Envirotech Corp. v. Halco Engineering, Inc.

• Decision Date: 15 January 1988
• Docket Number: Nos. 841342,841325,s. 841342
• Parties: , 6 UCC Rep.Serv.2d 1494 ENVIROTECH CORPORATION v. HALCO ENGINEERING, INC. HALCO ENGINEERING, INC. v. ENVIROTECH CORPORATION. Record
• Court: Virginia Supreme Court

Page 215

364 S.E.2d 215

234 Va. 583, 6 UCC Rep.Serv.2d 1494

ENVIROTECH CORPORATION v. HALCO ENGINEERING, INC.

HALCO ENGINEERING, INC. v. ENVIROTECH CORPORATION.

Record Nos. 841342, 841325.

Supreme Court of Virginia.

Jan. 15, 1988.

Joanne F. Alper (Harvey B. Cohen, Arlington, Thomas E. Spahn, Richmond, Cohen, Gettings, Alper & Dunham, Arlington, McGuire, Woods & Battle, Richmond, on briefs), for Envirotech.

Thomas R. Nedrich, Falls Church, for Halco.

Present: CARRICO, C.J., POFF, COMPTON, STEPHENSON, THOMAS and WHITING, JJ., and COCHRAN, Retired Justice.

COMPTON, Justice.

In this controversy arising under the Uniform Commercial Code--Sales (UCC), Code § 8.2-101 et seq., the dispositive question on appeal deals with the validity and enforceability of contractual provisions that limit the buyer's remedy for recovery of consequential damages.

In 1978, Arlington County contracted for a multimillion dollar expansion of the County's sewage treatment facilities. Specifically, the County proceeded to construct a Water Pollution Control Plant including a Biological Sludge Processing Building. The new facility would receive raw sewage, treat it with chemicals, and remove solids from the water by pressurized filtration. This process produces cakes of dried sludge which are shredded and burned in an incinerator in the building. The heat produced by the incinerator is recovered and converted into supplementary electrical power for the facility.

In 1978, the general contractor, John W. Cowper Company, awarded a subcontract to Halco Engineering, Inc., the plaintiff below, to perform the mechanical work connected with the construction of the facility. Under that agreement, Halco, an experienced contractor, generally was responsible for procurement, erection, and installation of equipment and associated piping for the plant.

Later in 1978, Halco awarded a subcontract to Envirotech Corporation, the defendant below. Envirotech was a manufacturer of sophisticated filtration equipment with considerable experience in the waste treatment industry. Under that agreement, the major pieces of equipment to be supplied by defendant were four filter presses, to compress and remove the water from raw sewage; four cake hoppers into which compressed sewage cakes were dropped; four cake breakers to grind the cakes into smaller particles; and four drive conveyers to carry the pulverized material for incineration. Other equipment supplied by Envirotech included blenders to mix the sludge with treating chemicals at the beginning of the process, plus conditioning tanks and chemical storage tanks. Most of the foregoing components were the source of the dispute between the parties. Although Envirotech had no responsibility for installation of the equipment, it had a duty to assist in "start-up" of the equipment and to train operators of the units.

The agreement between the parties, in which defendant was to be paid $850,000, was embodied in a series of letters with enclosures and a purchase order dated July 12, 1978. The following terms and conditions of the parties' agreement generated this controversy. Under the heading "Shipments and Delivery," the agreement provided

"Seller shall have no liability to Purchaser for damages or penalties, direct or indirect, for any delay in shipment or delivery, whether such delay is minor or substantial, nor shall Purchaser have the right to declare a breach of contract because of any such delay."

Under the heading "Limitation of Liability," the contract provided

"Seller shall not be liable to Purchaser for any incidental or consequential damages for any reason whatsoever, including, but without limitation, damages in the character of (a) loss of profits or revenues resulting from the failure of the equipment to meet specifications or warranties, (b) damages suffered by Purchaser as a result of loss of production facilities or equipment, (c) cost of replacement equipment, (d) damages suffered by customers of Purchaser, or (e) any fines or penalties assessed for failure to comply with any law or governmental regulations."

The completion date of the prime contract was originally fixed as November 10, 1980. The project was not completed on time and, by agreement between the owner and the general contractor, the date of completion was extended to December 31, 1982. Halco commenced work in May of 1978 and at the time of trial in January-February 1984 had not finished work under its contract with the general contractor.

