# Ebasco Services, Inc. v. Pennsylvania Power & Light Co.

> District Court, E.D. Pennsylvania · September 27, 1978 · 460 F. Supp. 163

URL: https://www.frixlaw.com/law-library/cases/2093137

## Case

- **Full name:** Ebasco Services, Incorporated v. Pennsylvania Power & Light Company v. General Electric Company
- **Court:** District Court, E.D. Pennsylvania
- **Decided:** September 27, 1978
- **Citations:** 460 F. Supp. 163; 1978 U.S. Dist. LEXIS 15301
- **Precedential status:** Published
- **Opinion:** Opinion by Becker
- **Judges:** Edward R. Becker
- **Cited by:** 35 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2093137

## How later opinions describe it (automated extraction)

- concluding that defendant in an action for tortious interference “established by a preponderance of the evidence that it acted with reasonable justification and privilege”
- applying 13 Pa.Cons.Stat. 2719(b)

## Opinion text

OPINION
EDWARD R. BECKER, District Judge.
I.
Preliminary Statement
This opinion memorializes our findings of fact and conclusions of law in the wake of a lengthy trial in which Pennsylvania Power & Light Company (PP&L) sought to establish that General Electric Company (GE) was liable to it for certain consequential damages, principally cost of replacement power, as the result of GE’s role in the construction of a power plant.
PP&L is a public utility that furnishes electric power to large areas of eastern and central Pennsylvania. A large PP&L power plant complex is located at Brunner Island in the Susquehanna River, south of Harrisburg, Pennsylvania. In 1964, recognizing the need to augment its generating capacity to meet the area’s growing electric power demands, PP&L determined to erect on Brunner Island an additional generating plant to be known as Brunner Island # 3 (Brunner # 3). On previous occasions PP&L had superintended the erection of its own power plants, letting various contracts and subcontracts for the several portions of the work. However, on this occasion PP&L engaged Ebasco Services, Inc. (Ebasco) to undertake complete responsibility for the construction of the plant on a so-called “turnkey” basis. Under this arrangement, Ebasco was to assume the responsibility for designing the plant, selecting appropriate equipment and contractors, supervising construction and testing, obtaining appropriate performance guarantees, and overseeing all aspects of the project until the plant became operational. At that time, the key would be turned over, as it were, to the owner, PP&L. The PP&L-Ebasco agreement, entered into in 1964, was formally executed on March 10, 1966. Under its terms, PP&L was to pay Ebasco a .total of $54,300,000, payable in installments over the construction period, with a $3,640,000 retainage to be paid by PP&L only after it was satisfied that Ebasco had fulfilled the performance guarantees in the contract.
In March 1964, Ebasco, acting as the agent for PP&L, began obtaining subcontractors for the plant. The other parties to this action — GE, Poster Wheeler Corporation (Foster Wheeler), and Combustion Engineering Company (Combustion) — are firms that were engaged by Ebasco to furnish and install major components of the power plant. GE’s principal contractual undertaking was to supply the steam turbine generator and boiler feed pump turbines, which together could fairly be described as the heart of the power plant. Combustion supplied the boilers necessary to create the steam that powers the turbines, and Foster Wheeler supplied the elaborate pumps that the power plant requires.
The power plant was ultimately completed in 1970. In 1972, seeking some $1 million in retention moneys that PP&L had refused to disburse plus an additional $1.6 million in expenses above the contract specification, which Ebasco claimed it had incurred at PP&L’s request, Ebasco commenced this litigation. PP&L counterclaimed against Ebasco for damages allegedly resulting from delay, use of unauthorized bidders, breach of warranty, and negligence. PP&L, as third-party plaintiff, also joined GE, Foster Wheeler, and Combustion as third-party defendants on its counterclaim.
PP&L’s counterclaim against GE seeks damages allegedly resulting from (1) furnishing defective equipment; (2) negligent design and installation supervision of the steam turbine generator and boiler feed pump turbines; (3) breach of implied warranties; and (4) tortious interference with certain of PP&L’s contract rights. The total damages asserted by PP&L approximate $64 million. The largest single element of these damages is PP&L’s claim against GE for the cost of purchasing replacement power from other power companies in the Pennsylvania-New Jersey-Maryland Interconnec
*168
tion (PJM), which became necessary when Brunner # 3 did not function as anticipated.
1
After discovery was substantially complete, GE, Combustion, and Foster Wheeler filed motions for partial summary judgment. We proceeded to argument first on GE’s principal motion, which involved Ebasco purchase order NY-668001, relating to the steam turbine generator and boiler feed pump turbines. In that motion, GE asked us to declare that it was not liable on the contract to PP&L for (1) cost of replacement power or lost profits; (2) breach of an alleged implied warranty of fitness for an intended use; or (3) tortious interference with the contractual rights of PP&L. The issues with which the motion dealt evolved in large measure from the parties’ differing views as to what documents or acts formed the contract between GE and Ebasco (the latter acting as agent for PP&L) and as to the terms of that contract.
We disposed of GE’s motion by a lengthy opinion,
Ebasco Services, Inc. v. Pennsylvania Power and Light Co.,
402 F.Supp. 421 (E.D.Pa.1975)
(Ebasco I),
in which we denied partial summary judgment. Because
Ebasco I
formed the general charter for the trial that is adjudicated herein, we must summarize the salient features of that opinion as a precondition to clear and orderly presentation of our findings of fact and conclusions of law. Understanding of those salient features in turn requires a brief recitation of some of the background facts and of the issues raised in the partial summary judgment motion.
The inception of the steam turbine generator transaction was in a telephone conversation on July 15, 1964, between Charles Bonin of Ebasco and George Cox of GE. What transpired during that important telephone call is in dispute, and we make findings on the subject.
See
Part II.B.
infra.
However, it is undisputed that on that day, acting pursuant to Ebasco’s request, GE issued by means of a letter to Ebasco quotations for the steam turbine generator and the boiler feed pump turbines. The letter stated,
inter alia:
“The above prices are based on our Standard Conditions of sale, price policy and price data as shown in GE Handbook 4710, dated May 25, 1964.” Six days later Ebasco placed its purchase order NY-668001 for the generator and turbines and accompanied that order with a letter of intent reading, in part: “A formal contract will be issued at a later date containing the terms and conditions of, and in the format of, the usual type of contract issued by Ebasco.”
The GE standard terms and conditions differed textually from those of the Ebasco standard contract in such areas as warranties and remedies available to Ebasco (and therefore to its principal, PP&L), and negotiations continued between Ebasco and GE on these issues until December 1967. At that time an agreement, included in Supplement 16 to the contract, was reached on language governing warranties and remedies.
2
Supplement 16 was executed by GE
*169
and Ebasco on December 7, 1967. Significantly, GE began construction of the generator even while the negotiations were proceeding, Indeed, when Supplement 16 was executed in la+e 1967, that unit was already nearing completion and delivery.
The main points at issue on the partial summary judgment motion were:
1. Is the language of limitation contained in Supplement 16 sufficient to insulate GE both from PP&L’s claims for cost of replacement power and lost profits and also from claims predicated upon alleged breach of implied warranty?
2. Is there a genuine issue of material fact on the question whether PP&L obtained contractual rights pursuant to § 2-207 of the Uniform Commercial Code (U.C.C.) by virtue of the GE quotation of July 15, 1964, the Ebasco purchase order of July 21, 1964, and the events occurring thereafter but before December 7,1967, the date Supplement 16 was executed?
3. If the foregoing question is answered affirmatively, the question then arises as to whether Ebasco had authority to impair PP&L’s § 2-207 rights by executing Supplement 16;
i.
e., is there a genuine issue of material fact as to whether PP&L is even bound by Supplement 16?
4. Is there a genuine issue of material fact on the question whether GE, through the negotiations resulting in Supplement 16, tortiously interfered with the contractual and/or fiduciary relationship between PP&L and Ebasco, and, if there is such a genuine issue of material fact, is there also a genuine issue of material fact on the question of GE’s privilege to interfere?
We concluded in
Ebasco I
that Supplement 16 clearly excluded claims for replacement power, lost profits, and breach of implied warranties. However, we found that there were genuine issues of material fact: (1) on the question whether PP&L obtained contract rights pursuant to'U.G.C. § 2-207 by virtue of the GE quotation, the PP&L purchase order, and subsequent events; (2) on the question whether Ebasco possessed the authority to impair any such rights that may have
existed
— i.
e.,
as to whether PP&L is bound by Supplement 16; and (3) on PP&L’s tortious interference claim and on GE’s defense of privilege thereto. The “bottom line” of the opinion, as it were, was that
if
Supplement 16 were valid, GE would have no liability for cost of replacement power. However, in the face of PP&L’s claim that Supplement 16 was not binding, either because it was executed without authority or because it was improperly pro
*170
cured, we determined that a trial would be necessary to adjudicate its validity.
.We have referred thus far only to issues of contract formation and construction, agency, and tcrtious interference. The issues subsumed within the total litigation are, of course, far broader. Questions of performance or breach and negligence involve technical considerations, which presaged a trial of several months on the questions whether Ebasco and the equipment suppliers had in fact furnished defective equipment, had breached implied warranties, had breached the contract by delay in completion of the work, and/or had been guilty of negligence in the design or supervision of the installation of the various components of the power plant. Additionally, the damages questions are so involved that they would also take several months to try.
As we have suggested above, the vast bulk of PP&L’s claims against all defendants is for cost of replacement power. As we noted in
Ebasco I,
in view of'the enormous complexity of the litigation, it was apparent that ultimate trial time might be significantly reduced if Supplement 16 was determined at a separate trial to be valid and/or if the analog of Supplement 16 in the other equipment supply contracts for Brunner # 3 were held to exclude liability for cost of replacement power. We therefore decided to exercise our broad litigation management powers under Fed.R.Civ.P. 16 and try first only those issues that bore on Supplement 16’s validity and on whether Ebasco, Combustion, and Foster Wheeler, under their contracts with PP&L, and GE under its contracts to supply equipment other than the steam turbine generator and boiler feed pump turbines, were contractually liable for the cost of replacement power.
3
After a number of additional pretrial conferences, we framed the issues for initial trial as follows:
(1) What is cost of replacement power?
(2) Is the cost of replacement power recoverable by PP&L as an item of damage against the various defendants on PP&L’s counterclaim, assuming arguendo that PP&L can establish liability against them?
We also formulated a crash discovery program limited to these issues. A jury having been waived, we listed the case for a bench trial to commence on June 14, 1976.
During the weeks before trial, intensive settlement negotiations developed among the parties. These negotiations resulted in the settlement of PP&L’s claims against Ebasco, Combustion, and Foster Wheeler and of Ebasco’s claims against PP&L. PP&L’s case against GE remained open and proceeded to bench trial on the above two issues from June 14, 1976 to July 20, 1976. The voluminous record developed included thousands of pages of testimony and hundreds of documentary exhibits. After the conclusion of the trial, the parties submitted extensive requests for findings of fact and conclusions of law as well as lengthy post-trial memoranda, all followed by a number of reply memoranda. This opinion adjudicates the issues thus tried and briefed.
The vast bulk of this opinion addresses the issues surrounding the steam turbine generator contract (NY — 668001) and Supplement 16 thereto. We will determine herein the validity of Supplement 16 and whether GE can be held liable for cost of replacement power on the turbine generator contract. We will also adjudicate the question whether GE can be held liable for such cost of replacement power as may be found to flow from GE’s alleged breach of the other GE-Ebasco/PP&L equipment contracts for Brunner # 3.
We shall perforce begin with findings of fact. These findings will commence with certain background material relative to the parties, the steam turbine generator, PJM
*171
(the power interconnection), and the notion about which the parties are battling — the cost of replacement power. It is important to explicate what that notion is at the outset; understarding thereof is important to the legal issue of whether it is a direct or consequential damage. We shall then make findings about the dealings between GE and Ebasco relative to the steam turbine generator contract. Next, we shall address the question of trade custom and understanding circa 1964-67 relative to the imposition on power generation equipment suppliers of consequential damages, but particularly cost of replacement power. In the course of our findings we shall also consider the history of the GE-Ebasco course of dealing on various power plant contracts. These matters will illuminate the contractual undertakings of the parties. We shall then discuss the agency relationship between PP&L and Ebasco (for that subject bears upon Ebasco’s authority to negotiate and accept Supplement 16) and then PP&L’s reaction to Supplement 16 (which is relevant to the question of ratification). Lastly, we shall make findings on the question whether GE tortiously interfered with PP&L’s contractual relations with Ebasco.
