Southwestern Engineering Co. v. Cajun Elec. Power Co-op., Inc., 89-3813

• Decision Date: 26 October 1990
• Docket Number: No. 89-3813,89-3813
• Citation: 915 F.2d 972
• Parties: SOUTHWESTERN ENGINEERING COMPANY, Plaintiff-Appellee, Cross-Appellant, v. CAJUN ELECTRIC POWER COOPERATIVE, INC., Defendant-Appellant Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 972

915 F.2d 972

SOUTHWESTERN ENGINEERING COMPANY, Plaintiff-Appellee, Cross-Appellant, v. CAJUN ELECTRIC POWER COOPERATIVE, INC., Defendant-Appellant Cross-Appellee.

No. 89-3813.

United States Court of Appeals Fifth Circuit.

Oct. 26, 1990.

John Schwab, William E. Hodgkins, Schwab & Walter, Baton Rouge, La., for defendant-appellant cross-appellee.

Davis B. Allgood, Leon Gary, Jr., Gary, Field, Landry & Dornier, Baton Rouge, La., for plaintiff-appellee cross-appellant.

Appeals from the United States District Court for the Middle District of Louisiana.

Before THORNBERRY, GEE, and SMITH, Circuit Judges.

THORNBERRY, Circuit Judge:

An engineering company entered into two contracts to design and manufacture power plant components for a utility company. This appeal presents the question whether the contracts allowed the engineering company to recover unabsorbed overhead costs caused by the utility company's suspension and ultimate termination of the contracts. It also presents the question whether the engineering company was entitled to recover the full contract price. The district court held that the engineering company could recover the unabsorbed overhead costs but not the full contract price. Finding no error, we AFFIRM.

FACTS AND PROCEDURAL HISTORY

Appellee/cross-appellant, Southwestern Engineering Company ("SWECO"), designs and manufactures equipment used to generate electric power. Appellant/cross-appellee, Cajun Electric Power Cooperative, Inc. ("Cajun"), is a utility cooperative that generates and sells electricity in southern Louisiana. In 1980, Cajun was planning to build a lignite-fired electrical power plant near Coushatta, Louisiana, to be called "Big Cajun Oxbow, Unit 1." After soliciting competitive bids, Cajun awarded two contracts to SWECO to design and fabricate a steam surface condenser and nine feedwater heaters for Big Cajun Oxbow. The parties executed a written contract for the feedwater heaters on August 25, 1980, and a contract with identical provisions for the condenser on September 22, 1980.

The contracts originally provided that the condenser and feedwater heaters were to be delivered to the plant site between August 1 and October 1, 1982. Because Cajun was to obtain its financing from the Rural Electrification Administration ("REA"), the contracts incorporated standard REA forms allowing Cajun to change the delivery dates simply by issuing a written order. In return, SWECO had the right to request and receive an equitable adjustment in the contract prices to compensate it for any increases in the cost of its performance caused by such a change.

In August 1981 and May 1982, Cajun notified SWECO of various delays and revised delivery dates. In June 1982, Cajun again revised the delivery dates for the condenser and feedwater heaters to February 1, 1984. On April 1, 1983, Cajun notified SWECO that the project schedule was being revised as a result of delays in obtaining financing and that SWECO should completely suspend the fabrication of the condenser and feedwater heaters until further notice.

By April 1983, SWECO had completed 60% of the engineering work for the design of the heaters and condenser and had already ordered materials and accessory equipment for their fabrication scheduled for the second half of 1983. SWECO billed Cajun for the engineering work performed prior to April 1, 1983. In response to SWECO's bill, Cajun paid an installment of $28,194.00 in December 1983 and the remaining $56,388.00 in March 1984. Because SWECO was unable in 1983 to secure other contracts with appropriate delivery dates to fill the void in its manufacturing schedule caused by the suspension of Cajun's contract, SWECO took steps to reduce expenses. For example, SWECO laid off some employees.

In September 1984, it became apparent that the REA would not approve or finance the Big Cajun Oxbow project. Cajun notified SWECO by letter on September 26, 1984, that it was terminating the contracts, relying on the "termination for convenience clause" in section 5(m) of the contracts, which gave Cajun the right to terminate the contracts for any reason.

SWECO brought this action against Cajun in the United States District Court for the Middle District of Louisiana, seeking to recover the unabsorbed overhead expenses it incurred as a result of the suspension of the contracts. The court held a two-day bench trial in September 1988, after which the parties filed post-trial briefs. SWECO argued for the first time in its post-trial brief that the contracts provided for recovery of the full contract price upon termination, not just the unabsorbed overhead. In October 1989, the district court entered written findings of fact and conclusions of law. The court awarded SWECO $685,582.00 for unabsorbed overhead expenses, but denied recovery of the full contract price. Cajun appeals from the judgment for SWECO; SWECO appeals the denial of the full contract price.

