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SMS Demag, Inc. v. ABB Transmissone & Distribuzone

March 31, 2008

SMS DEMAG, INC., A PENNSYLVANIA CORPORATION, PLAINTIFF,
v.
ABB TRANSMISSONE & DISTRIBUZONE, S.P.A., A FOREIGN CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Judge Nora Barry Fischer

MEMORANDUM OPINION

I. INTRODUCTION

The instant case involves the application of two similar but not identical contracts and the legal effect, if any, of an arbitration (and confirmation of the same in another federal district court) on the instant lawsuit stemming from the failure of a Electric Arc Furnace transformer in Kentucky.

Pending before the Court for consideration is Plaintiff's Motion for Partial Summary Judgment [19] and Defendant's Motion for Partial Summary Judgment [23]. For the following reasons, the former will be denied in all respects and the latter will be granted in part and denied in part.

II. FACTS*fn1

On November 22, 1999, Plaintiff SMS Demag, Inc. ("SMS") entered into a contract ("SMS-NAS contract") with North American Stainless, L.P. ("NAS") to construct a stainless steel melt shop in Ghent, Kentucky. (Docket No. 25, at ¶1; Docket No. 22, Ex. 1, SMS-NAS Contract*fn2, R-1 - 35). Under the SMS-NAS contract, SMS was responsible for the overall design, manufacture, and installation of the equipment required for the melt shop, to include the Electric Arc Furnace ("EAF"). (Docket No. 20, at ¶1; Docket No. 22, Ex. 1, SMS-NAS Contract, R-1 - 35). The SMSNAS contract was valued at more than $100 million. (Docket No. 20 at ¶1; Docket No. 22, Ex. 1, at R-9).

In order to fulfill its obligations under the SMS-NAS contract, SMS contracted with Defendant ABB Transmissone & Distribuzone, S.p.A. ("ABB"), in order to purchase an EAF Transformer ("transformer"). (Docket No. 25, at ¶2; Docket No. 26, Ex. No. 12, Goetz Deposition*fn3 at 9:4-7). This contract was put into writing by SMS purchase order No. 16265 ("Purchase Order"), dated April 7, 2000. (Docket No. 25, at ¶6; Docket No. 26, Ex. No. 12, at 9:8 - 10). The purchase order had terms for the design, manufacture, delivery, and start-up support of the EAF transformer (Docket No. 20, at ¶6; Docket No. 22, Ex. 2, SMS-ABB Contract, R-36 - 38). The purchase order was modified three times and was re-executed by the parties on or about September 21, 2000 ("SMS-ABB contract"). (Docket No. 20, at ¶6; Docket No. 22, Ex. 2, SMS-ABB Contract, R-52 -58). Lori Goetz was the principal buyer associated with the transformer transaction for SMS and Tom Slovik was the primary representative for ABB. (Docket No. 25, at ¶¶ 4-5; Docket No. 26, Ex. No. 12, at 9:8 - 10 and 13:17-23). ABB manufactured the transformer in its facility in Italy and delivered it to Kentucky where it was installed by SMS in the NAS melt shop during the summer of 2001, at the expense of SMS, per SMS' contractual obligations. (Docket No. 20, at ¶¶ 15-16).

On February 2, 2002, the NAS melt shop conducted its first production of hot steel using the EAF transformer provided by ABB. Id. at ¶17. The transformer remained in operation for approximately two months. Id. at ¶18. During this period, SMS began its performance testing of the equipment to ensure compliance with the SMS-NAS contract. Id. On April 10, 2002, the transformer "catastrophically failed" causing a complete cessation of performance testing and ancillary steel-making activities at the melt shop. (Docket No. 20, at ¶18; Docket No. 22, Ex. 9, Deposition of Uwe Neubert, R-208). SMS had just begun performance testing when the transformer failed; testing included tests of equipment installed by SMS, to prove the equipment was in compliance with the SMS-NAS contract.(Docket No. 20, at ¶19; Docket No. 22, Ex. 14, at R-1485-1486). As a result of the EAF transformer failure, there was a complete cessation of all performance testing and ancillary steel-making activities at the melt shop. (Docket No. 20, at ¶20; Docket No. 22, Ex. 14, at R-1485-1486).

On April 16, 2002, shortly after the transformer failed, SMS made a warranty claim to ABB under the warranty clause of the SMS-ABB contract. (Docket No. 20, at¶21; Docket No. 22, SMS Demag Meeting Report, Ex.4, at R-88-90). In response to SMS' warranty claim, ABB facilitated the repair of the transformer. Id . As part of this process, the transformer was shipped to an ABB facility in St. Louis, Missouri, the transformer core was re-manufactured, and the transformer was returned to NAS's facility in Ghent, Kentucky. Id. As documented in an ABB report dated September 4, 2002, ABB accepted sole responsibility for the failure of the transformer, which was the result of a manufacturing defect.*fn4 ABB has never retracted these findings. Id. at ¶23; Docket No. 22, Ex.5, ABB Transformer Failure Report, at R-106-108. The melt shop was completely out-of-service from April 10, 2002 until approximately May 8, 2002. (Docket No. 20, at ¶24; Docket No. 22, Ex. A, R-207-211). Thereafter, SMS and NAS resumed performance testing, on a reduced power basis, following the installation of a temporary, leased EAF transformer.*fn5 Id.