The chronicle that will emerge is in most respects mundane, as one might expect in a piece of commercial litigation. A fascinating aspect of this history, however, is the portrait that emerges of the contract formation process prevalent in the power generation industry in those halcyon days before litigation became the national sport. For, strange as it may seem, the custom in the trade was for electric utilities or their architect-engineer agents to agree to purchase tens of millions of dollars worth of equipment from GE, Westinghouse, or other power generation industry equipment suppliers, on only a handshake or sketchy preliminary document like a letter of intent, and on the faith of years of dealing together. The parties understood that in due course, a year or two or three or more— long after the machinery was in production or was completed, delivered, or even in operation — final documents would formally be executed. We note at the outset the existence of this languid modus operandi because it has important consequences for this litigation (it is responsible for the kinds of issues with which we must deal) and because it will facilitate understanding of the facts.
In the legal discussion which follows the findings of fact we will first take up the question of Ebasco’s authority to issue Supplement 16. As will be seen, we find initially that Ebasco possessed implied, inherent, and apparent authority to issue Supplement 16. These conclusions, like most of the ultimate conclusions of this opinion, are a function of our findings of fact, principally those relating to: (1) the extremely broad powers vested in Ebasco by PP&L under their turnkey arrangement; (2) the extent to which PP&L held Ebasco out as having full authority to deal with all matters involving permanent project equipment even in the face of the dispute resolved by Supplement 16; and (3) trade custom and understanding. Moreover, because we find that Supplement 16 represented a negotiating trade off or
quid pro quo,
we also find that Ebasco possessed actual authority to issue it.
Our discussion will then proceed to a consideration of plaintiff’s claim that GE tortiously interfered with the PP&L-Ebasco contractual relationship. That claim was based upon PP&L’s contention that certain actions taken by GE (principally Cox’s withholding of certain exhaust hood bolts from shipment to Brunner # 3) were designed to coerce Ebasco into accepting the provisions which became Supplement 16 not only in connection with Brunner # 3, but also in connection with all future turbine generator purchases made by Ebasco from GE on behalf of its many utility clients. Thus, in PP&L’s submission, GE induced Ebasco to breach its fiduciary duty to PP&L, to PP&L’s disadvantage. Again, our factual findings control. Crediting Mr. Cox’s version of the exhaust hood bolts episode, (we find instead that he held up the bolts as leverage against Ebasco’s refusal to pay for the boiler feed pump turbines), and finding
*172
no other tortious conduct by GE, we reject PP&L’s tortious interference claim.
The bulk of our discussion, however, will relate to the contract issues. In that discussion we conclude, inter alia, that: (1) there was no U.C.C. § 2-207 contract, on Ebasco terms or otherwise; and (2) the Ebasco standard terms themselves, when construed in the light of the Ebasco-GE course of dealing and the usage of the trade, limit PP&L’s recovery for the most part to the cost of replacement and repair and do not permit recovery for cost of replacement power under any theory,
i. e.
contract, negligence, or strict liability.
4
The “bottom line” of the foregoing is our finding that Supplement 16 is valid, insulating GE from PP&L’s claims for cost of replacement power under the steam turbine generator contract, and further that GE is also insulated from liability for cost of replacement power on the other contracts that it had with Ebasco, even though those other contracts were made according to Ebasco’s standard terms and were not covered by Supplement 16. We add that on the contract issues, just as on the authority and tortious interference issues, the result flows primarily from the facts developed at trial. This should not be surprising since
Ebasco I
suggested that the intent of the contracting parties needed illumination from such sources as course of dealing, trade custom and understanding, and the events involving Brunner # 3. Indeed, although
Ebasco I
focused in large measure on the tension between the July 15, 1964 GE quotation and the July 21, 1964 Ebasco letter of intent and purchase order, the record on which the case is now to be decided is infinitely more ample; we did not appreciate when we filed
Ebasco I
the extent to which the interstices would be augmented by a full trial record.
This opinion constitutes our findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a).
II.
Findings of Fact
A.
Background: The Parties; the Steam Turbine Generator; PJM; and “Cost of Replacement Power”
1.
The Parties to the Case
PP&L, headquartered in Allentown, Pennsylvania, is an investor-owned Pennsylvania public utility that provides electric power to large areas of northeastern and central Pennsylvania. This case concerns the third unit at PP&L’s Brunner Island power plant, south of Harrisburg, Pennsylvania. Brunner # 3 was erected between 1965 and 1968 to augment PP&L’s generating capacity. Ebasco, headquartered in New York, is a corporation engaged in designing and constructing power plants and acts in various capacities on behalf of its scores of utility clients throughout the world. Foster Wheeler and Combustion manufacture and sell components of power plants and supplied major equipment for Brunner # 3. GE is a New York corporation that, since 1900, has been engaged in the business of building and supplying to the electric power industry turbine generators and other equipment employed in the generation of electricity. GE is a large diversified corporation and is highly decentralized, with many independent and autonomous divisions.
2.
The Steam Turbine Generator
Although this lawsuit has involved a considerable number of the myriad components of a power plant, the piece of equipment that mainly concerns us is the steam turbine generator. A steam turbine generator is at the heart of any power plant. The turbine obtains steam, under pressures up
*173
to super-critical pressure of 3500 lbs per square inch, from either a coal- or oil-fired boiler or a nuclear steam supply system. The steam causes the turbine rotor and its blades (or “buckets”) to rotate at very high speeds, often 3600 revolutions per minute. The energy thus created is transferred to the generator, which converts this energy to electricity. This electricity is passed, first through a transformer and then through transmission lines, to the electrical user.
5
3.
PJM and Cost of Replacement Power
The electric utilities throughout the eastern two-thirds of the United States and Canada are, with the exception of those in Texas, interconnected. Each utility is joined to its neighboring utility by electric transmission lines and generates electricity that flows over the transmission lines from one utility to the next throughout the country. Through these interconnections utilities can purchase or sell electricity as the situation warrants. By a series of transfers, electricity generated in the Midwest may supply the needs of consumers in Pennsylvania. The oldest and one of the most fully integrated interconnections in the United States is PJM (the Pennsylvania-New Jersey-Maryland Interconnection). Originally started in 1927 by three utilities, PJM is currently comprised of eleven utilities and operates as an integrated power pool. It serves an area that extends from northern New Jersey to Washington, D.C. and from the Atlantic Ocean to Lake Erie. There are six member utilities (including PP&L) and five associated utilities. The six member companies are signatories of the PJM agreement, which is the charter of PJM.
Interconnections such as PJM permit utilities to operate with enhanced reliability and greater economy. Each of the eleven inter-connected utilities in PJM generates a certain amount of electricity in order to supply the total customer demand in the PJM area at the least total cost. The electricity generated passes through free-flowing ties from utility to utility within PJM. Meters record this exchange of electricity between member utilities.
Every day of the year, PJM calculates the anticipated customer demand. It then directs the member companies to operate a sufficient number of generating units to meet that projected demand and also to provide an adequate available reserve. The reserve protects against the loss of a generating unit or inaccuracies in the prediction of customer demand. The most economical units on the interconnection are scheduled for operation, regardless of which utility owns the units.
6
During the day, PJM continuously monitors the customer demand and directs the eleven utilities to use their least expensive generating units to produce the energy to meet that demand. Customer demand follows a fairly regular daily pattern, which varies seasonally, and is predictably at its highest level at certain hours of the day. By means of the interconnection, the percent of generating capacity that any one utility must place in reserve is reduced. The diversity of the hour, day, week, and month of each interconnected utility’s peak demand leads to substantial savings throughout the interconnection.
Because the cost of electric power varies with the cost of the fuel burned and the efficiency of a generating unit, it is different for each generating unit. Units with
*174
the lowest costs are called “base-load” units, and are operated continuously in order to meet the basic customer demand most economically. As demand increases, the “peak-load” units with higher incremental costs must be brought into operation.
Since it began operation, Brunner # 3 has always been a base-load unit. Brunner # 3 therefore operates at or near the highest capacity of which it is capable whenever it is available for operation. When a base-load unit, or any unit, is unavailable to meet the customers’ demand, the utility is required to replace that lost power generation. It accomplishes this replacement either by operating its own more expensive equipment or by purchasing power from a neighboring utility, whichever is less expensive.
The foregoing discussion illuminates the notion, central to this case, of “cost of replacement power.” The cost of this replacement power is always higher than the power that is replaced. Because, during 1968-1970, Brunner # 3, a base-load unit, would always have been scheduled and operated at or near its rated capacity if available, but was unavailable to supply PP&L load demand for some portion of that period, PP&L had to purchase replacement power from PJM.
7
The nature of “cost of replacement power” has a number of implications for this case. We note initially that because the PJM Interconnection is a fully integrated power pool to which PP&L and many other utilities belong, PP&L’s sales or purchases of energy are dependent on and relative to the power supply and requirements of all the members of the PJM. In particular, Wilmer S. Kleinbach, the able manager of PJM, noted as follows during the course of his testimony:
There are too many variables to predict, with any reasonable degree of accuracy, the dollar cost of replacement power for a unit that is presently being planned to go into operation at a future date.
The principal factors affecting the cost of replacement power are within the exclusive control of the utility and include the installed cost of various units, operating costs, load forecasts, the size and type of units installed, the forced outage predictions and in-service date.
The cost of replacement power thus can only be determined retroactively, based on
*175
many factors that cannot be known in advance. For example, the cost of replacement power varies widely depending on the number of base-load units that are available and operating at any given time — and this very important variable cannot be known in advance.
An example of this complexity is shown' by the testimony of PP&L’s Vice President —Financial, Robert Fortune, who could not state at his deposition whether or not PP&L at that time had “excess capacity” (/. e., excess over what PP&L needs to serve its own customers). Mr. Fortune did not feel qualified to answer the question because “it involves a lot of considerations, both in the short-term/long-term liability in serving customers, economics of it. It is a very sophisticated judgment.”
Mr. Fortune stated that PP&L did have a temporary excess reserve situation, which came about as a result of circumstances that were not planned for. He said that the reasons for this were rather involved and that it was difficult to pinpoint any one reason. It was partially due to the differential in fuel costs (PP&L had advantages because it was primarily a coal burning utility) and partially due to a reduction of growth resulting from conservation efforts as well as the recession. Mr. Fortune agreed that all of these factors are unforeseeable in terms of planning.
Moreover, the tremendous growth in demand for electric power (caused in part by PP&L’s own marketing efforts) between 1964 (when the unit was ordered) and 1968-1970 (the period for which PP&L seeks damages) was, according to Mr. Kleinbach, so much greater than expected that it was “definitely not foreseeable.” Indeed, the entire PJM Interconnection had insufficient base-load units in 1969-70 to meet the demand for power. This shortage increased the cost of power because relatively higher cost equipment had to be operated. In addition, the PJM experienced “slippage”
(i. e.,
delay) in installed capacity and transmission capability. The PJM itself had forecast in the early 1960’s a growth rate of 7 to 8 percent annually for the remainder of the 1960’s, but the actual growth rate in 1968 was 13 percent. This greatly affected the cost of replacement power for PJM members.
In sum, the problematical nature of cost of replacement power contributes to our ultimate finding,
see
Part III.E.3.
infra,
that it is not a recoverable item of damage.
B.
The GE-Ebasco Dealings for the Brunner # 3 Steam Turbine Generator (The Facts Bearing on the UCC § 2-207 Issue)
The steam turbine generator transaction began when, on July 14, 1964, Charles Bonin, a Vice-President of Ebasco, telephoned George B. Cox, then Marketing Manager of the GE Large Steam Turbine Generator Operations.
8
Bonin inquired whether GE was still offering turbine generators at a 22% discount off the list price. Bonin said that he was concerned because Westinghouse had just raised its turbine prices. Cox stated that GE was still offering the 22% discount, but refused to advise Bonin whether or when GE might raise prices. Cox also declined to accept an order, which Bonin tendered, because Bonin would not reveal the name of Ebasco’s utility client. However, on July 15, 1964, Bonin again called Cox, disclosed the identity of Ebasco’s client to be PP&L, and orally placed an order with Cox for one turbine generator, with an option for a second unit. Cox gave Bonin a price for these two units conditioned on the prevailing 22% discount off the GE Handbook price and stated that the price was based on standard GE Handbook terms and conditions, which,
inter alia,
specifically excluded consequential damages and limited GE’s liability to repair or replacement of defective components.
