A recent federal case between American Municipal Inc. (AMP) and Bechtel Power Corp. could have future repercussions on construction disputes involving EPC contracts and liability issues. On May 8, a federal judge in Ohio dismissed two of three claims in a lawsuit AMP filed against Bechtel.
AMP claims Bechtel improperly under estimated the cost of its services on a coal-fired power plant by more than $1 billion.
In 2007 and 2008, AMP, a nonprofit owner and operator of electric facilities, commissioned feasibility studies for a supercritical coal plant, leading to the development of the 1,000 MW AMP Generating Station. After a bidding process among several different EPCs, AMP chose Bechtel as the project contractor in 2008. From November 2008 to December 2009, Bechtel sent AMP monthly progress reports, which included cost estimates for the project. According to AMP, Bechtel represented that the expected EPC cost from the original cost estimate was sound and reliable during these monthly reports spanning from November 2008 to September 2009.
In May 2009, due to declining costs of energy, AMP told Bechtel it was reconsidering the project, but Bechtel offered a lower price and AMP decided to keep the project going. On May 5, 2009, Bechtel met with AMP and updated elements of its price, reporting that the estimated cost had declined by $157 million. As a result, AMP’s members, during a meeting on May 28, 2009, decided to move forward with the result.
At that time, AMP signed various project contracts with power plant system suppliers, including Hitachi and Powerspan.
In October 2009, Bechtel advised AMP that the EPC cost for the project would be more than $1 billion higher than Bechtel’s original estimates. In November 2009, Bechtel suggested possible cost reductions that could result in an estimated price that remained $846 million more than Bechtel’s initial estimates. Based on these numbers, AMP canceled the project and terminated the contracts with Bechtel and other vendors.
In 2011, AMP filed suit against Bechtel in the Federal Court in Columbus, Ohio on three claims: for alleged breach of the EPC contract, for gross negligence and for breach of fiduciary duty. All three claims totaled damages of not less than $97 million. However, Bechtel said its liability under the count of “breach of contract” should be limited to $500,000, the contractual limitation of liability appropriate to the stage of the contract performance, at the time the project was cancelled. Judge Michael Watson agreed with AMP which argued that “the limitation of liability clause cannot be enforced if it proves that [Bechtel] acted willfully or wantonly recklessly, or with gross negligence,” according to the court Opinion and Order.
“The primary issue the judge discussed in the Opinion was Bechtel’s position that because the contract had a limitation of liability condition, it could not be held liable in excess of $500,000. As we understand the opinion, the court rejected that notion rather forcefully,” said Judah Lifschitz, co-president of Shapiro, Lifschitz & Schram and an attorney representing AMP.
However, the $500,000 limitation has not been dismissed in court.
“Our view has been that this lawsuit was without merit and we fully met our obligations under the contract,” said Bechtel spokesperson Michelle Michael.
During the May 8 hearing, Watson did rule that AMP had failed to identify actual damages separate from the breach of contract claim and had failed to state a proper claim in counts two and three. Therefore, Watson dismissed counts two and three, but kept the breach of contract claim, as well as $97 million in damages from Bechtel, in play for future court action. For the time being, the case is in discovery.
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