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AMERICAN ELEC. POWER CO. v. WESTINGHOUSE ELEC. COR

July 19, 1976

AMERICAN ELECTRIC POWER COMPANY, INC., et al., Plaintiffs,
v.
WESTINGHOUSE ELECTRIC CORPORATION, Defendant



The opinion of the court was delivered by: CARTER

ROBERT L. CARTER, District Judge.

 Defendant Westinghouse Electric Corporation ("Westinghouse") has moved, pursuant to Rule 56, F.R.Civ.P., for summary judgment dismissing plaintiffs' claims in their entirety and awarding Westinghouse judgment on Count I of its counterclaim. In the alternative, Westinghouse has moved for partial summary judgment dismissing plaintiffs' claims for consequential damages. Plaintiffs have moved, pursuant to Rule 15(a), F.R.Civ.P., for leave to amend their complaint and their reply to defendant's counterclaim.

 I

 Facts

 Beginning in September, 1965, plaintiff American Electric Power Company, Inc. ("AEP") *fn1" and defendant Westinghouse commenced negotiations on the design, manufacture and construction of a new turbine generator which came to be known as Mitchell Unit I. AEP made an oral commitment to purchase that turbine generator on December 28, 1965. Subsequent negotiations over a period of more than two years culminated in the execution of a fully integrated written contract signed by plaintiff Appalachian Power Co. on April 26, 1968, and by Westinghouse on May 9, 1968.

 The Mitchell Unit I Contract provides that Westinghouse will manufacture and deliver a steam turbine generator guaranteed to produce 760,582 kilowatts of electrical energy under certain specified steam conditions. *fn2"

 By the express terms of the contract's "Guarantee" provision, the parties excluded implied warranties and agreed that Westinghouse's entire obligation for defects in Mitchell Unit I would be fulfilled by the repair or replacement of defective parts for one year after initial synchronization *fn3" with corrected parts thereafter carrying a new one-year warranty. In addition, the parties also agreed in a separate "Limitation of Liability" provision that Westinghouse would not be held liable for consequential damages. Furthermore, the Limitation of Liability clause limited the liability of Westinghouse with respect to the contract or anything done in connection therewith to the price of the equipment or part on which such liability is based.

 Because of their importance to the disposition of the instant motions, these two provisions will be set out in full:

 
" GUARANTEE
 
"The turbine-generator as manufactured will be warranted against defects in materials and workmanship for a period of one year after date of initial synchronization in accordance with the following statement of warranty:
 
"The Seller warrants that the equipment to be delivered will be of the kind and quality described in this contract and will be free of defects in workmanship and material. Should any failure to conform to this warranty appear within one year after the initial date of synchronization, the Seller shall, upon notification thereof and substantiation that the equipment has been stored, installed, maintained and operated in accordance with the company's recommendations and standard industry practice, correct such defects including non-conformance with the specification, by suitable repair or replacement at its own expense.
 
"Any component requiring repair or replacement should hereafter carry a one year warranty starting from the date the unit is again returned to service after such correction.
 
"This warranty is exclusive and is in lieu of any warranty of merchantability, fitness for purpose or other warranty of quality, whether express or implied, except of title and against patent infringement.
 
"Correction of non-conformities, in the manner and for the period of time provided above, shall constitute fulfillment of all liabilities of the Company to the purchaser, whether based on contract, negligence or otherwise with respect to, or arising out of such equipment."
 
" LIMITATION OF LIABILITY
 
"Except as otherwise agreed herein, the Seller shall not be liable for special, or consequential damages, such as, but not limited to, damage or loss of other property or equipment, loss of profits or revenue, loss of use of power system, cost of capital, cost of purchased or replacement power, or claims of customers of purchaser for service interruptions. The remedies of the purchaser set forth herein are exclusive, and the liability of Seller with respect to any contract, or anything done in connection therewith such as the performance or breach thereof, or from the manufacture, sale, delivery, resale, installation or technical direction of installation, repair or use of any equipment covered by or furnished under this contract whether in contract, in tort, under any warranty, or otherwise, shall not, except as expressly provided herein, exceed the price of the equipment of [or] part on which such liability is based."

 The final contract price of the Mitchell Unit I turbine-generator was $12,260,580.08. To date, the purchaser has made payments totalling $10,868,656.00. The balance due -- $1,391,924.08 -- is sought by Westinghouse in Count I of its counterclaim.

 II

 Operational History of the Generator

 On April 22, 1970, Mitchell Unit I was hooked up, or "initially synchronized" with the AEP system. The first major failure of the generator occurred in July, 1971, when Mitchell Unit I suffered a line-to-ground fault (similar to a short circuit). *fn4" It is alleged that inspection following this failure revealed cracked copper strands and insulation material which had become soaked by water leaks. A rewinding of the generator was required, during the course of which the Unit was out of service for almost five months. The rewind work was completed in November, 1971, and the Unit returned to service.

