U.S. Pipeline, Inc. v. N. Natural Gas Co.

• Decision Date: 28 June 2019
• Docket Number: No. S-18-679.,S-18-679.
• Citation: 930 N.W.2d 460,303 Neb. 444
• Parties: U.S. PIPELINE, INC., appellee, v. NORTHERN NATURAL GAS COMPANY, appellant.
• Court: Nebraska Supreme Court

303 Neb. 444

930 N.W.2d 460

U.S. PIPELINE, INC., appellee,

v.NORTHERN NATURAL GAS COMPANY, appellant.

No. S-18-679.

Supreme Court of Nebraska.

Filed June 28, 2019

Gregory C. Scaglione, J. Daniel Weidner, Minja Herian, Michele E. Young, Omaha, and Cassandra M. Langstaff, of Koley Jessen, P.C., L.L.O., for appellant.

Shawn D. Renner, Lincoln, and Richard P. Jeffries, Omaha, of Cline, Williams, Wright, Johnson & Oldfather, L.L.P., and Barrett H. Reasoner, Ayesha Najam, and Ross M. MacDonald, of Gibbs & Bruns, L.L.P., for appellee.

Heavican, C.J., Cassel, Stacy, Funke, and Freudenberg, JJ.

Freudenberg, J.

I. NATURE OF CASE

In 2014, a natural gas company solicited bids for a pipeline replacement and relocation project in northern Michigan. The natural gas company accepted a bid from a pipeline company, and the parties entered into a detailed construction contract. The contract provided that the project would be substantially completed by September 2014. However, because of extra work orders by the natural gas company and for various other reasons, the project was not substantially completed by that date. Based on a liquidated damages provision in the contract, the natural gas company withheld the maximum amount of liquidated damages allowable under the contract for the delay in the project’s completion. The natural gas company also refused to pay certain costs requested by the pipeline company related to the extra work orders. At the center of the lawsuit is whether the natural gas company should pay for the costs associated with the extra work and be allowed to withhold liquidated damages.

II. FACTS

1. PLEADINGS

In January 2016, U.S. Pipeline, Inc., a corporation engaged in the business of constructing oil and gas pipelines and related energy infrastructure facilities, filed a complaint in the district court for Douglas County against Northern Natural Gas Company (Northern), a corporation headquartered in Omaha, Nebraska, and engaged in the business of providing natural gas transportation and storage services. U.S. Pipeline sought compensation under a pipeline replacement and relocation project contract for costs incurred to perform work that was outside of the original contract price (Extra Work). U.S. Pipeline sought relief under a breach of contract theory, as well as alternative theories, including claims for misrepresentation and fraudulent concealment.

In response to U.S. Pipeline’s amended complaint, Northern’s answer and counter-complaint denied that it owed U.S. Pipeline any compensation for the Extra Work and resources U.S. Pipeline did not anticipate and denied any liability to U.S. Pipeline for U.S. Pipeline’s low bid. Northern’s counter-complaint further alleged that pursuant to the contract, U.S. Pipeline materially missed the substantial completion date and overbilled Northern for the work it performed. Based on this and a liquidated damages provision within the parties' contract, Northern sought a declaratory judgment upholding Northern’s decision to withhold payment of $351,000 from U.S. Pipeline as liquidated damages. Northern also sought a declaration from the district court upholding Northern’s withholding of $320,000 in payment from U.S. Pipeline as a credit for U.S. Pipeline’s change in the construction plan that resulted in a cost savings.

2. SUMMARY JUDGMENT

Prior to trial, the court granted Northern partial summary judgment on the issue of whether U.S. Pipeline is entitled to indirect or consequential damages. The district court found that U.S. Pipeline admitted that it is not seeking damages for "indirect or consequential damages." The district court overruled Northern’s motion for summary judgment on the remaining issues.

3. MOTIONS FOR DIRECTED VERDICT

A bench trial was held pursuant to a jury waiver contained in the parties' contract. At the close of U.S. Pipeline’s case, Northern moved for a directed verdict, asserting that (1) U.S. Pipeline’s damages were barred by the consequential damages waiver and (2) there was no genuine issue of fact on U.S. Pipeline’s misrepresentation/fraudulent concealment claims regarding "geotechnical information." The court denied the motion. Northern later renewed the motion at the close of all the evidence, adding no further new grounds, and the court again denied the motion.

4. BENCH TRIAL

The following evidence was adduced during the parties' 2-week bench trial.

