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Orion Drilling Co., LLC. v. EQT Production Co.

United States District Court, W.D. Pennsylvania

September 10, 2019


          Maureen P. Kelly Magistrate Judge.

          OPINION AND ORDER RE: ECF NOS. 371 AND 373


         This action was commenced by Plaintiff Orion Drilling Company, LLC (“Orion”), against Defendant EQT Production Company (“EQT”), alleging that EQT breached a series of contracts pursuant to which Orion agreed to build and operate two drilling rigs at various EQT well sites for a specified number of days. After a two-week jury trial, the jury rendered a verdict in favor of EQT as to the claims asserted against it.[1]

         Presently before the Court are Orion's Motion for New Trial Pursuant to Rule 59, and its Renewed Motion for Judgment as a Matter of Law Pursuant to Rule 50(b). ECF Nos. 371, 373. Upon consideration of the parties' submissions in support of and in opposition to both Motions, ECF Nos. 372, 374, 385, 386 and 388, and for the following reasons, Plaintiff's Motion for New Trial Pursuant to Rule 59 and Renewed Motion for Judgment as a Matter of Law Pursuant to Rule 50(b) are denied.


         The facts as set forth in the pleadings and as presented during trial, and viewed in the light most favorable to EQT as the verdict winner, are as follows.

         Orion and EQT are two sophisticated business entities, each operated by individuals with decades of experience in the oil and gas industry. Beginning in 2014, the parties entered into a series of contracts related to gas drilling operations using two rigs constructed by Orion, identified as Rig 17 and Rig 18. The pending litigation arises from fundamental differences in the interpretation of provisions governing termination of these contracts.

         A. The Contracts

         On August 4, 2014, with regard to Rig 17, and on August 6, 2014, with regard to Rig 18, the parties adopted a form International Association of Drilling Contractors (“IADC”) Drilling Bid Proposal and Daywork Drilling Contract (“Drilling Contract”), as supplemented with IADC standard exhibits. ECF No. 1-3, 1-5. In both agreements, EQT is identified as the “Operator” and Orion is identified as the “Contractor.” The principal agreements were modified to incorporate certain “early termination” provisions set forth in form Exhibit A; however, no changes were made to provisions regarding termination for contractor default, or to remove otherwise available equitable remedies. For ease of reference, the Drilling Contracts (as amended) provide as follows:


         6.1 Duration of Contract:

         This Contract shall remain in full force and effect until drilling operations are completed on the well or wells specified in Paragraph 1 above, or for a term of 1095 days of activity including standby, moving and/or operating days (excluding any days affected by a Force Majeure Event) commencing on the date specified in Paragraph 2 above.

         6.3 Early Termination by Contractor: See “Exhibit A, Other Provisions” Item 7.3.

         (a) By Either Party: Upon giving of written notice, either party may terminate this Contract when total loss or destruction of the rig, or a major breakdown with indefinite repair time necessitates stopping operations hereunder.

         (b) By Operator : Notwithstanding the provisions of Paragraph 3 with respect to the depth to be drilled, Operator shall have the right to direct the stoppage of the work to be performed by Contractor hereunder at any time prior to reaching the specified depth, and even though Contractor has made no default hereunder. In such event, Operator shall reimburse Contractor as set forth in Subparagraph 6.4 hereof.

         (c) By Contractor: Notwithstanding the provisions of Paragraph 3 with respect to the depth to be drilled, in the event Operator shall become insolvent, or be adjudicated a bankrupt, or file, by way of petition or answer, a debtor's petition or other pleading seeking adjustment of Operator's debts, under any bankruptcy or debtor's relief laws now or hereafter prevailing, or if any such be filed against Operator, or in case a receiver be appointed of Operator or Operator's property, or any part thereof, or Operator's affairs be placed in the hands of a Creditor's Committee, or, following three business days prior written notice to Operator if Operator does not pay Contractor within the time specified in Subparagraph 5.2 all undisputed items due and owing, Contractor may, at its option, (1) elect to terminate further performance of any work under this Contract and Contractor's right to compensation shall be as set forth in Subparagraph 6.4 hereof, or (2) suspend operations until payment is made by Operator in which event the standby time rate contained in Subparagraph 4.6 shall apply until payment is made by Operator and operations are resumed. In addition to Contractor's rights to suspend operations or terminate performance under this Paragraph, Operator hereby expressly agrees to protect, defend and indemnify Contractor from and against any claims, demands and causes of action, including all costs of defense, in favor of Operator, Operator's co-venturers, co-lessees and joint owners ….

