The opinion of the court was delivered by: BECKER
This opinion memorializes our findings of fact and conclusions of law in the wake of a lengthy trial in which Pennsylvania Power & Light Company (PP&L) sought to establish that General Electric Company (GE) was liable to it for certain consequential damages, principally cost of replacement power, as the result of GE's role in the construction of a power plant.
PP&L is a public utility that furnishes electric power to large areas of eastern and central Pennsylvania. A large PP&L power plant complex is located at Brunner Island in the Susquehanna River, south of Harrisburg, Pennsylvania. In 1964, recognizing the need to augment its generating capacity to meet the area's growing electric power demands, PP&L determined to erect on Brunner Island an additional generating plant to be known as Brunner Island # 3 (Brunner # 3). On previous occasions PP&L had superintended the erection of its own power plants, letting various contracts and subcontracts for the several portions of the work. However, on this occasion PP&L engaged Ebasco Services, Inc. (Ebasco) to undertake complete responsibility for the construction of the plant on a so-called "turnkey" basis. Under this arrangement, Ebasco was to assume the responsibility for designing the plant, selecting appropriate equipment and contractors, supervising construction and testing, obtaining appropriate performance guarantees, and overseeing all aspects of the project until the plant became operational. At that time, the key would be turned over, as it were, to the owner, PP&L. The PP&L-Ebasco agreement, entered into in 1964, was formally executed on March 10, 1966. Under its terms, PP&L was to pay Ebasco a total of $ 54,300,000, payable in installments over the construction period, with a $ 3,640,000 retainage to be paid by PP&L only after it was satisfied that Ebasco had fulfilled the performance guarantees in the contract.
In March 1964, Ebasco, acting as the agent for PP&L, began obtaining subcontractors for the plant. The other parties to this action GE, Foster Wheeler Corporation (Foster Wheeler), and Combustion Engineering Company (Combustion) are firms that were engaged by Ebasco to furnish and install major components of the power plant. GE's principal contractual undertaking was to supply the steam turbine generator and boiler feed pump turbines, which together could fairly be described as the heart of the power plant. Combustion supplied the boilers necessary to create the steam that powers the turbines, and Foster Wheeler supplied the elaborate pumps that the power plant requires.
The power plant was ultimately completed in 1970. In 1972, seeking some $ 1 million in retention moneys that PP&L had refused to disburse plus an additional.$ 1.6 million in expenses above the contract specification, which Ebasco claimed it had incurred at PP&L's request, Ebasco commenced this litigation. PP&L counterclaimed against Ebasco for damages allegedly resulting from delay, use of unauthorized bidders, breach of warranty, and negligence. PP&L, as third-party plaintiff, also joined GE, Foster Wheeler, and Combustion as third-party defendants on its counterclaim.
PP&L's counterclaim against GE seeks damages allegedly resulting from (1) furnishing defective equipment; (2) negligent design and installation supervision of the steam turbine generator and boiler feed pump turbines; (3) breach of implied warranties; and (4) tortious interference with certain of PP&L's contract rights. The total damages asserted by PP&L approximate $ 64 million. The largest single element of these damages is PP&L's claim against GE for the cost of purchasing replacement power from other power companies in the Pennsylvania-New Jersey-Maryland Interconnection (PJM), which became necessary when Brunner # 3 did not function as anticipated.
After discovery was substantially complete, GE, Combustion, and Foster Wheeler filed motions for partial summary judgment. We proceeded to argument first on GE's principal motion, which involved Ebasco purchase order NY-668001, relating to the steam turbine generator and boiler feed pump turbines. In that motion, GE asked us to declare that it was not liable on the contract to PP&L for (1) cost of replacement power or lost profits; (2) breach of an alleged implied warranty of fitness for an intended use; or (3) tortious interference with the contractual rights of PP&L. The issues with which the motion dealt evolved in large measure from the parties' differing views as to what documents or acts formed the contract between GE and Ebasco (the latter acting as agent for PP&L) and as to the terms of that contract.
We disposed of GE's motion by a lengthy opinion, Ebasco Services, Inc. v. Pennsylvania Power and Light Co., 402 F. Supp. 421 (E.D.Pa.1975) (Ebasco I ), in which we denied partial summary judgment. Because Ebasco I formed the general charter for the trial that is adjudicated herein, we must summarize the salient features of that opinion as a precondition to clear and orderly presentation of our findings of fact and conclusions of law. Understanding of those salient features in turn requires a brief recitation of some of the background facts and of the issues raised in the partial summary judgment motion.
The inception of the steam turbine generator transaction was in a telephone conversation on July 15, 1964, between Charles Bonin of Ebasco and George Cox of GE. What transpired during that important telephone call is in dispute, and we make findings on the subject. See Part II.B. Infra. However, it is undisputed that on that day, acting pursuant to Ebasco's request, GE issued by means of a letter to Ebasco quotations for the steam turbine generator and the boiler feed pump turbines. The letter stated, Inter alia : "The above prices are based on our Standard Conditions of sale, price policy and price data as shown in GE Handbook 4710, dated May 25, 1964." Six days later Ebasco placed its purchase order NY-668001 for the generator and turbines and accompanied that order with a letter of intent reading, in part: "A formal contract will be issued at a later date containing the terms and conditions of, and in the format of, the usual type of contract issued by Ebasco."
The main points at issue on the partial summary judgment motion were:
1. Is the language of limitation contained in Supplement 16 sufficient to insulate GE both from PP&L's claims for cost of replacement power and lost profits and also from claims predicated upon alleged breach of implied warranty?
