Kier Construction, Ltd. v. Raytheon Company, Civil Action No. 19526 (DE 3/10/2005)
| Decision Date | 10 March 2005 |
| Docket Number | Civil Action No. 19526. |
| Court | United States State Supreme Court of Delaware |
| Parties | KIER CONSTRUCTION, LTD., Plaintiff, v. RAYTHEON COMPANY and RAYTHEON ENGINEERS & CONSTRUCTORS INTERNATIONAL, INC., Defendants. |
PARSONS, Vice Chancellor.
This action stems from a 1998 construction subcontract (the "Kier Subcontract") between plaintiff, Kier Construction, Ltd. ("Kier"), and a non-party, Raytheon Engineers & Constructors, UK Ltd. ("REC UK"). Kier claims it is owed over $ 12 million for work performed under the subcontract. Kier contends that the contract with REC UK was transferred to defendants, Raytheon Company ("Raytheon") and Raytheon Engineers & Constructors International, Inc. ("RECI" and collectively, the "Raytheon Defendants"), in 2000 as part of transaction in which the Raytheon Defendants sold REC UK and other subsidiaries to Morrison Knudsen Corporation ("MK"). Kier contends that the Raytheon Defendants, as REC UK's assignees, are directly liable to Kier for the work it performed under the Kier Subcontract.
The parties have filed cross motions for summary judgment. Each side contends that the disputed provisions of the agreements at issue are unambiguous. For the reasons explained in this Memorandum Opinion, the Court grants the Raytheon Defendants' motion for summary judgment and denies Kier's motion for summary judgment. The Court finds the agreements at issue to be unambiguous and that Kier has not carried its burden to show that the Raytheon Defendants accepted an assignment of the rights under, or assumed the obligations of, the Kier Subcontract. Therefore, the Raytheon Defendants are not liable to Kier under the Kier Subcontract.
REC UK, which is not a party to this action, acted as general contractor for a project in Hull, England to construct a 1200-megawatt cogeneration plant (the "Saltend Project"). Kier is a company organized under the laws of England and engaged in the construction business. On June 22, 1998, Kier executed the Kier Subcontract with REC UK to perform construction services related to the Saltend Project. At that time, REC UK was a wholly owned subsidiary of defendant RECI. RECI is a Delaware company based in Waltham, Massachusetts, which, in turn, is a subsidiary of defendant Raytheon. Raytheon is a Delaware corporation also headquartered in Waltham, Massachusetts. Neither Raytheon nor RECI were parties to the Kier Subcontract at execution.
In 1999, MK entered into negotiations with the Raytheon Defendants to purchase RECI's engineering and construction business through a stock purchase transaction. Through the due diligence process, four international construction projects were identified as "high risk" projects (the "Indemnified Projects"). These projects were forecasted to lose money and posed significant financial risks. The Saltend Project was one of the Indemnified Projects.
On April 14, 2000, MK and the Raytheon Defendants entered into a Stock Purchase Agreement (the "SPA"). MK, unwilling to take on the risks associated with the Indemnified Projects, sought to remove them from the deal. To achieve this exclusion the SPA anticipated that the upstream contracts between RECI's subsidiaries and the project owners (the "Prime Contracts") would be transferred to RECI before closing. Then, in conjunction with the closing, the relevant RECI subsidiaries, including REC UK, were to enter into subcontracts with the Raytheon Defendants with terms largely tracking the respective Prime Contracts. The SPA included as exhibits term sheets for these anticipated subcontracts.2 Under these agreements (the "Contemplated Subcontracts"), the former RECI subsidiaries would perform, on a cost-reimbursed basis, all of the Raytheon Defendants' obligations under the Prime Contracts.3 The intended effect of these planned transactions was to allow MK to purchase RECI's engineering and construction business in its entirety, without acquiring the Indemnified Projects or their associated liabilities.
By the time the parties were ready to close on the SPA, they had not obtained the consents or novations required to transfer the Prime Contracts. As a result, MK and the Raytheon Defendants could not enter into the Contemplated Subcontracts because RECI subsidiaries, and not the Raytheon Defendants, remained the parties to the Prime Contracts. MK and the Raytheon Defendants chose not to amend the SPA. Instead, on the SPA's closing date of July 7, 2000, they entered into Project Completion Agreements ("PCAs") with respect to each of the Indemnified Projects. The intent of the PCAs was to implement the contractual relationships, as closely as practicable, that were to have been created by the Contemplated Subcontracts.4 The Kier Subcontract falls within the class of agreements addressed by the PCA.