         6.4 Early Termination Compensation: See “Exhibit A, Other Provisions” Item 7.3.

         (a) Prior to Commencement: In the event Operator terminated this Contract prior to commencement of operations hereunder, Operator shall pay Contractor as liquidated damages and not as a penalty a sum equal to the standby time rate (Subparagraph 4.6) for a period of days or a lump sum of $ .

         (b) Prior to Spudding : If such termination occurs after commencement of operations but prior to the spudding of the well, Operator shall pay to Contractor the sum of the following: (1) all expenses reasonably and necessarily incurred and to be incurred by Contractor by reason of the Contract and by reason of the premature termination of the work, including the expense of drilling or other crew members and supervision directly assigned to the rig; (2) ten percent (10%) of the amount of such reimbursable expenses; and (3) a sum calculated at the standby time rate for all time from the date upon which Contractor commences any operations hereunder down to such date subsequent to the date of termination as will afford Contractor reasonable time to dismantle its rig and equipment provided, however, if this Contract is for a term of more than one well or for a period of time, Operator shall pay Contractor, in addition to the above, the Force Majeure Rate, less any unnecessary labor, from that date subsequent to termination upon which Contractor completes dismantling its rig and equipment until the end of the term or

         (c) Subsequent to spudding: If such termination occurs after the spudding of the well, Operator shall pay Contractor (1) the amount for all applicable rates and all other charges and reimbursements due to Contractor; but in no event shall such sum, exclusive of reimbursements due, be less than would have been earned for days at the applicable rate “Without Drill Pipe” and the actual amount due for drill pipe used in accordance with the above rates; or (2) at the election of Contractor and in lieu of the foregoing, Operator shall pay Contractor for all expenses reasonably and necessarily incurred and to be incurred by reason of this Contract and by reason of such premature termination plus a lump sum of $ provided, however, if this Contract is for a term of more than one well or for a period of time, Operator shall pay Contractor, in addition to the above, the Force Majeure Rate less any unnecessary labor from the date of termination until the end of the term or .

         6.5 TERMINATION

         (1) Project Termination for Default - Contractor shall be deemed in default under and in breach of this Contract whenever Contractor shall:

(A) Suffer voluntary or involuntary bankruptcy.
(B) Make a general assignment for the benefit of its creditors.
(C) Become insolvent or have a receiver appointed for it on account of insolvency.
(D) Fail to supply sufficient labor and materials or to make adequate provision for the timely performance of the work to perform its obligations hereunder with due diligence in a good and workmanlike manner in accordance with industry standards, practices and procedures which would be reasonably expected from an experienced contractor in the drilling industry by Operator and does not cure failure within 7 days of Operator's written notice.
(E) Fail to make prompt payment when due to its subcontractors and suppliers for material or labor.
(F) Fail to comply with requirement or material provision of this Contract in accordance with industry standards and does not cure failure within 7 days of Operator's written notice.
(G) Violate or allow a violation of any law or regulation applicable to the performance of its work and does not cure failure within 7 days of Operator's written notice.
(H) Continuously violate Operator's safety, environmental, controlled substances or other applicable rules and policies in any material respect for 7 days and fail to cure the violation within 7 days of the date of Operator's written notice.
(I) Permit any performance, security or insurance policy required to be maintained by this Contract to be suspended or canceled without Contractor's providing replacement coverage; or upon the insolvency of the issuing financial or insurance institution, to fail to provide an immediate replacement performance, security or insurance policy. (2) In the event of a default by Contractor under Paragraph 1 above, Operator shall have the right:
(A) To remedy the Contractor's deficiency and deduct a reasonable cost thereof from any payment then or thereafter due to the Contractor and does not cure within 7 days of Operator's written notice;
(B) To terminate the Purchase Order and/or this Contract for the work or any part thereof and complete the work by whatever method the Operator deems expedient. Contractor hereby specifically authorizes Operator to undertake and charge the cost thereof to Contractor of Operator (1) completing the work itself with labor and materials priced at the prevailing rates with proper allowances for profit and overhead; (2) agreeing with others, through one or more contracts, to finish the work at such prices and on such terms and conditions as Operator deems advisable in its sole discretion; or (3) to finish a portion of the work itself and to contract with others to finish the remaining portion of the work. Operator will be responsible for equipment and tool maintenance during this time period of possession.
(C) To pursue any other remedy provided under this Contract or available at law or equity. Exercise by Operator of any such remedy or right shall not be an election of remedies nor restrict Operator's right to assert any other available right or remedy, nor operate to relieve Contractor of further liability and any and all damages sustained by reason of Contractor's default, unless and only to the extent expressly provided otherwise in this Contract. Operator shall have the right to repurchase any equipment originally purchased by itself and added to the Contractor's rig to augment or improve rig efficiency on or before the end of term at pricing less than amortization included in day rate.