In May 1982, Halco filed the present action against Envirotech seeking recovery in damages for $450,000, later amended to $843,081. Halco alleged that defendant failed to perform its contract in a timely manner. The plaintiff alleged that, under the contract, defendant was obligated to deliver all equipment and perform all services by January 1979, in accordance with the plans and specifications for the project. The plaintiff alleged that defendant's delays were so material and so unreasonable under the agreement as to vitiate it. Halco further alleged that as the result of the delays and the defendant's failure to perform, the plaintiff had been delayed materially in the performance of its contract with Cowper. In consequence, the plaintiff alleged certain additional costs were incurred.

Halco claimed damages consisting of costs for office overhead, field supervision, tools and equipment, labor, and financing which the plaintiff asserted it incurred because it had to remain on the job site past November 10, 1980. Although the plaintiff has maintained at times during this litigation that the damages claimed were direct and not consequential, counsel for Halco confirmed during oral argument that the damages sought by the plaintiff "may be fairly characterized as consequential under the UCC." See Code § 8.2-715(2).

Envirotech responded to the plaintiff's allegations by denying it was obligated in any amount. In addition, the defendant filed a counterclaim seeking judgment against the plaintiff for the sum of $96,314, allegedly due for equipment delivered pursuant to the agreement with Halco.

In a seven-day jury trial, the plaintiff obtained a verdict against the defendant for $428,554. The jury denied recovery on the counterclaim. Subsequently, the trial court overruled Envirotech's motion to set aside the verdict on the main claim and entered judgment on the verdict in favor of Halco. But the trial court granted Envirotech's motion to set aside as to the counterclaim and entered judgment in favor of the defendant against the plaintiff for $96,314. We awarded the parties separate appeals and consolidated them for oral argument.

A detailed recitation of the extensive evidence is not necessary in order to set the background for discussion of the central issue in this dispute. In essence, the plaintiff claimed that defendant represented itself as capable of supplying highly specialized sludge filtration equipment in accordance with the specifications fixed for the project by the consulting engineer. In spite of this representation, Halco contended, Envirotech failed to meet a fixed schedule for delivery of the equipment. Halco presented evidence that defendant had not completed its contractual obligations by delivering equipment by early 1979, or by November 1980, which was Halco's completion date under its contract with Cowper, or by December 15, 1982, the date through which Halco claimed money damages from Envirotech.

In addition, the evidence showed that the plant was designed to be an integrated, closed-loop system in which each piece of equipment had to fit, had to be compatible with other components, and had to perform in accordance with design specifications. Any failure of a component to operate as specified would affect adversely the entire unitary system. Halco presented evidence that Envirotech shipped unassembled pieces of equipment with incomplete sets of component parts. In addition, the plaintiff showed that major items failed to meet contract specifications. The plaintiff's field superintendent analogized the situation to ordering a customized automobile shipped in component parts with enclosed instructions for assembly. He testified, "When we received it and opened up the box, number one, there were no assembly instructions in the box. Number two, we found out that we had what appeared to be the front end of a Lincoln Continental and the back end of part of a tractor-trailer."

Halco's witnesses described in detail how each particular piece of equipment failed to meet specifications and the work Halco was required to perform to correct the perceived problems. For example, Halco showed that the filter press, conveyor, and cake breaker systems were to be driven with 500-pound electric motors with a single motor control system, according to the specifications. Instead, defendant delivered 3000-pound hydraulic motors causing Halco to redesign the entire electrical system.

According to Halco's evidence, defendant's failure to meet the time and equipment requirements caused Halco to seek replacement equipment elsewhere. No other source of supply was available to produce the highly specialized equipment. Thus, according to Halco, it was forced to continue to deal with the defendant and, in the process, Halco began to withhold payments to Envirotech. The defendant then stopped making deliveries. Eventually, the parties modified their agreement and defendant began making delivery on a COD basis but Halco refused to pay the entire balance defendant claimed to be due. That issue formed the basis for the counterclaim.

Halco sought to establish that, because of Envirotech's refusal and failure to perform, it became necessary for the plaintiff to remain on the project through 1981 and 1982, beyond its contracted 1980 completion date. Halco calculated its damages during this period as totaling $534,101, consisting of overhead costs, superintendent costs, tool and equipment...