The opinion of the court was delivered by: MUNSON
Plaintiffs allege breach of contract and warranty arising out of a contract for the sale of a turnkey energy system that was designed, manufactured and installed by defendants. In their amended complaint, plaintiffs seek judgment against defendants "jointly and severally for an amount yet to be determined in excess of FIFTY THOUSAND ($ 50,000) DOLLARS, . . . for attorney's fees and for costs and disbursements of this action." See Amended Complaint at WHEREFORE Clause. Defendants have counterclaimed for payment of the outstanding debt on the contract, for a declaration that they are released from all obligations under the contract, and for costs associated with the instant action. The following constitutes the court's Memorandum-Decision and Order ("MDO").
Plaintiffs Besicorp Group, Inc. and Bio-Energy Services Corp. ("Besco") have their principal places of business in New York. Plaintiff Bio-Energy Services Corp. is a wholly-owned subsidiary of plaintiff Besicorp Group, Inc. Defendants Thermo Electron Corp. and Tecogen, Inc. are incorporated in Delaware and have their principal places of business in Massachusetts. Tecogen, Inc. ("Tecogen") is a subsidiary of Thermo Electron Corp. In 1986, Besco executed a contract with Saint Francis Hospital ("SFH"), located in Jersey City, New Jersey, in which Besco agreed to install and operate a "total energy system" ("System") at SFH, the host site. Under the contract, Besco retained ownership of the System, and the hospital agreed to purchase from Besco the energy produced by the System. Because Besco does not itself actually design, manufacture or install energy systems, it entered into an agreement with defendant Tecogen to manufacture and install such a system at SFH.
The relationship between the parties is governed primarily by a contract that was executed after a series of discussions between representatives of Besco and Tecogen. In a letter dated February 5, 1987, Leon C. Dombrowski, President of Besco, sent to Tecogen a purchase order for the installation of a System. The order specifically was for the purchase and installation, on a turnkey basis, of a cogeneration module to be installed at Saint Francis Hospital, Jersey City, New Jersey. The purchase order, which did not state a price, was signed by Leslie T. Cadigan, a sales representative for Tecogen. On the same day that the purchase order was executed, Dombrowski also executed a Sale Agreement ("Agreement") drafted by Tecogen, which consisted of a one-page form with thirteen separately numbered paragraphs on the reverse side, entitled "Terms and Conditions of Sale" ("Terms and Conditions" or "Terms and Conditions Clause"). The Terms and Conditions portion of the Agreement contains numerous provisions governing the parties' obligations under the contract, dealing with certain issues such as delivery, installation, inspection and warranty of the System.
With respect to defining the turnkey contract, the first paragraph of the Terms and Conditions Clause provides that the
Buyer may purchase from Seller either (a) the TECOGEN(R) Cogeneration Module(s) ("Cogeneration Module(s)" ("Equipment Only") sale) or (b) the Cogeneration Module(s), engineering and installation services, and all associated equipment required for installation ("Turnkey" sale). Either (a) or (b) will be referred to hereinafter as the "Equipment".
The Terms and Conditions Clause also contains a standard merger clause.
Furthermore, the Agreement requires that any change in the terms must be in writing and signed by both parties. The front of the Agreement contains both typed and handwritten terms, including a description of the parties and goods, price and place of delivery. Certain changes to the Terms and Conditions Clause are especially pertinent to the issues presently before the court. For instance, Besco, through its officers and agents, included a provision that stated: "Engineering design to be coordinated w/Besicorp requirements." Under a provision pertaining to the installation of the equipment, Besco crossed out a paragraph containing five enumerated exclusions from the Terms and Conditions Clause. One such provision exempted Tecogen from "any cost or expense incurred to obtain any and all licenses, permits or approvals required by any government entity or agency for installation or operation of the Equipment." The parties did not cross out or otherwise delete a provision in which Tecogen agreed to "assist Buyer in obtaining all licenses, permits or approvals required by any governmental entity or agency for installation or operation of the Cogeneration Module(s)." (emphasis added). The Terms and Conditions Clause also contains a warranty provision that provides, in pertinent part:
WARRANTY. Except as hereinafter set forth, the Equipment is warranted for a period of six (6) months after delivery or 500 hours of operation, whichever first occurs, to be free from defects in material and workmanship. If Buyer within the warranty period notifies Seller in writing of any claimed defect in the Equipment, and if after appropriate test and inspection by Seller, the Equipment is found by Seller to be not in conformity with this warranty, Seller will at its option either repair the same or provide a replacement therefore. F.O.B. shipping point, freight prepaid. Seller's liability on its warranty shall under no circumstances exceed its cost in repairing the Equipment or in providing a replacement. Immediately after any defects in the Equipment requiring correction become known or should have been known they are to be reported and confirmed in writing by Buyer to Seller or Seller's designated representative. The foregoing warranty does not cover, and Seller makes no warranty with respect to, any defect not reported to seller within the warranty period specified above.
THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE. NO IMPLIED WARRANTY ARISING BY USAGE OF TRADE, COURSE OF DEALING OR COURSE OF PERFORMANCE IS GIVEN BY SELLER OR SHALL ARISE BY OR IN CONNECTION WITH THE SALES AGREEMENT AND/OR THE SELLER'S AND/OR BUYER'S CONDUCT IN RELATION THERETO OR TO EACH OTHER, AND IN NO EVENT SHALL SELLER BE LIABLE ON ANY SUCH WARRANTY WITH RESPECT TO ANY EQUIPMENT.
Besco interlineated the following provision under the Warranty Clause: "This warranty will be superseded by our Performance & Availability Warranty ("P & A Warranty") to be mutually agreed upon, attached hereto." A copy of the proposed warranty was attached to the Agreement. The Agreement also contained a limitation of liability clause, which stated:
LIMITATION OF LIABILITY. Except for the remedies specifically provided for in this Agreement, in no event shall the Seller be liable to Buyer, whether in contract, tort (including strict liability), or otherwise, for loss of services or profits, loss of use or operation, increased expense of operation or service, cost of purchased or replaced power, claims of any third parties, loss of use of capital for any special, incidental or consequential loss or damage of any kind or nature arising at any time or from any cause whatsoever.
The maximum liability of Seller to Buyer under this Agreement or arising in connection with the sale, use, operation or service of the Equipment, shall not exceed the Purchase Price of the Equipment.
The following provision was handwritten next to the above-quoted limitation of liability clause by Besco: "Except as Performance Warranty provides otherwise."
The changes to the warranty and liability clauses, along with several other changes not worth mentioning here, were initialed by Dombrowski on behalf of Besco, and Cadigan for Tecogen. Dombrowski then signed the Agreement on February 5, 1987 and sent it to Tecogen for its execution. On June 19, 1987, Jon L. Plexico, Tecogen Vice President at the time of the events in question, initialed the changes made by Besco to the Terms and Conditions page of the Agreement, but did not sign, initial or otherwise approve the P&A Warranty attached by Besco to the Agreement. The original price of the contract was $ 600,000, to be paid by Besco in three progress payment installments. Plexico changed the contract price from $ 600,000 to $ 627,000 to reflect the additional cost of adding hot water storage tanks. The final installment of $ 156,750 was due within 30 days of initial generation of power by the System. Plexico also executed a Maintenance Agreement that required Tecogen to maintain the System for a specified period of time. The Agreement was then forwarded to Besco. Upon receiving the Agreement, Steven P. Levine, then Vice President of Project Development for Besco, attempted to incorporate by reference a document entitled General Specification Number 315, which was offered by Besco as a proposal of its requirements for the manufacture, installation and operation of the System. Dombrowski initialed the change made by Levine and the changes to the contract price made by Plexico, signed the attached P&A Warranty and resigned the Agreement. Dombrowski also executed the Maintenance Agreement. The Agreement was then returned to Tecogen.
There is no evidence in the record that the reference to Specification No. 315 and the attached P&A Warranty were initialed, signed or otherwise approved by anyone from Tecogen. Indeed, as late as July and August 1989, Besco and Tecogen were negotiating the contents of the P&A Warranty, which no representative from Tecogen had signed as of that time. As to Specification No. 315, it was drafted by Besco and circulated to Tecogen representatives before the Agreement was fully executed, but Tecogen did not expressly or impliedly assent to its inclusion in the Agreement.
