McNALLY WELLMAN COMPANY, A DIVISION OF BOLIDEN ALLIS, INC., Plaintiff-Counter-Defendant-Appellee, v. NEW YORK STATE ELECTRIC & GAS CORPORATION, Defendant-Counter-Claimant-Appellant.
No. 1650. Docket 94-9273.
United States Court of Appeals, Second Circuit.
Argued May 31, 1995. Decided Aug. 18, 1995.
63 F.3d 1188 | 27 UCC Rep.Serv.2d 289
Before: MESKILL, McLAUGHLIN and LAY, Circuit Judges.
John R. Dingess, Pittsburgh, PA (Kirkpatrick & Lockhart, of counsel), for plaintiff-counter-defendant-appellee.
Before: MESKILL, McLAUGHLIN and LAY,* Circuit Judges.
MESKILL, Circuit Judge:
This case requires us to construe a contract clause excluding incidental and consequential damages under New York law. McNally Wellman Company, a division of Boliden Allis, Inc. (McNally), brought this diversity action to recover on a construction contract between its predecessor, Dravo Corporation,1 and New York State Electric & Gas Company (NYSEG), for the sale of six spillway gates and other equipment for a dam project. NYSEG filed counterclaims seeking recovery of the costs it incurred from McNally‘s delay in delivering the gates. The United States District Court for the Northern District of New York, Munson, J., found that the terms of the contract, as interpreted under New York‘s Uniform Commercial Code (UCC), prevented NYSEG from recovering on its counterclaims, and entered summary judgment in McNally‘s favor. We affirm.
NYSEG‘s Upper Mechanicville Spillway Project involved the refurbishment of a dam in Upper Mechanicville, New York. NYSEG hired McNally to supply the six spillway gates for the dam, together with other embedded parts and a hydraulic operating system, and the two parties signed a written contract memorializing their agreement on June 17, 1988. The contract provided that McNally would deliver the first pair of gates by November 28, 1988, the second pair by June 3, 1989, and the third pair by September 1, 1989. Performance by the last of these dates was considered necessary to ensure completion of the entire project by May 20, 1990, the termination date of NYSEG‘s construction permit with the Federal Energy Regulatory Commission (FERC). McNally received progress payments under the contract following the delivery of each of the gates, which were 111 feet long and weighed approximately 500,000 pounds. McNally took no responsibility for on-site assembly or installation or any future maintenance of the gates. NYSEG, for its part, conducted an independent evaluation of Ellwood City Iron & Wire Company (Ellwood), McNally‘s choice of subcontractor responsible for the fabrication of the gates, and explicitly approved McNally‘s choice.
McNally‘s selection of Ellwood proved unfortunate, for the subcontractor experienced financial and labor difficulties that ultimately delayed delivery of the gates. McNally‘s project manager, Robert Rice, first informed NYSEG that Ellwood would be unable to meet the original delivery schedule on January 18, 1989. The parties then agreed to two revisions to the delivery schedule. NYSEG‘s project manager, Richard Potts, consented to the revisions, realizing that if delivery was made under the original schedule NYSEG would have to store the gates for several months until the project was ready for their installation. Under the second revision the delivery of all gates was to be completed by September 18, 1989, and Potts informed Rice that this final delivery date was the latest acceptable to avoid a delay in the overall project.
Although McNally in turn informed Ellwood of the revised delivery dates, Ellwood failed to produce the gates as scheduled. On March 29, 1989 Ellwood, experiencing cash-flow problems, threatened to take workers off the gates unless McNally made a substantial progress payment, even though Ellwood‘s contract required McNally to make payments only on shipment of each gate. McNally eventually yielded to Ellwood‘s demand, agreeing on April 14 to pre-pay $74,000 in return for a security interest in the gates and Ellwood‘s promise not to remove workers from the job. NYSEG meanwhile became increasingly concerned with Ellwood‘s productivity, and on April 24, 1989 NYSEG invoked paragraph 90.2 of McNally‘s contract to require McNally to furnish 24-hour labor to put the work back on schedule. Paragraph 90.2 states in pertinent part:
If progress of the Work is such that in the opinion of Engineer its completion within the Contract time appears improbable, due allowance having been made for extensions of time as set forth above, Contractor, if Engineer so directs, shall proceed with the work day and night, Sundays and Holidays, furnishing a full force of men and foremen for all overtime work until work is back on schedule, and in such case, Contractor shall have no claim for extra costs, expenses or changes thereby occasioned.