*176
Cox testified that he felt strongly about conditioning the price on the basis of GE standard terms because GE was offering the unit at a price $600,000 lower than the Westinghouse quotation for a comparably sized unit. Bonin was obviously anxious to get the savings of $600,000 over Westinghouse’s quote, and did not object to Mr. Cox’s condition of GE terms.
9
This vast disparity between the Westinghouse and GE prices makes Cox’s testimony that Bonin acceded to GE Handbook terms ring true. It is important to keep in mind that, although this case revolves around the parties’ dispute as to what if any limitation of liability provisions inhere in the contract, we find that what was most important from Ebasco’s perspective in July 1964 was price. It does not ring true to us that Mr. Bonin was about to fight the Battle of Bunker Hill, as it were, over which commercial terms and conditions (Ebasco’s or GE’s) would prevail when his prime concern — particularly in view of the turnkey arrangement — -was price, for the price differential under a turnkey contract could not be passed on to PP&L. The best price (by some $600,000) was GE’s. Furthermore, as will be seen, Ebasco did not then believe that suppliers such as GE could be held liable for consequential damages in any event,
even
under Ebasco’s terms. It seems eminently reasonable to us that Mr. Bonin, fearful of an imminent GE price increase, would not object to Cox’s reference to GE Handbook terms.
We thus find that the conversation between Cox and Bonin constituted a classical offer and acceptance and, therefore, that there was an agreement as of July 15, 1964 on the critical terms of the turbine generator
contract
— i. e. price and commercial terms and conditions — which, since GE conditioned its price on GE Handbook terms, included a specific exclusion of consequential damages. In the wake of subsequent developments, and for reasons that will appear
infra,
GE did not rely upon the CoxBonin agreement as the basis for its position. While extremely important, our finding as to what transpired during their conversation is but one of many bases of our ultimate conclusion. However, the finding would be an important one even if for no other reason than that it constitutes a rejection of the position advanced by PP&L that, during the conversation, Cox and Bonin agreed to a contract on Ebasco standard terms.
At the conclusion of the Cox-Bonin conversation, Bonin requested Cox to have a written confirmation delivered the same day, but in the form of a quotation rather than a confirmation. Accordingly, on July 15, 1964, T. J. Barron, of GE’s New York Sales Office, delivered the written confirming quotation letter, as requested, to Bonin, “confirming George Cox’s telephone conversation of July 15, 1964,” stating the price for the turbine generator as quoted by Cox to Bonin, and noting that “[t]he above prices are based on our standard conditions of sale, price policy and price data, as shown in GE Handbook Section 4710 dated May 25, 1964.” Styled a quotation, this letter was, in actuality, written confirmation of the Cox-Bonin agreement, which included GE standard terms.
Barron’s letter described the first unit as a turbine generator set rated at 700,000 kw,
*177
with standard accessories listed in certain pages of the GE Handbook. The net price for the first unit, noted to be 22% below GE’s published price as of July 15,1964, was set as $9,609,854. That price was not only stated to be firm for shipment within three years from the date of the order, but GE additionally agreed that if within six months it quoted to any purchaser a lower price for a steam turbine generator unit rated at 44,000 kw or larger for use within the United States, Ebasco’s price would be reduced to that lower level. The quotation further afforded the purchaser the option to cancel the order without charge within 90 days. Finally, the quotation offered, subject to the same Handbook conditions, the same price terms for an order for boiler feed pump turbines.
The GE Handbook sections referred to by Cox orally (in general terms) and in Barron’s quotation letter (specifically) contained a clause entitled “Limitation of Liability,” which stated,
inter alia,
“In no event shall the company be liable for special or consequential damages,” and also contained a “Warranty” clause which limited GE’s liability “arising out of the supplying of the said equipment, or its use, whether on warranty, contract, or negligence . [to] the cost of correcting defects . . .”
On July 21, 1964, Ebasco’s purchasing agent, A. J. Salerno, wrote to GE, largely confirming Bonin’s verbal commitment of July 15, 1964 to Cox. Salerno’s letter included a technical description of the unit in greater detail than had Bonin’s oral order, and recited also that superintendence of erection was included. Salerno’s letter stated the total price and its derivation, rescribed the firm nature of the price, the price protection policy, and the option to cancel, set forth terms of payment, and noted that the time of delivery would be mutually agreed upon. Salerno concluded, however, by adding that “a formal contract will be issued at a later date containing the terms and conditions of, and in the format of, the usual type of contract issued by Ebasco.” The letter was signed “PP&L by Ebasco by A. J. Salerno, Purchasing Agent.”
10
There was nothing surprising about Salerno’s reference to the later execution of a formal contract, for this was customary in the trade. Neither was it surprising that Salerno’s letter referenced Ebasco’s standard terms and conditions, for Salerno was a tough bargainer,
see
text accompanying note 18
infra,
and the regular practice in the industry was for the contracting parties, over the ensuing years, to hammer out the details of the final contract. We find that the parties expected that to happen here.
GE did not take prompt exception to Salerno’s reference to Ebasco’s standard terms. Indeed, it was not until May 4, 1967, almost three years later, that GE gave formal written notice to Ebasco that GE objected to the use of the Ebasco terms and conditions on Brunner # 3. Notwithstanding this delay, we reject PP&L’s contention, the veritable cornerstone of its position in the case, that Ebasco and GE believed that they had a contract on Ebasco’s terms and conditions after the Salerno July 21,1964 letter — or at any time thereafter up to and including the critical November 1967 negotiations from which Supplement 16 emerged. We also reject the concomitant cornerstone of PP&L’s position, that there was an
integrated
contract on Ebasco’s standard terms.
We will describe,
see
Part II.D.
infra,
the GE in-house response to Salerno’s letter and the extent of oral communication from GE to Ebasco on the point.
11
However, we believe it preferable to first recount signifi
*178
cant contacts between GE and Ebasco relative to Brunner # 3.
On September 16, 1964, Salerno wrote to R. B. Davis of GE’s Electric Utility Sales Division confirming an order for boiler feed pump turbines for the steam turbine generator units previously ordered. Salerno’s letter referenced standard Ebasco terms. On October 14, 1964, Salerno wrote to GE, reserving the option until December 1, 1964 to cancel the entire order at no cost to PP&L, again referencing Ebasco terms. By letter dated March 5,1965, Salerno wrote to Davis fully releasing the turbine generator for design and production pursuant to certain general and basic specifications which Salerno proceeded to detail. Salerno further wrote that “shipment shall be scheduled for June 1967” and requested that GE submit a complete schedule covering all of the drawings to be submitted for review.
12
On April 20, 1965, in response thereto, Barron of GE wrote to Ebasco advising that the rating of the unit, as firmed up, was different from the GE quotation of July 15, 1964, and stating the technical revisions and revised price ($9,614,184.00). The letter added, however, that the stated prices were based on GE’s standard conditions of sale, price policy, and price data as shown in the GE Handbook § 4715, dated May 25, 1964. The letter was sent on GE’s “quotation stationery,” which on the back stated,
inter alia :
“In no event shall the company be liable for special or consequential damages.” Ebasco did not respond to the letter. On June 14, 1965, on similarly referenced quotation stationery, Barron wrote to Ebasco giving, based on a revised heat rating, further revisions to prices.
As the foregoing suggests, there had been intensive consultations between GE and Ebasco Engineers between July 1964 and June 1965 concerning technical and contract details. After receipt of Salerno’s March 5, 1965 letter, GE commenced the process of fabricating the turbine generator. The manufacturing process was not without incident, because of a lengthy strike at the GE Schenectady works, where the large steam turbine' generator operations are housed. In January 1967, GE advised PP&L that, because of the strike, the shipment of the Brunner # 3 turbine generator would be delayed from June 1967 to October 1967. The technical discussions continued. The contract discussions also continued off and on, hut it was not until March 1966 that Ebasco sent GE a proposed final contract.
13
As we have noted, in May 1967 GE memorialized its objections to Ebasco’s proposed purchase contract. It did so by a twelve page letter from Paul Pendzick of the Electric Utility Sales Division to W. P. Johnston of Ebasco. Pendzick’s letter principally raised issues about the superintendence of erection, patents, seller’s warranty, delivery, and limitation of liability clauses.
Ebasco, as a major engineer/constructor in the electric power industry, frequently dealt with GE in connection with the purchase of power plant equipment. Thus, in view of the ongoing contact between the two companies, there had been intermittent general discussions between GE and Ebasco about commercial terms even aside from Brunner # 3. Indeed, these discussions had been going on for many years.
See
Part II.C.
infra.
For instance, there had been a meeting in 1960 on the subject. The matter was again discussed by GE personnel in December 1965 with Mr. Colquhoun, Ebasco’s chairman, and later with Salerno and Chase of Ebasco. On February 10, 1966, Arthur Strang, counsel to GE’s Large Steam Turbine Division, met with Charles Read of Reid & Priest, Ebasco’s outside counsel. In these meetings, GE attempted to obtain tighter language of insulation against consequential damages in the event of power plant component failure.
During the summer of 1967, as the steam turbine generator approached completion,
*179
the negotiations over the final contract began to heat up. On August 15, 1967, Davis reported back to Schenectady that Ebasco had refused GE’s May 4, 1967 exceptions to Ebasco’s purchase order. In late August, GE began arranging for a contract meeting with Ebasco on Brunner # 3, but wanted to wait until Strang returned from Italy. Although PP&L disputes this, we find that Salerno was willing to delay the contract meeting, believing that delay gave Ebasco greater bargaining leverage. Salerno felt that his hand was strengthened because the steam turbine generator was nearing completion and was being readied for shipment; with no final contract having been signed, GE faced the possibility of having a steam turbine generator on its hands, which represented a potentially catastrophic business loss.
Also, by this time the boiler feed pump turbines had been delivered but had not been paid for because Ebasco had a policy of not paying suppliers on equipment in the absence of a signed contract. There is a serious dispute between the parties as to whether payment was due in October 1967 for the boiler feed pump turbines. We accept Ebasco’s position that it did not believe payment was due. Likewise, we accept GE’s submission that it believed that payment was due. On the basis of the record, we believe both that the dispute was an honest one and that GE’s position was reasonable. However, when Ebasco persisted in its position and did not pay for the boiler feed pump turbines, Cox held up from shipment certain bolts for the turbine exhaust hoods until Salerno agreed to pay for them (and, as will be seen, also agreed to abandon his threat not to pay for the main unit when it was shipped). The question of Cox’s true motivation for holding up shipment of the bolts is central to PP&L’s tortious interference claim.
See
Part II.G.
infra.
Amidst this “tug of war” atmosphere, a meeting was held in Ebasco’s New York City offices on October 26, 1967. Cox, assisted by Strang, Davis, Pendzick, and Benjamin Monk, represented GE; Salerno, assisted by Stolz, represented Ebasco. The principal topics discussed were: (1) whether GE’s responsibility would be superintendence of erection” vs. “technical direction of installation”; (2) the warranty and delay articles; and (3) the limitation of liability clause. It was out of this meeting that a consensus leading to Supplement 16 ultimately emerged via follow-up discussions. The dialogue and consensus of the meeting on the three major points went somewhat as follows.
Technical Direction of Installation vs. Superintendence of Erection
Ebasco sought to maintain the section of its proposed contract entitled “Superintendence of Erection,” but agreed to substitute the GE proposals called “Technical Direction of Installation.” Ebasco was satisfied that the latter was merely a clarification of GE’s duties at the site, and would not result in any change in actual responsibility. GE had offered to include Ebasco’s “Superintendence of Erection” clauses in the final contract for a price of $.50 per $100.00 of the contract amount, but PP&L was unwilling to pay the price adder.
The Warranty Clause
On the warranty clause, GE made certain concessions, and Ebasco secured corresponding benefits for PP&L as regards both an extended warranty period and a broadened warranty scope. In the “warranty” paragraph, GE insisted on the scope of the GE Handbook warranty but agreed to extend the term of that warranty, which ran one year from completion of installation. This represented an extension of the warranty over both the GE Handbook and the Ebasco form, and was thus of benefit to PP&L. Moreover, under the warranty paragraph which was agreed upon in Supplement 16, there was a further advantage gained by PP&L and Ebasco because the limitation of liability under the warranty clause applied only to claims
urder the warranty.
