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CONSOLIDATED EDISON CO. OF NEW YORK v. WESTINGHOUS

July 12, 1983

CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., Plaintiff, against WESTINGHOUSE ELECTRIC CORPORATION, Defendant.


The opinion of the court was delivered by: LASKER

LASKER, D.J.

On December 3, 1971, Westinghouse Electric Corporation ("Westinghouse") entered into an agreement (the "Agreement") with Consolidated Edison Company of New York, Inc. ("Con Ed") calling for Westinghouse to "furnish and construct a complete and operable nuclear power plant (excluding, however, the nuclear fuel assemblies) built to Westinghouse commercial utility standards and specifications. . . ." (Agreement, Article I) (Def. Ex. A). The facility, since built, is known as the Indian Point Power Plant Unit Number 2 (IP 2 Plant) and is located in Buchanan, New York. *fn1"

 Con Ed's complaint alleges that, following completion of the plant, *fn2" and beginning in 1975, defects began to appear in various components of the plant that, inter alia, have required extensive monitoring, repairs and modifications, have impeded Con Ed's ability to obtain maximum output from the IP 2 Plant, and may in the future require a complete shutdown of the plant for the replacement of defective equipment. The complaint divides the defects into three groups: (1) denting, corrosion and cracking of the tubes and tube support plates contained in the plant's steam generators; (2) cracks in certain turbine rotating components known as discs; and (3) defects in "other equipment," including low pressure turbine blades, the high pressure turbine casing joint, condenser tubes, cross-under piping, and circulating water pumps.

 The complaint alleges seven causes of action. *fn3" The first through sixth allege breach of express warranty and implied warranties of merchantability and fitness for intended purpose (first, second and third causes of action), breach of contract (fourth cause of action), negligence (fifth cause of action), and strict products liability (sixth cause of action). In its seventh cause of action Con Ed seeks a declaration that by virtue of its failure to honor its express warranty obligations Westinghouse has forfeited its right to rely on the limitations and exclusions of damages contained in the Agreement, that Westinghouse must honor its express warranty obligations, and that with respect to the fifth or sixth causes of action Westinghouse is responsible for all damages of any kind that Con Ed may incur as a result of shutting down the plant for repair or replacement of defective equipment.

 Westinghouse moves to dismiss various causes of action pursuant to Fed. R. Civ. Pr. 12(b)(6). It argues that (1) all seven causes of action are barred in whole or in substantial part by the applicable New York statutes of limitations; *fn4" (2) the fifth and sixth causes of action must be dismissed because mere economic loss is not recoverable in negligence and strict liability actions, and because the Agreement's express limiations of liability bar recovery under negligence or strict liability theories; (3) the second and third causes of action for breach of implied warranties are barred by contractual disclaimer; (4) the fourth cause of action, for breach of contract, is merely duplicative of the claims for breach of express and implied warranties; and (5) that portion of the seventh cause of action seeking a declaration of the ineffectiveness of the disclaimer of consequential damages must be dismissed as contrary to the terms of the Agreement. Westinghouse also moves, in the event the fifth and sixth causes of action are not dismissed, for a more definite statement of those claims pursuant to Fed. R. Civ. Pr. 12(e).

 I. Applicable Statute of Limitations -- Counts One through Four (Warranty and Contract Claims)

 Con Ed and Westinghouse negotiated over the alleged defects in the IP 2 Plant for a period for several years and eventually entered into agreements tolling any statutes of limitations that would otherwise be applicable to Con Ed's potential claims against Westinghouse. A tolling agreement with respect to the steam generators was executed on May 12, 1978, within four years of the accrual of Con Ed's contract causes of action; *fn5" tolling agreements with respect to the steam turbines and other equipment were executed two years later, on May 16th and May 19, 1980, respectively.

 Under New York law, a four-year statute of limitations applies to causes of action based on contracts for the sale of goods, which are governed by the New York Uniform Commercial Code ("N.Y.U.C.C."), while a six-year statute of limitations applies to causes of action based on service or construction contracts, which are governed by the common law. See N.Y.U.C.C. § 2-725; New York Civil Practice Law & Rules ("C.P.L.R.") § 213(2). Thus, although Con Ed's contract claims with respect to the steam generators are timely under either measure, the timeliness of its contract claims with respect to the steam turbines and other equipment depends upon whether the IP 2 Agreement is "in essence" a contract for the sale of goods under the N.Y.U.C.C., or whether instead it is a service contract -- a "work, labor and materials contract." Schenectady Steel Co., Inc. v. Bruno Trimpoli General Construction Co., 43 A.D.2d 234, 237, 350 N.Y.S.2d 920, 923 (3rd Dep't), aff'd on other grounds, 34 N.Y.2d 939, 359 N.Y.S.2d 560, 316 N.E.2d 875 (1974). In deciding whether a contract is one for the sale of goods or for the rendition of services, New York courts look to "the main objective sought to be accomplished by the contracting parties," Ben Construction Corp. v. Ventre, 23 A.D.2d 44, 45, 257 N.Y.S.2d 988, 989 (4th Dep't 1965).