Because the subcontract between McNally and Ellwood did not contain a provision similar to paragraph 90.2, however, McNally was unable to force Ellwood to undertake production on a 24-hour basis. Ellwood subsequently made another demand for an advance payment from McNally, and kept its workers off the job for several weeks until this second dispute was resolved.
These delays forced NYSEG and McNally to revise the delivery schedule on two subsequent occasions, each anticipating delivery of the final gate in September 1989. When representatives of NYSEG, McNally and Ellwood met to assess progress on August 30, after delivery of only four gates, Ellwood‘s representative stated that his company was being liquidated in early October but intended to deliver the last two gates by September 12. This prediction also proved unrealistic, and McNally subsequently terminated its contract with Ellwood. This decision forced McNally to bring a replevin action to obtain possession of gates five and six from Ellwood, and to hire another company, Western Pennsylvania Steel Fabrication, to complete the gates. As a result, NYSEG did not receive the fifth gate until December 26, 1989 and the sixth gate until February 2, 1990.2
Thereafter, NYSEG refused to make its final payment to McNally, contending that the delivery delays constituted a breach of their contract, and further assessed to McNally the standby costs incurred by the installation subcontractor. In response McNally invoked paragraph 360 of the contract. This special provision, added as an addendum by McNally and amended and approved by NYSEG, reads in pertinent part:
In no event and not withstanding [sic] any other provision of this Contract shall Contractor be liable for any special, incidental, indirect, or consequential damages, or for any damages of a similar nature arising out of or in connection with this Contract, ... regardless of whether any such liability shall be claimed in contract, equity, tort (including negligence) or otherwise. By way of example of the foregoing limitation of liability, but without limiting in any manner its scope or application, Contractor shall not be liable for all or any part of any of the following, no matter how claimed ...: loss of profit or revenue, ... cost of capital, ... loss or reduction of use or value of any facilities ... or increased costs of operations or maintenance. The limitation of liability contained in this Article shall be effective without regard to Contractor‘s performance or failure or delay of performance under any other term or condition of this Contract, including those contained in any warranty article.
In any case where Contractor is supplying only design and components and is not responsible for erection of the equipment, all costs related to the assembly and erection of the equipment in the field shall be deemed special, indirect, incidental or consequential and shall in no case be the responsibility of Contractor. This clause is not intended to supercede [sic] the rights of Owner [NYSEG] to require the Contractor to bear all costs and expenses of corrective work under the warranty.
Unable to reach an agreement on payment McNally filed this diversity action for $469,416.40 plus interest under theories of breach of contract and quantum meruit. NYSEG counterclaimed, seeking $872,793.09 as damages for the costs it allegedly incurred as a result of McNally‘s delays.
The case followed a somewhat tortuous path during which the district court addressed the various legal issues now also raised in this appeal. In sum, the district court first found that paragraph 360 exonerated McNally from liability for NYSEG‘s delay costs, but directed discovery on the issue of whether any of the common law exceptions to “no-damage-for-delay” clauses, as set forth in Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 502 N.Y.S.2d 681, 493 N.E.2d 905 (1986), rendered paragraph 360 unenforceable. After the conclusion of this additional discovery NYSEG amended its counterclaims to assert that McNally breached a fundamental obligation under the contract and acted in bad faith. The district court then rejected these common-law claims by concluding that because the contract involved the sale of goods, it was governed by Article 2 of the
NYSEG claims that McNally breached the contract by delivering the gates after the revised dates3 and by failing to make all necessary efforts to speed production and prevent such delays. McNally counters that although its performance was delayed, in all other respects it performed as warranted. McNally thus argues that in agreeing to paragraph 360 NYSEG waived its right to any claim for damages due solely to the delayed delivery of the gates.
Neither party contests the district court‘s decision that Article 2 of New York‘s UCC governs our review of the contract.4 McNally agreed to supply the six gates as well as other associated parts and equipment necessary for their operation, and the parties’ contract explicitly excluded any services related to their installation or ongoing maintenance. The essential terms and consequences of the contract thus predominantly concerned the sale of goods, and the UCC therefore governs the parties’ claims. See Levin v. Hoffman Fuel Co., 94 A.D.2d 640, 462 N.Y.S.2d 195, 196 (1st Dep‘t), aff‘d, 60 N.Y.2d 665, 468 N.Y.S.2d 104, 455 N.E.2d 663 (1983); cf. Forward Indus. v. Rolm of New York Corp., 123 A.D.2d 374, 506 N.Y.S.2d 453, 454-55 (2d Dep‘t 1986) (applying common law to contract for sale of telephone equipment as contract predominantly consisted of installation and maintenance services).