The Agreement called for Tecogen to sell and install an energy system, the heart of which consisted of a CM-600 cogenerator (the "System," a prototype system that was designed and manufactured by Tecogen). Although Tecogen had previously installed many energy systems for other customers, this apparently was their first attempt to install the CM-600 cogenerator. The design, manufacture and development of the System was largely underwritten by the "Gas Research Institute," ("Institute") which paid $ 1 million to Tecogen to develop and test the prototype. Indeed, Besco benefited by receiving a substantially reduced purchase price as a result of the Institute's funding.
The Agreement also provided that the purchase of the System was on a "turnkey" basis. The Agreement expressly refers to the turnkey sale as including the purchase of the "Cogeneration Module(s), engineering and installation services, and all associated equipment required for installation."
On July 28, 1987, representatives from Besco, Tecogen and SFH held what has been referred to as a "kick-off" meeting. Tecogen representatives knew at the time that the contract was executed that the installation of the System would be difficult. Representatives from Besco also knew from the outset that the installation would be difficult, but neither party envisioned the myriad problems that eventually led to the System's shutdown.
One of the topics discussed at the kick-off meeting, and an issue of central importance to this case, was the need to obtain an "Air Permit to Construct" from the New Jersey Department of Environmental Protection ("NJ-DEP"). The parties knew that a permit had to be obtained before Tecogen could begin actual installation of the System, and that the failure to obtain the permit before beginning construction could result in substantial fines. It was agreed that Tecogen would use its engineering expertise to prepare the application and that Besco would be the application signatory. In late August 1987, Tecogen sent Besco a completed air permit application, which was duly executed and sent to NJ-DEP. Although NJ-DEP received the application in mid-September 1987, the agency did not issue the Air Permit to Construct until nearly eight months later, in April 1988. During the period in which the air permit application was pending, representatives from Tecogen diligently acted in assisting Besco to obtain the permit by contacting representatives from the NJ-DEP in order to expedite the application process. Part of the delay was due to NJ-DEP's repeated requests for additional information from Tecogen, which Tecogen appears to have provided on a timely basis. There is no credible evidence in the record that the eight-month delay was the result of any fault or negligence by Tecogen. The air permit issued by NJ-DEP also stated that the System must be equipped with Continuous Emission Monitoring Equipment ("CEM") to monitor the System's air emissions. This was the first time that any of the parties learned of the CEM equipment. Based upon their experience installing similar systems in New Jersey, Tecogen advised Besco that CEM equipment was not required when the air permit application was submitted to NJ-DEP.
The process of installing the System was complex and, factoring in the installation delays, took nearly three years to complete. The principal events constituting the installation of the System are as follows. While the air permit application was pending, Tecogen prepared engineering designs of the System and began to coordinate the installation plans with various subcontractors. In late November 1987, SFH told Besco that the original location for installation of the System was no longer acceptable, due largely to considerations not relevant to the present discussion. The original plan was for the System to be installed in the mezzanine area of the hospital's basement. An alternative site was proposed by Besco in another area of the hospital's basement.
Meanwhile, Francis C. DiBella, a Tecogen employee and the project engineer who oversaw the design and manufacture of the System, inspected the proposed site to determine whether it was a viable alternative. DiBella concluded that it was feasible to install the System at the alternative site, but cautioned Tecogen personnel that it would make the installation process much more difficult than the original site. One of the many difficulties posed by the alternative site was the presence of high-voltage electrical components. In particular, to install the System at the alternative site, the cogenerator would have to be placed very close to what is commonly referred to by the parties as the "4160 VAC Switchgear ("Switchgear")," a substantial electrical structure that was a major component of the hospital's electrical system. DiBella knew that the applicable electrical code required a minimum 48-inch clearance between the Switchgear and any conductive surface, such as the cogenerator. DiBella also knew that the cogenerator would not have the requisite 48-inch clearance from the Switchgear, but at the time that he made initial assessment of the alternative site, DiBella envisioned that a non-conductive partition could be installed between the cogenerator and the Switchgear. He did not advise Besco representatives of these concerns.
In October 1988, the cogenerator module was delivered to and installed at the hospital site. The installation was primarily supervised by DiBella, who of all the witnesses that testified in the instant case, demonstrated the most thorough knowledge of the design and installation of the System. The installation process continued well into the following year, and in July 1989, the System was connected to the hospital's electrical system.
