Ocean Reef Club, Inc. v. UOP, Inc.
| Decision Date | 20 December 1982 |
| Docket Number | No. 78-1838-CIV-EPS.,78-1838-CIV-EPS. |
| Citation | 554 F. Supp. 123 |
| Parties | OCEAN REEF CLUB, INC., Plaintiff, v. UOP, INC., Defendant. |
| Court | U.S. District Court — Southern District of Florida |
COPYRIGHT MATERIAL OMITTED
Goldstein, Goldman, Kessler & Underberg, Miami, Fla., for plaintiff.
Mershon, Sawyer, Johnston, Dunwody & Cole, Miami, Fla., for defendant.
THIS CAUSE came before the Court on a non-jury trial. Pursuant to Federal Rule of Civil Procedure 52(a) the following shall constitute Findings of Fact and Conclusions of Law.
This is a civil action between the Ocean Reef Club, Incorporated, (hereinafter "Ocean Reef" or "ORC") as Plaintiff/Counterdefendant, and UOP, Incorporated (hereinafter "UOP"), as Defendant/Counterplaintiff.1 The dispute arose out of a service agreement between the parties that covered a reverse osmosis water treatment system located at the Ocean Reef Club in Key Largo, Florida (hereinafter the "System").
Ocean Reef is a residential resort community located in North Key Largo, Florida. There are approximately 2500 residences at Ocean Reef, including a variety of single family and condominium homes, together with a lodge, conference facilities and related amenities such as tennis and golf facilities. The water plant at issue provides the water for drinking and other purposes for the Ocean Reef residents and guests.
Prior to 1971, Ocean Reef obtained all of their water from Florida Keys Aquaduct Authority. However, it was apparent to the developers of Ocean Reef, since 1969, that an alternate source of water would be necessary to meet their expansion plan. Out of the several alternatives they explored, Ocean Reef chose the reverse osmosis plan as the way to provide water in the future.
In 1971, Ocean Reef and Gulf Environmental Systems Company (hereinafter "Gulf") a division of Gulf Oil Corporation, entered into a demineralizing lease whereby Gulf leased to Ocean Reef a reverse osmosis system having a design capacity of 350,000 gallons of product water per day (hereinafter "gpd"). The original 350,000 gpd system was built and went into operation in or about January, 1972.
A reverse osmosis plant produces potable water from brackish well water by passing the well water through a semipermeable cellulose acetate membrane at a pressure of approximately 450 pounds per square inch. The salts and other dissolved solids which do not pass through the membrane, along with the water in which they remain dissolved, are disposed of, and are referred to as "brine" or "concentrate". Approximately 50% of the water introduced into the system passes through the membrane, losing its salts and other dissolved solids in the process. This water, when it emerges from the system, is referred to as "permeate" or "product water."
The osmotic process that accomplishes the above takes place in a number of cylindrical "pressure vessels." Pressure vessels are tubes about 20 feet long and four and one half inches in diameter. Originally, the pressure vessels used at Ocean Reef were made of carbon steel but during 1975 the system was outfitted with fiberglass reinforced plastic (hereinafter "FRP") vessels of approximately the same size.2 Inside each pressure vessel are six "modules" containing the actual membrane. These modules (or "eleneurs") are cylindrical in shape and are placed end-to-end within the vessel. The modules gradually lose their effectiveness through use and need to be replaced periodically.
The original 350,000 gpd system consisted of 144 carbon steel pressure vessels along with certain pre and post treatment equipment. The pressure vessels were grouped into three "skids" or "banks" of 48 tubes each. Those banks have been referred to by the parties as units 1A, 1B and 1C. This system worked in two stages whereby pretreated "feed" water from Ocean Reef's wells was directed only into units 1A and 1B. The "product" water produced by 1A and 1B was then collected and processed through 1C in order to produce product water which met the prescribed potability standards. The final product water from 1C was then chemically post-treated and distributed.
As Ocean Reef continued to expand their need for water grew. On or about September 29, 1972, Gulf sold the existing 350,000 gpd system to Ocean Reef for the agreed price of $500,000 and agreed to up-grade it by a minor repiping and by installation of new modules which would increase its rated output to 630,000 gpd. That same date, Ocean Reef and Gulf entered into a service agreement whereby Gulf agreed to service and maintain the 630,000 gpd system for five years.3
The upgraded 630,000 gpd system that resulted was composed of three banks of vessels. Each bank contained 50 vessels, arranged in five rows of ten vessels each stacked one row on top of another. The design capacity of each bank or unit is 210,000 gpd of product water. In this system, the feed water only had to make one pass in order for the product water to meet the minimum standards.
