Opinion ID: 6497766
Heading Depth: 2
Heading Rank: 3

Heading: The Initial Build

Text: Payment for the Initial Build under the Purchase Agreement was based on the passing of seven milestones: (1) “10% of Purchase Order value with order”; (2) “10% of Purchase Order value on delivery of critical components to [Fiber-Span for use in making the Nodes]”; (3) “10% of Purchase Order value on [Fiber-Span] carrying out successful pre-testing”; (4) “5% of Purchase Order value on passing FCC tests”; (5) “5% of Purchase Order value on passing interoperability testing”; (6) “40% of Purchase Order value on delivery … after successfully passing all required tests”; and (7) “20% of Purchase Order value on successful commissioning and [Nodes] ready for commercial service or 3 months after delivery of [Nodes] to [Transit,] whichever is the earlier.” (J.A. at 16, 58, 398.) With the exception of Milestone 7, all payments were to be made “on or about the 45th day from the day of receipt of a Correct Invoice[.]” (J.A. at 399.) Milestones 1 and 2 were satisfied without difficulty, but when testing of the Nodes for Milestone 3 was underway, Transit raised an issue regarding the Nodes’ excessive heat output and resulting high surface temperatures.3 It sent a letter 3 An external surface temperature requirement was not explicitly included in the Purchase Agreement but was incorporated by reference under the License. Specifically, the touch temperature of the Nodes was capped to “prevent burn 8 to Fiber-Span on February 28, 2011, stating that “protection would need to be incorporated” if the Nodes’ external surface temperature exceeded 60°C. (J.A. at 72, 744.) Fiber-Span responded that it was “in [the] process of incorporating [an] engineering improvement” to address the surface temperature issue, and that it would “retrospectively deploy this solution to the 17 [Nodes] being delivered.” (J.A. at 64, 749.) In the interim, however, Fiber-Span planned to retrofit the Nodes with fans for cooling and shields to protect the fans from environmental contaminants such as dust or liquids. Despite Transit’s concerns, Fiber-Span passed the pretests required at Milestone 3. Fiber-Span subsequently issued an invoice, which Transit timely paid in full. At Milestone 4, the Nodes passed the required FCC tests, and Fiber-Span issued another invoice. About a week later, however, Transit “cautioned that the [Nodes], with proposed retrofit [i.e., the fans and shields], would not be accepted unless all testing and specifications were met.” (J.A. at 72, 748-49.) Fiber-Span responded that same day that it would only “ship the goods … if acceptance occurred upon completion of the testing on the original goods, with testing on the retrofit to occur in the injuries to the public.” (J.A. at 64.) Other quality and technical requirements were also imposed by the License. Additionally, the License required the network to be passively cooled at 50°C, such that “fans and other moving parts [are] minimized” in the subway environment. (Dist. Ct. D.I. 15-9 at 22.) Fans could be used “in the event this temperature range was inadequate in any or all locations.” (Dist. Ct. D.I. 15-9 at 22.) In the event of conflict between the standards set in the Purchase Agreement and those in the License, the more stringent standard applied. 9 future.” (J.A. at 65 (citing J.A. at 748).) Without resolving that dispute, Transit tendered payment in full for Milestone 4. Upon completion of Milestone 5, on April 14, 2011, Transit’s CEO wrote in an email to representatives of Transit’s parent company that Fiber-Span had passed the “critical interoperability testing at [Fiber-Span’s] plant[,]” which was a “key step in the delivery process for the Fiber-Span equipment[.]” (J.A. at 751.) He noted that Fiber-Span had also completed “successful FCC, safety[,] and environmental testing … allow[ing] [Transit] to progress with installation of … the Initial Build stations starting next week.” (J.A. at 18, 751.) The critical interoperability test was witnessed by “key NYCT[A]/MTA staff” who “appeared very satisfied and impressed with the signal quality through the Fiber-Span equipment.” (J.A. at 751.) Three days after that upbeat assessment, however, Transit’s Chief Technology Officer sent an internal email to other Transit employees mentioning a problem with the Nodes’ power consumption and “resultant heat” limits. (J.A. at 63, 333.) That is, the Nodes were drawing close to 500 watts of power, which exceeded the Purchase Agreement’s maximum power limit of 395 watts. As noted earlier, Transit had already raised concerns regarding the external surface, or “touch,” temperature of the Nodes, an issue that was linked to the excessive power draw. Nevertheless, the CTO “conditionally” signed off on the completion of the testing.4 (J.A. at 63, 333.) Transit tendered payment in full for Milestone 5. 