2. Is there a genuine issue of material fact on the question whether PP&L obtained contractual rights pursuant to § 2-207 of the Uniform Commercial Code (U.C.C.) by virtue of the GE quotation of July 15, 1964, the Ebasco purchase order of July 21, 1964, and the events occurring thereafter but before December 7, 1967, the date Supplement 16 was executed?
3. If the foregoing question is answered affirmatively, the question then arises as to whether Ebasco had authority to impair PP&L's § 2-207 rights by executing Supplement 16; I. e., is there a genuine issue of material fact as to whether PP&L is even bound by Supplement 16?
4. Is there a genuine issue of material fact on the question whether GE, through the negotiations resulting in Supplement 16, tortiously interfered with the contractual and/or fiduciary relationship between PP&L and Ebasco, and, if there is such a genuine issue of material fact, is there also a genuine issue of material fact on the question of GE's privilege to interfere?
We concluded in Ebasco I that Supplement 16 clearly excluded claims for replacement power, lost profits, and breach of implied warranties. However, we found that there were genuine issues of material fact: (1) on the question whether PP&L obtained contract rights pursuant to U.C.C. § 2-207 by virtue of the GE quotation, the PP&L purchase order, and subsequent events; (2) on the question whether Ebasco possessed the authority to impair any such rights that may have existed I. e., as to whether PP&L is bound by Supplement 16; and (3) on PP&L's tortious interference claim and on GE's defense of privilege thereto. The "bottom line" of the opinion, as it were, was that If Supplement 16 were valid, GE would have no liability for cost of replacement power. However, in the face of PP&L's claim that Supplement 16 was not binding, either because it was executed without authority or because it was improperly procured, we determined that a trial would be necessary to adjudicate its validity.
We have referred thus far only to issues of contract formation and construction, agency, and tortious interference. The issues subsumed within the total litigation are, of course, far broader. Questions of performance or breach and negligence involve technical considerations, which presaged a trial of several months on the questions whether Ebasco and the equipment suppliers had in fact furnished defective equipment, had breached implied warranties, had breached the contract by delay in completion of the work, and/or had been guilty of negligence in the design or supervision of the installation of the various components of the power plant. Additionally, the damages questions are so involved that they would also take several months to try.
As we have suggested above, the vast bulk of PP&L's claims against all defendants is for cost of replacement power. As we noted in Ebasco I, in view of the enormous complexity of the litigation, it was apparent that ultimate trial time might be significantly reduced if Supplement 16 was determined at a separate trial to be valid and/or if the analog of Supplement 16 in the other equipment supply contracts for Brunner # 3 were held to exclude liability for cost of replacement power. We therefore decided to exercise our broad litigation management powers under Fed.R.Civ.P. 16 and try first only those issues that bore on Supplement 16's validity and on whether Ebasco, Combustion, and Foster Wheeler, under their contracts with PP&L, and GE under its contracts to supply equipment other than the steam turbine generator and boiler feed pump turbines, were contractually liable for the cost of replacement power.
After a number of additional pretrial conferences, we framed the issues for initial trial as follows:
(1) What is cost of replacement power?
(2) Is the cost of replacement power recoverable by PP&L as an item of damage against the various defendants on PP&L's counterclaim, assuming arguendo that PP&L can establish liability against them?
We also formulated a crash discovery program limited to these issues. A jury having been waived, we listed the case for a bench trial to commence on June 14, 1976.
During the weeks before trial, intensive settlement negotiations developed among the parties. These negotiations resulted in the settlement of PP&L's claims against Ebasco, Combustion, and Foster Wheeler and of Ebasco's claims against PP&L. PP&L's case against GE remained open and proceeded to bench trial on the above two issues from June 14, 1976 to July 20, 1976. The voluminous record developed included thousands of pages of testimony and hundreds of documentary exhibits. After the conclusion of the trial, the parties submitted extensive requests for findings of fact and conclusions of law as well as lengthy post-trial memoranda, all followed by a number of reply memoranda. This opinion adjudicates the issues thus tried and briefed.
The vast bulk of this opinion addresses the issues surrounding the steam turbine generator contract (NY-668001) and Supplement 16 thereto. We will determine herein the validity of Supplement 16 and whether GE can be held liable for cost of replacement power on the turbine generator contract. We will also adjudicate the question whether GE can be held liable for such cost of replacement power as may be found to flow from GE's alleged breach of the other GE-Ebasco/PP&L equipment contracts for Brunner # 3.
The chronicle that will emerge is in most respects mundane, as one might expect in a piece of commercial litigation. A fascinating aspect of this history, however, is the portrait that emerges of the contract formation process prevalent in the power generation industry in those halcyon days before litigation became the national sport. For, strange as it may seem, the custom in the trade was for electric utilities or their architect-engineer agents to agree to purchase tens of millions of dollars worth of equipment from GE, Westinghouse, or other power generation industry equipment suppliers, on only a handshake or sketchy preliminary document like a letter of intent, and on the faith of years of dealing together. The parties understood that in due course, a year or two or three or more long after the machinery was in production or was completed, delivered, or even in operation final documents would formally be executed. We note at the outset the existence of this languid modus operandi because it has important consequences for this litigation (it is responsible for the kinds of issues with which we must deal) and because it will facilitate understanding of the facts.
In the legal discussion which follows the findings of fact we will first take up the question of Ebasco's authority to issue Supplement 16. As will be seen, we find initially that Ebasco possessed implied, inherent, and apparent authority to issue Supplement 16. These conclusions, like most of the ultimate conclusions of this opinion, are a function of our findings of fact, principally those relating to: (1) the extremely broad powers vested in Ebasco by PP&L under their turnkey arrangement; (2) the extent to which PP&L held Ebasco out as having full authority to deal with all matters involving permanent project equipment even in the face of the dispute resolved by Supplement 16; and (3) trade custom and understanding. Moreover, because we find that Supplement 16 represented a negotiating trade off or Quid pro quo, we also find that Ebasco possessed actual authority to issue it.
