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Xnergy v. Hess Microgen

August 29, 2007

XNERGY, PLAINTIFF,
v.
HESS MICROGEN, LLC, (DOC. # 44) DEFENDANT.



The opinion of the court was delivered by: Hayes, Judge

ORDER AND RELATED COUNTERCLAIM

The matter before the Court is the Motion for Summary Judgment filed by Defendant Hess Microgen, LLC ("Hess"). (Doc. # 44.)

I. Background

On April 16, 2004, Plaintiff Xnergy signed a contract with Onsite Energy Providers, LLC ("OSEP") to engineer, purchase and install cogeneration systems on the roof of two office buildings known as Treat Towers in Walnut Creek, California (the "EPC Contract").*fn1 (Davis Decl., Doc. # 61, ¶ 3.) Also on April 16, 2004, Xnergy and Hess entered into an Agreement for Purchase and Sale of Equipment ("Purchase Agreement"), wherein Hess agreed to construct, and Xnergy agreed to buy, two cogeneration systems for the Treat Towers for a purchase price of $1,027,776. (Smith Decl., Doc. # 51, Ex. A at 897.)

The purchase price was to be paid in four installments made at different points along the manufacturing process. According to the Purchase Agreement: "Upon execution of this Agreement, [Xnergy] shall pay [Hess] a non refundable deposit equal to twenty five percent (25%) of the Purchase Price ('Deposit'). [Hess] agrees that the Deposit will be returned to [Xnergy] in the event that [Hess] unilaterally cancels this Agreement without cause and at a time prior to shipment." (Id.) On April 16, 2004, Xnergy paid the deposit of $256,941.50. (Davis Decl. ¶ 5.) The Purchase Agreement further provides: "Upon successful completion of witness testing in Carson City and prior to delivery," the second payment of fifty percent (50%) of the purchase price would be due. (Id. at 898.) The third payment of fifteen percent (15%) would be due at the time of shipment. (Id.) The fourth and final payment of ten percent (10%) would be due at start-up of the cogeneration systems. (Id.)

The Purchase Agreement provides that certain equipment would be "mounted" and/or "installed" on "steel equipment skids" by Hess. (Id. at 906-15.) However, "[s]pecifically excluded from th[e] [Purchase] Agreement are any and all services related to installation, permitting, utility interconnection, integration of the Goods with building facility, and civil, electrical, mechanical or other systems beyond the border of the skids." (Id. at 897.) The Purchase Agreement also requires Hess to submit various "documentation" and "drawings" to Xnergy, some of which are to be submitted "for written approval by Xnergy." (Id. at 916.)

Soon after entering into the contract, the parties began to disagree over whether each party was performing according to the terms of the Purchase Agreement. Hess claims that the congeneration systems have been fully constructed and "witness tested," and are now ready for shipment. Xnergy claims that the congeneration systems have not been designed or constructed according to the terms of the Purchase Agreement and have not been "witness tested." Xnergy has refused to accept delivery of the congeneration systems and has not paid any additional amount of the purchase price beyond the initial deposit.

On January 17, 2006, Xnergy instituted this action by filing a Complaint against Hess in San Diego County Superior Court, alleging two causes of action: (1) breach of contract, and (2) breach of the duty of good faith and fair dealing. In the first cause of action, Xnergy alleges that Hess breached the Purchase Agreement (i) by failing to build and deliver the cogeneration systems with the agreed-upon skid system (Compl. ¶¶ 7-8), (ii) by missing deadlines to submit documents to Xnergy for approval (Compl. ¶ 8), and (iii) by failing to perform witness tests on the entire cogeneration skid (Compl. ¶¶ 7-9). Because of these alleged breaches, Xnergy seeks return of its deposit and cancellation of the Purchase Agreement. (Compl. ¶ 10.) In the second cause of action, Xnergy alleges Hess breached the implied duty of good faith and fair dealing by insisting that Xnergy waive deficiencies and pay the payment of 50% of the contract price, by unreasonably limiting and then cutting off communications with Xnergy, and by communicating with Xnergy's customer and seeking to oust Xnergy from the Treat Towers project and other projects. (Compl. ¶ 13.) Due to the alleged breach of the implied duty of good faith and fair dealing, Xnergy seeks return of its deposit, cancellation of the Purchase Agreement, and general and special damages. (Compl. ¶ 14.)