In relevant part, Exhibit A to each contract provides as follows:

7.1 Term
This contract applies to the rig identified in Section 4.1 of Exhibit A and shall be for a term ending (a) 1095 days from the date this rig begins daywork for this Operator or (b) upon rig release from the well being drilled on such 1095th day, whichever is later. The Operator acknowledges that it is contracting to obtain and pay for the services of such rig for the entire term of this contract, except as provided in Section 7.4. above.[2] Operator may at its sole discretion extend the term of the Agreement within eighteen (18) months of the Commencement Date for a period of twelve (12) additional months at the day rate specified below in Section 7.16.
7.3 Early Termination
Operator shall have the right to termination (sic) this contract at any time after the date of execution by giving written notice of the effective date of cancellation at least thirty (30) days in advance, provided that the Operator pays Contractor the early termination amount as specified below.
In the event of early termination by Operator after execution of this contract, operator shall pay to Contractor as liquidation damages and not as a penalty, a lump sum equal to $20, 000 for each of the remaining days in the contract term early termination amount. Operator shall pay this lump sum early termination amount within 30 (thirty) days of the invoice date. Further, all other amounts due and owing under this Contract, including without limitation, the mobilization and demobilization payments, shall be paid pursuant to the provisions set out in this Contract. Notwithstanding the forgoing, Operator shall not be required to pay an early termination amount if Operator elects to terminate this Contract based upon one of the following events:
(a) The rig is deemed a total or constructive loss or a major breakdown occurs with an indefinite repair time and Contractor has not substituted a rig capable of substantially the same performance within 30 (thirty) days of the date of Operator's written demand for a substitute rig.
(b) The Contractor suffers involuntary or voluntary bankruptcy, is insolvent or subject to receivership or similar insolvency proceedings.
(c) If Contractor fails to materially perform its operations hereunder with reasonable due diligence in a good and workmanlike manner generally in accordance with the industry standards, practices and procedures which would be reasonably expected from an experienced contractor in the drilling industry and does not cure such failure within 50 (fifty) calendar days of the date of Operator's written notice to Contractor of such failure.
If Operator terminates this Contract in the case of (b) or (c) above, Contractor shall be entitled to the amount then due and owing under this Contract prior to the effective early termination date in accordance with the payment terms in this Contract, plus reasonable mobilization and demobilization costs to a mutually agreed location in Pennsylvania. If Operator terminates this Contract in the case of (a) above, Contractor shall be entitled to the amounts due and owing under this Contract as of the date rig is deemed a total or constructive loss or the date the rig suffers a major breakdown with an indefinite repair time, plus mobilization and demobilization costs to a mutually agreed location in Pennsylvania.

         Exhibit C to each Drilling Contract sets forth Additional Responsibilities of Contractor, and provides in pertinent part:

15. Contractor shall be fully responsible for development and implementation of its workplace safety policies and procedures for its employees or agents and shall not rely upon any guidelines, policies or procedures of Operator. Operator reserves the right to audit contractor's compliance at any reasonable time with all EHS laws, regulations and policies including but not limited to, contractor's written safety program, employee training records and accident reports/logs. Operator reserves the right to shut down an operation if material non-compliances or other unsafe conditions are observed. Failure of operator to shut-down an operation does not indicate a determination of compliance or safety by the Operator or for any other purpose. Notwithstanding any provisions or actions of Operator, Contractor acknowledges its responsibility and obligations for all safety matters and agrees that it is not relying on Operator in any manner.