4 As the Bankruptcy Court observed, “[t]here is no provision in the [Purchase] Agreement for ‘conditional’ 10 The next day, in satisfaction of Milestone 6, Fiber-Span delivered the Nodes and related equipment to Transit’s thirdparty contractor for installation. Nine days later, Transit’s CEO sent an email stating that “[Transit] successfully completed Factory Acceptance Testing and Interoperability testing of the Fiber-Span equipment earlier this month[,] [t]hird party certification was provided … [, and] [t]he equipment … also pass[ed] FCC, environmental[,] and [Underwriters Laboratories] testing at independent labs.” (J.A. at 62, 753.) Once again, though, the sense of satisfaction quickly passed. On May 13, 2011, Transit sent Fiber-Span a letter, complaining that “[t]here are a number of items that will need to be resolved or clarified regarding the recent … delivery[.]” (J.A. at 467.) Transit raised an issue with the “high temperature” of the Nodes and explained that “it is unlikely that [the retrofitting with fans] will be accepted, as the MTA/NYCT[A] specification calls for passive cooling.” (J.A. at 467.) It also claimed that Fiber-Span had either not carried out or failed to provide results for “a significant amount of the testing specified in [the] Purchase Agreement” and the License. (J.A. at 467.) Transit followed up three days later, emphasizing that “[t]he excessive heat output is of serious concern[.]” (J.A. at 479.) In response, Fiber-Span drew a distinction between “pilot” Nodes and “production” Nodes: the pilot Nodes apparently being those included in the Initial Build, and the production Nodes those to be included in the Full Build. It approval of testing.” (J.A. at 63.) 11 proposed to eventually “integrate higher efficiency [radio frequency] amplifiers … and additional thermal engineering advances into the production [Nodes].” (J.A. at 482.) According to Fiber-Span, the increased efficiency would have the effect of “reducing the total [Node] power below 395 Watts.” (J.A. at 482.) It said that the final production Nodes would be “passively cooled[,]” but, in the meantime, that it would retrofit the pilot Nodes. (J.A. at 482.) It also promised to later upgrade the pilot Nodes with the “production passively cooled solution … at no cost.” (J.A. at 482.) And it subsequently noted that “it was only covering costs for the retrofit as an accommodation to Transit, [because] its position [was] that there was no specification for surface temperature.” (J.A. at 73, 759.) Seemingly ignoring Fiber-Span’s message that passive cooling would have to wait, Transit responded a few days later that it “appreciated and accepted” Fiber-Span’s “offer to retrofit the Initial Build [Nodes] with the passively cooled solution without cost to Transit[.]” (J.A. at 485.) It also noted that it “ha[d] not approved any solution [because] [a]pproval can only be given when a solution is demonstrated to be safe and fully meet specification.” (J.A. at 487.) Transit nevertheless paid Fiber-Span’s Milestone 6 invoice in full. Fiber-Span issued the Milestone 7 invoice on June 1, 2011, and soon after, the parties met and discussed, among other things, issues surrounding the Nodes’ external temperature, the delivery of production Nodes, and additional testing. According to minutes kept by Transit, Fiber-Span stated that the retrofitted Nodes were an “interim” solution and that a “permanent solution without fans continues to be developed.” (J.A. at 488.) Those minutes also reported that 12 Fiber-Span would begin retrofitting the Initial Build Nodes with fans and shields on June 21, 2011; it would target November 1, 2011 to complete the permanent solution; and it would upgrade those Nodes “without charge.” (J.A. at 488.) That did not stop Transit from noting its dissatisfaction. On July 7, 2011, it informed Fiber-Span that it considered the Nodes to be “outside the contractual specification[,]” citing its excessive power and external heat concerns.5 (J.A. at 490.) Transit stated that until the permanent solution was executed, tested, and certified, it would be “unable to consider the [Nodes] as accepted.” (J.A. at 490.) Payment on Fiber-Span’s invoice for Milestone 7 was due July 18, 2011. Instead of paying the invoice in full, Transit issued a check for half of the invoice and included two handwritten notes. The first stated that Transit was only paying half of the final invoice, and the second note explained that the 5 That position was somewhat at odds with Transit’s internal view about a month earlier. On June 6, 2011, Transit asked Underwriters Laboratories whether “there [is] a standard for the temperature of operating equipment for safety in a public environment; e.g., what is the maximum allowable temperature a device can operate at without harming someone that may come in contact with the device?” (J.A. at 763.) Underwriters Laboratories provided a table of values and informed Transit that temperature limitations may vary due to engineering considerations. On June 8, 2011, in an internal email, Transit’s CTO stated that “if this is correct it makes Fiber-Span compliant per [Underwriters Laboratories] for touch. But still not compliant for specified power draw[.]” (J.A. at 761.) 13 remainder would be “paid if agreed by [Transit’s CEO] at later date or on delivery of fully compliant [Nodes.]” (J.A. at 66.) Transit submitted a final installment payment of $15,943.96 two years later, on July 18, 2013, after deducting $66,687.74 for what it identified as “Warranty Repair Costs.” 6 (J.A. at 529.) In total, Transit paid $643,606 to Fiber-Span.7