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AEL INDUS. v. LORAL FAIRCHILD CORP.

January 26, 1995

AEL INDUSTRIES, INC.
v.
LORAL FAIRCHILD CORP.



The opinion of the court was delivered by: CLARENCE C. NEWCOMER

 After a bench trial of this case on January 10-12, 1995, and after considering the testimony of the witnesses, the admitted exhibits and the arguments of counsel, the Court makes the following Findings of Fact and Conclusions of Law. *fn1"

 Findings of Fact

 A. The Request For Proposals

 1. On December 29, 1988, defendant Loral Fairchild Corporation ("Loral") distributed a request for proposals for a subcontract on a prime contract it had entered into with the United States Air Force ("USAF"). The prime contract called for the manufacture and installation of a long-range reconnaissance camera, known as the EO-LOROPS camera, in USAF RF-4C aircraft. Loral sought a subcontractor to design and build a system to mount the cameras within the aircraft. The mounting system components are referred to as the "Group A Kit." The camera itself, together with related equipment, is referred to as the "Group B Kit."

 2. The prime contract required Loral to perform a structural analysis of the impact of the camera and mounting equipment on the airplane. Loral incorporated this requirement into its request for subcontracting proposals, requiring that the subcontractor perform the structural analysis called for by the USAF in the prime contract.

 3. Paragraph 4.3.2.10 of Loral's Statement of Work *fn2" (the "SOW") incorporated the requirement that the subcontractor analyze the impact of the Group A and Group B equipment on the airplane by performing Durability and Damage Tolerance Analyses ("DADTA"):

 
The installation of the Airborne Equipment shall not alter the Structural Integrity of the aircraft . . . The subcontractor shall perform and submit the Durability Analysis Reports and the Damage Tolerance Analysis Reports [in accordance with] CDRL A039 and A040.

 4. The phrase "Airborne Equipment" in paragraph 4.3.2.10 refers to both the Group. A and the Group B equipment.

 
The contractor shall prepare a Durability Analysis Report which shall identify those areas of the airframe structure which could be susceptible to fatigue, corrosion, or other crack initiation mechanisms.

 6. DADTA is defined and codified in United States Department of Defense contract standards, specifically those incorporated in MIL-STD 1530A, entitled "Aircraft Structural Integrity."

 7. Paragraph 4.1.1 of the SOW stated that "Group A equipment must meet all the MIL-STDs, DOD-STDs and McDonnell-Douglas Process Specifications stated in this [Statement of Work]."

 8. Loral's request for proposals required that the subcontractor take steps to obtain any engineering data needed to complete the subcontract from McDonnell Douglas, the RF-4C's manufacturer. Paragraph 10.2 of the Statement of Work provided as follows:

 
The Group A Kit subcontractor shall establish an Associate Contractor Agreement with McDonnell Douglas in order to obtain any required data necessary to perform this contract.

 B. AEL Industries, Inc.'s Proposal To Loral

 9. On February 23, 1989, plaintiff AEL Industries, Inc. ("AEL") submitted a proposal to perform the subcontract work solicited by Loral. The proposal was divided into three parts: a management proposal, a technical proposal, and a pricing proposal. The technical proposal incorporated the SOW by describing, in numbered paragraphs corresponding to paragraphs in the SOW, each of the tasks AEL would perform under the proposed subcontract.

 10. AEL proposed modifications to some CDRLs contained in Loral's SOW, but did not propose modifications to CDRLs A039 or A040. The modifications were proposed by AEL as the result of a "sanitizing" process performed by AEL's proposal team. The purpose of the "sanitizing" process was to remove from the SOW a number of data analyses contained in the prime contract which AEL did not believe were required in the proposed subcontract. For example, AEL's proposal describes CDRLs B001 and A012 as "not required" for the subcontract, and CDRL B002 as limited to "source data" only. AEL made a careful review of the CDRL requirements in Loral's SOW and concluded that CDRLs A039 and A040, applied to the airborne equipment (both Group A and Group B) as installed on the aircraft, would be required.

 11. In submitting its proposal, AEL informed Loral that "the AEL proposal is fully responsive to the [Loral] requirements, and no deviations or exceptions are taken or requested." No deviations or exceptions relating to DADTA or to CDRLs A039 or A040 were set forth in AEL's proposal.

 C. Post-Proposal Discussions

 12. Between the submission of its bid proposal to Loral in February 1989 and the subcontract award in July 1989, AEL corresponded with and met with Loral on numerous occasions to negotiate various terms of the SOW and other aspects of Loral's solicitation. At no time during this correspondence or during these meetings was paragraph 4.3.2.10 of the SOW discussed.