         Orion argues that pursuant to the provisions set forth above, Rigs 17 and 18 were subject to “take or pay” agreements that require the payment of liquidated damages in the event of termination prior to the expiration of the designated term, regardless of cause or reason. In support of its position, Orion points to the incorporation of Exhibit A, Sections 7.1 and 7.3, and the striking of Section 6.4 in the primary agreement. EQT argues that the parties intended to permit termination for default pursuant to Section 6.5, which was retained in the primary agreement, and which preserved the ability to terminate without payment of liquidated damages in the event of persistent safety concerns that remained uncured after 7 days. In addition, EQT contends that Section 6.5(2)(C) specifically preserves all other remedies available under the Drilling Contracts and at law and equity. Through this provision, the parties maintained EQT's right to shut down unsafe operations and to terminate the contract for material breach and default without providing an opportunity for cure or payment of liquidated damages.

         B. Performance and Termination

         The evidence presented at trial established that in 2015 and 2016, both Rig 17 and Rig 18 experienced “dropped block” incidents. A dropped block is “an uncontrolled descent” of approximately 50, 000 pounds of the drill's top drive, traveling block, and associated equipment in the mast, ECF No. 331 at 204-05. Wayne Squires, Orion's Chief Executive Officer and President, conceded at trial that such incidents raise significant safety concerns for the lives and well-being of any contractors or employees working on the drilling platform below. ECF No. 379 at 52, 184. David Castro, Orion's Vice President for Health, Safety, and Environment testified that in the years he spent working for several other oil companies in safety-related roles, he had never dealt with a dropped block incident, and that such incidents have the potential to be fatal if the underlying causes are not corrected. ECF No. 353 at 26-27, 64.

         The peril and rarity of a dropped block event was confirmed by Craig Sims, the Vice President of Business Development for Integrated Drive Systems (“IDS”), designer of the Rig 17 and Rig 18 control system, who reported the first dropped block event to IDS leadership indicating “we are lucky someone wasn't hurt, ” ECF No. 331 at 76-77; ECF No. 368-7; by Karl Van Camp, Orion's independent rig commissioning inspector, who testified that a dropped block is extremely rare, potentially fatal, and that he had never heard of a rig experience more than one dropped block incident prior to being retained by Orion, ECF No. 331 at 154, 178-179; by Brett Schellenberg, Orion's General Manager, who testified that before being employed by Orion, he had never heard of a rig that experienced multiple dropped blocks, and that such events were classified as “high potential” events, that could result in injury or significant equipment damage, id. at 205; by Matthew Tonder, a consultant retained by Orion, who testified that in his 25 years in the drilling industry, he had never worked on a rig that experienced a dropped block incident, and had never heard of a rig experiencing three such incidents; Tonder further agreed that a dropped block incident has “the potential to kill someone, ” id. at 144-45, 146; by Owen Brandt, Orion's Operations Manager and Rig Superintendent for Rigs 17 and 18, who testified that prior to working on these rigs, he had not experienced a dropped block on any other Orion rig, and had never heard of another rig that dropped its block three times, ECF No. 359 at 7.

         Rig 18 experienced three dropped block incidents during operations on behalf of EQT: September 25, 2015, October 10, 2015, and June 7, 2016. The September 25, 2015, incident was described by Sims as “an out of control condition of the control system” compounded by the failure of an emergency brake, which did not prevent the block from hitting the drilling platform floor. ECF No. 331 at 76-77. On September 30, 2015, EQT sent a notice of default referencing Section 6.5(1)(F) of the Rig 18 Drilling Contract and demanded formal documentation of a cure within 7 days. ECF No. 379 at 195; ECF No. 367-10. The notice identified the dropped block incident as a material failure, “resulting in a significant near miss on the drilling floor, ” which “thankfully did not result in fatalities.” ECF No. 367-10. The letter advised that “[i]f Orion fails to cure these Rig failures to EQT's satisfaction, or there are additional failures in Orion's operation of or the performance of the Rig (related to the IDS drilling system or otherwise), EQT may elect to exercise its contractual termination rights under the Drilling Contract.” Id.

         Squires responded on behalf of Orion within the Drilling Contract's 7-day cure period and represented that Orion had identified the cause of the dropped block incident and cured the fault. ECF No. 379 at 196. Orion repaired a drill string, made changes to bridge protection parameters, tested the brake system, and provided additional training to platform engineers. Id. at 196-97. Despite Orion's representations that these measures were sufficient to ensure safe operation of Rig 18, a second dropped block incident occurred on October 10, 2015, when the block again suffered uncontrolled descent and the braking system failed to engage. ECF No. 331 at 37-38.

