Opinion ID: 6215883
Heading Depth: 2
Heading Rank: 1

Heading: Legal error in contract interpretation

Text: Hess claims legal error in the district court’s interpretation of two sections of API 14A standards that were incorporated into the sales contract. 3 In response, Schlumberger argues for a “resulting from” standard found in the statute’s damages provision. See Tex. Bus. & Com. Code § 2.715 (entitling a nonbreaching buyer to damages “resulting from the seller’s breach”). Schlumberger, though, presents no authority to show that Section 2.715 is relevant to the preliminary inquiry into whether a non-conformance substantially impaired the value of goods. 5 Case: 20-20663 Document: 00516194200 Page: 6 Date Filed: 02/07/2022 No. 20-20663 Alternatively, Hess claims that the district court’s findings of fact relating to Schlumberger’s compliance with one of these two sections were clearly erroneous. If Hess prevails on either of its API 14A interpretation claims, Schlumberger would, as a matter of law, have delivered non-conforming goods.
API 14A Section 6.3.2.2, which pertains to “design criteria” for SCSSVs, provides that equipment “shall be manufactured to drawings and specifications that are substantially the same as those of the size, type, and model [SCSSV] equipment that has passed the validation test.” The trial court record shows that the drawings kept on file by the seal assembly manufacturer, Greene Tweed, did not substantially change from 1998 to 2015. Hess is correct that the seals that had been used for the initial validation and testing process in 2004 to qualify the valve did not exactly match the dimensions specified in the drawings themselves. A partial explanation is that their shapes had been changed by testing. The validation package did not contain any untested seals. 4 As a simple factual matter, this means that in API 14A 6.3.2.2 terms, there were no “drawings and specifications” of the valves that “passed the validation test”; consequently, Hess claims that Section 6.3.2.2 was not — indeed, could not — be satisfied. To use Hess’s words, “Section 6.3.2.2 requires the drawings and specifications of the validated valve to precisely 4 The district court found that the valves sold to Hess complied with Section 6.3.2.2: “Because drawings of MSE Assembly . . . remained the same from April of 1998 until September of 2015, the MSE Assemblies . . . in the SCSSVs that Schlumberger manufactured for Hess in 2013 . . . were manufactured to drawings and specifications that are the same as the drawings and specifications of the MSE Assembly that passed the validation test in 2004.” 6 Case: 20-20663 Document: 00516194200 Page: 7 Date Filed: 02/07/2022 No. 20-20663 match the validated valve itself,” but no drawings of the validated valve even exist. Hess contends it would be inappropriate to “read in” a “substantially the same” standard for the variation between the devices and the drawings for three reasons. First, Hess claims that when Section 6.3.2.2 says “of the size, type and model equipment that has passed the validation test” the “of” denotes an “exact match” between the drawing and the equipment. Allowing anything else, Hess says, gives “no assurance that the new valve has any relation to the validated valve.” Second, Hess believes that because “substantially the same” was used to qualify the relationship between the two sets of drawings (of the original qualified equipment and the new produced equipment), its absence in the provision comparing the drawings to the products suggests a required exact match. Finally, Hess argues that accepting the district court’s reading of the contract “would frustrate the entire purpose of [the] standard,” because the standard would be meaningless if the valves were not required to be manufactured exactly to the drawings and specifications. The district court, though, determined that “Hess’s contention . . . is not supported by the evidence that Section 6.3.2.2 . . . is a design requirement, not a quality control provision.” According to Schlumberger, this reading “is supported by the text of the provision, industry custom and practice, and the structure of API 14A.” At trial, Schlumberger relied on witness testimony from experts who helped draft the API 14A standards, who stated that nothing else beyond a comparison between “drawings and specifications” was required to comply with 6.3.2.2. Under Texas law, “[e]ven if a contract is unambiguous as a matter of law, a court may still consider the surrounding facts and circumstances as an aid in the construction of the contract’s language.” Barrow-Shaver Res. Co. v. 7 Case: 20-20663 Document: 00516194200 Page: 8 Date Filed: 02/07/2022 No. 20-20663 Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 483 (Tex. 2019) (quotation marks and citation omitted). 5 When “construing a specific contractual term, we must give consideration to the meaning attributed to that term in the industry.” Kona Tech. Corp. v. Southern Pac. Transp. Co., 225 F.3d 595, 611 (5th Cir. 2000) (quoting Personal Preference Video, Inc. v. HBO, 986 F.2d 110, 114 (5th Cir. 1993)) (applying Texas substantive law). In Kona, the court relied on expert testimony and treatises to determine what “same or related origins to same or related destinations” meant in the context of the shipping industry. Id. at 611–12. The district court did not err in doing the same regarding the interpretation of API 14A Section 6.3.2.2. Schlumberger’s interpretation, adopted by the district court, is the better one under Texas law. By understanding “of” to allow for some insubstantial variation, the district court does not destroy any link between the drawing and the qualified equipment. The interpretation requires that any difference between physical product and drawing be insubstantial. This interpretation accords with the expert testimony that the district court heard from some of those who assisted in drafting the API 14A standards. The district court did not err in considering such testimony. See Kona, 225 F.3d at 611. The district court did not err in interpreting API 14A Section 6.3.2.2 to require only that the drawings remain substantially the same and that the valves be manufactured using those drawings.