Our discussion will then proceed to a consideration of plaintiff's claim that GE tortiously interfered with the PP&L-Ebasco contractual relationship. That claim was based upon PP&L's contention that certain actions taken by GE (principally Cox's withholding of certain exhaust hood bolts from shipment to Brunner # 3) were designed to coerce Ebasco into accepting the provisions which became Supplement 16 not only in connection with Brunner # 3, but also in connection with all future turbine generator purchases made by Ebasco from GE on behalf of its many utility clients. Thus, in PP&L's submission, GE induced Ebasco to breach its fiduciary duty to PP&L, to PP&L's disadvantage. Again, our factual findings control. Crediting Mr. Cox's version of the exhaust hood bolts episode, (we find instead that he held up the bolts as leverage against Ebasco's refusal to pay for the boiler feed pump turbines), and finding no other tortious conduct by GE, we reject PP&L's tortious interference claim.
The bulk of our discussion, however, will relate to the contract issues. In that discussion we conclude, inter alia, that: (1) there was no U.C.C. § 2-207 contract, on Ebasco terms or otherwise; and (2) the Ebasco standard terms themselves, when construed in the light of the Ebasco-GE course of dealing and the usage of the trade, limit PP&L's recovery for the most part to the cost of replacement and repair and do not permit recovery for cost of replacement power under any theory, I. e. contract, negligence, or strict liability.
The "bottom line" of the foregoing is our finding that Supplement 16 is valid, insulating GE from PP&L's claims for cost of replacement power under the steam turbine generator contract, and further that GE is also insulated from liability for cost of replacement power on the other contracts that it had with Ebasco, even though those other contracts were made according to Ebasco's standard terms and were not covered by Supplement 16. We add that on the contract issues, just as on the authority and tortious interference issues, the result flows primarily from the facts developed at trial. This should not be surprising since Ebasco I suggested that the intent of the contracting parties needed illumination from such sources as course of dealing, trade custom and understanding, and the events involving Brunner # 3. Indeed, although Ebasco I focused in large measure on the tension between the July 15, 1964 GE quotation and the July 21, 1964 Ebasco letter of intent and purchase order, the record on which the case is now to be decided is infinitely more ample; we did not appreciate when we filed Ebasco I the extent to which the interstices would be augmented by a full trial record.
This opinion constitutes our findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a).
II. Findings of Fact A. Background: The Parties; the Steam Turbine Generator; PJM; and "Cost of Replacement Power"
1. The Parties to the Case
PP&L, headquartered in Allentown, Pennsylvania, is an investor-owned Pennsylvania public utility that provides electric power to large areas of northeastern and central Pennsylvania. This case concerns the third unit at PP&L's Brunner Island power plant, south of Harrisburg, Pennsylvania. Brunner # 3 was erected between 1965 and 1968 to augment PP&L's generating capacity. Ebasco, headquartered in New York, is a corporation engaged in designing and constructing power plants and acts in various capacities on behalf of its scores of utility clients throughout the world. Foster Wheeler and Combustion manufacture and sell components of power plants and supplied major equipment for Brunner # 3. GE is a New York corporation that, since 1900, has been engaged in the business of building and supplying to the electric power industry turbine generators and other equipment employed in the generation of electricity. GE is a large diversified corporation and is highly decentralized, with many independent and autonomous divisions.
2. The Steam Turbine Generator
3. PJM and Cost of Replacement Power
The electric utilities throughout the eastern two-thirds of the United States and Canada are, with the exception of those in Texas, interconnected. Each utility is joined to its neighboring utility by electric transmission lines and generates electricity that flows over the transmission lines from one utility to the next throughout the country. Through these interconnections utilities can purchase or sell electricity as the situation warrants. By a series of transfers, electricity generated in the Midwest may supply the needs of consumers in Pennsylvania. The oldest and one of the most fully integrated interconnections in the United States is PJM (the Pennsylvania-New Jersey-Maryland Interconnection). Originally started in 1927 by three utilities, PJM is currently comprised of eleven utilities and operates as an integrated power pool. It serves an area that extends from northern New Jersey to Washington, D.C. and from the Atlantic Ocean to Lake Erie. There are six member utilities (including PP&L) and five associated utilities. The six member companies are signatories of the PJM agreement, which is the charter of PJM.
Interconnections such as PJM permit utilities to operate with enhanced reliability and greater economy. Each of the eleven inter-connected utilities in PJM generates a certain amount of electricity in order to supply the total customer demand in the PJM area at the least total cost. The electricity generated passes through free-flowing ties from utility to utility within PJM. Meters record this exchange of electricity between member utilities.
Every day of the year, PJM calculates the anticipated customer demand. It then directs the member companies to operate a sufficient number of generating units to meet that projected demand and also to provide an adequate available reserve. The reserve protects against the loss of a generating unit or inaccuracies in the prediction of customer demand. The most economical units on the interconnection are scheduled for operation, regardless of which utility owns the units.
During the day, PJM continuously monitors the customer demand and directs the eleven utilities to use their least expensive generating units to produce the energy to meet that demand. Customer demand follows a fairly regular daily pattern, which varies seasonally, and is predictably at its highest level at certain hours of the day. By means of the interconnection, the percent of generating capacity that any one utility must place in reserve is reduced. The diversity of the hour, day, week, and month of each interconnected utility's peak demand leads to substantial savings throughout the interconnection.