         EQT ordered a stoppage of drilling operations and notified Orion that the incident constituted default of the Rig 18 Drilling Contract pursuant to Section 6.5. EQT stated that as evidenced by the second incident, Orion had failed to correct the defect that caused the September rig failure. ECF No. 355 at 14-15; ECF No. 367-12. Upon investigation into the cause of the second incident, Orion and IDS determined that a programming error had been entered into the control system which allowed the drill speed to run faster than it should have for the given weight. ECF No. 331 at 37-38. Orion and IDS further determined that this error was likely the cause of the first dropped block incident in September. ECF No. 379 at 198. Squires conceded that the repairs conducted after the first incident were necessary, but not related to the September 2015 incident. Squires represented to EQT that the programming errors were remedied and that these changes would prevent similar occurrences in the future. Id. at 198-199. Squires further disputed EQT's contention that the incidents, which Orion characterized as equipment “malfunction, ” gave rise to default under the controlling contract or violated industry standards. ECF No. 367-13.

         On October 26, 2015, the parties entered into a “Third Amendment to the IADC Daywork Drilling Contract” for Rig 18, whereby Orion agreed to conduct further testing of Rig 18 at its sole expense and to indemnify EQT for any claims arising from the “loss of safe block motion control” during a test period and for thirty days thereafter. ECF No. 367-14. Orion granted EQT the right to immediately terminate the Drilling Contract “without any penalty or obligation for any liquidated damages, and early termination payments” in the event of an additional incident during this extended testing period, and the parties agreed to preserve “all other terms and provisions of the Contract, and each party's respective rights and remedies” which “shall remain in force and in effect between the parties.” Id.

         Just two weeks later, on November 6, 2015, EQT provided notice to Orion of its dissatisfaction with “the continued accumulation of safety incidents and nonproductive time on both Orion Rig 17 and Rig 18.” ECF No. 367-15. The notice conveyed EQT's belief that “[m]any of these issues appear directly related to the IDS operating system or are premature equipment failures of critical components necessary to efficiently and safely execute our drilling program. Rig 17 and Rig 18 combined are averaging 8% NPT [Non-Production Time] from start up until this week. This is 5 times higher than the 1.6% average of the other 7 rigs in our fleet. The rigs together have averaged 347 hours of NPT, which is 3.5 times higher than the average of the other 7 rigs in our fleet, which have averaged only 99 hours.” Id. This notice did not invoke the termination provisions under either Section 6.5 or Section 7.3 of Exhibit A to the Rig 18 drilling contract, but was intended to document EQT's frustration with Orion's lack of response to issues arising in the field. ECF No. 355 at 61; ECF No. 353 at 111-12. EQT sent a second letter outlining similar issues to Orion on November 16, 2015. ECF No. 367-16; ECF No. 379 at 128-29.

         Orion responded to EQT's correspondence, and acknowledged its agreement “that IDS's equipment has been the leading cause of downtime on our rigs. It is our belief that the majority of these issues have been resolved or are in the works to be resolved. We would like to be clear that it is not the intent of Orion or IDS to work out bugs related to the IDS system while on EQT time. With that in mind, we have worked with IDS to create a robust data tracking system in an effort to prevent future NPT incidents from occurring.” ECF No. 367-17; ECF No. 379 at 129-30, 192.

         After an exchange of letters in late 2015 and early 2016 addressing additional NPT and equipment failures, EQT sent written notice of default pursuant to Section 6.5(1)(F) of the Drilling Contract with regard to both rigs, and requested cure within 7 days. ECF No. 367-20; ECF No. 367-21; ECF No. 379 at 131. Orion again denied the applicability of Section 6.5 to the ongoing issues but, on March 2, 2016, agreed to credit EQT the sum of $279, 834.65 of a total claim of $559, 669.29 in damages sustained by EQT as a result of costs incurred and lost production time and delayed drilling operations. ECF No. 379 at 131-133; ECF No. 367-20, 367-23. By way of the “Settlement and Release Agreement, ” and in exchange for the credit, EQT agreed to release and discharge Orion “of and from any and all claims, liabilities, damages, costs, offset entitlements, demands, expenses and/or causes of action arising from or pertaining to [alleged defective drilling operations, rig, failure to comply with requirements of the drilling contract, and resulting non-productive time in the performance of drilling operations on EQT wells].” ECF No. 367-23.