This represented a somewhat narrower limitation of liability than the GE Handbook, under which the limitation to the cost of
*180
correcting defects pertained to GE liability
“arising out of
the supplying of the said equipment
or its use.”
Limitation of Liability
Two facets of the limitation of liability problem were discussed at the October 26 meeting. Part of the discussion concerned the dollar amount of potential GE liability. GE insisted on a limitation to the price of the “part” of the unit which gave rise to any cause of action. Ebasco, on the other hand, sought a higher limit, such as the price of the turbine generator itself. GE ultimately agreed to increase its limit of liability for defects from the value of the defective part to the contract price of the entire unit (approximately $10,000,000), and to extend the termination date of any liability under the contract from 4 to 6 years.
14
The other facet of limitation of liability discussed at the meeting related to GE’s potential liability for consequential damages, such as cost of replacement power. Throughout the meeting, GE insisted on contract language that specifically and unequivocally excluded liability for such matters. Ebasco ultimately agreed to terms that specifically defined the types of damages for which GE would not be liable (believing this preferable for PP&L to a general exclusion of “consequential damages”). Neither during the meeting of October 1967 nor in subsequent telephone conversations or correspondence did Ebasco suggest that the contractual undertakings of the parties imposed consequential damages (or the cost of replacement power) as a potential liability on GE. In Supplement 16, the parties agreed that:
In no event, whether as a result of breach of contract, alleged negligence, or otherwise, shall the Seller be liable for damages for loss of profits or revenue resulting therefrom, or for damages for loss of use of power system, cost of capital, cost of purchased or replacement power, or claims of customers of Purchaser for service interruptions resulting therefrom, or similar items of damages resulting therefrom.
As part of the discussions, GE offered, for a dollar adder of 3% of the contract price, to omit from the contract any language containing a limitation of liability; this proposal was in due course rejected. The purpose of the 3% adder was, in Mr. Cox’s view, to insure against the cost of a lawsuit and not to include liability for cost of replacement power. The etiology of this position and of Ebasco’s consent to the clear exclusion of various forms of consequential
*181
damages requires that we recount some historical background.
Ebasco had for many years been of the view that suppliers were not liable for consequential damages, including cost of replacement power.
See
Part II.C.
infra.
Nevertheless, Ebasco had resisted changing its own standard terms and conditions to make that view explicit.
15
GE, needless to say, agreed with Ebasco’s understanding. However, GE continued to seek language more explicit than Ebasco’s. This had become a matter of more concern as the 1960’s developed because of the sporadic surfacing of claims for cost of replacement power. The concern was exacerbated by the potential magnitude of such claims as presaged by the famous November 1965 Northeastern U.S. power blackout. Indeed, on January 21, 1966, GE had issued a marketing information letter on the subject, announcing that thereafter all relevant handbook sections (including § 4710, involved here) would contain a statement that “every quotation and contract will include a provision expressly negating any liability for special or consequential damages.”
16
The letter explained to GE’s customers the basis of its position:
For example, if a utility suffered a forced outage due to failure of equipment, it may well incur extra expense in purchasing replacement power or in operating older, less efficient equipment of its own.
The Northeast blackout has underscored the potential liability which a supplier might have if such an occurrence could be traced to failure of equipment.
One of the problems in assessing the risk is that the potential liability has little relationship to the nature of the failure. It is much more heavily influenced by the system characteristics. For example, a failure at time of peak load would be more costly than the same occurrence off peak.
Most utilities agree that manufacturers should not be expected to take this risk since they do not have any direct control of the magnitude of expense. Since manufacturers cannot predict or control the costs of consequential damages, the inevitable result of taking such risk would be higher prices for turbine-generators.
Utilities can reduce and control their own expense by, arranging interconnections with other utilities, self insurance, adequate preventive maintenance or by purchasing “extra expense” insurance which not only protects against losses due to equipment failure but against failures due to operator error or even natural causes such as lightning.
*182
* * * * H« *
Adding to the seriousness of this situation are the recent instances of insurance companies suing for consequential damages on machine'’ which had been in service seven, four, and two years. In these three cases the utility, after a failure, has collected from the insurance company who, in turn, had sued us either directly or in the customer’s name. This is a particularly difficult situation because we must involve the utility in the suit. We have always felt that our relationships with our customers were such that we could settle our differences amicably— but, when an insurance company is involved, it is not concerned with the long-term relationships between the customer and ourselves.
For all these reasons we must have protection against claims of this nature. This must be in the contract to protect us against claims by the customer’s insurance company or customer himself if he has no insurance.
The marketing information letter stated that GE would charge a 3% adder to the total price to any customer who would not give GE protection against special or consequential damages. The letter continued:
The three percent adder is to cover the possibility of our additional risk during the normal warranty period, but in no way does this imply that we will be liable for consequential damages.
PP&L has argued that GE’s and Cox’s position on these points is preposterous. With all respect, we disagree. We find nothing surprising about GE’s efforts to obtain airtight limitation provisions notwithstanding general trade understanding, detailed in Part II.C.
infra,
that under Ebasco’s or other engineer/constructor’s standard provisions the supplier was not liable for cost of replacement power. Lawyers know that making explicit terms that would otherwise only be implicit is what lawyers always try to do, and would especially want to do given the escalating cost of litigation of the type in which cost of replacement power might be claimed. (Nor, of course, is it surprising that Ebasco resisted changing its terms; it was comfortable with them.) We do not perceive that Cox viewed potential liability for cost of replacement power as a substantial risk at the time, hence we do not find disingenuous Cox’s statement that 3% adder represented the cost of defending a lawsuit. Indeed, we suspect that GE’s legal fees to date in this case represent a substantial portion of that sum.
The role of the limitation clause in the events leading to Supplement 16 is critical to our disposition of this case, for the gravamen of PP&L’s tortious interference claim is its contention that the reason Cox held up shipment of the exhaust hood bolts was to pressure Ebasco into yielding to GE’s demands for a clause clearly exonerating GE from claims for cost of replacement power, not only for purposes of the Brunner # 3 contract but also as a prototype for all contracts for equipment purchases to be made from GE by Ebasco on behalf of its many utility clients. PP&L’s documentation of this conspiratorial theory was painstaking and its presentation of the theory was impressive.
17
We found it, however, to
*183
be unconvincing. For as we see it, the role of the limitation of liability clause paled in comparison with the bread-and-butter economic issues confronting Mr. Cox. We credit the testimony of both the GE witnesses and Ebasco’s Stolz that Salerno was an extremely tough negotiator, and that he was desirous of delaying final contractual negotiations in the belief that brinkmanship gave Ebasco more leverage. We also credit the testimony that Salerno was holding back payment on the boiler feed pump turbines and threatened not to pay for the steam turbine generator until a contract— which seemed elusive at the time — was signed.
18
This meant that GE would have to wait for, or litigate over, huge sums, the delay in payment of which would doubtless affect the turbine operations dollar performance figures about which Cox, as Marketing Manager, was concerned (and for which he may have been responsible). We believe that the leverage exerted by Cox in holding up shipment of the exhaust hood bolts was directed toward the basic matter of current payments, not the more speculative matter of doubtful — though potential —liability.
As we have noted, Supplement 16 emerged from the aftermath of the October 26 meeting (there were subsequent calls and letters, firming it up). Ebasco issued Supplement 16 to GE on November 30,1967 and the entire contract, with Supplements 1-16, was signed by GE on December 7, 1967.
19
In due course the steam turbine generator was' shipped, installed, and synchronized with the rest of the plant.
20
Before turning to the next segment of our findings of fact, which deals with the Ebasco-GE course of dealing and with trade custom and understanding circa 1964-67 relative to the imposition of consequential damages upon power generation industry equipment suppliers, which segment fills some interstices in our previous findings, we feel constrained to rescribe, in the light of our description of the prelude to and substance of the October 26 meeting, our finding that Ebasco did not believe as it entered the meeting that a contract existed on Ebasco standard terms or that there was an integrated contract. In view of our finding about the Cox-Bonin conversation, it was GE that had the right to believe that there was a contract on GE’s terms. PP&L has argued that nothing better demonstrates the absence of such a contract than GE’s failure to rely upon it in this litigation. That argument is not without force, though we have rejected it.
21
The point, however, is that whatever the threshold understanding may have been in the industry at that tim6, the parties expected a lot of give and take — on both contractual and technical terms — before reaching a final agreement.
The parties’ conduct tracked these expectations; rather than assert reliance on existing contract rights or on legally constructed contract rights á la U.C.C. § 2-207, which neither party ever thought of, much less believed existed, the parties went to the
*184
negotiating table and “hammered out” a deal. In this regard, we also note our finding that PP&L’s estimate of the situation was similar to that of Ebasco; PP&L neither believed nor had reason to believe that there was an integrated contract on Ebasco’s terms. Concomitantly, PP&L (acting principally through Mr. Baum) also knew that the final contract was yet to come. Indeed, Mr. Busby, PP&L’s President, testified that there customarily was a long lag in working out contractual details.
C.
Trade Custom and Understanding Circa 1964
— 67
Relative to the Imposition Upon Power Generation Equipment Suppliers of Cost of Replacement Pow- ■ er as a Recoverable Item of Damages (And the GE-Ebasco Course of Dealing)
We find that in. the power generation industry, there was, as of the period 1964-67, a long-standing custom and usage, recognized and accepted by all concerned parties, that manufacturers or suppliers of equipment warranted that their equipment would be free of defects in design, manufacture and operation; that the equipment would meet designated specifications; and that the limit of the supplier’s liability would be to repair or replace defects at its expense. Put differently, under the traditional custom and usage, manufacturers or suppliers were understood not to be liable for any form of consequential damages— more specifically, for loss of profits or cost of replacement power — as applied to all legal theories of recovery.
22
The standard Ebasco terms and conditions about which we have spoken mesh with this industry expectation. Ebasco’s terms provided that the seller’s liability shall “in no case” exceed the cost of repair or replacement. Roger F. Sherman, the President of Ebasco, testified that it was Ebasco’s understanding under its standard terms and conditions that suppliers were not to be liable for cost of replacement power. In response to our questioning, Mr. Sherman also testified that, in general terms, the custom in the trade was that suppliers were not liable for replacement power and that the documents that were current in the trade gave them that protection. We credit that testimony.
Harold E. Kennedy, general counsel of Foster Wheeler, dealt frequently with Ebasco on power plant purchases. During the pendency of Foster Wheeler’s dealings with Ebasco on Brunner # 3, Kennedy, á la GE, spoke with Salerno and observed that since Ebasco’s general terms and conditions did not in so many words exclude liability for consequential damages he would feel more comfortable if the language was more specific. According to Kennedy:
Mr. Salerno stated that the general terms and conditions that Ebasco used while they were perhaps ambiguous nevertheless had acquired a very definite meaning among all suppliers and customers of Ebasco. And he suggested to me that perhaps in pursuing the idea of writing some kind of new agreement, I would be putting Foster Wheeler in a poorer position than we were using terms and conditions that everyone in the industry knew exactly what they meant. . . . Mr. Salerno says that provisions of their general terms and conditions were not intended to impose liability for consequen
*185
tial damages of any nature or suppliers to Ebasco or its customers.
23
Kennedy also reported, in a November 13, 1963 inter-office memo, circulated after talking to Stoiz regarding Article 17 (“Delay”) of Ebasco’s standard terms, that Article 17’s intent was not to include liability for consequential damages either. Additionally, in 1964 William Stevens, Foster Wheeler’s Executive Vice-President, discussed Ebasco terms with Frank Ritchings, Ebasco’s Chief Consulting Engineer, in connection with a boiler that Foster Wheeler sold to Texas Power & Light. Mr. Ritchings assured Mr. Stevens that Ebasco terms did not include liability for consequential damages, and that Foster Wheeler’s responsibility was limited to repair and replacement. Mr. Stoiz also conceded that from 1960 to 1968 Ebasco had never attempted to hold suppliers liable to it or its utility client for consequential damages.