On May 14, 2001, WGI (f/k/a Morrison Knudsen) filed a petition seeking relief under Chapter 11 of the U.S. Bankruptcy Code.5 Various WGI subsidiaries, including WILLC (f/k/a REC UK), filed petitions at the same time. Kier subsequently filed a proof of claim in the Chapter 11 proceeding as an unsecured creditor, asserting that WILLC (f/k/a REC UK) owed it over $12 million under the Kier Subcontract.6 WGI and its subsidiaries emerged from bankruptcy pursuant to an approved plan on December 21, 2001.7 Kier settled its claim against REC UK and its successor in the Chapter 11 proceeding for an amount less than full value.8
The parties drafted the SPA to protect MK from the Indemnified Projects in three ways. First, § 1.4, entitled "Excluded RECI Assets," sets forth certain assets of the engineering and construction business that were to be excluded from the transaction, including all assets and liabilities of the Indemnified Projects.
1.4. Excluded RECI Assets. Notwithstanding the foregoing, RECI is not selling and the Buyer is not purchasing pursuant to this Agreement, and the term "Acquired RECI Assets" shall not include, any right, title or interest of RECI in, to or under any of the following rights, properties or assets (collectively, the "Excluded RECI Assets"):
* * *
(1) Distributed Assets. . . . [E]xcept as otherwise provided in the Indemnified Project Subcontracts referred to in Section 4.2(f), all assets and liabilities related to the Indemnified Projects (as defined in Section 4.2(f); and the other assets identified on Schedule 1.4(1); if any of the foregoing is not owned by RECI as of the date of this Agreement it will be transferred by the applicable RECI Subsidiary to RECI prior to the Closing (collectively, the "Distributed Assets").
Second, § 13.1 of the SPA includes provisions that require the Raytheon Defendants to indemnify MK against "Specified Seller Liabilities." These liabilities are defined in Article 14 to include, among others, liabilities associated with the four Indemnified Projects.
Third, the SPA anticipated that the parties would enter into an arrangement in which the relevant RECI subsidiaries would transfer the Prime Contracts of the Indemnified Projects to the Raytheon Defendants and then continue to operate the projects as contractors for the Raytheon Defendants. The Saltend Contemplated Subcontract stated, however, that
[i]f any such consent or novations is not received by Closing, the parties will enter into arrangements comparable to those described in the Section 8.3 of the Stock Purchase Agreement, with the intent of implementing, as closely as practicable, the contractual relationships between Prime Contractor [the Raytheon Defendants] and Subcontractor [REC UK] contemplated by this Exhibit.9
The SPA contemplated, but did not require, transfer of many of the assets and liabilities relating to the Indemnified Projects in conjunction with the transfer of the Prime Contracts. With respect to the "downstream" contracts, or those between REC UK and third parties, the term sheet for the Saltend Contemplated Subcontract states:
The parties may also choose not to transfer certain subcontracts or other ancillary agreements (whether because of consents, requirements for contractors, engineers or other licenses, tax planning or other reasons) and will enter into alternative arrangements that achieve to the maximum extent possible the economic intent of the parties.10
At the time the parties entered into the SPA on April 14, 2000, they had not transferred the Prime Contracts or the assets related to the projects, nor had they drafted the actual subcontracts anticipated by the term sheets. The parties to this action also agree that the SPA did not effect such a transfer.
The stated purpose of the Saltend PCA is to effect the intent of the Contemplated Subcontract. Kier and the Raytheon Defendants disagree about the nature of the relationships intended to be created by the Contemplated Subcontracts and about the method by which the PCAs attempt to implement those relationships.
The Saltend PCA states that its purpose is "to provide all the benefits and burdens of the Project Agreements to the Sellers," i.e., the Raytheon Defendants.11 Both parties heavily rely on PCA § 2.2, entitled "Benefits and Burdens," to explain the PCA's method for implementing that goal. Section 2.2, in its entirety, reads:
The Contractor [REC UK] hereby appoints the Sellers [Raytheon and RECI]...
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