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East Coast Repair & Fabrication, LLC v. United States

United States District Court, E.D. Virginia, Norfolk Division

August 9, 2016



         This Opinion and Order follows a ten day bench trial involving numerous disputes arising out of a maritime contract between East Coast Repair & Fabrication, LLC, ("ECR" or "Plaintiff") and the United States of America, through the Department of the Navy, and its activity the Norfolk Ship Support Activity (hereinafter collectively "Defendant, " the "Government, " or the "Navy"). With the benefit of the trial transcript, the parties have filed post-trial briefs and submitted proposed findings of fact and conclusions of law. Therefore, the matter is now ripe for review.

         I. Background Findings of Fact[1]

         A. Preliminary Summary

         The instant action involves numerous contract disputes arising out of the overhaul of a Navy vessel by ECR, a private ship repair company. A summary of the case would be incomplete without acknowledging at the outset that such overhaul was in many ways doomed from the start, marred by disputes among the various Government teams, inexperience of key Government players, underestimation of the complexity of the repairs by ECR and its primary subcontractor Tecnico Corporation ("Tecnico"), a defective Government specification based on an outdated hull survey, various "moving ball" standards employed by the Government regarding the manner in which hull "deflection" was measured, multi-month delays occurring at the outset of the overhaul, and lack of training and/or understanding of the unique nature of the type of vessel being overhauled by project managers, engineers, and other persons working in key positions for ECR, Tecnico, and the Government. These and other issues somewhat predictably led the parties to this Court, and the only easy conclusion to draw from the trial evidence is that it is impossible to apportion the entire blame for the contract disputes to one party or the other. Against such backdrop, the Court makes the following findings and conclusions, ultimately entering a PARTIAL DAMAGE AWARD to ECR, and to its primary subcontractor Tecnico on multiple "pass-through" claims.

         B. Stipulated Facts and Procedural Background [2]

         1. Plaintiff, ECR, is a Virginia corporation organized under the laws of the Commonwealth of Virginia with its principal place of business in Norfolk, Virginia. ECR performs ship repair work for commercial customers and for the United States Government, including the U.S. Navy.

         2. The subject of this dispute arises from a contract between the Navy and ECR under contract number N50054-11-C-1107 (hereinafter the "Contract") for ship repair work on the vessel USS THUNDERBOLT (PC-12) (hereinafter the "THUNDERBOLT" or the "Vessel"). The Government has issued a Contracting Officer's Final Decision denying ECR's Request for Equitable Adjustment (hereinafter "REA") seeking additional compensation for vessel repairs performed on the THUNDERBOLT.

         3. The THUNDERBOLT is a Navy Patrol Coastal Ship of the CYCLONE class ("PC") and is a public vessel of the United States being operated by the Navy as part of the United States fleet. The THUNDERBOLT has been homeported and forward deployed at Naval Support Activity Bahrain since July 3, 2013, but was, at times relevant to this lawsuit, homeported in, and the repair work at issue was completed in Hampton Roads, which is within the Eastern District of Virginia.

         4. The Navy built the CYCLONE class of patrol craft, including the THUNDERBOLT (PC-7), in the early 1990's as support craft for Navy SEAL teams. The CYCLONE class ships were originally designed for a service life of fifteen years, and by 2010, the ships were found to have suffered metal fatigue in their hulls. However, when a new mission for the ships in the Arabian Gulf was identified, the Navy undertook extensive repairs to the ships to extend their usefulness in the new role.

         5. As the repairs to accomplish the overhauls of the CYCLONE class ships were identified and specifications were written, an initial contract for the overhaul of the THUNDERBOLT was finalized between the Navy and Marine Hydraulics International ("MHI"). The disassembly of the THUNDERBOLT began under such contract, and the parts were stored by MHI.[3]

         6. In the spring of 2011, the Navy solicited another contract to complete the overhaul of the THUNDERBOLT that was begun by MHI. The solicitation sought fixed price bids for the specified repairs and advised potential bidders that the Vessel had been partially disassembled, with many parts in storage.