Since it began operation, Brunner # 3 has always been a base-load unit. Brunner # 3 therefore operates at or near the highest capacity of which it is capable whenever it is available for operation. When a base-load unit, or any unit, is unavailable to meet the customers' demand, the utility is required to replace that lost power generation. It accomplishes this replacement either by operating its own more expensive equipment or by purchasing power from a neighboring utility, whichever is less expensive.
The foregoing discussion illuminates the notion, central to this case, of "cost of replacement power." The cost of this replacement power is always higher than the power that is replaced. Because, during 1968-1970, Brunner # 3, a base-load unit, would always have been scheduled and operated at or near its rated capacity if available, but was unavailable to supply PP&L load demand for some portion of that period, PP&L had to purchase replacement power from PJM.
The nature of "cost of replacement power" has a number of implications for this case. We note initially that because the PJM Interconnection is a fully integrated power pool to which PP&L and many other utilities belong, PP&L's sales or purchases of energy are dependent on and relative to the power supply and requirements of all the members of the PJM. In particular, Wilmer S. Kleinbach, the able manager of PJM, noted as follows during the course of his testimony:
There are too many variables to predict, with any reasonable degree of accuracy, the dollar cost of replacement power for a unit that is presently being planned to go into operation at a future date.
The principal factors affecting the cost of replacement power are within the exclusive control of the utility and include the installed cost of various units, operating costs, load forecasts, the size and type of units installed, the forced outage predictions and in-service date.
An example of this complexity is shown by the testimony of PP&L's Vice President Financial, Robert Fortune, who could not state at his deposition whether or not PP&L at that time had "excess capacity" (I. e., excess over what PP&L needs to serve its own customers). Mr. Fortune did not feel qualified to answer the question because "it involves a lot of considerations, both in the short-term/long-term liability in serving customers, economics of it. It is a very sophisticated judgment."
Mr. Fortune stated that PP&L did have a temporary excess reserve situation, which came about as a result of circumstances that were not planned for. He said that the reasons for this were rather involved and that it was difficult to pinpoint any one reason. It was partially due to the differential in fuel costs (PP&L had advantages because it was primarily a coal burning utility) and partially due to a reduction of growth resulting from conservation efforts as well as the recession. Mr. Fortune agreed that all of these factors are unforeseeable in terms of planning.
Moreover, the tremendous growth in demand for electric power (caused in part by PP&L's own marketing efforts) between 1964 (when the unit was ordered) and 1968-1970 (the period for which PP&L seeks damages) was, according to Mr. Kleinbach, so much greater than expected that it was "definitely not foreseeable." Indeed, the entire PJM Interconnection had insufficient base-load units in 1969-70 to meet the demand for power. This shortage increased the cost of power because relatively higher cost equipment had to be operated. In addition, the PJM experienced "slippage" (I. e., delay) in installed capacity and transmission capability. The PJM itself had forecast in the early 1960's a growth rate of 7 to 8 percent annually for the remainder of the 1960's, but the actual growth rate in 1968 was 13 percent. This greatly affected the cost of replacement power for PJM members.
In sum, the problematical nature of cost of replacement power contributes to our ultimate finding, See Part III.E.3. Infra, that it is not a recoverable
item of damage. B. The GE-Ebasco Dealings for the Brunner # 3 Steam Turbine Generator (The Facts Bearing on the UCC § 2-207 Issue)
The steam turbine generator transaction began when, on July 14, 1964, Charles Bonin, a Vice-President of Ebasco, telephoned George B. Cox, then Marketing Manager of the GE Large Steam Turbine Generator Operations.
Bonin inquired whether GE was still offering turbine generators at a 22% Discount off the list price. Bonin said that he was concerned because Westinghouse had just raised its turbine prices. Cox stated that GE was still offering the 22% Discount, but refused to advise Bonin whether or when GE might raise prices. Cox also declined to accept an order, which Bonin tendered, because Bonin would not reveal the name of Ebasco's utility client. However, on July 15, 1964, Bonin again called Cox, disclosed the identity of Ebasco's client to be PP&L, and orally placed an order with Cox for one turbine generator, with an option for a second unit. Cox gave Bonin a price for these two units conditioned on the prevailing 22% Discount off the GE Handbook price and stated that the price was based on standard GE Handbook terms and conditions, which, Inter alia, specifically excluded consequential damages and limited GE's liability to repair or replacement of defective components.
Cox testified that he felt strongly about conditioning the price on the basis of GE standard terms because GE was offering the unit at a price $ 600,000 lower than the Westinghouse quotation for a comparably sized unit. Bonin was obviously anxious to get the savings of $ 600,000 over Westinghouse's quote, and did not object to Mr. Cox's condition of GE terms.
This vast disparity between the Westinghouse and GE prices makes Cox's testimony that Bonin acceded to GE Handbook terms ring true. It is important to keep in mind that, although this case revolves around the parties' dispute as to what if any limitation of liability provisions inhere in the contract, we find that what was most important from Ebasco's perspective in July 1964 was price. It does not ring true to us that Mr. Bonin was about to fight the Battle of Bunker Hill, as it were, over which commercial terms and conditions (Ebasco's or GE's) would prevail when his prime concern particularly in view of the turnkey arrangement was price, for the price differential under a turnkey contract could not be passed on to PP&L. The best price (by some $ 600,000) was GE's. Furthermore, as will be seen, Ebasco did not then believe that suppliers such as GE could be held liable for consequential damages in any event, Even under Ebasco's terms. It seems eminently reasonable to us that Mr. Bonin, fearful of an imminent GE price increase, would not object to Cox's reference to GE Handbook terms.
