Lincoln Pulp & Paper Co., Inc. v. Dravo Corp.
| Decision Date | 09 August 1977 |
| Docket Number | Civ. No. 74-65-ND. |
| Citation | 436 F. Supp. 262 |
| Parties | LINCOLN PULP & PAPER CO., INC., Plaintiff, v. DRAVO CORPORATION, Defendant and Third-Party Plaintiff, v. BABCOCK & WILCOX COMPANY, Koppers Company, and Whiting Corporation, Third-Party Defendants. |
| Court | U.S. District Court — District of Maine |
COPYRIGHT MATERIAL OMITTED
Arnold L. Veague, Bernard J. Kubetz, Bangor, Me., William L. D. Barrett, Caroline Martin, Manley Fleischmann, Robert A. Kandel, James V. Ryan, New York City, for plaintiff.
Ralph I. Lancaster, Ernest J. Babcock, Jotham D. Pierce, Jr., Portland, Me., William V. Kane, Allan Tupper Brown, Washington, D. C., Howard H. Dana, Jr., John W. Philbrick, Portland, Me., for defendant and third-party plaintiff.
Gerald F. Petruccelli, Thomas Cox, Portland, Me., Gene Carter, Richard J. Relyea, Bangor, Me., for third-party defendants.
This action arises from an engineering and construction contract dated December 4, 1970 and executed on March 9, 1971, under which defendant Dravo Corporation ("Dravo") agreed to design and construct a new heat and chemical recovery boiler and associated equipment to modify the existing chemical recovery system at the kraft pulp mill in Lincoln, Maine owned by plaintiff Lincoln Pulp and Paper Co., Inc. ("Lincoln"). Jurisdiction is predicated upon diversity of citizenship, the amount in controversy exceeding $10,000, exclusive of interest and costs. 28 U.S.C. § 1332(a). Count I of the complaint alleges breach of the underlying contract; Count II alleges breach of express and implied warranties; and Count III alleges negligence in design, construction and subsequent repair.1 Lincoln seeks in excess of $22 million in direct and consequential damages, including the cost of reconstruction and repair as well as loss of past and future profits resulting from lack of past, present and future production capacity.
The contract was for a fixed fee of $5.2 million and specified the work to be performed and the equipment guarantees which Dravo undertook to meet. In addition, the contract contains the following clause limiting Dravo's liability for damages:
At pretrial conference the Court ordered that the applicability of this limitation of liability clause be separately determined in advance of trial of the remaining issues of liability and damages. For the purposes of the determination of this question, the parties have agreed to assume that Lincoln is able to establish breach of contract, breach of express and implied warranties, and negligence on the part of Dravo, as alleged in the complaint, reserving, however, for further consideration the applicability of the clause in the event Lincoln is able to establish conduct amounting to unconscionability. A three-day evidentiary hearing has been held and the issues have been comprehensively briefed and argued.
The sole issue before the Court at this time is the meaning and effect of the above-quoted limitation of liability clause. Dravo contends that the clause relieves it of all liability to Lincoln (1) for any consequential damages resulting from loss of time in putting the modified chemical recovery system in operation or from delays or loss of time affecting other plants or property of Lincoln, and (2) for loss of profits and products, whether Lincoln's claim for such damages and losses are based upon allegations of breach of contract, breach of warranty, or negligence.2 Lincoln contends that the clause shields Dravo only from liability for Lincoln's consequential damages, including loss of profits and products, resulting from reasonable delay in start-up, and that if Lincoln establishes breach of contract, breach of warranty, or negligence, as alleged in the complaint, there should be no other limitation on Lincoln's provable damages. Additionally, Lincoln argues that whatever protection the clause affords is lost to Dravo if Dravo is found to have breached its contractual obligation to promptly repair or replace defective equipment. For the reasons set forth below, the Court has concluded:
(1) That the limitation of liability clause (Section XX) in the Lincoln-Dravo contract protects Dravo from liability for consequential damages, including loss of profits and products, arising from breach of contract or breach of warranty (Counts I and II of the complaint);
(2) That the limitation of liability clause (Section XX) in the Lincoln-Dravo contract does not shield Dravo from liability for consequential damages, including loss of profits and products, resulting from its own negligence (Count III of the complaint); and
(3) That the limitation of liability clause (Section XX) in the Lincoln-Dravo contract is effective to protect Dravo from liability for consequential damages, including loss of profits and products, arising from breach of contract or breach of warranty, even if Dravo is found to have breached its contractual obligation to repair or replace defective equipment.
Lincoln's business includes the operation of a mill in Lincoln, Maine which produces bleached hardwood kraft pulp. After being acquired by Premoid Corporation in 1968, Lincoln sought to expand the capacity of its mill and to modify the plant to meet new State and federal air and water pollution standards. Lincoln determined that an inadequate boiler recovery system was the primary source of pollution and that a larger recovery system would enable the mill to handle a greater volume of pulp by-products and increase production. As its own engineering staff was small, Lincoln sought a firm to undertake the engineering and design aspects as well as the construction of the new system. The three features most important to Lincoln in the prospective contract were: 1) a "turn-key" job, that is, a fully operative system to be turned over to Lincoln; 2) a fixed price contract rather than a contingency or cost-plus contract; and 3) specific guarantees of performance. At the time Dravo was a well-established engineer-constructor in other areas of the process industry3 and was seeking to enter the pulp and paper field.
In December 1969, after various communications between Lincoln and Dravo personnel and in response to Lincoln's verbal inquiry of September 26, 1969, Dravo submitted its first written proposal. Lincoln rejected it primarily because the price was too high. This proposal specified no limitations of Dravo's liability except for a force majeure clause and a requirement that Lincoln reimburse Dravo for costs resulting from any lockout or labor strike beyond Dravo's control. In mid-1970 Lincoln had Rust Engineering Company prepare a separate engineering study to determine the size and type of equipment required for the expansion of the mill's recovery system. Dravo was then asked to prepare a new proposal for the contract.
A second Dravo proposal, dated August 5, 1970, was submitted at a meeting held at Lincoln's executive offices in West Springfield, Massachusetts on August 6. The negotiator for Lincoln was its president, Joseph H. Torras. Dravo was represented by William C. Wilson, General Branch and Development Manager, and John P. McCloskey, Manager for Pulp and Paper Sales. The predecessor of Section XX, the subject of this preliminary trial, was Section XVI of this proposal, which read as follows:
Two additional clauses in the August 5 proposal also purported to limit Dravo's liability:
Discussions at the August 6 meeting focused upon price, start-up timing, and financing arrangements. Little was said concerning the limitation of liability clause. Torras testified that he refused to accept the clause because it represented a departure from Dravo's assurances that they could guarantee the job. Wilson testified that Dravo could make no further concessions if Lincoln's price was to be accepted. After telephoning James P. Sharpe, General Manager of Dravo's Engineering-Construction ("E & C") Division, and obtaining his approval, Wilson finally agreed to a lower price, stating that Dravo would agree to no more concessions. Lincoln then furnished Dravo a letter of intent, dated August 6, 1970. The letter established a lump-sum price of $5,200,000, an August 15, 1972 target date for completion of the project, and authority for Dravo to place an order for the recovery boiler with Babcock & Wilcox Company. This preliminary agreement was contingent upon Lincoln's ability to arrange...
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