         7. ECR prepared and submitted its quote for the THUNDERBOLT work and contract, relying on the information the Navy made available during the proposal phase regarding the scope of the work to be performed (the "specification" or "Specification Package") . The Navy awarded the Contract to ECR on August 25, 2011, at ECR's bid price of $7, 317, 394. Such Contract was a "Fixed Price" contract, as contrasted with a "Cost Reimbursement Contract."[4]

         8. The Contract contained four (4) Contract Line Item Numbers or CLINs, and all disputes at issue in this case pertain to the performance of CLIN 1, which was the main work item. CLIN 1 required ECR to: Plan for and accomplish the drydocking restricted availability (DRAV) of USS THUNDERBOLT (PC-12) SSP 038-11 (excluding CLIN 002). Among the Contract work to be performed was the cropping out and replacement of the THUNDERBOLT'S hull structure, plate, and stiffeners, referred to as the "structural steel work." The bulk of this work was to be performed while the THUNDERBOLT was docked at ECR's repair facility.

         9. Specification Package #037-11 listed fifty-seven Navy "Standard Items" that were explicitly incorporated into the Contract, named fifty-seven more Standard Items which might be invoked as changes were made to the Contract, then described the "Planned Work" of the overhaul in fifty-nine "Work Items" that specified the exact work to be done on the Vessel.

         10. The initial schedule under which the work was to be accomplished was specified in the Contract as a series of milestones. The THUNDERBOLT was towed to ECR on September 26, 2011, starting the availability, and the last milestone was the completion of the availability, which was to be accomplished by June 22, 2012. The initial performance period of the Contract was therefore 270 days. The original Contract milestones called for the docking to occur on October 7, 2011, and for undocking to occur on May 10, 2012.

         11. The "Changes" clause incorporated into this Contract, Federal Acquisition Regulation ("FAR") 52.243-1 (Alt II - Aug 1987), provides that changes to such fixed price contract can be made by the "Contracting Officer" and that: "If any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, the Contracting Officer shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract." 12. As the overhaul of the THUNDERBOLT progressed, plans and procedures for the work detailed in the specification package caused delays and new "growth" work was added to the package. As these new requirements arose, the Navy eventually issued a series of fifty-nine written Contract modifications.

         13. Of these fifty-nine modifications, forty-three were bilateral, i.e., signed and agreed to by both the Navy and ECR as to the price and the impact on the then current schedule. The remaining sixteen modifications were unilateral, i.e., issued and priced by the Navy but not agreed to by ECR. The unilateral modifications included prices and/or time extensions granted by the Navy but not agreed to by ECR, and several involved "credits" reducing the overall Contract price.

         14. After issuance of the fifty-nine modifications, the total Contract price was $15, 536, 680.57, and the contractually scheduled/allowed final completion date was December 9, 2012. The performance period was therefore extended by the Navy from the original 270 days by an additional 172 days. The THUNDERBOLT availability was not complete until April 2013, several months after the modified performance date.[5]

         15. On September 27, 2013, some months after ECR had completed work on the Vessel and delivered it to the Navy, ECR submitted its properly certified REA to the Navy seeking further adjustment of, and compensation for, the changes to the work scope and means and methods of performance on the THUNDERBOLT under the terms of the Contract.

         16. On or about September 8, 2014, the Navy issued its Final Decision by letter Serial 414/WKR/306. The Navy's Final Decision denied ECR's REA in its entirety, to include the claims ECR submitted on behalf of its subcontractors. The Final Decision also provided notice to ECR of its right to appeal the Final Decision.

         17. On or about November 25, 2014, ECR filed this timely appeal of the Contracting Officer's Final Decision in the United States District Court for the Eastern District of Virginia, Norfolk Division.

         18. Subsequent to the filing of this lawsuit, ECR and one of its subcontractors, Marine & Industrial Coatings, LLC ("MIC"), entered into negotiations to resolve the then-pending subcontractor "pass-through" claim which was included with the ECR damages calculations.

         19. MIC and ECR settled the MIC subcontractor REA for $650, 000 which is approximately 52% of the original value of MIC's claim ($1, 251, 545). This settlement was acknowledged in ECR's Initial Disclosures filed in this matter, and ECR has subsequently reduced its damages request to reflect the settlement, to include a reduction in the amount claimed for "General and Administrative" expenses ("G&A") calculated based on the MIC claim. Such changes result in a revised damages amount, or ad damnum, of $11, 166, 815.