We thus find that the conversation between Cox and Bonin constituted a classical offer and acceptance and, therefore, that there was an agreement as of July 15, 1964 on the critical terms of the turbine generator contract I. e. price and commercial terms and conditions which, since GE conditioned its price on GE Handbook terms, included a specific exclusion of consequential damages. In the wake of subsequent developments, and for reasons that will appear Infra, GE did not rely upon the Cox-Bonin agreement as the basis for its position. While extremely important, our finding as to what transpired during their conversation is but one of many bases of our ultimate conclusion. However, the finding would be an important one even if for no other reason than that it constitutes a rejection of the position advanced by PP&L that, during the conversation, Cox and Bonin agreed to a contract on Ebasco standard terms.
At the conclusion of the Cox-Bonin conversation, Bonin requested Cox to have a written confirmation delivered the same day, but in the form of a quotation rather than a confirmation. Accordingly, on July 15, 1964, T. J. Barron, of GE's New York Sales Office, delivered the written confirming quotation letter, as requested, to Bonin, "confirming George Cox's telephone conversation of July 15, 1964," stating the price for the turbine generator as quoted by Cox to Bonin, and noting that "(t)he above prices are based on our standard conditions of sale, price policy and price data, as shown in GE Handbook Section 4710 dated May 25, 1964." Styled a quotation, this letter was, in actuality, written confirmation of the Cox-Bonin agreement, which included GE standard terms.
Barron's letter described the first unit as a turbine generator set rated at 700,000 kw, with standard accessories listed in certain pages of the GE Handbook. The net price for the first unit, noted to be 22% Below GE's published price as of July 15, 1964, was set as $ 9,609,854. That price was not only stated to be firm for shipment within three years from the date of the order, but GE additionally agreed that if within six months it quoted to any purchaser a lower price for a steam turbine generator unit rated at 44,000 kw or larger for use within the United States, Ebasco's price would be reduced to that lower level. The quotation further afforded the purchaser the option to cancel the order without charge within 90 days. Finally, the quotation offered, subject to the same Handbook conditions, the same price terms for an order for boiler feed pump turbines.
The GE Handbook sections referred to by Cox orally (in general terms) and in Barron's quotation letter (specifically) contained a clause entitled "Limitation of Liability," which stated, Inter alia, "In no event shall the company be liable for special or consequential damages," and also contained a "Warranty" clause which limited GE's liability "arising out of the supplying of the said equipment, or its use, whether on warranty, contract, or negligence . . . (to) the cost of correcting defects . . . ."
On July 21, 1964, Ebasco's purchasing agent, A. J. Salerno, wrote to GE, largely confirming Bonin's verbal commitment of July 15, 1964 to Cox. Salerno's letter included a technical description of the unit in greater detail than had Bonin's oral order, and recited also that superintendence of erection was included. Salerno's letter stated the total price and its derivation, described the firm nature of the price, the price protection policy, and the option to cancel, set forth terms of payment, and noted that the time of delivery would be mutually agreed upon. Salerno concluded, however, by adding that "a formal contract will be issued at a later date containing the terms and conditions of, and in the format of, the usual type of contract issued by Ebasco." The letter was signed "PP&L by Ebasco by A. J. Salerno, Purchasing Agent."
There was nothing surprising about Salerno's reference to the later execution of a formal contract, for this was customary in the trade. Neither was it surprising that Salerno's letter referenced Ebasco's standard terms and conditions, for Salerno was a tough bargainer, See text accompanying note 18 Infra, and the regular practice in the industry was for the contracting parties, over the ensuing years, to hammer out the details of the final contract. We find that the parties expected that to happen here.
GE did not take prompt exception to Salerno's reference to Ebasco's standard terms. Indeed, it was not until May 4, 1967, almost three years later, that GE gave formal written notice to Ebasco that GE objected to the use of the Ebasco terms and conditions on Brunner # 3. Notwithstanding this delay, we reject PP& L's contention, the veritable cornerstone of its position in the case, that Ebasco and GE believed that they had a contract on Ebasco's terms and conditions after the Salerno July 21, 1964 letter or at any time thereafter up to and including the critical November 1967 negotiations from which Supplement 16 emerged. We also reject the concomitant cornerstone of PP&L's position, that there was an Integrated contract on Ebasco's standard terms.
On September 16, 1964, Salerno wrote to R. B. Davis of GE's Electric Utility Sales Division confirming an order for boiler feed pump turbines for the steam turbine generator units previously ordered. Salerno's letter referenced standard Ebasco terms. On October 14, 1964, Salerno wrote to GE, reserving the option until December 1, 1964 to cancel the entire order at no cost to PP&L, again referencing Ebasco terms. By letter dated March 5, 1965, Salerno wrote to Davis fully releasing the turbine generator for design and production pursuant to certain general and basic specifications which Salerno proceeded to detail. Salerno further wrote that "shipment shall be scheduled for June 1967" and requested that GE submit a complete schedule covering all of the drawings to be submitted for review.
On April 20, 1965, in response thereto, Barron of GE wrote to Ebasco advising that the rating of the unit, as firmed up, was different from the GE quotation of July 15, 1964, and stating the technical revisions and revised price ($ 9,614,184.00). The letter added, however, that the stated prices were based on GE's standard conditions of sale, price policy, and price data as shown in the GE Handbook § 4715, dated May 25, 1964. The letter was sent on GE's "quotation stationery," which on the back stated, Inter alia : "In no event shall the company be liable for special or consequential damages." Ebasco did not respond to the letter. On June 14, 1965, on similarly referenced quotation stationery, Barron wrote to Ebasco giving, based on a revised heat rating, further revisions to prices.