         Despite Orion's representations that it had cured the defects with the IDS control system after the second dropped block incident, Rig 18 suffered a third dropped block on June 7, 2016. Squires testified that the cause of this event was a Bonitron failure. ECF No. 379 at 135-136. However, it became apparent that the IDS control system was not programmed to set the brake in the event of a Bonitron failure and as a result, the block dropped unexpectedly and the brakes failed to engage. Id., at 200-01; ECF No. 367-24; ECF No. 356 at 33-36. Orion's incident report indicated as follows:

The driller reported that he heard the drawworks wind up and immediately applied the mechanical drawworks brakes (Witchita) by putting the controls into park position, which slowed downward descent of the block, but the brakes were not able to completely stop the drawworks due to rapid downward momentum at 278 FPM[] (based off of witness statements and Pason data). Personnel working on the floor at the time of incident evacuated the area before elevators came to rest on rotary table. The CRT was stacked out on the top of the elevators, and the drill line had slack in it. No. injuries were sustained as a result of this incident.

ECF No. 367-24; ECF No. 331 at 106-07. On June 9, 2016, EQT sent Orion a written notice of default pursuant to Section 6.5 of the Rig 18 Drilling Contract and instructed Orion to shut down all drilling operations for safety reasons. At trial, Squires conceded that EQT was permitted to cease operations under the Rig 18 contract. ECF No. 379 at 137-38, 200-01. EQT's default notice cited “material unsafe conditions observed in the operation of the Rig.” Id. In addition, EQT stated:

[It] afforded Orion ample opportunities to diagnose and repair the Rig following the prior block dropping failures, yet the Rig remains manifestly unsafe in its current operation condition. EQT cannot allow continued operation of the Rig due to the significant potential for accidents and the danger posed to drilling personnel. EQT hereby instructs Orion to pull the last joint of casing out of the hole and lay it down, and pick up the 5 ½” landing joint and land the casing in the wellhead. Orion will immediately rig down upon completion of this procedure. EQT will then arrange to demobilize the Rig from the West Run well pad to the Orion yard in Dubois, Pennsylvania or a similar mutually agreed location for Orion to perform diagnostics and repairs while EQT completes its drilling operations on the West Run well pad with another rig.
EQT hereby requests that Orion perform a formal investigation and root causes analysis of this latest block dropping failure. The shut down and suspension of Rig operations will continue until Orion has: (1) delivered and presented to EQT a report with the final results and findings of such investigation and analysis, (2) demonstrably corrected and repaired all Rig failures, and (3) delivered to EQT a written certification from an independent safety engineer approved by EQT certifying that Orion has satisfactorily completed all repairs and undertaken all preventative measures necessary to guaranty the safe operation of the Rig.

ECF No. 367-25. On June 16, 2016, the parties entered into a Letter Agreement documenting the steps to be taken by Orion to address EQT's stated concerns for the safety of its employees and contractors. ECF 367-28; ECF No. 379 at 201. Squires testified that he agreed to shut down Rig 18 and to permit Aberdeen Drilling Consultants, Ltd. (“ADC”), an independent safety engineering firm selected by EQT, to investigate and to identify preventative measures and repairs. Id. In addition, Squires agreed that Orion would complete any repairs or preventative measures identified by ADC “to the satisfaction of EQT.” Id. For purposes of conducting the inspection, the parties agreed “to extend the cure period specified in paragraphs 6.5(1)(F) and 6.5(1)(H) of the Drilling Contract” to “end at 5:00 pm on July 9, 2016, or seven days after the written assessment … is delivered to Orion, whichever date is later.” ECF No. 367-28. The Letter Agreement provided that if Rig 18 was placed back into service on EQT's behalf, Orion would indemnify and hold harmless EQT for any liabilities or claims arising out of any other uncontrolled block movement for one year after return to service. The parties further agreed that in the event of litigation:

This letter agreement shall not affect or limit Orion's position that (a) all claims relating to the prior incidents referenced in EQT's letter of June 9, 2016 were settled and released for all purposes by the Agreement between the parties dated March 2, 2016, (b) the provisions of Section 6.5 are not applicable to the subject matter of this letter agreement, and (c) Orion has satisfied the contractual requirements of Section 6.5 with respect to the subject matter of this agreement with its previous responses. This letter agreement also shall not affect or limit EQT's contrary position regarding (a), (b), and (c).