The parties’ claims raise four interrelated issues: (1) whether NYSEG‘s damages are direct, and thus recoverable, or whether they are either indirect or consequential, and thus subject to paragraph 360 of the contract, (2) whether
I
This appeal would merit a quick reversal were we to determine that the damages NYSEG incurred as a result of McNally‘s delays were direct, rather than indirect or consequential, as paragraph 360 does not preclude the recovery of direct damages. NYSEG‘s counterclaims asserted two categories of damages arising from late delivery of the gates: the standby costs assessed by the installation subcontractor and its own additional financing costs. NYSEG admits that its financing costs constitute consequential damages, but argues that the standby costs constitute direct damages. We conclude, however, that NYSEG‘s delay damages are categorized as either indirect or consequential by paragraph 360 itself.
II
In contesting the enforceability of paragraph 360, NYSEG principally contends that the common law exceptions to “no-damages-for-delay” clauses, as set forth by the New York Court of Appeals in Corinno Civetta, also apply to a contract governed by the UCC. McNally, in response, urges us to affirm the district court‘s finding that the UCC supplants the common law. We agree with the district court.
New York courts have held specifically that the UCC displaces the common law when the particular section at issue produces a result that would be contrary to that obtained under ordinary contract law. See Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321, 497 N.Y.S.2d 310, 314, 488 N.E.2d 56, 60 (1985) (holding UCC supplants common law where specific provision “is sufficiently extensive to alter” the common law); AP Propane v. Sperbeck, 157 A.D.2d 27, 555 N.Y.S.2d 211, 212 (3d Dep‘t 1990), aff‘d, 77 N.Y.2d 886, 568 N.Y.S.2d 908, 571 N.E.2d 78 (1991). Limitations on incidental and consequential damages are governed by
III
Our next inquiry is whether section 2-719 requires the enforcement of paragraph 360. NYSEG argues that incidental and consequential damages are available automatically, notwithstanding a contractual provision excluding such damages under
NYSEG relies on Official Comment 1 to
[I]t is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed. Similarly, under subsection (2), where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article.
NYSEG concedes that paragraph 360 is not unconscionable, as it possessed a “meaningful choice” when drafting the contract and the provision was negotiated explicitly between the parties, with NYSEG in fact amending the provision to add its final sentence. Further, the exclusion of incidental and consequential damages was not unreasonably favorable to McNally in that it did not disturb the “substantial value of the bargain.”
Finally, NYSEG contends that paragraph 360 should not be enforced because McNally performed in bad faith and breached a fundamental obligation under the contract. We review these contentions separately to determine whether NYSEG has established a genuine issue of material fact for trial.
A. Bad Faith
NYSEG asserts that McNally acted in bad faith by not paying Ellwood to provide 24-hour shifts, as required by paragraph 90.2 of the contract, and by waiting until November 1989 to inform NYSEG that it intended to disclaim liability for delay damages under paragraph 360. To establish this claim NYSEG must establish that these actions constituted an intentional breach of the contract. See County Asphalt, 323 F. Supp. at 1309; see also Kalisch-Jarcho v. City of New York, 58 N.Y.2d 377, 461 N.Y.S.2d 746, 750-51, 448 N.E.2d 413, 417-18 (1983) (noting under common law that claim of bad faith, regardless of its characterization as “willfulness,” “maliciousness,” or “gross negligence,” must be supported by proof of “deliberate intent” to delay performance).9
NYSEG does not argue that McNally acted in bad faith by failing to include a provision similar to paragraph 90.2 in Ellwood‘s subcontract when it first was drafted. Such a claim if made would fail, given that NYSEG possessed the authority under the general contract to approve or reject McNally‘s choice of subcontractors, because NYSEG either could have required McNally generally to include a paragraph 90.2 provision in any of its subcontracts, or could have vetoed the selection of any subcontractor who would not agree to the work acceleration clause. Rather, NYSEG‘s bad faith claim rests at bottom on McNally‘s own failure to comply with paragraph 90.2. Ellwood, however, not McNally, ultimately was responsible for the fabrication of the gates, and McNally could not require Ellwood to provide 24 hour labor because their subcontract did not contain a provision similar to paragraph 90.2. Construing the ambiguities of the provision against NYSEG, who drafted the contract, as we must, see Guardian Life Ins. Co. v. Schaefer, 70 N.Y.2d 888, 524 N.Y.S.2d 377, 378, 519 N.E.2d 288 (1987), we read paragraph 90.2 to apply to McNally alone. McNally thus was not required to pay Ellwood‘s overtime expenses itself, as paragraph 90.2 does not govern work performed by subcontractors.