The dialogue between GE and Ebasco over standard contract terms did not begin with Brunner # 3. Ebasco had numerous utility clients and had been dealing with GE on equipment purchases for many years. Ebasco had made clear to GE at various times during their ongoing relationship that Ebasco and its utility clients did not interpret Ebasco’s language to impose liability for consequential damages, such as the cost of replacement power, on GE.
There was much testimony at trial about developments on this front in 1960. By letter dated April 5,1960, GE’s Davis wrote
*186
to R. B. Chase, Ebasco’s general purchasing agent and Salerno’s predecessor, commenting on the “Delay” clause section of Ebasco’s Appendix A. This clause stated in part:
Seller shall be held responsible for any damages of a general nature which the purchaser may incur due to any delay in delivery or in the completion of the work hereunder as a result of causes within the seller’s reasonable control.
Davis wrote that GE had an understanding that the damages of a “general” nature did not include damages for loss of profits or revenue resulting from failure to make delivery as specified or damages resulting from the loss of its power system or the cost of purchase of replacement power or apparatus. By letter dated May 25, 1960, Chase replied to Davis and stated that Ebasco was “not in accord with the contents of your above mentioned letter, and we cannot agree to accept the provisions as you spell them out. Therefore, it would be our suggestion that you call the writer at your earliest convenience so that we can make arrangements to more fully discuss the entire situation with the idea of coming to a better understanding as to both of our requirements in respect to the matter.”
Sometime between the receipt of this letter and June 10,1960, Davis had a conversation with Chase, who advised Davis that “the present wording of Appendix A adequately covered GE with regard to consequential damages.” Chase asked Davis if a change in the “delay” clause of Appendix A would straighten out the problem, and proposed changing the word “general” in the first sentence to “direct.” Davis suggested to Woods McCahill, Esquire, GE’s counsel for Electric Utility Sales, that a meeting between McCahill and Ebasco lawyers was called for. McCahill agreed.
The meeting envisioned by these communications took place on December 13, 1960 and was reported in a memorandum from McCahill to J. W. Dodge of GE, dated December 19,1960. Davis and McCahill represented GE at the meeting, while Chase and Edward Wells of the law firm of Reid & Priest represented Ebasco. Chase was unwilling to make changes in the forms, because
a change of this nature with their twenty to twenty-five clients would be quite cumbersome, and each of the clients had very definite ideas of what should be in the terms of purchase.
However, Chase did state that all utility clients [of Ebasco] “were in agreement on the fact that consequential damages should not be claimed against manufacturers.” Additionally, Chase stated that, in the event of late delivery by a supplier, Ebasco interpreted Appendix A to mean that “no claim could be made for loss of profit, cost of purchased power or claims by customers for service interruptions.”
McCahill sent copies of his memorandum of the meeting with Chase to Strang, as well as to Messrs. Davis and Warner (GE sales representatives in New York City) in order to record in the GE files Ebasco’s expressed interpretation of its terms. That Ebasco would not have disagreed with this practice of documenting negotiations is reflected in McCahill’s memorandum, which states that Ebasco had pointed out that the language of Ebasco’s present forms had come out of GE’s recommendations in 1947 negotiations and that Wells said that if any questions ever came up “presumably the background of the negotiations of 1947 would be admitted into evidence to explain what the parties meant by the present language.”
There was also other testimony from other knowledgable executives in the power generation industry to the effect that Ebasco’s understanding accurately reflected the understanding and custom in the trade. We credit that testimony. Indeed, the record reflects that PP&L itself shared that understanding.
The deposition testimony of PP&L Vice-President Douglas Connell was introduced at trial. Mr. Connell testified that he did not believe that the customary warranty in the industry imposed the cost of replacement power on suppliers. Mr. Connell also
*187
described as accurate the statement in the letter of PP&L’s counsel, Mr. Crago, to the Pennsylvania Public Utility Commission dated August 5, 1970, which described the typical warrai.ties obtained from suppliers in connection with Brunner # 3 as being limited to the cost of repair or replacement of defective parts. Moreover, Connell told Stevens of Poster Wheeler, which was interested in bidding on the steam generator for Brunner # 3, that PP&L was opposed to a Foster Wheeler contract because Foster Wheeler had not yet built a supercritical, onee-through boiler such as was planned for Brunner # 3. Therefore, Connell continued, PP&L would have to take the risk of outages, which were a certainty for a first-time manufacturer (for it could not recover the cost of replacement power or other outage costs from Foster Wheeler).
24
PP&L’s treasurer, C. R. Collyer, gave deposition testimony, introduced at trial, to the effect that PP&L recognized the custom of the industry to be that suppliers of major equipment do not have the responsibility to compensate the utility for a unit’s downtime. But even more importantly, PP&L’s President, Jack Busby, told Ebasco’s President, Roger Sherman, that it had not been the intent of the parties to impose the risk of consequential damages (and Mr. Busby had described cost of replacement power as a consequential damages claim) on Ebasco (and, we assume,
a fortiori
on any of Ebasco’s suppliers), but stated that counsel had suggested that “new law” might be made in this case! Sherman stated in that conversation that Busby’s understanding as to the intention of the parties was his also.
25
Additionally, PP&L’s Vice-President, Willard O. Baum, Mr. Connell’s successor in charge of Power Systems and Engineering, testified that, based on what Ebasco told him and on information from PP&L engineers who had reviewed the purchase agreements, he did not believe that suppliers would be liable for consequential damages such as the cost of replacement power in the period 1964-67.
Finally, the record reflects a meeting at PP&L’s Allentown Headquarters in December 1964 at which the Combustion Engineering unit made a presentation to a host of PP&L executives and engineers, including Connell and Baum. A memo summarizing the meeting, circulated to all in attendance, stated that, because of its competitive position, GE was obliged to quote the lowest-priced precipitator
26
that is guaranteed to meet the collection efficiency requirement. The memo, after observing that if the precipitator does not meet the guarantees, they (GE) are required to make corrections, goes on to warn that “this latter cause can be quite expensive to the client (PP&L) in terms of outage time.” The memo adds that, for this reason, GE feels that “the client’s specifications should include all necessary design parameters to assure a quality job.” This memorandum itself demonstrated PP&L’s awareness of the trade custom we have described. All told there was most impressive evidence that PP&L’s top executives knew and were in accord with the trade understanding that
*188
power generation equipment suppliers were not liable for cost of replacement power.
As we have previously noted, by the mid-sixties there had been a number of lawsuits filed claiming consequential damages, but, with one possible exception, there was no evidence that any of the suits resulted in recovery. The most noteworthy of these suits, although it was not a factor in the original Ebasco-GE negotiations, is that filed against GE by Kansas City Power & Light Company in 1964. Evidence of the second noteworthy suit was developed via the testimony of one of GE’s key witnesses on trade custom, Walter E. Beckjord, Vice-President & General Counsel of Cincinnati Gas & Electric Co. Mr. Beckjord testified, in line with our previous findings, that the trade custom during the period in question was that suppliers were not liable for cost of replacement power under the conventional agreement forms (and even without reference to them). Mr. Beckjord conceded that this longstanding pattern was being assaulted, and he somewhat embarrassedly confessed that, as counsel for Cincinnati Gas & Electric, he had asserted a claim for cost of replacement power against Westinghouse and a firm known as Oberle Jordre in a suit filed in the United States District Court for the Southern District of Ohio in April 1970. The case was settled, and some portion of the settlement was apportionable to cost of replacement power. Mr. Beckjord attributed the settlement, at least in part, to what he considered to be, at best, an aberrational court decision. As we read Mr. Beckjord’s testimony, although the longstanding custom was beginning to erode, the erosion was in a nascent stage at the time of the events relevant to this case (of course, the Cincinnati suit was not even filed until 1970, well after the negotiations at issue here).
Although by the mid to late 1960’s there were exceptions to the established custom apparently emerging, we find the fabric of the conventional custom and understanding to have been still intact at the times critical to this case.
27
The evidence of the Kansas City Power & Light suit, the Cincinnati Gas & Electric suit, and the other suits mentioned in the record does not cause us to alter the findings stated above. This is particularly so in light of our findings about the specific understanding of GE, Ebasco, and PP&L executives on the subject.
28
*189
The course of dealing between Ebasco and GE prior to 1967 is congruent with the trade custom and understanding that we have described. For the most part, Ebasco’s standard terms and conditions were accepted by GE, with the gloss on their textual language supplied not only by the trade custom and understanding, but also by the specific declarations of GE and Ebasco representatives described above.
There were Ebaseo-GE contracts on 5 power plants during 1964, 1965, and 1966 and, as noted above, 4 purchase orders on Brunner # 3, ail on Ebasco Standard Terms. This was not an inflexible practice, however. For instance, in July 1964 dealings between GE and Ebasco in which Ebasco acted on behalf of Middle South Utilities, GE Handbook terms were used.
Although PP&L relies heavily on the course of dealing, which includes acceptance by GE, more often than not, of Ebasco’s standard terms, the important point is that the “course of dealing,” see pp. 211-212
infra,
must be read in light of the announced understanding by Ebasco and GE of the meaning of the Ebasco standard terms. In that light, “course of dealing” weighs heavily in favor of GE, not PP&L.
D.
GE’s Response to the July 21, 1964 Ebasco Purchase Order
It was against the background just described that GE entered into its July 1964 discussions with Ebasco about the steam turbine generator for Brunner # 3. As our findings suggest, although GE did not believe that the Ebasco standard terms referenced in Salerno’s July 21, 1964 purchase order subjected GE to liability for consequential damages such as cost of replacement power, GE preferred its own Handbook form, which was more explicit. However, the tenor of GE’s response to Salerno’s reference to Ebasco terms is a point in dispute, and our findings on the subject now follow.
Robert Davis, of GE’s New York City Sales office, forwarded the Ebasco letter of July 21, 1964, which referenced Ebasco standard terms, to Schenectady. Cox and Pendzick made notes of those of Ebasco’s statements with which GE disagreed. Cox noted objection,
inter alia,
to Ebasco’s statement that a contract would be issued with the terms and conditions of the usual type of contract issued by Ebasco. By internal GE letter dated August 6, 1964, R. W. Snyder of GE’s Marketing Department in Schenectady commented to Davis on Ebasco’s letter of July 21, 1964, noting that the reference to Ebasco terms and conditions could be “confusing,” and suggested that Ebasco change its “letter of intent” (i. e. the July 21, 1964 letter) to conform to the wording used in GE’s letter of July 15, 1964.
29
Cox directed that the matter of Ebasco’s July 21, 1974 letter be straightened out. As a result of Cox’s directive, Pendzick followed through by requesting Davis to pursue Snyder’s letter. Pendzick wrote:
I don’t feel that we should wait until this order is firmed up to ask Ebasco to rewrite their order letter of July 21, 1964. I think we should do it now so as not to give the impression we have accepted Mr. Salerno’s letter of July 21, 1964.
On October 1,1964, Salerno supplemented the Ebasco intent letter of July 21, 1964 with acceptance of some of the comments made by Snyder to Davis on August 6,1964. We infer from the fact that this letter discusses point by point the comments made by Snyder to Davis that Davis had discussed with Ebasco the matters raised by Snyder. By internal letter dated October 6, 1964, Davis forwarded to Pendzick copies of
*190
Ebasco’s supplemental letter of intent, commenting that these letters should take care of Schenectady’s comments on Ebasco’s letter of July 21, 1964, except for Ebasco’s reference to the “usual type of contract issued by Ebasco.” Mr. Davis expressed his belief that this point could be covered in GE’s acceptance.
By internal GE letter dated December 7, 1964, Pendzick, on Cox’s instructions, advised Davis to accept Ebasco’s letter of intent based on “mutually agreeable terms and conditions.” Pendzick testified that this meant to him that GE could insist on GE terms, which was his understanding as to the basis of the original order.
As we have noted, by letter dated March 5, 1965, Salerno wrote to GE to “release” the turbine generator for design and production, advised GE of certain basic specifications of an engineering nature, and requested shipment in June of 1967. Cox believed that in the interim between December 7, 1964 and the release dated March 5, 1965, GE and Ebasco were discussing technical items, particularly the heat balance, which is the critical starting point for the design. The letter of March 5, 1965 stated Ebasco’s instructions to GE on technical matters, including the heat balance. Meanwhile, the review of Ebasco’s July 15, 1964 purchase order continued in Schenectady. GE’s comments were internally memorialized and ultimately communicated to Ebasco in Pendzick’s May 4, 1967 letter taking detailed exception to the Ebasco proposal.
