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Export Development Canada v. Electrical Apparatus & Power

November 14, 2008

EXPORT DEVELOPMENT CANADA, PLAINTIFF,
v.
ELECTRICAL APPARATUS & POWER, L.L.C. AND AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Pitman, United States Magistrate Judge

OPINION AND ORDER

I. Introduction

This action arises out of the plaintiff's assignor's sale of 102 flowmeters to Electrical Apparatus & Power, L.L.C. ("EAP"). The flowmeters were installed in the New York City sewer system and were intended to provide remote reporting, through a connection to the internet via cellular telephone facilities, of certain unusual events in the sewer system. There is no real dispute that the system worked for only a short period of time before failing, although the parties vehemently dispute the cause of the failure. EAP paid only $399,000 of the $1,074,190 billed to it, leaving an unpaid balance of $675,190.00.*fn1 It is this unpaid balance of the purchase price that plaintiff seeks to recover here.

The parties consented to my exercising plenary jurisdiction over this matter pursuant to 28 U.S.C. § 636(c), and the matter was tried before me, without a jury, on June 12 through June 16, 2006. Based on the testimony and other evidence offered at trial and the parties' pre- and post-trial submissions, I make the following findings of fact and conclusions of law.

II. Findings of Fact

A. The Parties

1. RMI was, at relevant times, a corporation incorporated under the laws of Canada and/or the Province of Alberta, Canada having its principal place of business at 4755-76th Avenue, Edmonton, Alberta, Canada. Although RMI still exists as a corporation, it is no longer operating (Tr. 11).

2. Among other things, RMI manufactured and sold flowmeters for installation in municipal sewer systems. These devices can detect, record and report specific events such as effluent levels above a certain threshold, flow direction and velocity. RMI's flowmeters were designed to report events to a monitoring entity through a combination of cellular telephonic communications and the internet, i.e. the flowmeters would connect to the internet through a cellular telephone connection and report designated events. The flowmeters consist of a cylindrically-shaped canister, containing electronic components and batteries, to which sensors and an antennae are attached (Tr. 543-44, 552, 569; DX 163-A-I).

3. RMI manufactured and sold to EAP the flowmeters that are the subject matter of this action.

4. Defendant EAP is a limited liability company organized under the laws of the State of New Jersey, which, at relevant times, had its principal place of business at 10 South River Road, Cranbury, New Jersey 08512 (see Tr. 597).

5. At all relevant times, EAP was an electrical contractor; its work up to 2001 included maintaining electronic supervisory, control and data acquisition ("SCADA") systems, bidding on New York City projects, building control systems for the New York City Transit Authority and building a wound rotor for the New York City Department of Environmental Protection ("DEP") (Tr. 507). As discussed in more detail below, EAP entered into a contract with the DEP to install flowmeters at selected locations in the New York City sewer system; it purchased these monitors from RMI.

6. Defendant American Manufacturers Mutual Insurance Company ("AMM") is a corporation incorporated under the laws of the State of Illinois having its principal place of business at 1 Kemper Drive, Long Grove, Illinois 60049-0001.

7. AMM is the issuer of three payment bonds relevant to the dispute in this matter: (1) bond 3SE 995 181-00 with respect to "Contract REG-23A" between EAP and the DEP (PX G-1); (2) bond 3SE995184-00 with respect to "Contract REG-23E" between EAP and the DEP (PX G-2), and (3) bond 3SE995185-00 with respect to "Contract REG-23F" between EAP and the DEP (Tr. 612; PX G-3).

8. Plaintiff Export Development Canada ("EDC") is a Canadian government-affiliated Crown corporation having its principal place of business at 151 O'Connor Street, Ottawa, Ontario, Canada K1A 1K3 (see Tr. 416).

9. EDC is engaged in the business of promoting exports by Canadian companies (Tr. 416).

10. One of the ways in which EDC accomplishes its purpose is to underwrite export trade receivables of Canadian corporations. It provides "accounts receivable"/credit insurance which, effectively guarantees a Canadian exporter that a foreign buyer will pay for the Canadian goods (Tr. 416-18).

11. On or about April 10, 2001, EDC issued to RMI an Accounts Receivable Policy (Shipments) No. GG1-21534, dated April 10, 2001, having a policy period of April 1, 2001 to March 31, 2002 (the "Receivables Policy")(Tr. 419-21; PX LL).

12. RMI filed a claim in September 2001 against the Receivables Policy certifying that it had not been paid by EAP and was not aware of any dispute with respect to the transactions (DX 141). EDC paid RMI's claim, and, in turn, received an assignment of RMI's claim against EAP (PX NN). EDC commenced this action pursuant to that assignment.

