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U.S. Composite Pipe South, LLC v. Frank Coluccio Construction Co. Inc.

United States District Court, D. Hawaii

March 14, 2016

U.S. COMPOSITE PIPE SOUTH, LLC, Counterclaim Defendant, and WESTCHESTER FIRE INSURANCE COMPANY, and CITY AND COUNTY OF HONOLULU, Additional Counterclaim Defendants.


Barry M. Kurren, United States Magistrate Judge

U.S. Composite Pipe South, LLC (“USCPS”) filed this action against Frank Coluccio Construction Company, Inc. (“FCCC”) and Safeco Insurance Company of America (“Safeco”) to recover payment under a Purchase Order between USCPS and FCCC, stemming from a $37 million sewer construction contract between FCCC and the City and County of Honolulu (“City”). FCCC counterclaims against USCPS and Westchester Fire Insurance Company (“Westchester”) seeking damages under the Purchase Order and in tort.

This Court has original jurisdiction pursuant to 28 U.S.C. § 1332, and venue is proper pursuant to 28 U.S.C. § 1391(b)(2). Having heard and carefully weighed all of the evidence and testimony presented at a nine-day bench trial, having observed the demeanor of the witnesses and evaluated their credibility and candor, having heard the arguments of counsel and considered the memoranda submitted, and pursuant to Federal Rules of Civil Procedure (“FRCP”) Rule 52(a)(1), the Court makes the following findings of fact and conclusions of law. Where appropriate, findings of fact shall operate as conclusions of law, and conclusions of law shall operate as findings of fact.

I. Findings of Fact

A. The Beachwalk Project

FCCC and the City entered into a contract on June 23, 2009, for the construction of a “Beachwalk [Wastewater Pump Station] to Ala Moana Park Sewer: Phase I - Force Main System[, ] Contract, No.: CT-DDC-0900444 Job. No. W-18-07” (hereinafter “Beachwalk Project”). The Beachwalk Project was necessitated by a consent decree between the City and the United States Environmental Protection Agency resulting, at least in part, from a well-publicized sewage failure in 2006. With a bid of $37 million, approximately $13 million lower than the next lowest bid, FCCC was the successful low bidder and was selected by the City to serve as general contractor for the Beachwalk Project.

Among other things, the Beachwalk Project involved the placement of sewage piping from Waikiki to a station near Ala Moana Park, and required installation, by means of microtunneling, of a new sewer force-main line consisting of five sections, or drives, of sewer pipe. Four of the drives were straight; the fifth drive, which is the subject of this lawsuit, is a specialized double-curved section of pipe placed under the Ala Wai Canal. The Beachwalk Project was the first project in the United States involving a double, or compound, curved microtunnel drive.

In addition to selecting FCCC as the general contractor for the Beachwalk Project, the City also contracted with AECOM to provide construction management services for the project. AECOM had an obligation to inspect and observe portions of the work on the Beachwalk Project. The City also retained R.M. Towill as the lead designer and the engineer of record for the project. Yogi Kwong Engineers, LLC (“YKE”) was hired by R.M. Towill as a sub-consultant to do the microtunneling design work and to prepare the microtunneling specifications for the Beachwalk Project. AECOM also hired YKE as a sub-consultant to perform daily field observation and inspection duties of the microtunneling work.

B. Change Order & Selection of Meyer Pipe

The pipe for the fifth drive of the Beachwalk Project was originally to be manufactured and supplied by the Al-Watani Factory for Fiberglass Company of Kuwait. After the Beachwalk Contract was entered into, however, the City and FCCC decided not to utilize the Al-Watani pipe due to concerns regarding quality and responsiveness. The City and FCCC explored alternatives while the Beachwalk Project was already underway. FCCC offered the City “no cost” change order options to replace the Al-Watani pipe that would not have resulted in an increase in the Beachwalk Contract price; however, these alternatives were rejected by the City and the project designers because the proposed alternatives were unsuitable and did not meet the project specifications. By Written Order dated July 8, 2011, AECOM, on behalf of the City, mandated that FCCC obtain pipe manufactured by Meyer Rohr Schacht (“Meyer Germany”).

USCPS has the North American license to produce Meyer pipe in its Louisiana plant. The Beachwalk Project specifications require, in relevant part, that the pipe manufacturer selected for the project demonstrate at least five years of successful pipe manufacturing with over 100, 000 linear feet of pipe supplied for jacking and microtunneling, and at least three successful completions of curved microtunneling drives of at least 1, 000 feet in length each. While USCPS possessed the requisite manufacturing experience, inasmuch as the Beachwalk Project was the first curved drive project in the United States, USCPS did not have the necessary curved drive experience as required by the project specifications. Accordingly, at the behest of the City’s engineer and construction manager, USCPS began discussions with Meyer Germany, who had the requisite curved drive experience to satisfy the City for this project. Ultimately, it was determined that Meyer Germany would manufacture the pipe, and USCPS would sell the pipe to FCCC as a Meyer pipe distributor.