GE’s formalized exceptions to the Ebasco proposal were thus delayed for a long time. (We have already drawn the inference that GE had, prior to October 1, 1964, excepted informally.) In proper perspective, however, this response was not delayed unexpectedly, for, as we have already suggested, it was widely recognized and customary within the power generation industry that a formal contract, with all the essential commercial terms and conditions, frequently might not take final shape for a long period of time after an order was placed. A lapse of two to three years for major equipment purchases was not unusual.
William Stevens, Executive Vice-President of Poster Wheeler, was one of those who testified about the custom in the industry for the purchase of equipment. Before actually executing a contract with a customer, Foster Wheeler often utilized a brief letter of intent containing no contract terms or conditions. Foster Wheeler, as supplier, often would work quite far along before the final contract was ultimately decided upon and signed. Donald Wilson of Babcock & Wilcox described the manner of forming a contract. He stated that it could start with a verbal award or letter of intent, which would ripen into a preliminary purchase order and then into a finalized agreement over a period of time, often a few years. Mr. Beckjord testified to the same effect.
The evidence established that it was also customary for GE, in connection with the sale of large steam turbine generators and boiler feed pump turbines, to proceed with the manufacture of steam turbine generators on the basis of long history with these customers, even though GE knew that there were further documents to be signed. Indeed, Mr. Cox testified that there were occasions on which the turbines were delivered and the plant was actually in operation before final contracts were signed! The commitment for the equipment was usually confirmed with a letter of intent. Since most utilities wanted a great deal of engineering information in their contracts, the preparation of the contract documents was necessarily delayed. After a proposed GE contract was sent to the field offices, it was presented to the customer. Thereupon, contract discussions began, frequently lasting over a period of months or years. Ebasco knew of and had participated in this custom and practice, and PP&L knew of it as well.
Were GE’s formal exceptions untimely? In addressing the timeliness question, we consider a number of factors. First, we consider the practice, just described, of
*191
lengthy delays in executing contract documents. Second, we consider that in this case, congruent with the custom, there had been ongoing discussions concerning various technical details and contract terms for close to three years, with a general understanding by both parties that in due course a final contract would be negotiated. Finally, the ultimate delivery of the turbine was still some time away, and Ebasco was content to delay final negotiations to obtain added leverage. Under these circumstances, we do not view GE’s formal exceptions as being untimely.
E.
Ebasco’s Authority to Negotiate Supplement 16
On March 10, 1966, Ebasco and PP&L executed a contract covering Ebasco’s responsibility for Brunner # 3. Article II.A. set forth Ebasco’s general charter:
Ebasco shall, at its own cost and expense, design, engineer, construct and install the Project, and for this purpose shall furnish any and all design and engineering services and supervision, all facilities, equipment and material, and all supervision and labor necessary for the completion of the Project, within the time and on the terms and conditions provided for in this agreement.
Article II.B. of the contract defines Ebasco’s authority and obligations for the procurement of Permanent Project Equipment, including the turbine generator, in the following terms:
B. The Permanent Project Equipment described by Appendix D shall be provided by Ebasco with its own funds from among the list of bidders set forth in Appendix E. For this purpose Ebasco shall, in a good, substantial and workmanlike manner, in strict accordance with the requirements of all municipal, state or federal authorities having jurisdiction in the premises and at its cost and expense, perform the following services:
1. Prepare inquiry specifications and transmit them to PL at the time of issuance of the inquiry.
2. Prepare inquiries, solicit quotations, analyze and evaluate bidders’ proposals and advise PL of Ebasco’s selection of a vendor and of the proposed date of purchase commitment.
3. Prepare and issue all purchase ■orders and necessary supplements thereto.
7. Prepare and furnish to PL periodic reports on the status of production of equipment and material purchased.
10. Secure fulfillment of purchase order contracts in accordance with the provisions thereof.
11. Perform any and all other services and functions which may be necessary in order to initiate and complete the purchase and timely delivery of Permanent Project Equipment conforming to specifications and bearing appropriate warranties and guarantees.
In purchasing Permanent Project Equipment, Ebasco shall in all cases use its best efforts to obtain for PL warranties against defects in design, workmanship and materials, the most favorable possible guarantees of performance, and the most favorable possible indemnifications against the consequences of patent infringement, recognizing that the Contract Price is based upon obtaining customary warranties and guarantees and that appropriate adjustments will be made, pursuant to change order as provided in Section II, Paragraph E hereof, to cover increased costs, if any, of equipment occasioned by obtaining the most favorable' possible guarantees. It shall also, at PL’s request, and at no extra charge, assist PL in
*192
enforcing such warranties, guarantees and indemnifications.
There is no dispute either that Ebasco had express authority to place an order for the steam turbine generator with GE on July 15, 1964 or that Ebasco’s authority from PP&L included negotiation of commercial terms and conditions for the turbine generator contract. In the ordinary case, therefore, there would be no question about Ebasco’s authority to agree to the terms of Supplement 16. The issue that confronts us here is a more sophisticated and rather elusive one — whether Ebasco possessed sufficient authority to negotiate, and give up in the final negotiations (for Supplement 16), rights in respect to (non)limitation of GE’s liability that it had won either in earlier negotiations or by operation of law (i. e., U.C.C. § 2 — 207). As we have noted above, if Ebasco did not possess such authority, and if there were in fact pre-existing superior rights, then Supplement 16 might not be valid.
It is already obvious that our previous findings have undercut the basis for PP&L’s contentions on the authority point, for the import of those findings, see Part II.B.
supra,
and
see
text accompanying notes 39-41
infra,
is that Ebasco had won no rights for PP&L — either in the Cox-Bonin conversation, in the documents that followed, or by operation of law — that were denigrated by Supplement 16. However, given the magnitude of this case it would be inappropriate to adjudicate it without findings on all important points; hence, we make findings on the authority question as well. In the course of so doing we will make findings of fact from which conclusions of law can be drawn as to Ebasco’s inherent, implied, and apparent agency power to bind PP&L to Supplement 16, assuming arguendo that greater contractual rights had vested in PP&L theretofore. Obviously, there was no
express
authority conferred upon Ebasco by PP&L to dilute its rights, although — to repeat — in the absence of greater pre-existing rights there is no question of Ebasco’s authority to sign Supplement 16. It is important to note at this juncture, however, that to talk in terms of “downward” negotiations without more rather stacks the deck, because if Ebasco gave something up on one point but won other
concessions
— i.
e.,
negotiated a quid pro quo — then there was no dilution at all. We would then come full circle- — to conventional express authority to negotiate commercial terms, which we find that Ebasco possessed.
It is helpful to begin with a discussion of the breadth of the authority conferred upon Ebasco by PP&L, for that bears on a number of legal theories. Ebasco’s authority was best expressed in the testimony of PP&L’s President, Jack Busby. Busby looked at the contract as one
between PP&L and Ebasco and Ebasco being responsible for bringing all the pieces together including procurement of equipment necessary to make the project go. My concept was looking to Ebasco.
Responding to the question whether PP&L expected Ebasco to impose on suppliers a liability to make good on replacement power, Mr. Busby repeated that he looked to Ebasco and that “what they did with the suppliers was something else and I wasn’t concerning myself with that.” Responding to an inquiry about the turnkey concept, Busby replied that (unlike PP&L’s conventional cost-plus approach):
. this was for a fixed price at a fixed time, and there wasn’t a reservation of authority and the final decision-making by the company in the way this conventionally has been reserved when we signed the contract we did so with the framework of ultimate responsibility being Ebasco’s rather than PP&L’s.
Mr. Busby’s testimony reflected general trade custom in this area, for, we find, it was customary for architect-engineers purchasing project equipment, as Ebasco was for Brunner # 3, to have extremely broad authority. Supporting this conclusion was the testimony of Donald Wilson, Commercial Manager of the Marketing Division of Babcock & Wilcox (B&W) from 1961-68. B&W was a major manufacturer of equip-.
*193
ment for the power and energy field, including equipment for steam generating units for power plants. Wilson was in charge of checking terms, conditions, and specifications in offerings in connection with power plant equipment. In the course of his duties, he had become familiar with the methods by which utilities purchased major equipment for power plants, as well as with the practice of utilities in using architect-engineers (or “engineer-constructors”), such as Ebasco, to act for them in the construction of power plants, including the purchasing of major equipment. Wilson had experience in the 1960’s with approximately sixty projects in which B&W sold major equipment to an engineer-constructor who was signing the purchase contract on behalf of the utility.
In those instances in which the engineer-constructor (such as Ebasco) was acting as agent on behalf of the owner in connection with the purchase of equipment, B&W considered the engineer-constructor to be authorized to do any and all things, the only exception being that sometimes payments would be made directly by the utility. This generally expansive authority included negotiating technical specifications, terms of payment, and commercial terms such as the guarantee and limitations of liability. Wilson and B&W never felt compelled to go to the owner to ascertain the authority that the engineer-constructor had, and had no knowledge of any limitations ever being placed on an engineer-constructor regarding its authority to negotiate commercial terms and conditions, even if those terms and conditions were less favorable to the utility than those that had been referenced in a letter of intent.
30
Additionally, it was GE’s experience that architect-engineers, such as and including Ebasco, had broad authority from their utility clients to deal with GE in connection with the purchase of a turbine generator.
Turning to the extent to which PP&L gave Ebasco a free hand with respect to the negotiation of contractual terms, we find that Ebasco’s authority was virtually absolute. PP&L left all decisions on commercial terms up to Ebasco and, because of the turnkey arrangement, did not become involved in negotiations.
31
This fact is consistent with and corroborates the trade custom that we found to
exist
— i. e., the type of authority conferred upon Ebasco was similar to that customarily conferred upon architect-engineers by their utility clients in the power generation field. That finding also bears upon the extent to which PP&L held out Ebasco as an agent with full authority to negotiate all technical and commercial terms.
Also germane to the issue of Ebasco’s authority is the extent to which PP&L knew of the state of contractual negotiations between Ebasco and GE and did anything to limit Ebasco’s authority or advise GE that Ebasco’s authority was limited. In this regard, we find that PP&L knew that there was no final contract prior to October 1967 and that Ebasco would, as part of its obligations to PP&L, have to negotiate final commercial terms.
32
Indeed, Mr. Busby
*194
lamented that it was usual that there was a long lag in working out final contract details and that technical specifications and price commonly were arrived at before commercial terms. We add, however, some additional observations on this point.
In the first place, PP&L perforce knew of the differences between the GE letter of July 14, 1964 and Ebasco’s letter of July 21, 1964. On August 20, 1964 Mr. Baum reported to the PP&L Management Committee: “Ebasco has placed an order with a
letter of intent
for the turbine generator, although size has not already been determined, and is preparing to ask for quotations on the boiler . . .” (Emphasis added). Mr. Baum knew that the “letter of intent” would be followed by the preparation of a more formal contract or a purchase agreement at some time in the future. Further, when PP&L received the “Advance Copies” of various purchase orders from Ebasco in June 1965 and commented thereon in August 1965, PP&L indicated an awareness that final contracts did not exist and that further negotiations were necessary.
Baum conceded that it would have been a simple matter anytime thereafter to call up whomever he was dealing with at Ebasco in order to inquire whether the letter of intent had been converted into a formal written contract, but he never did so. Additionally, Baum knew from his discussions with Mr. Salerno on November 23, 1967 and from Salerno’s letter of November 28, 1967 that Ebasco was then having negotiations with GE for the turbine generator contract. Moreover, Mr. Baum’s response of December 28, 1967 (Ex. 2525) to Mr. Salerno authorized Ebasco to “negotiate further.”
Turning to the touchstone of this case— the issue of protection against claims for cost of replacement power — in the March 10, 1966 contract between Ebasco and PP&L Ebasco was obligated to use its best efforts to obtain for PP&L only:
¶ warranties against defects in design, workmanship and materials,
¶ the most favorable guarantees of performance, and
¶ the most favorable possible indemnification against the consequences of patent infringement.
