The opinion of the court was delivered by: KAPLAN
The Insurance and Initial LSA Review
The Purchase Agreement and Coastal's Due Diligence
LSA Refuses to Approve the Mooring
Coastal's Knowledge of the Issue
The Effect of Coastal's Decision to Close Given its Knowledge of the LSA Problem
LEWIS A. KAPLAN, District Judge.
A multimillion dollar transaction between huge corporations staffed by able managers and engineers, assisted by experts, and represented by able counsel -- though appropriately affected by the tugs of conflicting interests -- ought to be a model of competence and fair dealing. Regrettably, the deal that gave rise to this action, the acquisition by the plaintiffs for $ 70 million of a floating power plant in the Dominican Republic, appears to have been a model of neither.
The crux of the problem is that the windstorm insurance on the plant -- a coverage of no mean significance in view of the facility's hurricane-prone location -- was canceled on the day following the closing. Plaintiffs here claim that they were forced to spend almost $ 2 million on modifications to the plant's mooring in order to reinstate the insurance. They contend that the defendants should bear the cost on fraud and contract theories. Defendants deny liability. They contend among other things that plaintiffs were well aware of the insurance issue and the need for modifications prior to closing. They assert, moreover, that the plaintiffs have seized on what at most was a technical breach of warranty to seek to shift to the defendants the cost of modifications far more elaborate and costly than were required. As one might expect, there is a certain amount of truth on each side.
Plaintiff Coastal Power International, Ltd. ("Coastal") is a Cayman Islands corporation and an indirect, wholly-owned subsidiary of The Coastal Corporation, a publicly held Fortune 500 company. Plaintiff Commonwealth Development Corporation ("CDC") is a statutory corporation organized under the laws of the United Kingdom for the purpose of assisting overseas countries in the development of their economies. Coastal and CDC, as a result of the transaction at issue in this case, own approximately 96 percent of the issued and outstanding capital stock of Compania De Electricidad De Puerto Plata, S.A. ("CEPP"), which in turn owns the power generating facility at issue in this case. The facility now is operated by an affiliate of Coastal.
Defendant Wartsila Power Development, Inc., formerly known as Wartsila Diesel Development Corporation ("Wartsila Power"), is a Delaware corporation with its principal place of business in Maryland. It is an affiliate of a large Finnish company, Wartsila Diesel International OY ("Wartsila OY"). Wartsila OY, through affiliates including Wartsila Power and Wartsila Diesel, Inc. ("Wartsila Diesel"), is in the business, among others, of manufacturing "turnkey" power plants. Wartsila Power's role frequently is to identify a prospective project and customer and to arrange financing in order to facilitate the sale of a plant. While Wartsila Power sometimes operates power plants on an interim basis, its objective here was to develop the project and then to dispose of its interest.
Thus, it served principally a development and financing role.
The remaining defendant, Transcontinental Capital Corporation ("TCC"), is a New York corporation with its principal place of business in Greenwich, Connecticut. It owned the equity in CEPP, although its position was very much subordinate to that of Wartsila Power.
CEPP owns two power generating facilities at Puerto Plata, Dominican Republic, one a 16 megawatt land based generating plant completed prior to 1992 and the other the 50 megawatt barge-based plant, known as La Isabela I, that is the subject of this litigation.
The genesis of the La Isabela I project is not entirely clear from the record, but it appears that Wartsila
identified CEPP or TCC as a prospective customer for such a facility and, as is typical in such transactions, played an important role in structuring a transaction in which Wartsila would design and build, and CEPP would purchase, the plant. Accordingly, Wartsila contracted with CEPP to design and build the plant and the mooring to which it would be affixed in Puerto Plata harbor, receiving in exchange a lien and security interest in TCC's CEPP stock and various other interests in CEPP and its assets.
The mooring was designed beginning in or about February 1994 under the supervision of James Gray of Wartsila Diesel, who initially was assisted by the engineering firm of Aker Omega, Inc. ("AOI"). Gray met with Hans Treu of AOI on February 4, 1994 to discuss the project and provided him with, among other things, a report concerning the strength of the soil in the proposed mooring area, important information because the soil strength would have a direct bearing on the loads that the mooring could withstand.
On February 18, 1994, AOI rendered a preliminary report in which it assumed that the storm surge and maximum water depth at the location of the barge in a 50-100 year hurricane would be 10 feet and 23 feet, respectively, and based its advice on maximum wind speed of 118 mph.
It recommended a mooring consisting of a number of piles to which the port side of the barge would be moored by pile guide frames that would fit over the piles, thus allowing the barge to rise and fall with the water level.
The report noted, however, that the soil strength information provided to AOI by Wartsila Diesel was not adequate to complete the mooring design.
Gray spoke with Treu a few days later concerning the preliminary report. Based on information from another consultant, a Dr. Herbich of Texas A&M, Gray argued that the design should be based on a storm surge of 8 to 9 feet and that the appropriate wind speed assumption was 100 mph. He promised additional soil information.
Following the receipt of further soil strength data from another consultant to Wartsila Diesel, AOI rendered a revised report based on the 9 foot storm surge and 100 mph wind speed assumptions urged by Gray.
But AOI made clear that the soil data upon which its calculations were based still were inadequate because the piles would be driven to a depth greater than that to which borings had been made. Further, it cautioned that it had not yet received Dr. Herbich's report and was uncomfortable with the wind and wave assumptions. It "strongly recommended that better and deeper soil borings be obtained before the pile design is finalized" and pointedly inquired whether Wartsila Diesel would accept responsibility for the environmental criteria used in the load analyses and for the inadequacy of the soil information.