B. The Contract

and its Formation

13. In or about June 1999, the DEP consented to the entry of an Order against it by the New York State Department of Environmental Conservation concerning, among other things, the discharge of untreated sewage by New York City (DX 1). Among the issues the consent order addressed was the problem of "bypasses." In certain areas in New York City, storm sewers and sanitary sewers share common pipes. Although the contents of these pipes are ordinarily processed by sewage treatment plants, certain events, such as malfunctions at the treatment plant or a surge in the fluid levels in the sewers resulting from a rain storm or similar event, can result in a "bypass" in which untreated sewage is discharged into the waterways surrounding New York City (Tr. 43-44). In order to monitor these bypass events, Omnibus Order IV, issued pursuant to the 1999 Consent Decree, required, among other things, that the DEP install 102 monitors at certain locations that would provide alarms to the DEP of bypass events (DX 1, Omnibus Order IV at 68-71).

14. In order to comply with the Consent Order, the DEP issued Invitations for Bids for three contracts, designated Reg-23A, Reg-23E and Reg-23F, respectively (Tr. 51; PX F-1, F-2 and F-3).*fn2 Each contract had two components (1) the installation of flowmeters that would record and report bypasses and (2) the preparation of periodic reports to the DEP based on the data transmitted by the monitors.

15. Prior to 2002, RMI had successfully installed similar flowmeters in Seattle, Washington and Springfield, Massachusetts.

16. EAP was the successful bidder on contracts Reg-23A, Reg-23E and Reg-23F (PX F-1, F-2, F-3; DX 15, 16, 20, 32).

17. EAP had never previously been involved a similar project (Tr. 507, 520, 610), and, in order to fulfill the three contracts with the DEP, EAP turned to and ultimately entered into a contract with RMI.

18. EAP's principal, Louis Romola, first had contact with a representative of RMI -- Clark Harris, RMI's vice president -- during a pre-bid meeting in connection with the DEP contract (Tr. 508-10). Harris attended the pre-bid meeting "to familiarize himself with the needs of the city in order to attempt to fulfill those needs." Harris also attended this meeting with the goal of "find[ing] a partner, somebody to partner up on this contract with" (Tr. 162-63, 508-10).

19. At the bidder's meeting, Harris approached Romola, a founder and partner of EAP, and introduced himself. After the meeting Harris telephoned Romola and invited him to bid with Harris on the project (Tr. 508, 510). The two of them subsequently "got together and discussed [their] roles in th[e] project and what it would be and what [RMI] had to offer, and [Harris] made it very clear to [Romola] that he had done a project, he was familiar with these sewer systems, that is what they [RMI] did," so they "sat down and [EAP and RMI] laid out the bid" (Tr. 510).

20. EAP and RMI had a number of discussions concerning the work to be done prior to entering into a contract. In advance of these discussions, RMI had become familiar with the three DEP contracts and "with the specifications for the New York City contract" (Tr. 160-61) and RMI's principals understood there was "a consent decree from the EPA [and a] governmental requirement that the city monitor combined sewer overflow . . . because . . . it is a potential environmental hazard" (Tr. 161; see also Tr. 162-63, 508-09 (RMI familiar with underlying contract through attendance at pre-bid meetings)).

21. Thus, RMI, at the time of contracting knew the particular purpose for which the monitoring system was required, and the specific issues the DEP contracts were intended to address.

22. To induce EAP to purchase its monitoring system, RMI represented that "RMI meets the complete intent of the [DEP's contracts]" (DX 167).

23. One of RMI's principals -- Steven Bot -- acknowledged that he and RMI "were aware that there was a project going on, there were bid specifications out there that the city was looking for someone to supply a system" (Tr. 190).

24. Harris of RMI and Romola of EAP reviewed the bid documents together and assessed what EAP would need to accomplish the job. As Romola testified:

He [Harris] described my manpower needs. Again, I had no idea at the time what his equipment entailed, what my responsibilities outside the equipment would be. So we clarified that they were the experts. They knew what they were going to supply. He told me how much manpower to apply to the job. We discussed each different aspect of it as far as -- we went down to detailing as far as whether or not we needed to visit the sites every week. It was clear to me that -- he said to me I would not need to do that, that they had technology that, since they are transmitting data back, it would not require weekly visits to these sites. He told me how many men in a truck I would need to maintain the sites once they were installed. We plugged in all the numbers. He told me how much money to bid the job at based on his experiences on previous jobs. He knew our competition was going to be ADS at the time. I guess the company is ADS. We laid it out based on what he had for numbers on ADS's jobs in another part of the country, and we put the numbers in the blanks and filled in the blanks. So I was relying on him completely to tell me what pieces of the manpower I would need to bid the job, and even price it up. . . . .

He gave me a background as far as was they intended to provide. He was very clear about the pieces of software they are going to develop for me, the web site, the individual equipment, and how it would function. At that point he wasn't telling me the model numbers or anything like that. We weren't at that detailed a stage. We were more trying to fit the numbers to the paper, not really fitting model numbers to the dollars and cents at this point. So I really didn't know what I was going to be buying in any shape or form. He told me he had done some trials and he had a clear understanding of what it required. So I left it in his hands.

