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General Engineering Corp. v. Virgin Islands Water and Power Authority

filed: October 27, 1986.


On Appeal from the United States District Court of the Virgin Islands, St. Croix, Civil Nos. 85-0182 and 85-0202

Author: Adams

Before: ADAMS, STAPLETON, and GARTH, Circuit Judges


ADAMS, Circuit Judge.

In this appeal the Virgin Islands Water and Power Authority (WAPA) seeks to invalidate its power-sale agreement with the Caribbean Energy Corporation (CEC). WAPA asserts that the agreement conflicts with Virgin Islands statutes that prohibit contracts involving a conflict of interest, and that require public contracts to be bid competitively. The District Court of the Virgin Islands found that the agreement was valid, and enjoined WAPA, General Engineering, South Shore Alumina, Ashley Andrews, and persons acting on their behalf from interfering with it. General Engineering Corp. v. Virgin Islands Water and Power Authority, 636 F. Supp. 22 (D.V.I. 1985).


In early 1983 WAPA, an independent instrumentality of the Government of the Virgin Islands, consulted Arthur Lowe, an investment banker, regarding the feasibility of financing a new electric generating project on St. Croix. The outcome of the discussions was the appointment on December 12, 1983 of Donaldson, Lufkin & Jenrette (DLJ), a large investment banking firm with which Lowe was associated, as "exclusive agent and/or principal for a term of ninety (90) days, for the purpose of arranging financing to suit the needs and specification of the V.I. WAPA."*fn1 App. 2052. This appointment was renewed for a six-month period in a May 2, 1984 letter from WAPA to DLJ, in which WAPA authorized DLJ "to act as its exclusive agent in arranging the financing of certain power generating equipment." App. 2058. The letter employs contractual language: DLJ has an "obligation" to arrange the financing, WAPA "agrees" to cooperate with DLJ, and there is a place at the bottom of the letter for the signatures of each party. By a latter dated October 12, 1984, DLJ's authorization to act as WAPA's "exclusive agent" in arranging financing was extended until February 1, 1985. App. 2085. This letter is far more specific than the two previous letter. It narrows DLJ's task to evaluation of several proposals by equipment manufacturers tendered in response to a Request for Proposals that WAPA issued in August 1984, and negotiation of a financing arrangement that would suit WAPA's needs. None of this correspondence adverted to any formula by which DLJ would be compensated for its efforts. One of the WAPA board members testified that DLJ's compensation was to be derived from any financing package that DLJ might arrange. App. 332.

WAPA's requirements for increased power production were both pressing and quite difficult to solve. The residents of St. Croix were in urgent need of new electric generating capacity, but WAPA's options were circumscribed by a bond indenture that effectively prevented it from incurring additional debt to finance new facilities. WAPA and DLJ therefore contemplated a third-party non-recourse financing arrangement. Under such a program the new plant would be financed and owned by investors independent of WAPA, and WAPA would purchase the output of the plant and resell it to its customers. The investors' security interest would run only against the new plant, and not against WAPA. This sort of financing is highly complex and relatively new to the financial community. The district court found that only about ten such projects had been successfully completed, 636 F. Supp. at 26, and there was testimony that hundreds of attempts to arrange such financing packages had failed. App. 892.

On January 24, 1984, shortly after its initial appointment by WAPA, DLJ submitted a proposal to construct a plant using generating units manufactured by Wartsila Power, Inc. App. 2503. The proposal stated that upon WAPA's approval of the suggested equipment, DLJ would put together a suggested financing package. There was testimony that the contemplated financing was to be by third-party ownership with the sale of output to WAPA, as discussed above. App. 333. WAPA, dissatisfied with the equipment choice, rejected the proposal. 636 F. Supp. at 29.