On May 17, 1973 Ocean Reef purchased an additional bank or unit of 63 vessels, having a design capacity of 300,000 gpd, from General Atomic Company, for an agreed price of $198,000. This additional bank, referred to as unit 2A, had its own filters and pumps, separate and apart from those used for units 1A, 1B and 1C. Construction of unit 2A was completed in April, 1974.
In early 1974, R.L. Truby, UOP's director of marketing, drafted a new service agreement incorporating in large part the provisions of the previous agreements.4 The new agreement by its terms, pertained to the 630,000 gpd system until the 300,000 gpd went into operation; and, thereafter, to the entire 930,000 gpd system, until the agreement expired on December 31, 1977. This agreement was signed by UOP on March 29, 1974 and forwarded to Ocean Reef for signature. Ocean Reef did not sign it until one year later, on March 19, 1975.5 It is this service agreement that is the subject of the present law suit.
Between the signing of the service agreement in March, 1975, and about mid-1977, the relationship between the parties proceeded reasonably smoothly. However, by April or May of 1977 certain banks within the system would not, individually, meet potability standards. In order to get 930,000 gpd of potable water, the output from all four banks had to be blended. Ocean Reef believes that in late 1977 UOP knew the system was not meeting the agreed-upon standards and knew that important, expensive components were needed, but they did not want to put any more money into the plant because the agreement expired at the end of 1977 and they were treating it as a lame duck agreement. Specifically, Ocean Reef claims that the modules in units 1A, 1B and 1C were too old and that immediately after expiration of the service agreement they were required to replace the modules, at the cost of approximately $100,000.00 in order to bring the system's performance up to the standards set forth in the agreement.
The original complaint filed by Ocean Reef alleged that UOP breached the service agreement dated March 24, 1974 between Ocean Reef and General Atomic Company (a predecessor to UOP) whereby UOP was obligated to service and maintain for Ocean Reef a reverse osmosis water treatment system (the "System") at the Ocean Reef Club, Key Largo, Florida. In addition to the breach of contract count Count I, Ocean Reef's original complaint also alleged UOP negligently performed its obligations under the Service Agreement Count II and that UOP fraudulently induced Ocean Reef to enter into the Service Agreement Count III.
In response to the original Complaint, UOP denied liability and asserted counterclaims alleging (1) that Ocean Reef failed to pay the last 7 monthly payments due under the Service Agreement, amounting to $71,888 Count I; (2) that UOP was required, by reason of Ocean Reef's negligent operation, to perform extraordinary repairs and maintenance on the System Count II; and (3) that Ocean Reef converted certain spare parts delivered to the System's location in 1976 and stored there when the service agreement expired Count III.
Ocean Reef admitted in its reply to UOP's counterclaim that it did not make certain payments due under the service agreement for the period June through December 1977, and asserted a number of affirmative defenses to the counterclaims.
In 1979, Ocean Reef was permitted to file an Amended Complaint which added six counts alleging that the fiberglass tube and collar assemblies which were installed by UOP in the system during 1975 were defective. Count IV alleges UOP breached various express warranties; Count V alleges breach of an implied warranty of merchantability; Count VI alleges breach of an implied warranty of fitness for a particular purpose; Count VII alleges breach of the terms of the service agreement by failure to replace all the allegedly defective tube and collar assemblies; Count VIII alleges negligent failure to detect defective tube and collar assemblies; and Count IX claims the assemblies were negligently designed.
In response, UOP denied the material allegations of the Amended Complaint and asserted various additional affirmative defenses, including disclaimer of all warranties, failure of notice, and that the alleged defects were caused by Ocean Reef's negligent and improper operation of the system.
ORC has plead two alternate theories for recovering the cost of replacing the system's modules. Count I alleges that the failure to maintain the system so that each bank was individually capable of meeting the potability standards set forth in the parties' agreement constitutes a breach of contract. Count II alleges that UOP's failure to properly maintain each bank of the system constitutes negligent performance of their duties under the agreement. Both of these...
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