We also made sure that I -- at the time I made sure that he understood that since I had no background, he was going to take responsibility for the piece, the whole system. If he is going to do the software, if the devices are proprietary, if the software is his, if the e-mailing or alarming is his, then I could have no role in that development. There is no physical room for me there. I knew that my portion of it would be the installation and the maintenance of the hardware. (Tr. 511-13).

25. RMI admitted at trial that it held itself out as an expert. RMI's Bot testified:

Q: RMI, since -- as you started it, had experience and expertise in the manufacture, assembly and installation operations of flow monitoring systems, did it not?

A: Correct.

Q: It held itself out as having special expertise in this area, did it not?

A: Absolutely.

Q: And it did so with respect to EAP and with respect to the City of New York, did it not?

A: As in become [sic] an expert in the field?

Q: Yes.

A: Absolutely. (Tr. 168-69).

26. Harris, on behalf of RMI, also specifically represented to EAP that in order "[t]o identity the exact equipment requirements for this project a comprehensive field investigation will be provided. This will insure the best possible solution for each location and identify the system requirements for each site" (DX 167; see Tr. 166).*fn3

27. RMI was also aware that EAP had limited or no expertise in telemonitoring. As Bot testified at trial:

Q: . . . At the time of the -- by the way, when you first started dealing with EAP, did you know them to have any particular expertise or experience in telemonitoring apparatus?

A: I did not know anything about EAP. Clark Harris was the direct contact, you know, contact with them.

Q: Did you ever learn from Clark or anywhere else that EAP had any kind of expertise in telemonitoring?

A: Clark told me that EAP was a subway contractor who installed instrumentation in the subway system. At that point that was the only information that we really had on them.

Q: So to your knowledge, EAP had no expertise in installing apparatus in the sewer systems, municipal sewer systems?

A: That wasn't demonstrated to me, no. (Tr. 168).

28. For all the foregoing reasons, RMI had reason to know, prior to the formation of the contract between them, that EAP was relying on RMI's skill and judgment to select and furnish a suitable monitoring system.

29. During their pre-contract negotiations, EAP and RMI had discussions concerning the useful life of the batteries that would be installed in the flowmeters. Battery life was a material issue due to the substantial effort it would take to replace dead batteries. In order to replace batteries, a maintenance crew would have to travel to and enter the location in the sewer system where the flowmonitor was installed, open the cannister, replace the batteries and reseal the cannister (Tr. 516-18). During their negotiations, RMI represented to EAP that "the batteries would last 18 months, but [RMI will] put in writing a year . . . . So [EAP] was expecting a year life out of each battery" (Tr. 516, 551; see also (Tr. 195; DX 6 (RMI represented to DEP that its equipment would have "ONE YEAR POWER SUPPLY")).

30. RMI also represented to EAP that it would provide a "Factory Technician on location to train service and installation crews" (DX 7, 8)

31. The EAP-RMI Contract was subject to and incorporated the terms of EAP's contract with the DEP (Tr. 202-03, 210; PX B, B1; DX 7, 8, 18). These terms included the following:

! D-0.3 INTENT OF WORK: The intent of this contract is to have a Contractor completely furnish, install and make fully operational a regulator's outfalls dry weather bypass alarm/tidal inflow notification telemonitoring system for each of the 38 CSO locations listed in Table 1) page D-7. . . .

(PX F-1, F-2, F-3, all at page D-1)

! D-1.2 DESCRIPTION OF FLOW MONITORING SYSTEM: The services under this contract are related to the installation outflow monitoring equipment at each of the 38 sites which at a minimum, must demonstrate the ability to send an alarm/notification the instant a bypass/tidal inflow event occurs and to determine, record and transmit:

* depth of flow;

* direction of flow;

* velocity of flow; and

* duration of flow. (PX F-1, F-2, F-3, all at page D-10).

! D-5.4 OVERALL SYSTEM UPTIME GUARANTEE: The Contractor shall guarantee with standard operating procedures overall telemonitoring system-wide uptime during the operation and maintenance period will exceed 80% per month.

(PX F-1, F-2, F-3, all at page D-17; see also Tr. 36 (RMI's Steven Bot acknowledged that this "was part of the requirements that the city had that [RMI] in turn agreed to fulfill in [its] agreement with EAP."), 210).

D-6.4. The Contractor shall prepare and submit monthly and supplemental reports as described in this division. (PX F-1, F-2, F-3, all at page D-2).

32. RMI also expressly agreed to warrant the system, the warranties to run from the date of acceptance of the system by the DEP (PX B1, DX 18).

33. At no time during its negotiations with EAP or in the contract itself did RMI attempt to disclaim any warranty ...


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