In search of alternative equipment, WAPA in August 1984 issued a Request for Proposals (RFP) for the design and construction of a 20-megawatt electric generating facility. App. 2060. WAPA did not consult with DLJ before issuance of the RFP. The language of the RFP is somewhat ambiguous. A large portion of it describes the technical specifications of the plant and the role of the proposers in designing and constructing the plant. Isolated language in the RFP, however, suggests that the proposer is also responsible to provide financing for the plant. App. 2062. This suggestion is confirmed by a statement appearing later in the document: "Payments to be in accordance with a negotiated agreement based on purchase of power or lease purchase agreement," which indicates that third-party financing was contemplated. App. 2074. On the other hand, the RFP also stated: "Title to the work covered by this contract shall pass to the owner upon formal acceptance . . . ," id., apparently contemplating the outright purchase of the facility by WAPA. The district court found that these inconsistencies resulted from WAPA's lack of familiarity with the complexities of third-party financing. 636 F. Supp. at 29.

WAPA received ten proposals in response to the RFP. Its technical staff pared the list down to six proposals that it believed merited further consideration. On December 4, 1984, WAPA sent a slightly different list of six proposals to DLJ,*fn2 directing it to evaluate them as provided in the letters appointing DLJ as WAPA's "agent". DLJ completed this task on January 30, 1985, after interviewing representatives of four of the proposers in New York. None of the four proposers was willing to participate as principal in a third-party financing arrangement.

At about this time dissension developed within the WAPA board. At a February 14, 1985 meeting of the board*fn3 -- after DLJ had advised the board that it shortly would be making a power-sale proposal based on its evaluation of the responses to the RFP, but before it actually tendered the proposal -- board member Willem Westerbaan asserted that such a proposal could not be entertained without reopening the RFP to solicit power-sale proposals.*fn4 Although not all members of the board were in agreement with Westerbaan's assessment, App. 213, board member Roy Adams wrote to DLJ's attorney on February 21, 1985, explaining on behalf of the board that if DLJ were to conclude that it would be more advantageous for WAPA to have a third-party arrangement than outright ownership, it would be necessary to issue a new RFP. App. 2134. The record does not disclose a response to this letter DLJ.

DLJ submitted the second proposal to WAPA on February 25, 1985. App. 2136. It contemplated that DLJ and Sunlaw Energy Corp., "an experienced energy developer," would form a corporation, to be called Caribbean energy Co., Inc. (CEC), that would finance, design, construct, and own a 20-megawatt cogeneration plant that would sell electricity and steam to WAPA. DLJ, through CEC, would act as a principal in the undertaking. The plant would utilize generators manufactured by M.A.N., a German firm that submitted one of the six proposals that DLJ evaluated. In a March 1 follow-up letter, however, DLJ told WAPA that it would be willing to participate on the same terms but using the equipment of a different manufacturer, if WAPA so preferred. App. 2147. Under the proposal WAPA would be required to purchase a minimum amount of electricity and steam each year for 20 years, at a specified price. At the end of the 20 years WAPA would have an option to purchase the plant. A suggested letter of intent was approved by WAPA in a board meeting on March 14; Westerbaan dissented from this approval and walked out of the meeting. After some revisions, a contract embodying the proposal was approved at a board meeting on May 23, 1985, with Westerbaan again the sole dissenter. Among its provisions was one declaring that no relationship of agency would exist between the parties. App. 2198. Under the terms of the contract, WAPA is obligated to purchase at least 140 million kilowatt-hours of electricity per year at 4.5 cents per kilowatt-hour. It must also purchase at least 630 million pounds of steam each year, at $2 per thousand pounds. Both of these prices are subject to adjustment over the term of the contract. WAPA must supply the plant with fuel, lubricating oil, and water as required. The district court found that the total cost to WAPA will compare favorably with what it presently costs WAPA to produce energy at its existing plant, describing the potential savings to WAPA and its customers as "impressive." 636 F. Supp. at 34.

On March 13, 1985, upon learning of the Dlj proposal, General Engineering Corp., one of the disappointed responders to the RFP, wrote to WAPA offering to build a generating plant and sell the output to WAPA at a rate lower than that proposed by DLJ. App. 2233. WAPA apparently made no response, either to this ...

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