Opinion ID: 474281
Heading Depth: 2
Heading Rank: 1

Heading: Liability of Alchemy and Pitt, Inc. for Breach of Contract

Text: 7 Pursuant to the express terms of the contracts, California law governs all questions of state law. It is well settled that the construction and legal effect of a contract are questions of law subject to de novo review. E.g., Osborne v. Cal-Am Financial Corp., 80 Cal.App.3d 259, 267, 145 Cal.Rptr. 584, 589 (1978). To the extent that the meaning of the contract depends on disputed extrinsic evidence, however, it constitutes a finding of fact, LaCount v. Hensel Phelps Construction Co., 79 Cal.App.3d 754, 770, 145 Cal.Rptr. 244, 253 (1978), subject to review on appeal under the clearly erroneous rule, Fed.R.Civ.P. 52(a). District court findings as to what the parties said or did must also be accepted on appeal unless clearly errorneous. InterPetrol Bermuda Ltd. v. Kaiser Aluminum International Co., 719 F.2d 992, 998 (9th Cir.1983). With these standards of review in mind, we turn to the findings and conclusions of the district court. 8 The district court's findings regarding the liability of Alchemy and Pitt, Inc. for breach of the construction contract can be summarized as follows. Alchemy and Pitt, Inc. were obligated under the construction contract to provide Riceland with the design for the construction of a plant capable of achieving the performance criteria on a sustained basis, without the need for any fuel other than the rice hulls. 4 The trial court found that the facility never had the ability to achieve the performance criteria on a sustained basis and could not produce an ash satisfactory to Alchemy without the use of fuel oil in addition to the rice hulls because of the faulty and inadequate design provided by Pitt, Inc. According to the district court, the primary reason that the plant could not operate as warranted was that the furnace system, for which Pitt, Inc. admits responsibility, could not support combustion at a temperature low enough to produce quality ash without the aid of fuel oil when the outside temperature fell below fifty degrees Fahrenheit. 9 The district court recognized that not all of the plant's problems were attributable to Alchemy and Pitt, Inc. Most notably, much of the equipment supplied by Polutrol, Inc., (Polutrol) the company selected by Riceland to supply the boilers and the air pollution control system, was inadequately designed and poorly manufactured. The parties agree, and the district court found, that the air pollution control system supplied by Polutrol did not allow the facility to operate in compliance with the state air pollution control regulations as required by the construction contract. Moreover, Polutrol failed to take the abrasive quality of the ash into account when manufacturing the boilers, and the boilers thus deteriorated and were in need of replacement at the time Riceland permanently shut down the plant. The district court determined, however, that although Alchemy and Pitt, Inc. were not responsible for the damage or loss caused by the defective Polutrol equipment, the evidence established that Pitt, Inc.'s design would not have produced a plant capable of achieving the performance criteria even had the Polutrol equipment not been defective. As to the non-erosion problems caused by the boilers, such as the difficulty of controlling the water levels in the boilers and its system-wide repercussions, the district court found that Alchemy and Pitt, Inc. were responsible. The court explained that because Pitt, Inc. had approved the water-tube boiler design suggested by Polutrol, the water-tube boilers had become a part of Pitt, Inc.'s design. 10 The district court also found against Alchemy on its counterclaim for breach of contract against Riceland. Alchemy had urged at trial that Riceland had breached both the construction contract and the marketing contract because Riceland closed down the plant and thus did not pay Alchemy royalties for the use of Pitt, Inc.'s process as promised in the construction contract or provide Alchemy with the ash as provided in the marketing agreement. Moreover, Alchemy asserted, the failure of the plant to operate as anticipated was due to the defective equipment provided by Polutrol for which Alchemy claimed Riceland was responsible. In rejecting Alchemy's counterclaim, the district court relied on the findings it had made in connection with Riceland's claim against Alchemy and Pitt, Inc. The district court first noted that Polutrol's errors were limited to the abrasion-erosion problems of the boilers and the air pollution control system. Even had these problems been corrected, the district court stated, the plant could not have achieved the performance criteria because of the design deficiencies attributable to Alchemy and Pitt, Inc. The district court further held that although Polutrol's errors in designing and constructing certain equipment could be used as a partial defense to Riceland's action against Alchemy and Pitt, Inc., justifying a reduction of damages, Polutrol's errors could not be affirmatively raised by Alchemy as grounds for asserting that Riceland was in breach of contract. As designer of the facility, the district court determined, Pitt, Inc. was responsible for ensuring that any equipment provided by a third party would not have adverse effects on other parts of the facility, and Riceland could thus not be held affirmatively liable for errors of design made by third parties where Alchemy and Pitt, Inc. had approved such design delegation. 