As the foregoing suggests, there had been intensive consultations between GE and Ebasco Engineers between July 1964 and June 1965 concerning technical and contract details. After receipt of Salerno's March 5, 1965 letter, GE commenced the process of fabricating the turbine generator. The manufacturing process was not without incident, because of a lengthy strike at the GE Schenectady works, where the large steam turbine generator operations are housed. In January 1967, GE advised PP&L that, because of the strike, the shipment of the Brunner # 3 turbine generator would be delayed from June 1967 to October 1967. The technical discussions continued. The contract discussions also continued off and on, but it was not until March 1966 that Ebasco sent GE a proposed final contract.
As we have noted, in May 1967 GE memorialized its objections to Ebasco's proposed purchase contract. It did so by a twelve page letter from Paul Pendzick of the Electric Utility Sales Division to W. P. Johnston of Ebasco. Pendzick's letter principally raised issues about the superintendence of erection, patents, seller's warranty, delivery, and limitation of liability clauses.
Ebasco, as a major engineer/constructor in the electric power industry, frequently dealt with GE in connection with the purchase of power plant equipment. Thus, in view of the ongoing contact between the two companies, there had been intermittent general discussions between GE and Ebasco about commercial terms even aside from Brunner # 3. Indeed, these discussions had been going on for many years. See Part II.C. Infra. For instance, there had been a meeting in 1960 on the subject. The matter was again discussed by GE personnel in December 1965 with Mr. Colquhoun, Ebasco's chairman, and later with Salerno and Chase of Ebasco. On February 10, 1966, Arthur Strang, counsel to GE's Large Steam Turbine Division, met with Charles Read of Reid & Priest, Ebasco's outside counsel. In these meetings, GE attempted to obtain tighter language of insulation against consequential damages in the event of power plant component failure.
During the summer of 1967, as the steam turbine generator approached completion, the negotiations over the final contract began to heat up. On August 15, 1967, Davis reported back to Schenectady that Ebasco had refused GE's May 4, 1967 exceptions to Ebasco's purchase order. In late August, GE began arranging for a contract meeting with Ebasco on Brunner # 3, but wanted to wait until Strang returned from Italy. Although PP&L disputes this, we find that Salerno was willing to delay the contract meeting, believing that delay gave Ebasco greater bargaining leverage. Salerno felt that his hand was strengthened because the steam turbine generator was nearing completion and was being readied for shipment; with no final contract having been signed, GE faced the possibility of having a steam turbine generator on its hands, which represented a potentially catastrophic business loss.
Also, by this time the boiler feed pump turbines had been delivered but had not been paid for because Ebasco had a policy of not paying suppliers on equipment in the absence of a signed contract. There is a serious dispute between the parties as to whether payment was due in October 1967 for the boiler feed pump turbines. We accept Ebasco's position that it did not believe payment was due. Likewise, we accept GE's submission that it believed that payment was due. On the basis of the record, we believe both that the dispute was an honest one and that GE's position was reasonable. However, when Ebasco persisted in its position and did not pay for the boiler feed pump turbines, Cox held up from shipment certain bolts for the turbine exhaust hoods until Salerno agreed to pay for them (and, as will be seen, also agreed to abandon his threat not to pay for the main unit when it was shipped). The question of Cox's true motivation for holding up shipment of the bolts is central to PP& L's tortious interference claim. See Part II.G. Infra.
Amidst this "tug of war" atmosphere, a meeting was held in Ebasco's New York City offices on October 26, 1967. Cox, assisted by Strang, Davis, Pendzick, and Benjamin Monk, represented GE; Salerno, assisted by Stolz, represented Ebasco. The principal topics discussed were: (1) whether GE's responsibility would be superintendence of erection" vs. "technical direction of installation"; (2) the warranty and delay articles; and (3) the limitation of liability clause. It was out of this meeting that a consensus leading to Supplement 16 ultimately emerged via follow-up discussions. The dialogue and consensus of the meeting on the three major points went somewhat as follows.
Technical Direction of Installation vs. Superintendence of Erection
Ebasco sought to maintain the section of its proposed contract entitled "Superintendence of Erection," but agreed to substitute the GE proposals called "Technical Direction of Installation." Ebasco was satisfied that the latter was merely a clarification of GE's duties at the site, and would not result in any change in actual responsibility. GE had offered to include Ebasco's "Superintendence of Erection" clauses in the final contract for a price of $ .50 per $ 100.00 of the contract amount, but PP&L was unwilling to pay the price adder.
On the warranty clause, GE made certain concessions, and Ebasco secured corresponding benefits for PP&L as regards both an extended warranty period and a broadened warranty scope. In the "warranty" paragraph, GE insisted on the scope of the GE Handbook warranty but agreed to extend the term of that warranty, which ran one year from completion of installation. This represented an extension of the warranty over both the GE Handbook and the Ebasco form, and was thus of benefit to PP&L. Moreover, under the warranty paragraph which was agreed upon in Supplement 16, there was a further advantage gained by PP&L and Ebasco because the limitation of liability under the warranty clause applied only to claims Under the warranty. This represented a somewhat narrower limitation of liability than the GE Handbook, under which the limitation to the cost of correcting defects pertained to GE liability "Arising out of the supplying of the said equipment Or its use."
Two facets of the limitation of liability problem were discussed at the October 26 meeting. Part of the discussion concerned the dollar amount of potential GE liability. GE insisted on a limitation to the price of the "part" of the unit which gave rise to any cause of action. Ebasco, on the other hand, sought a higher limit, such as the price of the turbine generator itself. GE ultimately agreed to increase its limit of liability for defects from the value of the defective part to the contract price of the entire unit (approximately $ 10,000,000), and to extend the termination date of any liability under the contract from 4 to 6 years.