On February 14, 2006, Hess removed the case to this Court, properly alleging diversity jurisdiction. (Doc. # 1.) On February 28, 2006, Hess filed a Counterclaim (Doc. # 5), and on March 14, 2007, Hess filed a First Amended Counterclaim for breach of contract against Xnergy, seeking the unpaid balance of the purchase price allegedly due under the Purchase Agreement, as well as the costs of storing the two fully-constructed cogeneration systems (Doc. # 42). Among Xnergy's affirmative defenses to Hess' First Amended Counterclaim is for "Anticipatory Breach of Contract." (Doc. # 8 at 3; Doc. # 36; Doc. # 41.)

On March 28, 2007, Hess filed its Motion for Summary Judgment in this Court, seeking summary judgment in its favor as to each of the two causes of action in Xnergy's Complaint and the single cause of action in Hess' First Amended Counterclaim. (Doc. # 44.) After receiving evidence and briefing from both parties, the Court conducted oral argument on July 9, 2007.

II. Discussion

A. Standard of Review

Summary judgment is proper when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). An issue of fact is "genuine" only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is "material" if it may affect the outcome of the case. Id. at 248. The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery, and affidavits that demonstrate the absence of a genuine issue of material fact. See Celotex Corp. v. Cattrett, 477 U.S. 317, 323 (1986). Once the moving party meets its initial burden, the non-moving party must go beyond the pleadings and, by its own evidence, "set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). In order to make this showing, the non-moving party must "identify with reasonable particularity the evidence that precludes summary judgment." Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996). "In considering a motion for summary judgment, the court may not weigh the evidence or make credibility determinations, and is required to draw all inferences in a light most favorable to the non-moving party." Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997).

B. Xnergy's Claim for Breach of Contract

Under California law,*fn2 the elements of a cause of action for breach of contract are: (1) the existence of a contract, (2) plaintiff's performance or excuse for non-performance, (3) defendant's breach and (4) damages resulting to plaintiff because of the breach. See Armstrong Petroleum Corp. v. Tri-Valley Oil and Gas Co., 116 Cal. App. 4th 1375, 1391 (2004). The parties agree that the Purchase Agreement constitutes a contract.

Xnergy alleges that Hess breached the Purchase Agreement (i) by failing to build and deliver the cogeneration systems with the agreed-upon skid system (Compl. ¶¶ 7-8), (ii) by missing deadlines to submit documents to Xnergy for approval (Compl. ¶ 8), and (iii) by failing to perform witness tests on the entire cogeneration skid (Compl. ¶¶ 7-9). Hess moves for summary judgment as to each of these alleged breaches of contract.

1. Skid System

Hess' President testified that the language in the Purchase Agreement, "Package Skid 4 of 8'-11' x 15-25' steel equipment skids" (Smith Decl., Ex. A at 915), meant that Hess was to deliver two skids per Treat Tower, and each of the skids would be between 8 feet to 11 feet by 15 feet to 25 feet. (Smith Dep. at 30-32.) During the summer of 2004, after the Purchase Agreement was signed, Hess changed the design from two to three skids per tower. (Smith Dep. at 26, 32, 62; Fine Dep. at 63; Allen Dep. at 34-35; Jackson Dep. at 91.)

The change in skid design led to a dispute between Xnergy and Hess concerning certain equipment which would no longer fit on the original two skids. (Fine Dep. at 58-59.) Specifically, the change in design required installation work on the electrical panels, batteries, battery chargers, silencers and cooling towers to be performed on the roof that, under the original two-skid design, would have been performed by Hess in its factory because all of this equipment would have fit within "the border of the skids." (Smith Decl., Ex. A at 897; Smith Dep. at 46-47, 51-52; Costello Dep. at 15-18; Allen Dep. at 34-35; Jackson Dep. at 157-58; Davis Decl. ¶ 7.) Hess took the position that the Purchase Agreement did not require Hess to perform any installation work on the roof. (Smith Dep. at 46-47; Davis Decl. ¶ 7 ("In connection with changing from two to three skids, Hess . . . told me that it would not install various pieces of significant equipment on the skids, and that Xnergy itself would have to install the equipment on the roofs of the buildings. Specifically, despite what I thought was clear contractual language requiring installation by Hess, Hess told me that it would not install electrical panels, batteries, battery chargers, silencers, or cooling towers.").) Hess relied upon the following language in the Purchase Agreement: "Specifically excluded from this Agreement are any and all services related to installation . . . beyond the border of the skids." (Smith Decl., Ex. A at 897 ...


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