11 In contesting the district court's allocation of liability under the contracts on appeal, the defendants seek to prevail on Riceland's claim against them by prevailing on Alchemy's counterclaim against Riceland. More specifically, defendants argue that the district court erred in determining that Riceland is not responsible for the deficiencies in the Polutrol equipment. Defendants contend that Alchemy and Pitt, Inc. were only responsible for providing the furnace and the general requirements for the other equipment. As general contractor, defendants argue, Riceland was responsible for providing equipment that met the general requirements. Because Polutrol's equipment did not meet the general requirements of Pitt, Inc.'s design, defendants contend, Riceland committed a material breach of the construction contract. Defendants then argue that since Riceland breached the contract first, Riceland may not recover against the defendants for breach of contract under California law, regardless of whether the defendants also breached the contract. In short, defendants contend that Riceland's failure to construct a facility that conformed to Pitt, Inc.'s design breached its contracts with Alchemy. Concomitantly, Alchemy and Pitt, Inc.'s obligation to render the plant operational according to the performance criteria never arose because Riceland never completed the construction of such a facility. 12 We have carefully reviewed the trial court's findings of fact and the contracts entered into by the parties, and we conclude that the district court did not err in placing liability on Alchemy and Pitt, Inc. for the failure of the plant to operate as anticipated by the parties. The construction contract obligated Alchemy and Pitt, Inc. to provide the necessary engineering plant layout and equipment design and the onsite engineering supervision and start up engineering services for the construction of a hull-burning plant capable of achieving the performance criteria. Alchemy and Pitt, Inc. thus warranted that a plant constructed according to Pitt, Inc.'s design was capable of achieving the performance criteria. See United States v. Spearin, 248 U.S. 132, 137, 39 S.Ct. 59, 61, 63 L.Ed. 166 (1918) (a party who furnishes plans and specifications warrants their sufficiency for the purpose in view); Centex Construction Co. v. James, 374 F.2d 921, 924 (8th Cir.1967). The evidence is undisputed that the plant was never capable of achieving the performance criteria on a sustained basis. The district court found, and we agree, that the primary reason the plant could not perform as anticipated was that the furnace system designed by Pitt, Inc. could not perform properly when the outside temperature was less than fifty degrees. This finding is supported by the report of Pitt, Inc.'s own engineer who, after inspecting the facility upon Riceland's request in 1978, concluded that the furnace could not maintain combustion without the use of substantial amounts of fuel oil. It is true that the inadequacy of the air pollution control equipment provided by Polutrol and the failure of Polutrol to take the abrasive quality of the ash into account in manufacturing the boilers contributed to the plant's problems. As the district court observed, however, the problems attributable to the faulty air pollution control system and the failure of the boilers to withstand the abrasiveness of the ash did not manifest themselves until several years after it was evident that the plant was incapable of achieving the performance criteria on a sustained basis. We thus agree with the district court that even if the equipment provided by Polutrol had met the specifications established by Mr. Pitt and had operated properly, still the entire plant would not have been able to perform in accordance with the terms of the contract because of deficiencies in Mr. Pitt's design. We therefore affirm the district court's finding that Alchemy and Pitt, Inc. are liable to Riceland for breaching the warranty in the construction contract. 5 Our conclusion that the plant would not have operated properly because of Pitt, Inc.'s inadequate design even had the Polutrol equipment been properly manufactured also answers the defendants' contention that Riceland itself substantially breached the construction contract and is thus precluded from recovering on its claim because of Polutrol's errors. Because Pitt, Inc's design was itself defective and insufficient, it is in this sense irrelevant whether Riceland committed minor breaches in its obligation to build the plant according to Pitt, Inc.'s instructions. 13 We also agree with the district court, for the reasons discussed above, that Alchemy may not recover on its counterclaim against Riceland. The marketing contract expressly provides that Riceland assumes no responsibility for the quality of the ash produced as a result of following Alchemy's directions. The district court found, and we agree, that Riceland at all times operated the plant according to Alchemy's and Pitt, Inc.'s instructions. 6 Alchemy's contention that Riceland breached the contracts by shutting down the plant in September 1978, not allowing Alchemy and Pitt, Inc. to make further attempts at rendering the plant operational, and not spending the estimated $650,000 necessary to replace the air pollution control system and the worn-out boilers is simply without merit. Clearly, Riceland did not breach either the construction contract or the marketing contract when, after expending funds far in excess of the expenditures initially contemplated by the parties and allowing Alchemy and Pitt, Inc. three years following construction of the facility in which to render the plant operational, it finally shut the plant down rather than expending additional funds on a plant that would never work as anticipated because of a defective design. Alchemy's failure to provide a design capable of achieving the performance criteria constituted a material breach of the contract, discharging Riceland from all further obligation under the contracts. See Haskell v. McHenry, 4 Cal. 411, 411 (1854); see also Wells Benz, Inc. v. United States, 333 F.2d 89, 92-93 (9th Cir.1964) (applying California law).