(a) Bidding and Northern’s Original Project Plans

In 2013, Northern decided to replace or relocate approximately 29,450 feet, or 5.58 miles, of its Marquette main line (Marquette Replacement) and approximately 8,000 feet, or 1.52 miles, of its Ishpeming branch line (Ishpeming Relocation) (collectively the Project), both located in the Upper Peninsula of Michigan.

Northern designers prepared drawings for the Project. Northern’s construction drawings called for the installation of new underground piping using open-cut installation and horizontal directional drilling (HDD) techniques. Generally, underground pipeline is installed through either an open-cut process or HDD. For an open-cut installation, a trench is excavated and the pipe is placed in the bottom of the trench and covered. An HDD, in contrast, is a steerable, trenchless method of installing underground pipe in an arc along a prescribed bore path by using a surface-launched drilling rig. HDD drilling is more complicated and expensive to install.

Specifically, Northern’s construction drawings called for six HDD’s—four locations along the Marquette Replacement (including the "Highway 476/Ely Creek" crossing) and two HDD’s on the Ishpeming Relocation (including the "Cliffs Road" crossing). In addition, each set of Northern’s drawings specified an arc radius of 525 feet on the 12-inch-diameter pipeline and 600 feet on the 6-inch-diameter pipeline. A governmental permit was granted for these specifications. The design arc radius or design radius of curvature is the radius of directional changes along the drill path. The arc radius is determined by several factors, including the desired distance between entry and exit points, the desired drill depth, direction changes for the drill path, and how much the drill stem and installed pipe can bend without being damaged.

In March 2014, Northern opened the bid process for the Marquette Replacement and Ishpeming Relocation. Northern issued notice of a mandatory onsite, pre-bid meeting and route inspection to be held on May 13 and 14, 2014. One of the purposes for the route inspection was to walk the pipeline route to provide bidders a better understanding of the site conditions, project layout, and access issues. Three prospective bidders and their subcontractors, along with Northern representatives, attended the pre-bid meeting and route inspection.

U.S. Pipeline sent Kris Osborn to represent U.S. Pipeline at the meeting and route inspection. Osborn drove to the pipeline on May 13, 2014, but he did not walk the route like other bidders. The meeting and route inspection continued on May 14, but Osborn did not attend. U.S. Pipeline’s representative who created its bid for the Project confirmed that he was informed that Osborn did not walk the pipeline route with the other bidders and Northern’s representatives.

Northern used an online bid communication portal called Ariba to receive and transmit bid information to the interested bidders. Northern posted a summary of the meeting and route inspection on Ariba. Northern also posted the bid drawings, a form contract, the scope of work, questions and answers from bidders, meeting and route inspection notices, and summaries of meetings and inspections. U.S. Pipeline accessed the information posted on Ariba.

Among the questions and answers posted on Ariba during the pre-bid phase included a bidder’s request that Northern "provide geotechnical information associated with the original 12? MIM10101 installation." Northern responded by stating, "No geotechnical information associated with the original 12 inch MIM10101 is available." Broadly, geotechnical information is information about the geology and the estimated amount of rock in an area. This type of information provides insight as to the type of blasting that may be required for a drilling project.

Another question posted on Ariba inquired:

Without any geotechnical information, it is difficult at best to determine how much blasting, rock shield, or import padding to include in the bid. a. How many CY of ROW blasting does [Northern] want the Contractor to include in the bid?

b. How many LF of ditch blasting does [Northern] want the Contractor to include in the bid?

Northern replied, "[Northern] cannot speculate on the quantity and amount of blasting required for the [P]roject. The onsite visit was designed to familiarize bidders with the site conditions and bid accordingly."

In connection with its proposed work on the Project, Northern submitted "Resource Report No. 6" with the Federal Energy Regulatory Commission (FERC), the commission in charge of interstate pipeline construction and installation projects.

Compiled by an environmental consultant, Resource Report No. 6 estimated that excavators would encounter "approximately 3.77 miles" of "shallow bedrock that may require blasting" along the portion to be replaced on the Marquette main line. Although Resource Report No. 6 was publicly available as part of Northern’s FERC filings, Northern did not post a copy of Resource Report No. 6 to Ariba. The contract eventually entered into with U.S. Pipeline, however, expressly advises that "[e]xtensive rock structures occur throughout the area."

In order for geotechnical information to be obtained, a "geotechnical survey" or investigation must be done. A "geotechnical survey" consists of taking exploratory borings to collect soil samples for classification and laboratory analysis. In creating Resource Report No. 6, Northern did not take or analyze bore samples from the Project site. Rather, the report discussed "geological data,"...