There were no directions, instructions, or obligations for Ebasco to obtain protection for PP&L for the cost of replacement power. Moreover, when Connell of PP&L corresponded and met with Sherman of Ebasco in the summer of 1965 on the subject of the “advanced copies” of the proposed order for the turbine generator and requested certain revisions and/or additions of a technical nature before release to suppliers, Connell did not in any manner suggest that any provision should be inserted into the supplier contracts to obligate the suppliers to be responsible for the cost of replacement power in the event of outages. PP&L did not even do so when faced later on with the knowledge that GE and Ebasco were negotiating disputed commercial terms, which dealt,
inter alia,
with cost of replacement power.
PP&L had constructed its own power plants before, using GE equipment, without the intervention of a turnkey contract. The turnkey arrangement itself resulted in PP&L’s holding Ebasco out as having broad authority over commercial terms. PP&L’s continued absence from the negotiating picture and the free hand given Ebasco reinforced that holding out. The holding out was also many faceted. Much of the correspondence to GE from Ebasco was signed “Pennsylvania Power & Light Company by Ebasco Services Inc.” Ebasco not only issued the purchase order to GE in March 1966; it issued to GE fifteen supplements prior to Supplement 16, all without intervention by PP&L. Ebasco continually discussed with GE technical as well as commercial terms of the turbine generator contract. The discussions in 1967 leading up to Supplement 16 were consistent with the manner in which Ebasco had previously done business with GE, and there were no written communications from PP&L to GE concerning any limits on the authority of Ebasco to construct the plant, to order and execute contracts for equipment, or to negotiate the commercial terms and conditions with GE.
*195
Earlier in these findings we discussed at some length the events and sequellae of the October ,26, 1967 meeting. In our findings
infra
addressing PP&L’s tortious interference claim, w« will, a bit more formally, note our finding that there was a quid pro quo involved. Assuming that fact here, we find that Ebasco plainly had authority to negotiate that quid pro quo. Going a step further and addressing the question of Ebasco’s authority to dilute PP&L’s rights
(i. e.
— if there was no quid pro quo), we believe that given all of our findings on agency, Ebasco had the authority to do so.
We note as a final possibility that it would be legally possible for PP&L to be bound to GE on account of certain types of authority given to Ebasco, even though, viewing Ebasco and PP&L
inter se,
Ebasco lacked that authority. In such a case Ebasco would be liable to PP&L for acting in excess of its authority. It is important to note at this juncture that this is precisely the claim asserted by PP&L against Ebasco that was settled just prior to the commencement of trial.
33
In sum, in the area of the PP&L-Ebasco agency, we find the following: Ebasco had broad authority to bind PP&L to commercial terms and conditions, including those such as were negotiated in Supplement 16. The type of authority conferred upon Ebasco was similar to that customarily conferred upon architect/engineer/constructors in the power generation field by their utility clients. PP&L gave Ebasco a free hand in the final negotiations of commercial terms even though it knew that critical matters, including cost of replacement power, were at issue; it did not fetter Ebasco’s authority to negotiate limitation of liability provisions. PP&L held Ebasco out as having full authority — that is, its actions (and inactions) led GE to believe that Ebasco had full authority — notwithstanding its knowledge of the pendency of the negotiations that led to Supplement 16. Moreover, GE, based on its many years of experience in dealing with Ebasco and other architect-engineers, justifiably believed that Ebasco would have the usual broad authority to negotiate Supplement 16 in the manner that it did.
Finally, and this is an important point not mentioned heretofore, the actions of Ebasco were incidental and reasonably necessary to arrange for the purchase of the equipment for Brunner # 3.
F.
The Question of Ratification by PP&L of Ebasco’s Actions
On November 23, 1967, after GE and Ebasco had agreed on the language of what eventually became Supplement 16, but before Ebasco issued Supplement 16 to GE, Ebasco’s Salerno telephoned PP&L’s Baum and related the recent negotiations with GE on commercial terms and conditions, which covered the topics of technical direction of installation, warranty, limitation of liability, and patents.
34
Inter alia,
Salerno explained that GE would not accept the supervision aspect for the price quoted; that if supervision was involved, GE wanted more money; that the limitations arrived at with respect to implied warranty were less favorable but the warranty period was longer; that GE wanted a 3% adder for eliminating the limitation of liability language; and that GE disclaimed responsibility for patent infringement associated with purchase, design, or use. We find that the statements made by Salerno to Baum gave an accurate picture as to what had transpired at the October 26, 1967 meeting. Salerno told PP&L he wanted it to decide on GE offers of the contract adders.
By letter dated November 28,1967, Sailerno followed up on his November 23, 1967 telephone call to Baum with a letter “covering commercial conditions under discussion with General Electric relative to the turbine-generator and boiler feed pump turbines covered by the subject contract.”
*196
Salerno stated that Ebasco, in purchasing permanent project equipment, had used its best efforts on behalf of PP&L. He quoted to Baum the GE offer to eliminate the GE “limitation of liability” language for a payment of 3% of the contract price and the GE offer to agree to the “superintendence of erection” clause of the Ebasco purchase order in lieu of GE “technical direction of installation” at a charge of $.50 per $100 of contract value. Nagel, of PP&L’s legal department, received a copy of Salerno’s letter to Baum and prepared a draft of a reply letter from Baum to send to Salerno. Na-gel understood from the Salerno letter that GE was offering two contract adders and that Ebasco was requesting PP&L to notify Ebasco if it wanted either or both of those adders.
PP&L decided not to pay the 3% adder because it was of “questionable benefit.” Thus, PP&L recognized that GE would not be liable for consequential damage even if no specific exclusion of consequential damages was written into the contract. And Baum so advised Salerno. Baum then made the decision to request Ebasco to “negotiate further regarding limitation of liability” and authorized Ebasco to substitute “Technical Direction of Installation” for “Superintendence of Erection.”
Salerno replied to Baum by letter dated January 3,1968, enclosing a copy of Supplement 16. In that letter Salerno stated that Ebasco had been able to negotiate with GE more favorable wording than that contained in the GE Handbook, including elimination of the use of the words “consequential damages”; that Ebasco believed the clause as written more clearly defined the damages against which GE intended to be relieved; and that these modifications were made at no change in price. PP&L had also received a copy of Supplement 16 on December 7,1967 as part of its separate file on purchase order NY-668001. This file indicates that Ebasco sent PP&L the initial purchase order and all succeeding supplements as they were issued by Ebasco.
Salerno’s letter of January 3, 1968 was the last communication between PP&L and Ebasco on the subject of commercial terms and conditions for Brunner # 3. Mr. Baum distributed the January 3, 1968 letter from Salerno, together with a copy of Supplement 16, to Mr. Crago, who was the General Counsel of PP&L, and also to Messrs. Collyer and Frederick. PP&L made no objection and took no action with. regard to Supplement 16 until the filing of this lawsuit in August 1972. Nor did PP&L rescind any of Ebasco’s authority. Moreover, after PP&L received a copy of Supplement 16, Ebasco issued to GE Supplements 18-22 for the turbine generator contract without objections from PP&L, which received copies in the usual course. The last supplement, number. 22, was dated June 20, 1969. A copy was issued to PP&L on July 1, 1969.
The essence of PP&L’s arguments against a finding of ratification is the contention that Ebasco did not keep PP&L fully advised of what was going on, particularly with regard to the nature of its prior relationship with GE. While Ebasco doubtless did not relate every detail of the complex evolving GE/Ebasco scenario to PP&L, we know of no
material
thing that PP&L needed to know that was withheld. The basic and salient features were communicated, and, after all, PP&L was no novice in the field. Insofar as the alleged failure to detail the history of the GE-Ebasco relationship is concerned, PP&L is really saying that Ebasco did not relate that history according to the tenor of PP&L’s version thereof. But we have, in our findings, rejected the PP&L version. In any event, we have drawn different inferences than PP&L as to the import of that relationship. For example, we have found that cost of replacement power was not recoverable even under the Ebasco standard terms. Under our findings, the history of Ebasco’s relationship with GE would have been immaterial.
G.
PP&L’s Tortious Interference Claim
The essence of PP&L’s tortious interference claim is that GE coerced Ebasco into agreeing to Supplement 16, against the interests of its client, PP&L, by threatening a
*197
price increase on the turbine generator, by diverting certain nozzle boxes from Brunner # 3 to the Detroit Edison contract, and (mainly) by holding up the shipment of the exhaust hood bolts, which retarded the progress of Brunner # 3 at a critical period. GE’s motive for this alleged conduct is said to have been: (1) to disadvantage PP&L on Brunner # 3 by securing the specific limitation of liability contained in Supplement 16; and (2) to extract from Ebasco a commitment that Supplement 16 would be a prototype for all future GE dealings with Ebasco, regardless of the client Ebasco was representing. We have already made extensive findings relative to PP&L’s tortious interference claim, which we will rescribe during the course of this discussion.
The first question that should be addressed is whether GE had knowledge of any particular terms of the PP&L-Ebaseo contract with which it allegedly interfered. We find no evidence that GE had any knowledge of the specific essential terms of the PP&L-Ebasco contract, including any knowledge of the warranties or protections that Ebasco was obligated to procure for PP&L. We turn next to the question of Ebasco’s actual obligations under its contract with PP&L (a sine qua non of a tortious interference claim being that those obligations were interfered with).
Ebasco, under its contract with PP&L, was obligated to secure “warranties against defects in design, workmanship and materials”
35
and “the most favorable possible guarantees of performance.”
36
However, as we have noted several times, it had no obligation as such to secure inclusion of the vendor’s liability for consequential damages, including cost of replacement power. The Ebasco-PP&L contract also stated that the Ebasco price for constructing Brunner # 3 was based upon Ebasco obtaining “customary guarantees.” But Ebasco did obtain what, in light of trade custom and understanding, were customary guarantees. Moreover, as we have also noted above, PP&L knew from the outset, both from Ebasco as well as from its own experience and knowledge of trade custom and understanding, that GE would not accept liability for consequential damages. Thus, PP&L did not expect to be able to recover from GE the cost of replacement power if, as, or when incurred.
An important element on a tortious interference claim is intention to harm. However, we find that GE, in negotiating the language of Supplement 16, did not believe that it was interfering with or watering down any rights of PP&L in this regard. Rather, GE reasonably believed that the original order was based on terms that excluded such liability. This result obtains whether GE believed it had a contract on GE terms or on Ebasco terms, for even if Ebasco’s standard terms applied, in light of previous findings, GE was justified in believing that it had no liability for any type of consequential damages; that is what GE
*198
had consistently been told by Ebasco long before the negotiations to work out final contract language began in October 1967.
37
The critical time frame for the tortious interference claim is the late summer and early fall of 1964, culminating in the October 26,1967 meeting. PP&L’s principal complaint is that GE deliberately held up shipment of the exhaust hood bolts for the stream turbine generator in order to coerce Ebasco into agreeing to Supplement 16. We note again our rejection of that contention and our finding that Mr. Cox, whom we found to be a candid, forthright, and credible witness, held up the shipment in order to protect GE’s position with respect to payment for the boiler feed pump turbines (for which GE reasonably believed payment to be past due, although Ebasco did not) and for the turbine generator itself.
38
We find that GE was faced with equally serious threats from Ebasco and that GE regarded Salerno, who was threatening not to pay for the turbine generator, as a tough and tenacious opponent at the bargaining table. Moreover, Salerno was content to delay the final contract negotiations, believing that it enhanced his own bargaining position.
As to Supplement 16 itself, we find it to represent a quid pro quo, in which each party to the negotiations made concessions. Supplement 16 did, as we know, contain an explicit exclusion of liability for cost of replacement power, but this was, in view of our previous findings, of questionable detriment to PP&L. Although PP&L has argued that Supplement 16 was intended as a prototype, and although apparently it has for the most part worked out that way,
39
we find no evidence that such a commitment was extracted in the Brunner # 3 negotiations on October 26, 1964 or otherwise. GE also obtained substitution of the “technical direction of installation” clause for the “superintendence of erection clause”
40
and elimination of liability for negligence, not provided for by the Ebasco standard terms. On the other hand, as we have noted above, GE made concessions in the October 26 bargaining. First of all, GE agreed to raise its liability for defects from the value of the defective part to the contract price of the entire unit (/. e. up to $10,000,000) and to extend the termination date of any liability under the contract from 4 to 6 years. These concessions also increased liability over GE’s Handbook terms.