         C. Additional Factual Findings Based on Evidence Presented at Trial

         Based on the trial evidence, the Court makes the following additional factual findings by a preponderance of the evidence:

         1. The THUNDERBOLT is a thin-hulled PC class vessel engineered very differently from the "surface combatant" ships in the Navy's fleet. Such fact had broad reaching impacts on the overhaul of the THUNDERBOLT, and led to many of the disputes litigated before this Court. This is particularly the case because the Navy treated PC class vessels as "ships" during prior repair "availabilities, " but took steps to change such treatment during 2011.

         2. The THUNDERBOLT was one of three PC class vessels being overhauled around the same time (2011-2013) in the Hampton Roads port. In addition to the THUNDERBOLT, the USS TEMPEST was overhauled by ECR at the same Portsmouth shipyard as the THUNDERBOLT, with the initial plan being that the major work items on the two vessels would be worked in sequence, with the THUNDERBOLT beginning first. The USS SQUALL was the third PC class vessel being overhauled, although it was overhauled by a different local shipyard located in Norfolk: Colonna's Shipyard, Inc. ("Colonna's").

         3. The THUNDERBOLT overhaul, as well as the two other concurrent PC overhauls, was a high-priority availability from the Navy's perspective. However, different Navy representatives had different, and in many ways conflicting, priorities. First, there was an operational priority to finish the overhaul as soon as possible so that the Vessel could be deployed in the Middle East. Second, there was a conflicting engineering priority to conduct the repairs in a methodical and conservative manner in order to reduce risk of inadvertent hull damage and/or the need for "rework" on the thin-hulled PC class vessel. While there is no question that both Plaintiff and Defendant are responsible for delays during the THUNDERBOLT availability, needless to say, it was impossible for ECR to speed up, and slow down, at the same time.

         4. The Navy's ship repair group based in Hampton Roads, Virginia, has had various names over the years, including the Norfolk Ship Support Activity ("NSSA"), the Mid-Atlantic Regional Maintenance Center ("MARMC"), and SUPSHIP. PC class vessels, including the THUNDERBOLT, have been repaired in the past on multiple occasions, including repairs at local Hampton Roads shipyards. Such prior repairs, however, were not complete overhauls aimed at resolving structural damage throughout the entire vessels.[6] When prior PC repairs were performed locally, the Navy's Carderock Division ("Carderock"), which consists of engineers and naval architects, was not involved. Rather, in the past, engineers working at NSSA/MARMC would oversee the repairs. The contracts governing such prior repairs invoked various Navy "Standard Items" even though such standards and procedures were originally written to govern repair work on large surface combatants such as cruisers, destroyers, and frigates.

         5. From a structural standpoint, the PC class vessels are not "ships, " and are not "boats, " but are more of a hybrid, and therefore are structurally different from Navy surface combatants. Unlike a surface combatant, a PC is a high-speed craft that will semi-plane (which makes it like a boat), and to achieve such performance, the hull structure is very lightweight (and thus very thin). Speaking generally, ships have a backbone (a keel), whereas PCs do not have a keel. A PC's structural strength is based on the shell plate, the shell plate stiffeners, the longitudinal girders, and the main deck stiffeners.

         6. At the time of its overhaul by ECR, the THUNDERBOLT was several years past the end of its useful life, and large portions of structural steel, including its hull, deck, stiffeners and girders, were damaged and needed to be replaced. The degree to which a section of structural steel is "not fair, " i.e., dented or bent, is referred to as "deflection." Unfortunately for all involved in the THUNDERBOLT overhaul, the Government did not update the specification for the planned overhaul with a new and detailed "survey" of the THUNDERBOLT'S hull as measured immediately prior to the ECR overhaul, but instead relied on an outdated hull survey that had been performed prior to the MHI availability.

