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Baker Hughes Process and Pipeline Services, L.L.C. v. UE Compression, L.L.C.

United States Court of Appeals, Fifth Circuit

September 12, 2019

UE COMPRESSION, L.L.C., Defendant-Appellee

          Appeals from the United States District Court for the Southern District of Texas

          Before JONES, HO, and OLDHAM, Circuit Judges.


         Baker Hughes sued UE Compression for breach of contract and express and implied warranties after a containerized air booster compressor manufactured by UE ruptured on the job in Western Australia, injuring a Baker Hughes contractor (the "Incident"). The district court rejected all of Baker Hughes's claims on summary judgment and awarded sanctions to UE for Baker Hughes's misplacement and destruction of the allegedly defective compressor part. Finding no reversible error of law or fact in the court's ruling on these and related issues, we AFFIRM.


         BJ Process and Pipeline Services (Australia) Pty. Ltd., Baker Hughes's predecessor, entered into an agreement in December 2011 for UE to configure and supply seven containerized air booster compressors for use by Chevron on its Gorgon project in Western Australia. Baker Hughes used these units in putting Chevron's pipeline into service, including dewatering and hydrotesting functions. In November 2014, Baker Hughes's contractors were using the boosters when the drain line on one of the boosters exploded and injured a Baker Hughes contractor. All seven of the boosters were taken offline while the Incident was investigated, and Baker Hughes was forced to rent replacement boosters to fulfill its contract with Chevron. The explosion and its aftermath cost Baker Hughes millions of dollars.

         Baker Hughes filed this suit for breach of express warranty, breach of implied warranties of merchantability and fitness, and breach of contract. The company alleged that UE improperly selected a ball valve for the drain line of the boosters and provided deficient drain line configuration.

         The plaintiff's case turns on the parties' contract. The entire contract consists of four documents: (1) the agreement for the supply of the boosters (the "Supply Agreement"); (2) the LOGIC General Conditions of Contract (the "LOGIC Terms")[1]; (3) Baker Hughes's Purchase Specification for Containerized Air Booster Compressor System (the "Specification"); and (4) UE's Quote. The LOGIC Terms of the agreement control unless modified by the Supply Agreement. A choice of law provision mandates that Texas law governs controversies arising from the contract.

         The Supply Agreement states that UE shall provide seven "6425 Nm3/hr 150 Barg booster compressor units," which "shall be supplied in full compliance with the [Specification] and [the Quote]." UE's Quote represents that the boosters will be designed to meet the performance specifications provided by Baker Hughes. The LOGIC Terms reinforce the allocation of design responsibility to Baker Hughes. Section 4.3 of the LOGIC Terms provides that, "[e]xcept as expressly specified in the Contract [UE] shall not be responsible for the design of any part of the Permanent Work." Further, Section 12.1 of the LOGIC Terms requires Baker Hughes to furnish "technical information," including documents and drawings, as necessary to carry out the manufacture. Baker Hughes retained the right under Section 14.1(a) of the LOGIC Terms to modify the specifications at any time as the boosters were being built. For any sketches, drawings, calculations, reports or recommendations relating to the product that UE might be required to produce, Baker Hughes required UE to submit those for prior review and approval, affording Baker Hughes sufficient time to conduct its review.

         The express warranty pertinent to the claims at issue is contained in § 28 of the LOGIC Terms:

28.1: [UE] warrants and guarantees that it has performed and shall perform the WORK in accordance with the provisions of the CONTRACT, and that the PERMANENT WORK will be free from defects.
28.2: In the event that [Baker Hughes] notifies the CONTRACTOR [UE] of any defects in the WORK prior to or subsequent to the COMPLETION DATE in accordance with Clause 27 hereof and within the relevant Defects Correction Period or Periods specified in Appendix 1 to Section I - Form of Agreement, [UE] shall, subject to the operational requirements of [Baker Hughes] and to the provisions of Clause 28.3, carry out all works necessary to correct any defects in the WORK arising from any default of the CONTRACTOR GROUP.

         The relevant appendix sets the defects correction period as "1.5 years after shipment or 1 year from the date of the first field use of the unit, whichever occurs first." The WORK described in this express warranty is defined by the LOGIC Terms to mean "all work that [UE] is required to carry out in accordance with the provisions of the CONTRACT, including the provision of all materials, service and equipment to be rendered in accordance with the CONTRACT."

         In its complaint, Baker Hughes identified three express warranties that UE allegedly breached: (1) UE would "perform its obligations under the Agreement with all due care and diligence and with the skill to be expected of a reputable, experienced contractor"; (2) the boosters would be "fit for the purposes specified in the Agreement"; and (3) the boosters would be "free from defects." Baker Hughes pled breach of contract based on UE's failures "to meet its obligations by, among other things, providing an air booster that stopped functioning" and "to provide a timely replacement air booster compressor and to repair and/or replace the other compressor units on site." Baker Hughes sought damages including the full sales price of the boosters (more than $6.8 million), approximately $11 million for losses it allegedly incurred under its contract with Chevron, and approximately $1.4 million for replacement booster rental fees.

         The district court granted UE's motion for summary judgment and dismissed Baker Hughes's claims. The district court found that: (1) Section 28.2 of the Agreement was Baker Hughes's sole remedy for breach of express warranty; (2) the implied warranty of merchantability is inconsistent with Section 28.2 and is thus displaced; (3) no implied warranty of fitness for a particular purpose arose because Baker Hughes provided specifications for the boosters and the Agreement provided that UE would "not be responsible for the design" of the boosters; and (4) Baker Hughes's breach of contract claim, relating only to the general defectiveness of the boosters, was superseded by its express warranty claim.[2]

         UE sought sanctions for its costs resulting from Baker Hughes's failure to make the subject ball valve available for inspection by UE's expert in Australia as the parties had agreed and for destroying the ball valve before UE's expert could inspect it. After an oral hearing, the district court granted UE's motion, assessing monetary sanctions and a mandatory adverse-inference instruction because of Baker Hughes's destruction of the ball valve.

         Baker Hughes moved for a new trial and to reopen the summary judgment record. In response, the district court agreed that it had erred in finding as a matter of law that there was no reliance by Baker Hughes that would give rise to the implied warranty of fitness for a particular purpose, but the court ultimately denied Baker Hughes's motion because the parties' agreement placed the sole responsibility for the design on Baker Hughes. Baker Hughes appeals from all adverse rulings and the judgment.

         STANDARD ...

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