 On March 1, 1972, the generator suffered a three-phase short circuit at the turbine end which burned out all three phases and necessitated a complete rewinding which required almost five months to complete. It is alleged that an inspection of the generator after this fault revealed dusting at the exciter end of the generator end winding, dusting indicating loose strain blocks, and dusting between the coils and diamond spacer blocks. All these problems, it is claimed, are evidence of loose bracing.

 Since completion of the second generator rewind in July, 1972, Westinghouse has recommended full load operation (i.e., at the 760 mw level or higher), *fn5" but AEP has limited the Unit's load to 690 mw, or 90 percent of the guaranteed contract capacity. The reason given by plaintiffs for this limitation is that the generator is unable to absorb continuously the high vibration developed in the generator when the Unit is operated at or near the warranted capacity. See Tillinghast Tr., p. 1055. Thus, John E. Dolan, the AEP Vice President who determined Mitchell Unit I's present load limit of 690 mw, related that:

 
"Even at 690,000 kw the Unit is not commercially acceptable nor is it even close to industry standards of reliability. Its present operation at reduced loading is resulting in serious deterioration of the Unit, and requires frequent inspection and repairs. Based upon industry standards, Mitchell Unit I is not capable of operating without unacceptable deterioration at even the 690,000 kw level."
 
(Dolan Aff.,)

 According to the affidavits of Edwards, Rotating Machinery Staff Electrical Engineer for AEP, and Kindl, an outside technical expert retained by plaintiffs, even at the present reduced load, Mitchell Unit I is unsafe in the event of a sudden short circuit and exhibits dangerous deterioration which could lead to catastrophic failure.

 III

 Plaintiffs' Claims -- Motion to Amend

 On April 3, 1974, plaintiffs commenced this action against Westinghouse. Plaintiffs claim that Westinghouse breached both the express warranties of the Mitchell Unit I contract and implied warranties that the turbine-generator would be of merchantable quality and fit for its particular purposes. Plaintiffs have further alleged that Westinghouse was negligent in the design, manufacturing, testing and repair of the Unit.

 On November 3, 1975, plaintiffs moved, pursuant to Rule 15(a), F.R.Civ.P., to amend their complaint to allege, as an independent basis of liability, that Westinghouse fraudulently induced AEP to enter into the Mitchell Unit I contract.

 The essence of AEP's claim of fraud is that Westinghouse knew, prior to the execution of the contract, that it was not undertaking the necessary research, testing and development to provide a turbine-generator capable of operating safely and reliably at the contractual output.

 While it is impossible to summarize fully the voluminous record of technical data submitted in support of this motion, it will suffice to highlight some of the evidence adduced by AEP on its fraud claim. Thus, it is alleged that Westinghouse knew at the time it entered into the contract with AEP that Westinghouse had rejected a bracing system necessary to protect the Unit; that Westinghouse intentionally under-designed the Unit such that it failed to meet contract and industry standards; that Westinghouse intentionally omitted necessary improvements from the Unit before entering into the contract and concealed these omissions from AEP. These alleged omissions included, inter alia, lack of accommodation for axial thermal expansion, improper banding of stator coils, inadequacy of twine ties for bracing and the failure to use fibrous banding of end turn coils, the deliberate rejection of accurate force calculations which had mandated better bracing in the AEP generator, and the installation of unsuitable insulation.

 In addition to the claim of fraudulent inducement, AEP charges that Westinghouse similarly knew that it was perpetrating a further fraud in continuing to conceal fundamental defects in the Unit at the time of shipment, and that such concealment of defects precluded AEP from refusing delivery of the Unit. In effect, AEP charges Westinghouse with active concealment, misrepresentation and willful delay thus preventing discovery, and prolonging correction of inherent and persistent design defects in Mitchell Unit I.

 Finally, AEP contends that Westinghouse continued to defraud it after the execution of the Mitchell Unit I contract by misrepresenting to AEP that it had remedied the defects in the turbine-generator. It is claimed that these misrepresentations, on which AEP relied, caused it to refrain from taking alternative action to stem the damages it was suffering.

 Rule 15(a) expressly provides that leave to amend "shall be freely given when justice so requires." Despite the liberal amendment policy underlying Rule 15(a), the Supreme Court has stated that leave to amend may be denied, inter alia, on a showing of any of the following: (i) undue prejudice to the opposing party; (ii) undue delay; (iii) futility of the amendment. Foman v. Davis, 371 U.S. 178, 83 S. Ct. 227, 9 L. Ed. 2d 222 (1962); Feldman v. Lifton, 64 F.R.D. 539, 542 (S.D.N.Y.1974).