During the repair process, SMS claims that the SMS and NAS work forces incurred various costs and expenses. (See Docket No. 20, at ¶ 25; Docket No. 22, Ex. 9, Deposition of Miguel Sanchez, R-683-685; Docket No. 22, Ex. 9, Deposition of Alex Gomez, R-697-703; Docket No. 22, Ex. 9, Deposition of Mary Jean Riley, R-943-946). Specifically, SMS claims that they were forced to do the following: (1) remove the transformer; (2) prepare it for shipment to ABB's St. Louis facilities; (3) obtain a replacement transformer to continue performance testing; (4) design the installation for the replacement; (5) install the replacement transformer, and run necessary tests of said transformer; (6) remove the replacement transformer; (7) install the repaired transformer; and, (8) test and initiate operation of the repaired transformer in order to achieve unrestricted melt shop operation so that performance testing could be completed. (Docket No. 20 at ¶ 25.)

Turning to the relevant contracts, the Court notes that the instant case essentially concerns two contracts. First, Plaintiff SMS and NAS entered into the SMS-NAS contract, in which SMS agreed to design, manufacture, and install the equipment required for a stainless steel meltshop in NAS's facility in Ghent, Kentucky. (Docket No. 25, at ¶1; Docket No. 22, Ex. 1, SMS-NAS Contract, R-1 - 35). In order to fulfill its obligations under the SMS-NAS contract, SMS contracted with Defendant ABB to purchase a transformer, (Docket No. 25, at ¶2; Docket No. 26, Ex. No. 12, Goetz Deposition*fn6 at 9:4-7), which the parties memorialized in writing in a purchase order, (Docket No. 25, at ¶6; Docket No. 26, Ex. No. 12, at 9:8 - 10). Both the SMS-NAS contract and the SMSABB contract contained limitation on liability, warranty and indemnification clauses. (See Docket No. 22, Ex. 1, at R-17 - 18, R-24 -25, and R-27; see also Docket No. 26-2, Ex. 1, at 9).

1. The SMS-NAS Contract

At Article 16.3, the SMS-NAS contract provides a limitation on consequential damages:

Neither party shall be in any event responsible to the other party for the following consequential damages: loss of use of the Work, loss of profits, loss of product, or business interruption. (Docket No. 22, Ex. 1, at R-27).

The SMS-NAS warranty provision specifies, in pertinent part:

9.1 Contractor acknowledges that Contractor knows the particular purpose for which the equipment is required and that Purchaser*fn7 is relying upon Contractor's skill and judgment to furnish suitable Equipment. Contractor warrants the materials and workmanship of the Equipment on a continuous basis for a period of twelve (12) months from the Provisional Acceptance or 37 months after the date of this Agreement, whichever occurs first, if for reasons solely attributable to the purchaser the Provisional Acceptance does not take place on time.

9.2 Contractor shall promptly correct work or replace the Equipment or any component part found to be defective or Work failing to conform to the Contract Documents, whether observed before or after completion of the Project and whether or not fabricated, installed, or completed. Contractor shall repair or replace all Equipment or any component part and correct all Work at Contractor's expense at no cost to purchaser. Repair or replacement of the equipment or any component part or correction of defective Work shall not impair Purchaser's right to pursue all other remedies allowed purchaser by this agreement. Contractor agrees that the warranty bond referred to in Article 8 above shall have application to Contractor's obligations herein and shall remain in effect in an amount of at least ten (10%) percent of the Contract Sum during the one (1) year following final payment to Contractor as described in Article 4 herein.

9.5 All the Contractor's Work and Scope of Supply is covered by the 12 month Warranty period and the only Warranty of the Work is as described in this Article. (See Docket No. 22, Ex. 1, at R-17 - 18).