Shortly thereafter, Wartsila sent AOI Dr. Herbich's report concerning environmental conditions. The report, however, was not site specific. It gave general information concerning significant wave heights offshore, but it failed to provide information concerning maximum wave height at the proposed location of the barge, which of course was among the important questions driving the design of the mooring. Treu then spoke with Gray in early March 1994, concluding on the basis of that conversation that Wartsila would take responsibility for the environmental loading assumptions used in the design. He did not question them further.
By the end of March, however, AOI's role in the design of the mooring ended.
Wartsila Diesel completed the design, which did not employ all of AOI's recommendations,
and construction began.
While this narrative suggests that Wartsila Diesel wilfully ignored competent engineering advice in the expectation that it quickly would sell the plant and pass any problem on to the buyer, the reality arguably is more nuanced. As Treu suggested, there is an inverse relationship between storms of a given intensity and their probability -- storms of common intensity occur frequently and intense storms only infrequently at any given location.
When designing a facility that will be subjected to storm conditions, one takes into account both the expected useful life of the facility -- the shorter the useful life, the less likely that the facility will be subjected to extreme conditions -- and one's level of aversion to risk.
Treu testified, for example, that fixed facilities located in the Gulf of Mexico with useful lives of greater than five years are designed to withstand 50 or 100 year conditions
while rigs that are moved frequently often are designed to withstand only 10 year conditions.
Implicit, of course, are the propositions that (1) even the most stringent design criteria cannot guarantee against all loss, as improbable conditions do occur, and (2) the choice of any particular design criteria involves a cost-benefit analysis in which the owner weighs the added cost of building to more stringent criteria against the possible loss, discounted by its improbability. Thus, Wartsila's decisions may have been judgments that would have been reasonable for a long-term owner of the facility
or they may have been colored by its short-term self interest,
although nothing ultimately turns on this.
As ultimately constructed, the original mooring at Puerto Plata consisted of five 90 foot piles driven approximately 45 to 52 feet into the subsoil beneath the barge. The barge was affixed to the piles by pile frame guides. There were three principal factors determining the security of the mooring system. The first was the height of the pilings above the bottom, which determined the maximum height to which the water could rise without the pile frame guides rising above the piles and thus freeing the barge from the mooring.
The second was the inherent strength of the piles themselves, which determined the lateral force that could be placed upon the barge by wind and wave without snapping the piles. The third was the resistance of the piles to displacement as a result of the application of force by a wind- and wave-driven barge, which in turn depended principally upon the length of the piles, the depth to which they were driven, and the strength of the subsoil.
The barge was completed, floated to the Dominican Republic, and installed at the mooring in April 1994.
On November 18, 1994, CEPP entered into financing arrangements with an indenture trustee and the Maritime Administrator ("MARAD") of the Department of Transportation pursuant to which it granted the Secretary of Transportation a security interest in La Isabela I and covenanted that it would keep the vessel insured against certain risks.
The Insurance and Initial LSA Review
At the time of the installation of La Isabela I, Wartsila obtained various insurance coverages for the barge, including a hull and machinery policy underwritten by syndicates at Lloyds of London. The initial term of the policy, which included coverage for windstorm damage, had an expiration date of July 10, 1995.
The underwriters, however, conditioned the continuation of the policy upon a survey by the London Salvage Association ("LSA"), a marine warranty surveyor, compliance with any LSA recommendations, and approval by the LSA of the mooring arrangements.
Moreover, they retained the right to terminate the windstorm coverage, effective June 1, 1995, absent such LSA approval.
A representative of LSA observed the installation of the barge in April 1994
and the driving of the piles.
On May 4, 1994, he requested information regarding the design parameters and engineering calculations for the mooring.
On September 22, 1994, another LSA surveyor visited the site.
In a report dated September 23, 1994, the surveyor advised Wartsila that it wished to review the final "as installed" mooring arrangement design and plans as well as the design calculations and parameters, including information showing allowance for hurricane conditions and surge. The report further cautioned that review of this information might lead to "further recommendations concerning mooring."
Days later, Wartsila's insurance broker emphasized the importance of complying with LSA's requests.
And this was but the start of a lengthy series of LSA requests which, for the most part, went unanswered by Wartsila:
. In a further report dated October 7, 1994, LSA again requested engineering calculations and information regarding design parameters.
. On October 20, 1994, LSA's New York office conveyed to CEPP -- which was operated at the time by Wartsila -- an extensive request for additional information. It sought, among other things, engineering plans of the piles, design calculations, details of the location and orientation of the moored barge including water depths, calculations of the strength limitations of the barge against wave loads and, most significantly, information regarding the philosophy of the wind and wave design criteria selected for the mooring. It carefully explained that the wave height employed by Wartsila appeared unduly small and indicated that "meteorological data for wind and waves in the area. . . would be useful."
LSA thus made clear that it needed site specific meteorological and oceanographic data.
There is no evidence of any meaningful response to these requests during at least the period October 1994 through February 1995.
The Purchase Agreement and Coastal's Due Diligence
Although TCC was the record owner of the stock of CEPP, its interest was heavily mortgaged to Wartsila, which therefore had a substantial incentive to bring about a sale of the company. In or about September 1994, Wartsila began discussions with Coastal concerning the sale of CEPP to Coastal,
discussions which culminated in an acquisition agreement dated as of December 30, 1994 (the "Purchase Agreement")
pursuant to which Coastal and affiliates and CDC agreed to buy and TCC agreed to sell all of the issued and outstanding capital stock of CEPP for total consideration, payable principally to Wartsila, of approximately $ 70 million.
Although TCC nominally was the seller, both TCC and Wartsila ...