 13. On June 28, 1989, AEL participated in a Preliminary Design Review held between the USAF and Loral. The purpose of the review was to discuss the status of Loral's efforts on the EO-LOROPS prime contract. Paragraph 4.3.2.10 of the SOW was not addressed during the Preliminary Design Review. AEL's written presentation materials indicated an intent to comply with paragraph 4.3.2.10.

 D. Offer And Acceptance Of The Contract

 14. On July 14, 1989, Loral awarded the subcontract (the "contract") to AEL. This contract incorporated a SOW. Paragraph 4.3.2.10 of the SOW, requiring AEL to perform the DADTA on the RF-4C aircraft, was identical to paragraph 4.3.2.10 of Loral's solicitation and of AEL's proposal. Similarly, paragraphs 4.1.1 and 10.2, referenced above, were incorporated in the contract in a form identical to that in Loral's solicitation and AEL's proposal.

 15. On August 2, 1989, AEL accepted the contract, subject to conditions not relevant to the present action. AEL did not condition its acceptance on a deletion or modification of the DADTA requirement set forth in paragraph 4.3.2.10 of the SOW incorporated into the contract.

 E. The Post-Contract Communications

 16. On August 28, 1989, AEL wrote Loral to report that it had further reviewed the terms of the SOW accompanying the subcontract offer. AEL "reserved the right to comment" on certain provisions of the SOW. AEL did not seek to reserve its right to comment, or otherwise refer to, the DADTA requirement set forth in paragraph 4.3.2.10 of the SOW incorporated into the contract.

 17. On August 7, 1989, AEL provided a document titled "Equipment Schedule" to Loral. The schedule listed the tasks required by the contract and provided a completion date for each task. The schedule contained references to both CDRL A039 and. CDRL A040, including a proposed completion date for each CDRL. The schedule did not purport to modify or limit the DADTA requirement set forth in paragraph 4.3.2.10 of the SOW incorporated into the contract.

 18. On September 14-15, 1989, AEL participated in a Preliminary Design Review with Loral. The purpose of the review was to discuss the status of AEL's efforts on the subcontract. AEL did not dispute its obligations under paragraph 4.3.2.10 of the SOW during the Preliminary Design Review. AEL's written presentation materials indicate that AEL intended to comply with paragraph 4.3.2.10.

 F. AEL's Partial Repudiation Of The Contract

 19. AEL subsequently determined that it had "grossly underestimated the cost" of fulfilling its obligations under paragraph 4.3.2.10 of the SOW. This fact was admitted by AEL's Vice President, John Watson, to Loral's Senior Vice President of Programs and Operations, Steven Kantor, during a private meeting in July 1990. In its other communications to Loral, however, AEL adopted the position that the Contract did not require it to perform the DADTA on the airborne equipment as installed on the RF-4 aircraft. AEL asserted that the Contract merely required AEL to perform the analysis on the Group A equipment prior to installation.

 20. In presenting this argument, by letters dated March 20, 1990 and August 8, 1990, AEL relied on paragraph 3.3.8.3 of the SOW, which provides as follows:

 
The modifications shall not alter the inherent structural integrity of the aircraft. The Group A structure added to support the EO-LOROPS Group B equipment is secondary structure which shall be installed without modification of the basic airframe and is not safety of flight critical. The subcontractor shall perform necessary [DADTA] on Group A Kit to insure the structural integrity of the RF-4C due to the installation of the EO-LOROPS hardware. In order to substantiate the structural integrity (as specified in MIL-STD-1530A) of the RF-4C aircraft, damage tolerance and durability analyses shall be performed on Group A kit in accordance with MIL-A-8344 and MIL-A-8866B, respectively . . .

 21. This paragraph of the SOW did not limit AEL's obligations under paragraph 4.3.2.10. This paragraph was intended to support the USAF's requirement that it be able to remove the Group A Kit from the RF-4C without performing additional analysis of the aircraft's load profile. The USAF's requirement is set forth in the immediately preceding paragraph, paragraph 3.3.8.2.1. By explicitly requiring the Group A Kit to be "secondary structure" and not "safety-of-flight critical," paragraph 3.3.8.3 would permit the USAF to remove the Group A Kit from the aircraft. The USAF would not be able to remove the Group A Kit were the Kit "primary structure" or "safety-of-flight critical."


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