DISCUSSION

A. Recovery of Unabsorbed General and Administrative Overhead upon Termination

The district court found that when Cajun suspended performance of the contracts in April 1983, SWECO was unable to find replacement work to utilize the part of its manufacturing facilities that had been set aside for the remaining months of 1983 for the fabrication of Cajun's condenser and heaters. Although SWECO reduced the costs associated with the Cajun jobs as much as possible, SWECO continued to incur overhead expenses that would have been allocated to and absorbed by the Cajun jobs. Ordinarily such fixed overhead costs are allocated to all the manufacturer's work. Because the Cajun jobs were suspended, the portion of overhead expenses during the period of suspension that would have been allocated to the Cajun jobs had to be allocated to SWECO's remaining jobs for that period. Since SWECO could not obtain replacement work, those other jobs bore a greater share of company overhead, and SWECO was forced to make up the difference from its profits.

The district court found that the equitable adjustment in the event of suspension that is called for by section 5(i) of the contracts included these overhead costs, which SWECO would not have absorbed if Cajun had not suspended performance of the contracts. Section 5(i) provides in pertinent part Purchaser may at any time by a written order make changes in the Technical Specifications, Contract Drawings, or the time and place of delivery. If any such change causes an increase or decrease in the cost of, or the time required for, the performance of any part of the work under this Contract, whether changed or not changed by any such order, an equitable adjustment shall be made in price or delivery, or both, and this Contract shall be modified in writing accordingly.

(Emphasis added).

The term "work," as defined in section 5(h)(8) of the contracts, "includes all labor, material, equipment and documents required to be furnished under the Contract," and Cajun argues that the only "work" performed under the contracts was the engineering work for which SWECO has already been paid. Cajun argues that the unabsorbed overhead costs were not increases in the cost of performance of the engineering work under the contract and that SWECO had no contractual right to recover the unabsorbed general and administrative overhead which had been allocated for, but not absorbed by, the Cajun jobs.

SWECO argues that the definition of "work" in section 5(h)(8) is more expansive than Cajun suggests because the word "includes" indicates that the items listed do not constitute an exclusive list. SWECO also contends that it "furnished" its plant, equipment, and labor force for the performance of the Cajun contracts in the second half of 1983 and could not divert them to other jobs at the last minute. Moreover, SWECO asserts that "work" should be interpreted consistently with the purpose of the equitable adjustment clause, which, they contend, is to compensate them fully for any costs arising from suspensions by Cajun.

Cajun maintains that the terms of its contracts do not allow for recovery of unabsorbed overhead, and that the district court erred in awarding such damages when they were excluded by the contracts.

SWECO, on the other hand, maintains that "equitable adjustment" is a term of art in government contracts and is always given the same interpretation. ¹ See J. Cibinic & R. Nash, Administration of Government Contracts 456 (2d ed. 1985). The purpose of the equitable adjustment is to leave the parties in the same position as if the contract had not been changed. See R. Nash, Government Contract Changes 16-3 (2nd ed. 1989). "There seems to be little question that unabsorbed overhead is properly includable in an equitable adjustment if the contractor can prove that changes idled some of its facilities" and reduced the direct costs to which the overhead could be charged. Id. at 17-11.

Louisiana courts have rarely interpreted equitable adjustment clauses. Where Louisiana courts have awarded unabsorbed overhead expenses, they have done so as part of the damages for a breach of contract. See, e.g., French Jordan, Inc. v. Oilfield Sales & Serv., Inc., 439 So.2d 523, 527 (La.App. 1st Cir.1983) (calculating damages to include an amount that would have been allocated to pay for fixed expenses); McCarty Corp. v. Indus. Scaffolding, Inc., 413 So.2d 1322, 1324 (La.App. 1st Cir.1982) (noting that overhead costs are "as true a cost of doing business as are [ ] direct costs"). Apparently, Louisiana has never determined whether unabsorbed overhead expenses are recoverable costs under a contract. However, at least one Louisiana court has recognized the Nash treatise, cited above, (which in turn relies on Board of Contract Appeals and Court of Claims cases for the meaning of "equitable adjustment") as authoritative on the interpretation of an equitable adjustment clause. See Avondale Shipyards, Inc. v. Delta Marine Contractors, Inc., 440...