We therefore find from the evidence that Supplement 16 represented a compromise for each side. Stolz testified that Ebasco and PP&L gained ground in Supplement
*199
16,
41
and neither Stolz nor Ebasco’s president, Roger Sherman, believed that Supplement 16 detracted from the basic intent of the Ebasco terms. It may be that by way of 20 — 20 hindsight (i. e., in light of the problems that emerged later) GE got the better of the quid pro quo, but we cannot permit such post hoc analysis to enter into our deliberations. Indeed, PP&L has not established here that Ebasco in fact breached its contract with PP&L.
Tortious interference analysis also subsumes the matter of privilege.
42
GE, of course, had a privilege to act to protect its legitimate commercial interests. GE had valid commercial reasons to seek more specific contract language to exclude any possibility that it would be held liable for cost of replacement power or other consequential damages. Indeed, it was common practice in the industry to do so, particularly in light of attempts being made in the 1960’s by some utilities or their insurers to assert claims for consequential damages. Even if the Supplement 16 language in fact eventuated as a prototype, and even if that was what GE had hoped for, that would not constitute an abuse of privilege so long as GE did not induce Ebasco to trade off PP&L’s rights in order to obtain some benefits for itself or others. We find that that was not done.
43
Additionally, GE had a legitimate commercial interest in obtaining guarantees of payment before shipping all of the component parts, just as Ebasco had a legitimate commercial interest in delaying negotiations until it had a signed contract.
In sum, we find that PP&L has failed to demonstrate that Ebasco did not use its best efforts on behalf of PP&L. We further find that GE did not overreach or coerce or act improperly in the negotiation of Supplement 16 and that GE’s actions were privileged.
This concludes our findings of fact. We turn now to our discussion of the applicable law.
III.
Discussion
A.
Introduction
Our findings of fact have been extensive. However, because the trial that resulted in those findings was carefully charted on the basis of our lengthy opinion in
Ebasco I,
which described in great detail the applicable legal principles, and because the findings of fact are in effect dispositive of most of the issues before us, our discussion and conclusions of law will be briefer than they otherwise would be.
The trial was designed to determine two questions: (1) what is cost of replacement power? and (2) can PP&L recover from GE the cost of replacement power as an item of damages, assuming arguendo that PP&L can establish GE’s liability? The first question, not a matter of great dispute, has been treated herein as a factual matter and, except as an ingredient in our discussion of general vs. special damages, need not be dealt with again. It is the second question that perforce shall occupy us, and we shall organize the bulk of our discussion of that question along the lines of the discussion in
Ebasco I,
with a view to making conclusions as to the validity of Supplement 16 to the steam turbine generator contract (NY-668001).
Ebasco I
dealt solely with the steam turbine generator contract and, more specifically, with the matter of Supplement 16. It decided that if Supplement 16 is valid, PP&L cannot recover cost of replacement power on any theory (breach of contract, breach of implied warranty, negligence, strict liability
44
or delay damages). As our
*200
findings of fact confirm, the trial was almost exclusively focused on those matters. However, the issues for trial also subsumed the question of PP&L’s right to recover cost of replacement power on the other Brunner # 3
contracts
— i.
e.,
those for power transformers (# NY-668006); 450 switchgear, isolated phase bus, and power centers (# NY-668007); station auxiliary motors (# NY-668008); and volt motor control centers (# NY-668009). Supplement 16 is inapplicable to these other contracts, which were, accepted by GE on the basis of Ebasco’s standard terms and conditions. However, the question of the meaning of Ebasco’s standard terms is also an ingredient in our discussion of the U.C.C. § 2-207 issue, the authority issue, and the tortious interference issue. We shall therefore integrate our discussion of all these points. Concomitantly, the factual findings we have made also bear upon the limitation of liability question as it affects these other contracts.
B.
Choice of Law
Initially, the parties stipulated that the laws of Pennsylvania and New York were the same on all contract issues relevant to this case,
see Ebasco I,
402 F.Supp. at 427 n. 4, and that, therefore, there was no conflict and no choice of law to be made. Even as of this writing, they do not dispute that the construction of the final contract, which was signed in December 1967 and which included Supplement 16, turns on New York law, for the contract contained a provision that New York law would govern.
See
U.C.C. § 1-105(1). And, they continue to agree that Pennsylvania law governs the tortious interference claim.
45
The major area of dispute is that of the proper law to be applied to the dealings of the parties between July 15, 1964 and December 7, 1967, particularly with respect to limitation of liability. In the trial and post-trial briefs, the initial agreement of the parties on choice of law began to break down. GE initially maintained that New York law applied to all contract formation and interpretation questions, but after the opinion in
Posttape Associates
v.
Eastman Kodak Co.,
537 F.2d 751 (3d Cir. 1976),
see
discussion
infra,
GE began to talk more about Pennsylvania law. In the wake of
Posttape,
PP&L took the position that the law of Pennsylvania and New York had diverged and opted for New York law with respect to the issue of limiting liability for negligence. We note, however, that in its trial brief, PP&L had maintained that Pennsylvania law should apply with respect to evaluation of the 1964 correspondence and all other matters occurring before December 7, 1967 (i. e., the U.C.C. § 2-207 questions). Moreover, PP&L has stressed the impact of
R. I. Lampus Co. v. Neville Cement Products Corp.,
474 Pa. 199 , 378 A.2d 288 (1977),
see
discussion
infra,
a Pennsylvania case addressing the question of general versus special damages. The parties have thus not been altogether com sistent on their choice of law contentions.
Choice of law in contract cases is not a simple matter where Pennsylvania is the forum state, see
Melville v. American Home Assurance Co.,
443 F.Supp. 1064 (E.D.Pa. 1977). The traditional (Restatement, Conflict of Laws) rules, doubtless do not apply in a U.C.C. context.
See
U.C.C. § 1— 105(1).
46
Under the interest analysis approach of
Griffith v. United Air Lines, Inc.,
416 Pa. 1 , 203 A.2d 796 (1964),
see Melville supra
(analysis of Pennsylvania’s current approach), or the more significant relationship test of Restatement (Second), Conflict
*201
of Laws, sound arguments can be made for application of both Pennsylvania and New York law on the various issues. However, because of the facts that we have found, we need not engage in lengthy analysis of the choice of law question or decide it because, under either law, GE must prevail on the various issues. During the course of the discussion that follows, we shall consider the law of both states.
C.
Did Ebasco Possess Authority to Issue Supplement 16 (or, Did PP&L Ratify it)?
1.
Introduction
We commence with the authority question because, even if PP&L had somehow previously acquired contract rights greater than those conferred by Supplement 16, Supplement 16 is valid so long as Ebasco had authority to negotiate and issue it on PP&L’s behalf. In
Ebasco I, see
402 F.Supp. at 445-52 , we analyzed the authority question in terms of four potential kinds of authority — express, implied, apparent and inherent — and in terms of the notion of ratification. We shall do so again, in the wake of our findings of fact. We discussed in
Ebasco I
the meaning of those legal concepts and will not repeat their description now. For the reasons that follow, our conclusion is that, under the facts as we have found them, Ebasco possessed express, implied, apparent, and inherent authority to issue Supplement 16.
2.
Express Authority
We note preliminarily that, if there were no claim of intervening acquisition of greater contract rights, there could be no colorable assertion by PP&L that Ebasco lacked authority to enter into Supplement 16. Ebasco’s express authority to purchase permanent project equipment and to negotiate commercial terms and conditions in connection therewith would then plainly prevail. However, given the intervening acquisition claim, it cannot be said that Ebasco possessed
express
authority to negotiate downward and thereby to dilute rights won for PP&L either via U.C.C. § 2-207 or on the theory that, even in the absence of § 2-207, there was a threshold contract for the steam turbine generator on Ebasco terms.
There is, however, the matter of “quid pro quo,” which we have found to attend Supplement 16. In light of our finding that Supplement 16 represented a negotiating trade-off in which PP&L both won and lost certain contract advantages and considering the extremely broad authority conferred by PP&L upon Ebasco under the turnkey concept, we believe that Ebasco did possess express authority to negotiate and issue Supplement 16. The Supplement 16 negotiations fall within the continuum of Ebasco authority and responsibility for purchasing permanent project equipment and for negotiating commercial terms and conditions in connection therewith. We do not believe that an analysis of the advantages and disadvantages of Supplement 16 can be applied to alter this conclusion any more than PP&L could avoid what it deemed to be unfavorable terms of earlier Supplements on the ground that they were detrimental. We add only a reference to our finding that at no point in the PP&L-Ebasco dealings was Ebasco divested of its broad authority by a direction from PP&L to secure protection against the cost of replacement power. To the contrary, in accordance with the GE-Ebasco course of dealing and general trade custom, PP&L did not expect that cost of replacement power could be recovered.
3.
Implied Authority
We have found that Ebasco’s extremely broad turnkey authority to get Brunner # 3 built included, among the acts incidental to or that usually accompany or are reasonably necessary to accomplish such a task, negotiating and issuing Supplement 16. The quid pro quo finding, of course, supports this conclusion, but it would in any event be supported by the finding that it was customary for engineer-constructors to have authority even to negotiate “down
*202
ward.” It is also important to note in this regard that Supplement 16 cannot be deemed to stand apart from the general process of contract negotiations for, as we have found, it was customary within the power generation industry for a formal contract, with all the essential terms and conditions, not to be finally executed until years after the order was placed. Moreover, PP&L knew that before October 1967 there was no final contract, but only a letter of intent subject to further negotiations; thus, final negotiations were in fact anticipated by PP&L. In connection with implied authority, we referred in
Ebasco
I to § 33 of the Restatement (Second) of Agency and to Comment b thereto:
An agent is authorized to do, and to do only, what it is reasonable for him to infer that the principal desires him to do
in the light of the principal’s manifestations and the facts as he knows or should know them at the time he acts,
(emphasis added).
Comment b. Authority distinct from contract of agency. An agent is a fiduciary under a duty to obey the will of the principal as he knows it or should know it. This will may change, either with or without a change in events. Whatever it is at any given time, if the agent has reason to know it, his duty is not to act contrary to it. The fact that in changing his mind the principal is violating his contract with the agent does not diminish the agent’s duty of obedience to it. Hence the rule applicable to the interpretation of authority must be as flexible as the will of the principal may be. Thus, whether or not the agent is authorized to do a particular act at a particular time depends, not only on what the principal told the agent, but upon a great variety of other factors, including changes in the situation after the instructions were given. The interpretation of authority, therefore, differs in this respect from the interpretation of a contract, even the contract of agency.
We then observed:
When PP&L and Ebasco first negotiated the agency contract, they did not cover the situation that arose when Ebasco and GE were unable to agree on the terms of the sale of the turbine generator unit. In such a situation, Comment
b
indicates that Ebasco’s authority should be measured in light of the circumstances prevailing at the time difficulties in negotiating Supplement 16 were encountered. As we indicated previously, it is difficult to determine when viewed ten years later whether a § 2-207 contract existed while the Supplement 16 negotiations were proceeding. Whether Ebasco could reasonably have determined that one did exist, and whether, if one did, Ebasco could reasonably have been led to believe that PP&L would therefore have forbade the negotiation of Supplement 16 is a question for the trier of fact. Further, the fact finder would also have to take into account GE’s forceful contentions that Supplement 16 was not a “downward” negotiation for PP&L but, rather, a quid pro quo.
402 F.Supp. at 448—49.
We have already resolved the quid pro quo question in GE’s favor. We add here that we do not believe that Ebasco could reasonably have determined that a § 2-207 contract existed. Even if it could have so determined, we do not think that it could have reasonably believed that PP&L would, under all the circumstances, have forbidden this negotiation of Supplement 16. In short, under the facts as they existed at the time of the Supplement 16 negotiations and given Ebasco’s broad turnkey authority (and, additionally, the quid pro quo that was negotiated), we are satisfied that Ebasco was doing what it was reasonable for it to believe PP&L would have wished it to do, in light of PP&L’s manifestations and the facts as Ebasco knew them at the time (including PP&L’s failure to give specific instructions on replacement power in the face of its knowledge of the negotiations leading to Supplement 16).
4.
Apparent Authority
We have found that PP&L held out or manifested to GE that Ebasco was au
*203
thorized to negotiate Supplement 16 (as well as do everything else reasonably necessary in connection with Brunner # 3). PP&L put Ebasco in the traditional architect/engineer/eonstructor role, which included purchase of equipment and negotiation of commercial ter

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2093137. Public record. Not legal advice.