The other facet of limitation of liability discussed at the meeting related to GE's potential liability for consequential damages, such as cost of replacement power. Throughout the meeting, GE insisted on contract language that specifically and unequivocally excluded liability for such matters. Ebasco ultimately agreed to terms that specifically defined the types of damages for which GE would not be liable (believing this preferable for PP&L to a general exclusion of "consequential damages"). Neither during the meeting of October 1967 nor in subsequent telephone conversations or correspondence did Ebasco suggest that the contractual undertakings of the parties imposed consequential damages (or the cost of replacement power) as a potential liability on GE. In Supplement 16, the parties agreed that:
In no event, whether as a result of breach of contract, alleged negligence, or otherwise, shall the Seller be liable for damages for loss of profits or revenue resulting therefrom, or for damages for loss of use of power system, cost of capital, cost of purchased or replacement power, or claims of customers of Purchaser for service interruptions resulting therefrom, or similar items of damages resulting therefrom.
As part of the discussions, GE offered, for a dollar adder of 3% Of the contract price, to omit from the contract any language containing a limitation of liability; this proposal was in due course rejected. The purpose of the 3% Adder was, in Mr. Cox's view, to insure against the cost of a lawsuit and not to include liability for cost of replacement power. The etiology of this position and of Ebasco's consent to the clear exclusion of various forms of consequential damages requires that we recount some historical background.
Ebasco had for many years been of the view that suppliers were not liable for consequential damages, including cost of replacement power. See Part II.C. Infra. Nevertheless, Ebasco had resisted changing its own standard terms and conditions to make that view explicit.
GE, needless to say, agreed with Ebasco's understanding. However, GE continued to seek language more explicit than Ebasco's. This had become a matter of more concern as the 1960's developed because of the sporadic surfacing of claims for cost of replacement power. The concern was exacerbated by the potential magnitude of such claims as presaged by the famous November 1965 Northeastern U.S. power blackout. Indeed, on January 21, 1966, GE had issued a marketing information letter on the subject, announcing that thereafter all relevant handbook sections (including § 4710, involved here) would contain a statement that "every quotation and contract will include a provision expressly negating any liability for special or consequential damages."
The letter explained to GE's customers the basis of its position:
For example, if a utility suffered a forced outage due to failure of equipment, it may well incur extra expense in purchasing replacement power or in operating older, less efficient equipment of its own.
The Northeast blackout has underscored the potential liability which a supplier might have if such an occurrence could be traced to failure of equipment.
One of the problems in assessing the risk is that the potential liability has little relationship to the nature of the failure. It is much more heavily influenced by the system characteristics. For example, a failure at time of peak load would be more costly than the same occurrence off peak.
Most utilities agree that manufacturers should not be expected to take this risk since they do not have any direct control of the magnitude of expense. Since manufacturers cannot predict or control the costs of consequential damages, the inevitable result of taking such risk would be higher prices for turbine-generators.
Utilities can reduce and control their own expense by arranging interconnections with other utilities, self insurance, adequate preventive maintenance or by purchasing "extra expense" insurance which not only protects against losses due to equipment failure but against failures due to operator error or even natural causes such as lightning.
For all these reasons we must have protection against claims of this nature. This must be in the contract to protect us against claims by the customer's insurance company or customer himself if he has no insurance.
The marketing information letter stated that GE would charge a 3% Adder to the total price to any customer who would not give GE protection against special or consequential damages. The letter continued:
The three percent adder is to cover the possibility of our additional risk during the normal warranty period, but in no way does this imply that we will be liable for consequential damages.
PP&L has argued that GE's and Cox's position on these points is preposterous. With all respect, we disagree. We find nothing surprising about GE's efforts to obtain airtight limitation provisions notwithstanding general trade understanding, detailed in Part II.C. Infra, that under Ebasco's or other engineer/constructor's standard provisions the supplier was not liable for cost of replacement power. Lawyers know that making explicit terms that would otherwise only be implicit is what lawyers always try to do, and would especially want to do given the escalating cost of litigation of the type in which cost of replacement power might be claimed. (Nor, of course, is it surprising that Ebasco resisted changing its terms; it was comfortable with them.) We do not perceive that Cox viewed potential liability for cost of replacement power as a substantial risk at the time, hence we do not find disingenuous Cox's statement that 3% Adder represented the cost of defending a lawsuit. Indeed, we suspect that GE's legal fees to date in this case represent a substantial portion of that sum.
The role of the limitation clause in the events leading to Supplement 16 is critical to our disposition of this case, for the gravamen of PP&L's tortious interference claim is its contention that the reason Cox held up shipment of the exhaust hood bolts was to pressure Ebasco into yielding to GE's demands for a clause clearly exonerating GE from claims for cost of replacement power, not only for purposes of the Brunner # 3 contract but also as a prototype for all contracts for equipment purchases to be made from GE by Ebasco on behalf of its many utility clients. PP&L's documentation of this conspiratorial theory was painstaking and its presentation of the theory was impressive.
We found it, however, to be unconvincing. For as we see it, the role of the limitation of liability clause paled in comparison with the bread-and-butter economic issues confronting Mr. Cox. We credit the testimony of both the GE witnesses and Ebasco's Stolz that Salerno was an extremely tough negotiator, and that he was desirous of delaying final contractual negotiations in the belief that brinkmanship gave Ebasco more leverage. We also credit the testimony that Salerno was holding back payment on the boiler feed pump turbines and threatened not to pay for the steam turbine generator until a contract which seemed elusive at the time was signed.
This meant that GE would have to wait for, or litigate over, huge sums, the delay in payment of which would doubtless affect the turbine operations dollar performance figures about which Cox, as Marketing Manager, was concerned (and for which he may have been responsible). We believe that the leverage exerted by Cox in holding up shipment of the exhaust hood bolts was directed toward the basic matter of current payments, not the more speculative matter of doubtful though potential liability.