Meyer pipe is a polymer concrete product that is a thick-walled microtunneling pipe. It is produced with polymer resin, rock, and sand, and it is very durable with a high compressive strength and a corrosion resistance that is superior to concrete pipe. Polymer concrete pipe, such as Meyer pipe, is traditionally pressurized only to 35 pounds per square inch (“psi”) under its ASTM standard. The original Beachwalk Project specifications, however, required that the installed pipe be tested to a pressure test of 75 psi. Meyer Germany and USCPS advised the City and FCCC that the Meyer pipe could not satisfy the original project specification requirements, but indicated that it was willing to increase the test pressure to 50 psi, but no higher. Accordingly, use of the Meyer pipe required a modification of the original Beachwalk Project specifications.

Terms of the modifications to the original Beachwalk Project specifications were discussed between the City, FCCC, USCPS, and Meyer Germany. The original project specifications were revised via change order to allow for the use of the Meyer pipe (hereinafter “Revised Section 406 Specifications”). Specifically, the original specifications were changed to reduce the pipe testing pressure from 75 psi to 50 psi. Because the Meyer pipe would be replacing the Al-Watani pipe originally selected by FCCC, the Revised Section 406 Specifications instructed FCCC to collaborate with the pipe manufacturer to ensure its product was compatible with FCCC’s microtunneling machine and system operation.

C. Purchase Order

Even before FCCC entered into a purchase order with USCPS, FCCC was vehemently opposed to using Meyer pipe in the Beachwalk Project. Donald Bergman, the Chief Estimator for FCCC, expressed various concerns regarding the use of the Meyer pipe to AECOM, and indicated that FCCC wanted no responsibility for the use of the Meyer pipe in the Beachwalk Project. FCCC requested that the City include in a change order a provision that the City would defend, indemnify, and hold harmless FCCC from any and all claims arising from FCCC’s use of the Meyer pipe on the Beachwalk Project. FCCC further requested that it be allowed to disclaim any and all responsibility or warranty concerning the Meyer pipe, and that FCCC would, under no circumstances, warrant the Meyer pipe as being adequate or sufficient for use on the Beachwalk Project. FCCC’s requests were not incorporated into any change order.

The Purchase Order for the Meyer pipe was largely negotiated between the City and USCPS. Following these negotiations, the City informed USCPS that it needed to continue to negotiate the Purchase Order terms and conditions with FCCC. On June 30, 2011, USCPS provided a quote with the general terms and conditions it required to FCCC. FCCC provided USCPS with a proposed purchase order based on FCCC’s standard terms. In response, on November 23, 2011, USCPS provided FCCC with the terms and conditions that were negotiated with the City specifically for the Beachwalk Project with the instruction that they were to be attached to and made a part of the Purchase Order. FCCC did so and reissued the Purchase Order for signature.

On November 23, 2011, FCCC and USCPS executed Purchase Order No. 29001-00013 for the purchase of Meyer pipe and related equipment necessary for the Beachwalk Project for a purchase price of $3, 596, 636.98. The Purchase Order includes the terms and conditions that were previously negotiated between USCPS and the City. USCPS’ terms and conditions, which were included in the Purchase Order, indicate that the Meyer pipe “is fully and completely warranted” by Meyer Germany and that “Seller [USCPS] is a retailer of Meyer Germany and as such, all warranties of the manufacturer, Meyer Germany, shall run to Buyer [FCCC] and Owner [the City] of the pipe.” (Joint Exhibit 23.) The Purchase Order expressly states that:

8.1 Seller [USCPS] assumes no responsibility for work done or expense incurred by the Buyer or others in connection with defective pipe or goods sold under this Agreement and repairs or replacement due to defective pipe.
8.2 Seller assumes no liability for any special or consequential damages, other than what is expressly stated in the manufacturer’s warranty.
8.5 If the product is found to be defective, the product would be replaced under the manufacturer’s warranty.

(Id.) The Purchase Order further requires a first 50% down payment of the purchase price, a second 25% installment payment upon delivery of the pipe to the job site, and the remaining third 25% installment payment “to be paid immediately after pipe is installed and satisfactorily pressure tested (50 psi for one hour).” (Id.) Section 1.1 of the Purchase Order’s General Terms and Conditions also provides for liquidated damages of $1, 000.00 per calendar day for late delivery, as a credit from the purchase price.