 Westinghouse argues, in favor of the applicability of the N.Y.U.C.C., that the primary object of the agreement was the purchase by Con Ed of Westinghouse-manufactured and-designed component parts -- the steam generators, turbines, and other coponents of the IP 2 Plant. Indeed, Westinghouse asserts, Con Ed's lawsuit complains of defective equipment, not of the structural soundness of the plant; since Con Ed's claims relate in fact to the goods that Westinghouse sold Con Ed, Con Ed should not be heard to contend that the law governing construction contracts is the applicable law. Westinghouse further contends that the U.C.C. has become the "operative law" applicable to agreements between utilities and suppliers of power plant equipment, even though services are required for construction and installation of the equipment. E.g., Florida Light & Power Co. v. Westinghouse Electric Corp., No. 78-1896, slip op. (S.D. Fla. June 22, 1982) (nuclear steam supply systems); Ebasco Services Inc. v. Pa. Power & Light Co., 460 F. Supp. 163 (E.D. Pa. 1978) (steam turbine generator and boiler feed pump turbines); American Electric Power Co. v. Westinghouse Electric Corp., 418 F.Supp 435 (S.D.N.Y. 1976) (steam turbine generator); Royal Indemnity Co. v. Westinghouse Electric Corp., 385 F. Supp. 520 (S.D.N.Y. 1974) (turbine generator).

 In answer Con Ed points out that the IP 2 Agreement is a contract not simply for the sale of specific items of power plant equipment, but for the construction of a complete nuclear power plant. The Agreement, Con Ed argues, not only required Westinghouse to provide all architectural and engineering services necessary to the contruction of the plant, along with the labor required for its construction, but also provided that Westinghouse would take all necessary steps to assure that the plant would be granted an operating license under the requirements established by the United States Atomic Energy Commission. Con ed contends that the scope of Westinghouse's responsibilities under the Agreement, which continued throughout several years of design, construction, testing and licensing, differentiates the Agreement from typical "goods" contracts involving the one-time installation of a specific item of equipment. Con Ed also argues that, because "goods" by definition must be "movable at the time of identification to the contract for sale," see N.Y.U.C.C. § 2-105(1), a contract for the furnishing and construction of a nuclear power plant cannot be considered a contract for the sale of goods. Finally, although Con Ed asserts that the IP 2 Agreement is in essence a service contract as a matter of law, it contends, in the alternative, that at most Westinghouse has raised a question of fact as to the nature of the contract that cannot be resolved on the basis of the pleadings.

 The New York cases exploring the distinction between sales and services contracts provide no clear answer to the proper classification of the IP 2 Agreement. In several instances New York courts have held that contracts as to which "service predominates and the transfer of title to personal property is an incidental feature of the transaction" are outside the scope of the U.C.C. Schenectady Steel, supra, 43 A.D.2d at 237, 350 N.Y.S.2d at 922 (contract to furnish and erect the structural steel for a bridge), citing Perlmutter v. Beth David Hospital, 308 N.Y.100, 104, 123 N.E. 2d 792, 794 (1954) (action for strict liability against hospital that supplied impure blood plasma in course of blood transfusion); see also Ben Construction Corp., supra, (sale and installation of a swimming pool); Milau Associates, Inc. v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1247 (1977) (installation of a sprinkler system). In the present case, however, on the record as it stands, neither the goods nor the services aspect of the Agreement can reasonably be characterized as "incidential." Just as Con Ed plainly could not have considered the power generating equipment to be an incidental feature of its contract with Westinghouse, so also the architectural, engineering and testing services provided by Westinghouse, and the labor necessary to carry them out, were crucial to the Agreement's objective.

 Moreover, contrary to Westinghouse's rationale, the applicable law cannot be determined simply by looking to the matters about which Con Ed is seeking relief -- primarily, defects in various items of equipment supplied by Westinghouse.The New York courts appear to have rejected an approach of applying sales law to the sales aspect of a transaction which combines both sales and service features, requiring instead that the applicable law be determined by looking to the essential nature of the underlying contract. Compare Schenectady Steel, supra, 43 A.D.2d at 238, 350 N.Y.S.2d at 924 (concurring opinion of Greenblott, J.) with Milau Associates, supra, 42 N.Y.2d at 485, 398 N.Y.S.2d at 884.

 Where, as here, the question is closely balanced, factual development is necessary before the issue is resolved. See Back O'Beyond, Inc. v. Telephonic Enterprises, Inc., 76 A.D.2d 897, 429 N.Y.S.2d 250 (2d Dep't 1980); Schulman Investman Co. v. Olin Corp., 477 F. Supp. 623 (S.D.N.Y. 1979); cf. Stafford v. International Harvester Co., 668 F.2d 142 (2d Cir. 1981); Triangle Underwriters v. Honeywell, Inc. 604 F.2d 737 (2d Cir. 1979).The pleadings do not reveal the allocation of contract price as between construction and equipment costs, the precise nature and scope of the services undertaken by Westinghouse, or other matters that may contribute to a proper resolution of the question. It may be, as Westinghouse argues, that the "essential" nature of the contract will not be significantly clearer following development of the record, but the accuracy of this prediction cannot be determined in advance of obtaining the facts. *fn6"

 II. Fifth Cause of Action -- Negligence

 In its fifth cause of action Con Ed asserts that Westinghouse breached its duty of due care in the performance of the IP 2 Agreement by (1) negligently furnishing components and operating instructions that were defective and improper, and (2) failing to inform Con Ed promptly of defects that Westinghouse discovered in the course of inspection of the IP 2 Plant, and failing to inform Con Ed of problems that had developed with equipment supplied to other utility customers which was similar to equipment in use at the IP 2 Plant.

 Westinghouse moves to dismiss this cause of action on the grounds that (1) New York law precludes the recovery of purely economic loss under a negligence theory; (2) the claim is barred by New York's three-year negligence statute of limitations (C.P.L.R. § 214(4)); (3) the IP 2 Agreement contains disclaimers of liability that preclude discovery of the damages sought by Con Ed pursuant to its negligence claim. Westinghouse moves in the alternative for a ...


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