In addition to its assertion that the district court erred in interpreting Section 6.3.2.2, Hess argues that the district court also erred in interpreting API 14A Section 7.6.2. Hess asserts that the MSE seal spring, known also as 5 Hess concedes that the contract is “unambiguous” and “that all undefined terms in API 14A are given their ‘plain, ordinary meaning.’” 8 Case: 20-20663 Document: 00516194200 Page: 9 Date Filed: 02/07/2022 No. 20-20663 the “rosette spring,” was a “traceable component” under API 14A Section 7.6.2. That section requires “[a]ll traceable components, except nonmetallic seals, shall be dimensionally inspected . . . during or after the manufacture of the components but prior to assembly.” Hess argues that, under the “plain, ordinary meaning” of Section 7.6.2, because the rosette spring could be traced, it is a traceable component requiring inspection. Identifying the springs, not the entire seal, as traceable components would mean the springs needed a dimensional inspection. That inspection did not occur. “Traceable component” is not defined in the contract. The district court determined that whether the spring was a traceable component was a question of fact rather than a question of law. After trial, the district court found that “[t]he traceable components for purposes of [Section] 7.6.2 are the MSE Seal assemblies [containing the rosette springs], not the rosette springs” themselves. The district court primarily relied on the fact that the seal assemblies were the “lowest level of traceable component” identified in the Schlumberger Bill of Materials and the Hess Inspection Matrix — both included in the contract — and expert testimony suggesting that it was industry practice to define the lowest level of traceable component. We consider the following to be dispositive. First, the parties set out a quality control plan in which the parties stipulated to inspection of the seal (but not its subcomponents). Second, the district court found that Schlumberger put on credible testimony that it is industry practice to enumerate components to be inspected and accounted for in the inspection plan in order to be qualified as “traceable parts.” Finally, inspecting the rosette spring inside the seal would require the destruction of the seal, something that Schlumberger could not feasibly do as the purchaser of the completed seal assembly. To inspect would destroy the assembly, and a new one would be needed — only also to be destroyed during inspection. That 9 Case: 20-20663 Document: 00516194200 Page: 10 Date Filed: 02/07/2022 No. 20-20663 cannot be. We conclude that the contract contemplated dimensional inspection of the seal assemblies rather than inspection of the rosette springs within that assembly. c. The district court’s API 14A factual determinations Hess argues that the district court also made clearly erroneous factual findings relative to Schlumberger’s compliance with 6.3.2.2. Namely, Hess asserts that “the district court clearly erred in finding that the difference between the Greene Tweed drawings and the 2004 validated valve was ‘insubstantial.’” The Supreme Court has explained how to apply a clear-error standard to a district court’s credibility findings at a bench trial. See Anderson v. City of Bessemer City, 470 U.S. 564 (1985). The Anderson Court cautioned that a trial court could not “insulate [its] findings from review by denominating them credibility determinations” and outlined certain “factors” for consideration that could show error. Id. at 575. Namely, “[d]ocuments or objective evidence may contradict the witness’ story; or the story itself may be so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it.” Id. If “such factors are present, the court of appeals may well find clear error even in a finding purportedly based on a credibility determination.” Id. We applied Anderson in an appeal involving a fatal maritime collision between a tug and a shrimper; the district court had considered physical evidence, expert testimony analyzing the physical evidence, and independent witness testimony. In re Luhr Bros., Inc., 157 F.3d 333, 339–40 (5th Cir. 1998). The district court determined that the tug was at fault. Id. at 339. We considered the “plausibility and internal consistency” of the shrimper’s account, in addition to the actual evidence. Id. We found that “physical evidence strongly support[ed]” the tug’s case; the tug’s expert witness was 10 Case: 20-20663 Document: 00516194200 Page: 11 Date Filed: 02/07/2022 No. 20-20663 far more qualified than the shrimper’s expert and considered more information in making his assessment; the independent witness testimony was “inconsistent with the [shrimper’s] account of the collision”; and the shrimper’s account smacked of “sheer implausibility.” Id. at 340–42. Accordingly, we were left with the “definite and firm conviction” that the evidence showed clear error by the district court. Id. at 342. We are not left with that conviction in this case. The drawings for the seal did not change from 2003 to 2014, and Schlumberger presented some evidence showing a series of springs from 2005 to 2015 that were manufactured within the tolerances specified in the drawings. Although it is clear that Greene Tweed produced springs that were outside the tolerances dictated by the drawings and thus did not conform, it is certainly not “implausible” that Greene Tweed manufactured its valves “to the qualified drawings” under the design-requirement-only interpretation of Section 6.3.2.2 adopted by the district court. We accept the district court’s interpretation of Section 6.3.2.2, meaning the evidence supports the district court’s factual findings that the degree of difference was insubstantial.