Tecogen began the final "start-up phase" in early August 1989 when the System began to generate "full output" power. In August, the System was issued a Certificate of Safe Completion by the Jersey City Building Department after an inspection of the System's electrical components. Also during August, Besco engineers inspected the System and drew up a "punch list" of items that Tecogen was required to address before Besco took over operation of the System. During September 1989, the System underwent over 55 hours of operation under "test conditions," with representatives from both Tecogen and Besco present.
Soon thereafter, in early October 1989, the installation of the System was complete and it was capable of continuous on-line commercial operation, which facts were communicated to Besco. In completing installation of the System, Tecogen included about $ 30,000 of additional components which were not initially contemplated under the Agreement, but were necessary for completion of the turnkey installation at this site. Tecogen asked Besco to accept the test results obtained in September and requested the third and final installment payment. Under the terms of the turnkey contract, the final installment payment of $ 156,750 was due within thirty days after initial generation of power. However, Besco refused to remit the final payment until Tecogen completed the punch list items and added several additional components to the System. The components that were the primary subject of discussions between the parties included CEM equipment valued at over $ 30,000, an acoustical enclosure for the cogenerator, a "blow-down" tank, and an oil reservoir. Besco, while acknowledging the System was capable of production performance, questioned whether the temporary operating permit was in force. Tecogen assured Besco that the operating permit was issued and was customarily renewable under these circumstances until such time as a final permit could be issued.
Tecogen and Besco entered a negotiation phase that lasted from about September 1989 until April 1990. The parties held a series of discussions in October and November 1989 regarding, among other topics, completion of punch list items, final inspection of the System by Besco, the P & A Warranty, unforeseen installation costs, and responsibility for the cost of installing the CEM equipment, an acoustical enclosure, a blow-down tank, and an oil reservoir. Besco continued to question Tecogen as to whether the System had the necessary permits for operation and whether those permits could be renewed on a continual basis. Indeed, in March 1990, DiBella wrote to NJ-DEP to obtain confirmation that the System could operate without the CEM equipment. The NJ-DEP confirmed that the System was safe and that the System had been issued all of the appropriate permits for safe operation. During the negotiation phase, Tecogen also substantially completed the punch list items; but the parties continued to disagree over the remaining issues, with each party insisting that the other was obligated for the cost of the remaining items in issue. Meanwhile, Besco secretly began plans to take over operation of the System.
In April 1990, Besco instituted the instant lawsuit seeking damages for breach of contract and warranty. For some time after Besco filed this complaint, Tecogen remained at the SFH work site and continued to address some of the punch list items. Despite Tecogen's efforts to complete the punch list items and to assist Besco with obtaining the necessary permits to operate the System, Besco began to insist upon immediate compliance with its various demands, including a request for consequential damages dating back over one year. In May 1990, primarily because Besco refused to make the final installment payment, and out of concern about the unsafe operation of the System by inexperienced Besco personnel, Tecogen "disabled" the System by turning it off. When Besco learned that the System had been shut down, it retaliated by barring Tecogen employees from SFH premises. Several days later, Besco was able to restart the System, making it capable of continuous commercial operation, and sold energy generated by the System to SFH for approximately the next 17 months, constituting over 4,000 hours of operation.
In October 1991, however, SFH ordered Besco to shut the System down, largely as a result of its concerns about alleged over-billing. SFH subsequently commissioned an outside agency to review the billing system and putatively to determine whether the System posed any safety risk to hospital personnel. An engineering report, referred to as the "Morris Report," was issued in late October 1991 and concluded that the System had been installed in violation of four provisions of the National Electrical Code ("NEC"). Two of the violations are serious and prevented safe operation of the System. The first of these two violations cited in the Morris Report was the inadequate clearance between the cogenerator and the Switchgear. Instead of the requisite distance of a four foot clearance, the distance between the Switchgear and the cogenerator was only about 36 to 38 inches. The second serious violation concerns the lack of an adequate means of secondary egress from the clearance space between the cogenerator and the Switchgear. At the time Besco locked Tecogen out of the SFH worksite, it was not aware of the NEC violations.
SFH notified Besco that it could not restart the System until the issue regarding the billing was resolved and the safety violations were remedied. In December 1991, a copy of the Morris Report was sent to the Jersey City Building Department, Office of the Construction Official, which, after reviewing the report, ordered the System at SFH shut down ...