work and services performed under this agreement unless caused by the willful acts or negligence of UOP. Except as otherwise provided in this Article 7, UOP shall not be liable for or obligated in any manner to pay any losses, damages, claims or demands arising out of the work and services performed by it under this agreement. In no event shall UOP be liable for or obligated in any manner to pay any consequential or indirect damages.

HOVIC makes several arguments as to why the district court's decision regarding the limitation on its damages should be reversed. First, HOVIC claims that under the Illinois rule of strict construction, its contractual limitation of UOP's liability for consequential damages applies only for UOP's contractual liability and not for its negligence. Second, HOVIC asserts that an Illinois statute renders void hold harmless clauses in construction related contracts and voids the exculpatory agreement. In the alternative, HOVIC says that a portion of the damages award, treated by the trial judge as consequential damages under the exculpatory agreement, was not consequential merely because it received reimbursement for that portion of its loss under its "business interuption" policies. HOVIC also argues that the district court improperly calculated the damages reduction for the percentage of negligence for which HOVIC was found contributorily negligent, and the credit due for the amount which former defendants paid in settlement. Finally, as the prevailing party HOVIC claims that under Oklahoma law it is entitled to attorney's fees.

UOP, in its cross-appeal, asserts that the district court erroneously instructed the jury under Virgin Islands comparative negligence law. Secondly, UOP argues because the jury found that it did not breach its contract with HOVIC, the submission of HOVIC's tort claim to the jury was erroneous.

Neither party questions the district court's decision to apply Illinois law in construing the exculpatory or limiting contractual provision in the Engineering Agreement, nor disputes the correctness of the district court's reliance upon Virgin Islands law for the substantive law of negligence. The parties disagree as to the appropriate law to apply on the issue of attorney's fees.

II.

A.

UOP argues that the trial court committed reversible error by allowing HOVIC's negligence claims to go to the jury after it had already been determined that UOP did not breach any contract or warranty between itself and HOVIC. UOP says that the relationship between itself and HOVIC was completely contractual; that is all of its duties, obligations and rights towards HOVIC were contained in the parties' Agreements. UOP asserts that any of its acts or omissions which allegedly caused the refinery fire were activities that were required and specified in the Agreements; therefore, no independent or extracontractual duty in tort can arise which is separate from those duties expressed in the Agreements. UOP says that because HOVIC's contract and negligence claims relied on the same facts, and HOVIC's allegations of tort duties fall within one or more of UOP's contractual obligations to HOVIC, the verdict by the jury finding no breach of contract or warranties by UOP requires reversal of HOVIC's judgment based on negligence. We disagree.

UOP relies primarily on Isler v. Texas Oil & Gas Corp., 749 F.2d 22 (10th Cir.1984), Illinois Central Gulf R.R. Co. v. Pargas, Inc., 722 F.2d 253 (5th Cir.1984) and Western Industries, Inc. v. Newcor Canada Ltd., 739 F.2d 1198 (7th Cir.1984), in support of its position that HOVIC's negligence claims were precluded by a determination that no contract was breached. They are inapposite. In Isler, the plaintiffs brought a contract and negligence action against an oil and gas leasee. As part of their contract, the defendant lessee agreed to use its bests efforts to make rental payments on the property but had no responsibility to plaintiffs if it failed. However, the contract did provide that the defendant was to give plaintiffs notice prior to the discontinuation of payments. Plaintiffs sought to recover damages from defendant after he drilled two wells without notice that the lease had expired due to defendant's failure to pay. The jury found that the defendant did not breach its contract with plaintiffs, but determined that defendant was liable to plaintiffs for negligence. Id. at 22. We reversed, stating:

... the facts alleged in plaintiffs' tort claim are precisely the same as those alleged in their contract claim. Because the contract specifically defined the rights and duties of the parties regarding rental payments and notice, thereby precluding any extracontractual tort duty regarding such payments, we must reverse the judgment for plaintiffs sounding in tort.

Id. at 24. (emphasis added). Thus, Isler makes the point that no tort duty can be imposed on a party where that party's same duties and rights are specifically defined by contract. That is not the case here. For similar reasons Western Industries and Illinois Central are not pertinent.

HOVIC does not allege any tort duties arising from any specifically defined rights in the parties' contract, but claims that UOP's negligence was founded on breach of a duty independent from those specific duties defined in the contract. In fact, UOP concedes that the contract expressly provides that it will be responsible for its own negligence. (Answer Brief of UOP, p. 10). Therefore, UOP's argument that HOVIC's negligence claims were negated by the contract, or are precisely the same as HOVIC's contractual claims, is untenable. ¹

We believe the allegations asserted by HOVIC against UOP for negligence are separate and distinct from UOP's contractual obligations owed to HOVIC. UOP's relationship to HOVIC for the performance of services imposes on UOP a duty of care to act reasonably toward HOVIC, apart from the specific duties in the parties' contract. DCR, Inc. v. Peak Alarm Co., 663 P.2d 433, 435-37 (...