not support the Board's conclusion that the transformers had more than one defect or that the transformers had incurred an "excessive" number of test failures. But for such erroneous findings, Kingston argues, the Board would not have concluded that WMATA was legally justified in rejecting all the transformers.
Kingston asserts that the unanimous testimony indicated that the only fault identified was the mislocation of the insulation. This ignores the results of numerous tests which identified problems not related to the insulation defect. For example, the two transformers tested at KEMA Laboratories in February 1992 failed because of "air-gap flashovers," a problem the Board reasonably concluded was unrelated to the insulation gap. In addition, at least one transformer that was known to be free of the misplaced insulation problem failed the extended applied voltage tests performed in the Manassas warehouse.
Kingston also contests the Board's factual finding that the transformers incurred an excessive failure rate. Kingston points out that only one unit failed the tests required by the contract and only one unit failed after installation. All other failures, Kingston argues, were the result of noncomparable, extra-contractual testing and thus could not be the basis for rejection of the transformers.
This argument is without merit. Even if the tests were not expressly called for by the contract, WMATA had the right to require noncontractual testing in view of the problems identified by contractual testing. WMATA's basis for demanding additional tests was further strengthened when the explosion of the first installed transformer -- which had passed all contractually-specified testing -- cast serious doubt on the reliability of the contractual tests. It cannot seriously be asserted that WMATA was required to ignore defects, whether identified through contractual tests or otherwise. Clearly, the contract clearly did not require WMATA to accept transformers of questionable reliability.
In sum, the Board's factual findings that the transformers had more than one defect and incurred an excessive number of tests failures are supported by substantial evidence.
2. Kingston's Assertion that the Board Committed Errors of Law in Refusing to Apply the Economic Waste Doctrine and in Refusing to Sever the Contract
Kingston asserts that WMATA should have allowed it to inspect and repair the transformers and that its refusal to do so was economic waste which should not be sanctioned. Alternatively, Kingston argues that, even if WMATA had the right to refuse to accept repair of the defective transformers, the Board should have required WMATA to accept the eleven transformers which "had passed all applicable tests and were of potentially acceptable quality." 95-2 BCA P 27,841 at 138,848.
The Court sustains the Board's conclusion that the facts of this case do not require application of the economic waste doctrine. The inspection and repair methods proposed by Kingston required cutting into the structure of the transformer and could have shortened the life of the transformers. Thus, Kingston's proposed "cure" may have remedied one defect but created another.
Under the economic waste doctrine, WMATA would be required to accept repair rather than replacement of the transformers only if repair would provide a product which is "adequate for its intended purpose." See Granite Constr. Co. v. United States, 962 F.2d 998, 1007 (Fed. Cir. 1992), cert. denied, 506 U.S. 1048, 122 L. Ed. 2d 121, 113 S. Ct. 965 (1993). Clearly, a proposed repair which may have undermined the structural integrity of the unit would not have given WMATA a product "adequate for its intended purpose." WMATA had further justification for demanding that Kingston replace rather than repair the transformers since at least one "repaired" transformer completely failed to function upon installation.
The transformers' dismal record of repeated failures calls into significant doubt the reliability of all 22 units as well as the tests utilized to identify defects. Given WMATA's reasonable need for absolute reliability of the transformers, WMATA certainly was justified in rejecting the entire lot. There is nothing wrong with a public transportation authority being meticulous about the integrity of the products used in its transit system.
3. Kingston's Assertion that the Board Committed an Error of Law in Partially Enforcing the Liquidated Damages Clause
Kingston also challenges the Board's decision to enforce in part the liquidated damages clause, by reducing the liquidated damages to $ 500 from $ 1,000 per day for unexcused delay. Kingston claims that, once the Board determined that the amount of liquidated damages was unreasonable at the time of contract formation, its only alternative was to strike the liquidated damages clause as an unenforceable penalty. Kingston contends it was improper for the Board to reform the contract to substitute a liquidated damages amount found by the Board to be reasonable. The Court concurs.
The Board found that WMATA's estimate of liquidated damages was increased from $ 500 to $ 1,000 per day as a contingency against a possible Environmental Protection Agency penalty. This was so even though WMATA knew that the penalty would not be assessed. 95-2 BCA P 27,841 at P 138,850. The Board concluded that "the appropriate daily rate for assessment of liquidated damages should be $ 500..." Id.
The law is clear that a liquidated damage clause must be stricken as an unenforceable penalty where the amount is not a reasonable forecast of expected damages. See, e.g., Mega Constr. Co., Inc. v. United States, 29 Fed. Cl. 396, 502 (1993); Coliseum Construction Inc., ASBCA No. 36642, 89-1 BCA P 21,428 (1988). Where a liquidated damage clause is stricken, only actual damages may be recovered. See, e.g., Rattigan v. Commodore Int'l Ltd., 739 F. Supp. 167, 169 (S.D.N.Y. 1990) ("When a court strikes the [liquidated damage] clause as a penalty, the prevailing party is limited to actual damages proven."); Drillers, Inc., EBCA358-5-86, 90-3 BCA P 23,056 (1990) (awarding actual damages where liquidated damages provision was unenforceable).
Because WMATA knew at the time the contract was formed that the EPA penalties at issue would not be assessed against WMATA, it was unreasonable to include estimated penalties in calculating the liquidated damages amount. Therefore, the contractual clause providing for liquidated damages must be struck down as an unenforceable penalty. Because the Board revised the amount of liquidated damages, the Board did not consider what amount of damages were actually incurred.
Accordingly, the Court will remand the case to the Board for the sole purpose of determining what amount, if any, of actual damage WMATA incurred as a result of the unexcused delays in contract completion.
An appropriate Order accompanies this Memorandum Opinion.
UNITED STATES DISTRICT JUDGE
This matter comes before the Court on cross motions for summary judgment and on defendant's motion to strike plaintiffs statement of undisputed facts. For the reasons stated in the foregoing opinion, it is hereby
ORDERED that defendant's motion to strike plaintiff's statement of undisputed facts be GRANTED; and it is
FURTHER ORDERED that plaintiff's motion for summary judgment is GRANTED IN PART AND DENIED IN PART. Plaintiff's motion is GRANTED with respect to its request that this Court hold that the Corps of Engineers Board of Contract Appeals committed an error of law in partially enforcing the contract's liquidated damage provision; and it is DENIED with respect to the remaining claims; and it is
FURTHER ORDERED that defendant's motion for summary judgment is GRANTED IN PART AND DENIED IN PART. Defendants motion is DENIED with respect to its request that the Court uphold the decision of the Corps of Engineers Board of Contract Appeals regarding enforceability of the liquidated damage clause; and it is GRANTED with respect to all remaining claims; and it is
FURTHER ORDERED that, except with respect to the liquidated damage provision, the decision of the Corps of Engineers Board of Contract Appeals is AFFIRMED; and it is
FURTHER ORDERED that the above captioned case be remanded to the Corps of Engineers Board of Contract Appeals for consideration of the amount of actual damages which WMATA incurred due to the unexcused delay in contract completion.
UNITED STATES DISTRICT JUDGE