 In my view, plaintiffs' proposed amendment is not futile in the sense that the claim advanced -- at least for purposes of this motion -- can be deemed to be legally insufficient on its face or otherwise clearly without merit. See Middle Atlantic Utilities Co. v. S.M.W. Development Corp., 392 F.2d 380, 386-87 (2d Cir. 1968); Vine v. Beneficial Finance Co., 374 F.2d 627, 636 (2d Cir.), cert. denied, 389 U.S. 970, 88 S. Ct. 463, 19 L. Ed. 2d 460 (1967); Christophides v. Porco, 289 F. Supp. 403, 408 (S.D.N.Y.1968); 6 Wright & Miller, Federal Practice and Procedure § 1487 (1971 ed.).

 Here, the proposed amendment amplifies, with the particularity requisite under Rule 9(b) of the Federal Rules, *fn6" the allegations of fraud contained in paragraph 14 of plaintiffs' original complaint, and constitutes an alternative theory for recovery to those previously alleged. See Foman v. Davis, supra, 371 U.S. at 182, 83 S. Ct. 227; see generally, 3 J. Moore, Federal Practice para. 15.08[3] (2d ed. 1974).

 Nor is this a case where the facts on which the proposed amendment is based were known to the moving party at an earlier date, and the motion to amend was delayed for a substantial period of time without excuse. Cf. Feldman v. Lifton, supra, 64 F.R.D. at 542-3.

 Thus, plaintiffs contend that their claims of fraud are based in substantial part on information only recently obtainable during the course of pretrial discovery. While it is true that many documents relied on by AEP were in their hands at least as of October, 1974 -- over one year before initiation of the motion to amend -- this delay is not inordinate or inexcusable, particularly in view of the extensive and continuing discovery being carried on to date, which plaintiffs claim tie together and buttress their claims of fraud. This factor lends additional support for granting leave to amend. See, e.g., Glazer Steel Corp. v. Yawata Iron & Steel Co., Ltd., 56 F.R.D. 75, 78 (S.D.N.Y.1972).

 Finally, there is little prejudice to the defendant since the factual showing necessary to support plaintiffs' claims of fraud will arise out of the same transactions and occurrences which are already the subject matter of this lawsuit -- namely, the sale, design, manufacture and repair of Mitchell Unit I. See, e.g., Lewis v. Marine Midland Grace Trust Co. of New York, 63 F.R.D. 39, 51 (S.D.N.Y.1973). *fn7"

 Accordingly, plaintiffs' motion to amend their complaint to add a claim for fraudulent inducement and misrepresentation is hereby granted.

 Plaintiffs also seek leave to amend their reply to Westinghouse's counterclaim by adding a statute of limitations defense. Plaintiffs' motion is granted. While there is absolutely no excuse on the record before me for AEP's failure to raise this affirmative defense in their July, 1974 reply to Westinghouse's counterclaims, and while the information upon which such a defense would have been predicated was not obtained only recently, there is little prejudice to the defendant in allowing the amendment -- at least not in the sense that Westinghouse could have sued in another jurisdiction had the statute of limitations defense been raised in a more timely fashion. Cf. Strauss v. Douglas Aircraft Co., 404 F.2d 1152, 1155 (2d Cir. 1968). Finally, there is likely to be little need for any further discovery on this issue. Accordingly, plaintiffs' motion to amend their reply to add a statute of limitations defense is hereby granted.

 IV

 Motion for Summary Judgment

 Before proceeding, it would do well to set out briefly the standards for the grant or denial of this motion for summary judgment. In Heyman v. Commerce and Industry Insurance Co., 524 F.2d 1317 (2d Cir. 1975), and in several other recent pronouncements, *fn8" our circuit has taken the opportunity to re-emphasize and to highlight several basic propositions of summary judgment doctrine. Thus, it is a "fundamental maxim" that on a motion for summary judgment the court cannot try issues of fact; it can only determine whether there are issues to be tried. Heyman, supra, 524 F.2d at 1320. Furthermore,

 
". . . when the court considers a motion for summary judgment, it must resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought, United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 8 L. Ed. 2d 176 (1962), with the burden on the moving party to demonstrate the absence of any material factual issue genuinely in dispute, Adickes v. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970)."
 
Heyman, supra, 524 F.2d at 1320.

 Finally, Heyman is particularly significant with respect to the instant motion since it deals with summary judgment in the context of disputed issues of contract interpretation. In this regard, Chief Judge Kaufman took the opportunity to restate the long-standing rule that "where contractual language is susceptible of at least two fairly reasonable interpretations, this presents a triable issue of fact, and summary judgment would be improper." Heyman, supra, 524 F.2d at 1320, and cases there cited. Furthermore, "when a contract is so ambiguous as to ...


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