The SMS-NAS Contract also contained an indemnification clause at Article 12.1, which reads as follows:

12.1 In addition to the insurance requirements set forth herein (and as described in Addendum 8), and not in lieu thereof, Contractor shall indemnify, hold harmless and defend the Purchaser, its employees, agents, servants, and representatives from and against any and all damages including reasonable attorneys' fees, expenses, claims, suits and demands of whatever nature, resulting from damages to property other than the Work, or injuries, including death, to any person caused by or arising out of any negligent action, omission or operation under this Agreement or in connection with the services attributable to the Contractor or any person or entity providing services as a result of this Agreement. Provided, further, and with the exception to purchaser's gross negligence or willful misconduct, that Contractor shall be required to indemnify the Purchaser, its employees, agents, servants, and representatives hereunder for any claims, damages, or injuries including damages to any property other than the Work, or person. This covenant of indemnity shall expire with the termination of this Agreement, and/or the Final Acceptance of the work which is the completion of the Contractor Work. Contractor shall additionally indemnify and hold harmless the purchaser against any assertion of claims by Contractor's subcontractors or materials suppliers and against any assertion of security interest by suppliers of goods or materials. The indemnification obligation set forth herein for any and all claims against the Purchaser, including its affiliates, partners, parents and subsidiaries, by any employee of Contractor, anyone directly or indirectly employed by Contractor or anyone for whose acts the Contractor may be liable shall not be limited in any way by way of any limitation on the amount or type of damages, compensation or benefits payable by or for the Contractor under workers' compensation acts, disability benefit acts or other employee benefit acts. (See Docket No. 22, Ex. 1, at R-24-25).

2. The SMS-ABB Contract

ABB claims that the SMS-ABB contract relieves ABB from liability for consequential damages of any kind. (Docket No. 31, at ¶2). The consequential damages provision in the SMSABB contract provides:

ABB shall not be, in any event, responsible to SMS Demag for consequential damages such as loss of use of work, loss of profits, loss of product, or business interruption. (Docket No. 26-2, Ex. 1, at 9). This consequential damages clause in the SMS-ABB contract was the result of extensive pre-contract negotiations between the parties. (Docket No. 20, at ¶11; Docket No. 31, at ¶11).

In addition to the limitation on liability clause, the SMS-ABB contract also contained a warranty clause and an indemnity provision. (See Docket No.20, at ¶¶ 12 and 14; Docket No. 25, at ¶¶ 24 and 36). The warranty clause, contained in Paragraph 10 of the Terms and Conditions section of the contract, states:

Warranty: The Seller warrants that all articles, equipment, materials, labor, or work furnished by the Seller hereunder will conform to the specifications and drawings applicable for this purchase order, will be of good quality and workmanship and will be fit for the purpose intended as well as the purpose for which such articles, equipment, materials, labor or work are generally used, and shall be merchantable, of good materials and workmanship, and free from any fault, imperfection or defect. Seller shall, for a period of one year following the completion, installation and commencement of operation for the ultimate use intended of the work to be performed or the materials or equipment required to be furnished hereunder, at the direction of the Buyer and at the expense of the Seller, replace, repair, and insure any and all faulty or imperfect material or workmanship furnished or performed by the seller hereunder. In the event that seller fails to do so, the Buyer may perform the same and recover the resulting cost and expense from the Seller. (See Docket No. 22, Ex. 2, at R-58). Further, the indemnity clause reads:

Seller hereby agrees to indemnify buyer from any loss, expense, recovery or settlement, including attorneys fees and costs of defense which arise from any demand, claim, or suit which may be asserted or brought against Seller or Buyer as a result of any damage to any person or persons (including death) or property allegedly caused by, resulting from, arising out of, or occurring in connection with the furnishing of any goods or services or the performance or preparation for performance of any of the work or any of the duties of Seller hereunder, or incidental to or appertaining thereto and whether or not such injury is due to or chargeable to any negligence of Buyer, owner, or any contractor under a contract from which the goods or services here ordered are required or the negligence of any employee of Buyer, owner or aforesaid contractor, including but not limited to any claim based on liability without fault for injury caused by defective products supplied by Seller. (See Docket No. 22, Ex. 2, at R-58 and Docket No. 25, Ex. 2).

III. PROCEDURAL HISTORY

1. Underlying Arbitration

The SMS-NAS Contract required that the parties handle any disputes through arbitration, that the arbitration would be in accordance with the American Arbitration Act, that venue would be Cincinnati, Ohio, and that the substantive law of the State of Kentucky would apply. (Docket No. 20, at ¶4; Docket No. 22, Ex. 1, at R-27). On August 2, 2002, NAS brought suit in the United States District Court for the Eastern District of Kentucky against SMS, at civil case number 3:01CV-54, to recover damages related to in the transformer failure. (Docket No. 20, at ¶28; Docket No. 25, at ¶12). NAS's claims against SMS with regard to the EAF transformer failure were asserted in Count III of its fourth amended counterclaim. (Docket No. 25, at ¶13; Ex. 12, at R-1421). In addition to the allegations in Count III, NAS brought additional claims against SMS at Counts II and XIV. (Docket No. 22, Ex. 6, at R-119-120 and R-123-124; Ex. 12, at R-1421 & 1446). Count II stated a claim for damages and costs associated with SMS' alleged failure to achieve provisional acceptance, while Count XIV stated a claim for SMS' alleged failure to acquire and maintain builder's risk insurance coverage for the AEF transformer failure, ...


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