The Purchase Order contains handwritten changes, allowing USCPS to determine the best shipping option for the products to be delivered according to the delivery schedule. As such, it was USCPS’ option to determine whether shipment would be via ocean or airfreight. FCCC did not object or take exception to these handwritten changes.

D. Pipe Production

On February 7, 2011, while production of the pipe was supposed to be underway, Meyer Germany notified USCPS that it was preparing to file insolvency proceedings. USCPS had already remitted the initial deposit and payment for the pressure test to Meyer Germany and was not aware that Meyer Germany was having problems or issues that led to its insolvency. USCPS met with Meyer Germany’s Insolvency Administrator, who agreed to reopen the Meyer Germany facility, but refused to recognize any of the deposits that were already paid by USCPS. As a result, USCPS had to make the original deposits again at its own expense. USCPS and the Insolvency Administrator agreed to all of the terms that were already within the Purchase Order, including the purchase amount, the limits of liability, and the warranties. USCPS also paid for repairs for the damage the Meyer Germany plant sustained, and replaced all of the plant’s raw materials in order to get the facility back into production. USCPS committed to having the general manager from its Louisiana plant on site at the Meyer Germany plant 100% of the time during production of the Beachwalk Project pipe.

On March 1, 2012, USCPS provided AECOM with a status report regarding production of the pipe and USCPS’ agreement with the Meyer Germany Insolvency Administrator. On March 2, 2012, counsel for USCPS confirmed to the City that agreements had been reached with the Meyer Germany Insolvency Administrator, including an agreement to restart the Meyer Germany facility, secure adoption of the Purchase Order, begin pipe production on or before March 12, 2012, and complete pipe production by April 20, 2012. Meyer Germany had agreed that the Beachwalk Project contract would be fulfilled, including all warranty claims.

E. Request for Additional Pipe

Toward the end of manufacturing, the City directed USCPS to add four additional lengths of pipe to the original order. In turn, USCPS provided the City with a proposed change order, increasing the quantity of the pipe by four additional lengths of pipe for a price increase of about $69, 000. In conjunction with the change order, USCPS requested to modify the delivery schedule to June 1, 2012.

At the time USCPS provided a cost proposal for the four additional lengths of pipe, the intent was to deliver the pipe by airfreight. FCCC and the City suggested that instead of airfreight, the pipe could be shipped by ocean in order to offset the cost of the additional pipe and result in a no cost change order. Under the terms of the original Purchase Order, it was USCPS’ option to airfreight the pipe, which would have allowed for a faster delivery. In order to get the additional lengths of pipe without any additional cost, the City asked USCPS not to exercise that option. On May 8, 2012, USCPS submitted the revised no-cost change order to the City and requested that the City provide USCPS with a copy of the revised change order executed by both the City and FCCC. The no-cost change order provided for an anticipated delivery date of June 1, 2012, but stated that the “actual date of delivery will be used as an amendment” to the change order. (Joint Exhibit 149.)

The city agreed to the terms of the no-cost change order and informed FCCC of the modification. USCPS was then directed to proceed on the change order for the four additional lengths of pipe. USCPS never received an objection to the terms of the no-cost change order or the revised delivery date.

F. Delivery of the Pipe

The schedule attached to the Purchase Order anticipated that the pipe would be delivered so that FCCC could commence microtunneling by April 24, 2012. The anticipated delivery date was based on USCPS receiving the 50% down payment of the Purchase Order price on November 23, 2011. The down payment to USCPS was delayed by six days, and therefore, the delivery schedule was revised. A revised schedule was transmitted to FCCC on December 1, 2011, indicating that the pipe would be delivered such that FCCC could commence microtunneling on April 30, 2012. As discussed above, the request for four additional lengths of pipe postponed the scheduled delivery to June 1, 2012 or the “actual date of delivery” in exchange for the no-cost change order. (See Joint Exhibit 149.) The initial shipment of pipe arrived to the job site in Honolulu on May 17, 2012; the final shipment of pipe arrived in Honolulu on June 15, 2012. (Joint Exhibit 281.)

G. Inspection of the Pipe

Once the pipe arrived and was unloaded in Honolulu, the City had a team consisting of R.M. Towill, YKE, and AECOM inspect the pipe at FCCC’s Sand Island storage yard. In response to FCCC’s concerns about the Meyer pipe’s conformance with the industrial pressure ASTM specifications and the quality of pipe as specified in the ASTM for polymer concrete pipe, AECOM investigated the appropriateness of the pipe for use in the Beachwalk Project by sending a team to the storage yard to conduct a personal inspection of the pipe. AECOM issued its findings to FCCC, which noted that some pipe needed minor repair, but otherwise, the pipe was suitable for use in the Beachwalk Project. Certain cosmetic shipping damage and damage to the ...

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