NYSEG also fails to point to any evidence that suggests McNally‘s efforts to speed Ellwood‘s production were undertaken in bad faith. Ellwood experienced delays because of material shortages, manufacturing errors, work stoppages, and its own financial difficulties, and not from any act or omission of McNally‘s. Instead, McNally on two occasions made advance payments not required under its subcontract and otherwise made extensive efforts to encourage Ellwood to speed up production, including the assignment of its own employees to Ellwood‘s production facility. Significantly, NYSEG was aware of these efforts when they occurred and never complained that they were insufficient under paragraph 90.2, and on one occasion NYSEG itself offered Ellwood‘s workers a bonus to complete timely the last two gates, an offer Ellwood refused when it could not reach an agreement with its union. Indeed, there can be no dispute that NYSEG was made amply aware of Ellwood‘s production problems, undercutting NYSEG‘s claim that McNally willfully concealed the cause of delay from NYSEG. Finally, McNally‘s failure to disclaim its liability for delay damages until November 1989 did not prevent NYSEG from terminating McNally, as NYSEG had considered ending the contract as early as April but decided not to do so to avoid even greater delays. In short, NYSEG fails to raise a genuine issue whether McNally intentionally avoided its responsibilities under paragraph 90.2.
NYSEG also argues that McNally‘s failure to perform under paragraph 90.2 constituted a total default of its contractual obligations. Under New York common law every party to a contract has an affirmative obligation to use its “best efforts” to meet the contract‘s terms, and NYSEG argues that the breach of this obligation can render unenforceable a provision excluding consequential damages. See Forward Indus., 123 A.D.2d 374, 506 N.Y.S.2d at 455. Without deciding whether such an obligation survives under
A breach of a fundamental obligation under a contract occurs only where the contract fails in its essence: that is, where ordered goods are not delivered at all or are delivered with significant faults rendering them inoperable. See id., 123 A.D.2d 374, 506 N.Y.S.2d at 455-56; see also RRX Indus., 772 F.2d at 546 (finding failure of fundamental obligation under contract where computer software delivered by seller was rendered inoperable because of “bugs” in programs). NYSEG makes no allegation that the gates McNally delivered were inoperable or defective, or that their delay caused material damage to the entire project. Rather, the gates performed as warranted and the project was completed within the deadline of its construction permit. McNally‘s performance therefore did not constitute a failure of a fundamental obligation under the contract.10
V
Finally, NYSEG argues that the district court improperly calculated prejudgment interest from the end of the grace period for each unpaid invoice. NYSEG argues that McNally‘s right to prejudgment interest did not accrue while a good faith dispute existed concerning McNally‘s entitlement to payment.
CONCLUSION
For the reasons stated above, we affirm the judgment of the district court.
Notes
| Gate | Original | 2-07-89 | 3-17-89 | 6-27-89 | 8-30-89 | Final |
| No. | Contract | Revision | Revision | Revision | Revision | Delivery |
| 1 | 11-28-88 | 1-07-89 | 2-20-89 | 4-17-89 | 5-16-89 | |
| 2 | 11-28-88 | 1-07-89 | 4-03-89 | 5-08-89 | 6-02-89 | |
| 3 | 6-03-89 | 5-15-89 | 5-29-89 | 7-07-89 | 7-26-89 | |
| 4 | 6-03-89 | 6-26-89 | 6-18-89 | 7-28-89 | 8-24-89 | |
| 5 | 9-01-89 | 8-07-89 | 7-09-89 | 8-18-89 | 9-12-89 | 12-26-89 |
| 6 | 9-01-89 | 9-18-89 | 7-30-89 | 9-09-89 | 9-12-89 | 2-02-90 |
(1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and limitation of damages,
(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer‘s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.
(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
N.Y. U.C.C. § 2-719.