         Squires testified that ADC's report identified 11 nonconformance issues and made several key conclusions that raised serious concerns with the safety of the hardware and software of the IDS control system. ECF No. 379 at 202-03; ECF No. 367-31. In particular, ADC concluded that there was additional concern regarding the interaction of the various rig systems and components within the hardware and software of the control system. Id. ADC further determined that in the absence of a Failure Modes Effect Analysis (“FMEA”) to help identify additional dormant faults that may reside within the software and hardware of the control system, “it cannot be confirmed that all envisaged failure modes have been adequately investigated and addressed.” ECF No. 379 at 203-04; ECF No. 367-31.

         David Elkin, EQT's Senior Vice President for Drilling & Completions, reviewed the report and was concerned that, based upon ADC's review of the control system and the happening of three highly unusual dropped block incidents, ADC determined that “even if [Orion did] everything that they [ADC] outlined in the report … they weren't sure that any amount of testing that they were prescribing in the report was going to ensure that the rig could operate safely.” ECF No. 353 at 129-30.

         On July 8, 2016, EQT notified Orion that in accordance with its rights under Section 27.2 and Exhibit C, Paragraph 15 of the Rig 17 Contract, and because of ongoing safety concerns with the IDS software and hardware control system utilized by both Rig 18 and Rig 17, EQT “believes it is necessary for health and safety protection and because of material unsafe conditions to shut down operation of Rig 17.” ECF No. 367-32.

         Orion informed EQT that it corrected the Rig 18 critical and major nonconformance issues identified in the ADC report by July 11, 2016, and tendered the rig for inspection by EQT. ECF No. 367-33. However, Orion did not represent that it had undertaken an analysis and testing of the control system for latent defaults that could cause another dropped block incident. Elkin, on behalf of EQT, cited this lapse in tender as a violation of the June 16, 2016 Letter Agreement, whereby Orion agreed to complete “any and all identified … preventative measures to the satisfaction of EQT and ADC.” ECF No. 353 at 137-38; ECF No. 367 at 34. Because Rig 17 employed the identical IDS control system, Elkin informed Orion that Orion's failure to assess the control system for “additional dormant faults” required that Rig 17 be shut down, given the number of dropped block incidents on Rig 18 “because of unidentified faults.” Id. Despite EQT's directive, Orion “refused to shut down” Rig 17. ECF No. 353 at 136.

         On July 12, 2016, Orion stated it would conduct the requested FMEA and remedy any failures identified therein, and would apply all changes identified to Rig 17. ECF No. 367-35. In addition, it would complete this inspection and tender Rig 18 in two days, on July 14, 2016, within the cure period set forth in the Letter Agreement. Id. Orion submitted its FMEA report to EQT on July 15, 2016, along with documentation stating it had cured the identified nonconformances. ECF No. 353 at 138; ECF 367-36. EQT forwarded the documentation to ADC to review and requested that ADC provide EQT an opinion regarding Orion's proposed corrective action. Id.

         On July 15, 2016, EQT formally notified Orion of Orion's default of the Rig 17 Drilling Contract pursuant to Section 6.5, and its failure to “materially perform its operations in a workmanlike manner and in accordance with industry standards, practices and procedures under Exhibit C, Section 7.3 of the Rig 17 Contract.” ECF No. 367-37. Elkin testified that because the software and control system were identical, EQT had serious safety concerns regarding Rig 17's continued operation. ECF No. 353 at 139-40. In addition, Rig 17 had experienced “a number of other HSE incidents … and it was our opinion that Rig 17 could not be operated safely as well.” Id. EQT's notice identified 16 serious safety incidents on Rig 17, including erratic brake operation and at least one instance where the brakes did not engage, resulting in a dropped block. Id.; ECF No. 353 at 145. The notice further referenced ADC's conclusion from the Rig 18 report that “it is unlikely that additional testing would determine all potential system-based failures.” ECF No. 367-37 (italics in original).