As we have noted, Supplement 16 emerged from the aftermath of the October 26 meeting (there were subsequent calls and letters, firming it up). Ebasco issued Supplement 16 to GE on November 30, 1967 and the entire contract, with Supplements 1-16, was signed by GE on December 7, 1967.
In due course the steam turbine generator was shipped, installed, and synchronized with the rest of the plant.
Before turning to the next segment of our findings of fact, which deals with the Ebasco-GE course of dealing and with trade custom and understanding circa 1964-67 relative to the imposition of consequential damages upon power generation industry equipment suppliers, which segment fills some interstices in our previous findings, we feel constrained to rescribe, in the light of our description of the prelude to and substance of the October 26 meeting, our finding that Ebasco did not believe as it entered the meeting that a contract existed on Ebasco standard terms or that there was an integrated contract. In view of our finding about the Cox-Bonin conversation, it was GE that had the right to believe that there was a contract on GE's terms. PP&L has argued that nothing better demonstrates the absence of such a contract than GE's failure to rely upon it in this litigation. That argument is not without force, though we have rejected it.
The point, however, is that whatever the threshold understanding may have been in the industry at that time, the parties expected a lot of give and take on both contractual and technical terms before reaching a final agreement.
that there customarily was a long lag in working out contractual details. C. Trade Custom and Understanding Circa 1964-67 Relative to the Imposition Upon Power Generation Equipment Suppliers of Cost of Replacement Power as a Recoverable Item of Damages (And the GE-Ebasco Course of Dealing)
We find that in the power generation industry, there was, as of the period 1964-67, a long-standing custom and usage, recognized and accepted by all concerned parties, that manufacturers or suppliers of equipment warranted that their equipment would be free of defects in design, manufacture and operation; that the equipment would meet designated specifications; and that the limit of the supplier's liability would be to repair or replace defects at its expense. Put differently, under the traditional custom and usage, manufacturers or suppliers were understood not to be liable for any form of consequential damages more specifically, for loss of profits or cost of replacement power as applied to all legal theories of recovery.
The standard Ebasco terms and conditions about which we have spoken mesh with this industry expectation. Ebasco's terms provided that the seller's liability shall "in no case" exceed the cost of repair or replacement. Roger F. Sherman, the President of Ebasco, testified that it was Ebasco's understanding under its standard terms and conditions that suppliers were not to be liable for cost of replacement power. In response to our questioning, Mr. Sherman also testified that, in general terms, the custom in the trade was that suppliers were not liable for replacement power and that the documents that were current in the trade gave them that protection. We credit that testimony.
Harold E. Kennedy, general counsel of Foster Wheeler, dealt frequently with Ebasco on power plant purchases. During the pendency of Foster Wheeler's dealings with Ebasco on Brunner # 3, Kennedy, a la GE, spoke with Salerno and observed that since Ebasco's general terms and conditions did not in so many words exclude liability for consequential damages he would feel more comfortable if the language was more specific. According to Kennedy:
Mr. Salerno stated that the general terms and conditions that Ebasco used while they were perhaps ambiguous nevertheless had acquired a very definite meaning among all suppliers and customers of Ebasco. And he suggested to me that perhaps in pursuing the idea of writing some kind of new agreement, I would be putting Foster Wheeler in a poorer position than we were using terms and conditions that everyone in the industry knew exactly what they meant. . . . Mr. Salerno says that provisions of their general terms and conditions were not intended to impose liability for consequential damages of any nature or suppliers to Ebasco or its customers.
Kennedy also reported, in a November 13, 1963 inter-office memo, circulated after talking to Stolz regarding Article 17 ("Delay") of Ebasco's standard terms, that Article 17's intent was not to include liability for consequential damages either. Additionally, in 1964 William Stevens, Foster Wheeler's Executive Vice-President, discussed Ebasco terms with Frank Ritchings, Ebasco's Chief Consulting Engineer, in connection with a boiler that Foster Wheeler sold to Texas Power & Light. Mr. Ritchings assured Mr. Stevens that Ebasco terms did not include liability for consequential damages, and that Foster Wheeler's responsibility was limited to repair and replacement. Mr. Stolz also conceded that from 1960 to 1968 Ebasco had never attempted to hold suppliers liable to it or its utility client for consequential damages.
The dialogue between GE and Ebasco over standard contract terms did not begin with Brunner # 3. Ebasco had numerous utility clients and had been dealing with GE on equipment purchases for many years. Ebasco had made clear to GE at various times during their ongoing relationship that Ebasco and its utility clients did not interpret Ebasco's language to impose liability for consequential damages, such as the cost of replacement power, on GE.
Seller shall be held responsible for any damages of a general nature which the purchaser may incur due to any delay in delivery or in the completion of the work hereunder as a result of causes within the seller's reasonable control.
Davis wrote that GE had an understanding that the damages of a "general" nature did not include damages for loss of profits or revenue resulting from failure to make delivery as specified or damages resulting from the loss of its power system or the cost of purchase of replacement power or apparatus. By letter dated May 25, 1960, Chase replied to Davis and stated that Ebasco was "not in accord with the contents of your above mentioned letter, and we cannot agree to accept the provisions as you spell them out. Therefore, it would be our suggestion that you call the writer at your earliest convenience so that we can make arrangements to more fully discuss the entire situation with the idea of coming to a better understanding as to both of our requirements in respect to the matter."
Sometime between the receipt of this letter and June 10, 1960, Davis had a conversation with Chase, who advised Davis that "the present wording of Appendix A adequately covered GE with regard to consequential damages." Chase asked Davis if a change in the "delay" clause of Appendix A would straighten out the problem, and proposed changing the word "general" in the first sentence to "direct." Davis suggested to Woods McCahill, Esquire, GE's ...