         On July 25, 2016, ADC completed its review and submitted a Final Report to EQT. ECF No. 353 at 141; ECF No. 367-42. Elkin testified that ADC was concerned that the FMEA control system testing had been conducted on a simulator in Houston, not on the rig itself, and this seriously impacted the reliability of Orion's analysis. Id. ADC reported that “[u]tilizing this method does not give full confidence that the rig's systems will act in the same manner, nor does it indicate that the software has been changed or tested on the rig as the documentation only has a record of seven alarms being fitted and tested to the rig .…” Id. at 142. In addition, Elkin determined that Orion had not addressed all of ADC's key conclusions and, as a result, EQT had no choice but to terminate the Rig 18 Drilling Contract. Elkin testified as follows:

There were three very serious safety incidents. With two of those incidents, the blocks actually struck the floor. On the third incident, one of our contractors was within like a foot when the blocks hit the rig floor. To us, that was kind of an untenable situation. We just didn't feel comfortable that we could continue to operate this rig. It was based on those three incidents and, I think, it was truly based on the ADC report. They said in their own words, no matter how much testing we say they should do, we're still not sure that all the faults are going to be found. There's been so much wrong and so much history in regards to the system not working correctly, that they were unwilling to tell us that the rig could go back to work safely. In our mind, there was no way we could continue to operate the rig.

Id. at 143. Further investigation was ruled out by EQT because:

three near misses of that magnitude was really enough. And it was our opinion that there was a history with Orion that they would do stuff, but typically, we would have to point it out to them that it needed done, hey, you need to do this, and then they would do it. A lot of times it was a struggle to get them to do it. They had, in regards to the first dropped block, they had given us a reason; it proved to be incorrect. With the second dropped block, they had assured us that it wasn't going to happen again and six months later, basically, it happened again. So we had just basically lost faith that they could operate the rig safely.

Id. at 144.

         Elkin testified that on July 27, 2016, he sent Orion notice of termination of the Rig 18 Drilling Contract with a list of safety concerns that had arisen and EQT's conclusion that Orion could not ensure the rig's safe operation. Id. at 144; ECF No. 369-27. The termination letter stated that repairs and preventative measures had not been completed to EQT's satisfaction and as a result of Orion's continued default, EQT terminated the contract in accordance with Section 6.5 and Exhibit C, “effective immediately.” Id. Elkin testified that Orion performed an FMEA on Rig 17, but did not complete all remedial measures identified by ADC. Accordingly, “based on the history of both rigs' operation and the accumulation of the two ADC reports, the Orion responses, not just to this incident but the prior two incidents, we really could come to no other conclusion in our mind that we needed to terminate Rig 17 as well.” ECF No. 353 at 146. On September 12, 2016, 59 days after its notice of default, EQT sent Orion notice of termination of the Rig 17 contract based upon Orion's “violation of Section 6.5.” Id. Elkin testified that fundamentally, “it was our opinion that [Orion] could no longer operate the rig safely.” Id. at 148.

         Orion filed the Complaint commencing the instant litigation on September 30, 2016. At Count I, Orion alleges breach of the Rig 18 Drilling Contract and seeks damages in an amount not less than $21, 002, 000; and at Count II, alleges breach of contract of the Rig 17 Drilling Contract and seeks damages in an amount not less than $11, 100, 000. ECF No. 1.

         Subsequent to filing suit, Orion contracted with WPX Energy, LLC to undertake drilling operations utilizing Rig 18. Despite Orion's repeated representations to EQT and its insistence that all control system defects had been cured, Rig 18 experienced a fourth dropped block incident on June 17, 2017, nearly a year to the day of the third incident. ECF No. 362 at 4-5. The cause of the event was identified as an error listed in the preventative maintenance required by the 2016 FMEA conducted by Orion at EQT's request, as well as a failure of the control system to identify an electrical fault issue and automatically set the brake. ECF No. 331 at 121-22.

         Following the presentation of evidence in the trial of this matter, the jury deliberated and returned a verdict in favor of EQT as to Count I, finding that EQT had not breached the Rig 18 Drilling Contract. ECF No. 329. As to Count II, the jury returned a verdict finding that EQT breached the Rig 17 Drilling Contract, but further determined that Orion was in material breach of the contract. The Court permitted the jury to consider whether the material breach was sufficient to relieve EQT of providing a cure period. The jury found that Orion was entitled to a cure period, but determined that Orion had failed to cure its material breach of the Rig 17 Drilling Contract. Id. Judgment was entered on the verdict in favor of EQT as to both Count I and Count II of Orion's Complaint. Thereafter, Orion timely filed the pending post-trial motions and the motions are now ripe for consideration.

         II. ...

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