         7. During the summer of 2011 when ECR was awarded the Contract for the THUNDERBOLT overhaul, the following entities did not fully appreciate the engineering challenges involved in a PC overhaul involving large-scale structural steel renewal: ECR, ECR's structural steel contractor-Tecnico, the Navy Contracting Officers assigned to the THUNDERBOLT (the individuals responsible for contract-related issues and authorizing growth work and new work differing from that required under the terms of the Contract, as well as compensation for such changes), the Navy maintenance team assigned to the THUNDERBOLT (the team responsible for overseeing day-to-day repairs, led by Navy Project Manager Justin Thivierge ("Thivierge")), and arguably most importantly, Navy engineers employed by NSSA, to include the lead Project Support Engineer. See, e.g., ECR Ex. 3 61.

         8. At the time the Contract was awarded, based on knowledge obtained from prior PC overhauls occurring in the country of Bahrain, the Navy's Carderock engineers had detailed information about PCs, including newly identified structural risks associated with a large-scale overhaul. Such information, however, resided only in Carderock, and there was an internal Government "information gap" between Carderock and NSSA. Critically, it was NSSA who wrote the specification for the overhaul of the THUNDERBOLT that was bid on by ECR. The disconnect between Carderock and NSSA is further evidenced by the fact that the specification for the THUNDERBOLT overhaul omitted a reference to a newly developed Government Liaison Action Record ("LAR") specific to structural steel renewals on PC class vessels that established the updated standard for measuring deflection after structural steel repairs are performed. Although the updated LAR was not part of the Contract, the Government held ECR and Tecnico to such newly developed standard during the THUNDERBOLT availability.

         9. The specification provided by the Navy to enable ECR (and others) to bid on the THUNDERBOLT overhaul did not include restrictions as to how the steel repairs were to proceed, nor did the specification, or other bid documents, effectively communicate the knowledge that Navy Carderock engineers had obtained in 2010 during PC overalls in Bahrain. Moreover, ECR had prior familiarity working on PCs as required by NSSA, including the THUNDERBOLT, and the PCs were previously treated as ships by NSSA notwithstanding their "hybrid" nature. Notwithstanding such past treatment, ECR was contractually bound to perform as required in the Contract documents, and to the extent the Contract included provisions that may have been viewed as "atypical" in the industry, ECR bore the risk of the additional costs of satisfying such contractual provisions.

         10. After ECR was awarded the THUNDERBOLT Contract, but before the Vessel was ever docked, the planned nine-month timeline for the availability was delayed by more than two months. Due to no fault of ECR, even after the Contract was awarded, the Navy was "still analyzing how best to lift the USS THUNDERBOLT out of the water and haul it up to the shipyard without structural damages." ECF No. 58 ¶ 28. The Navy was working on such plan because a Carderock engineering analysis had concluded that one of the "root causes" of the existing structural damage on the PC vessels was performance of past dockings utilizing the Navy's own flawed required docking plan. Trial Tr. 1353. The Navy failed to inform ECR of such issue until after its bid was accepted.

         11. As a result of the docking issues caused by the Navy, the docking of the THUNDERBOLT was delayed from October 7, 2011, until December 13, 2011, putting the availability more than two months behind schedule before the THUNDERBOLT was ever out of the water. Such delay was the subject of a bilateral Contract modification (MOD-8), and ECR was compensated $1, 350, 000. JE 8, Govt. Ex. 36. As part of such negotiated change, which included release language, ECR was precluded from seeking further compensation as a result of the docking delay. As a result of the agreed change, the Contract performance period was extended by approximately two months.

         12. A second major issue that caused the planned timing of the THUNDERBOLT availability to derail from the start is the fact that, almost immediately after the THUNDERBOLT Contract was awarded to ECR, the Navy informed ECR that a Process Control Procedure ("PCP") would be required by the Navy for the structural steel renewals on the THUNDERBOLT. The structural steel work was the largest line item of the overhaul, and the Navy's invocation of a PCP for the structural steel would afford the Navy far more oversight of, and the authority to control, the processes and procedures used by ECR to replace the steel.

         13. Because the Navy did not invoke the PCP until after ECR's bid was accepted, ECR's bid price for the THUNDERBOLT did not include the added cost of writing or implementing a PCP for the structural steel renewals. Rather, ECR's bid was based on its intent to follow "good ship-fitting" practices when removing and replacing large portions of steel simultaneously, taking the necessary steps to ensure the structural integrity of the Vessel consistent with its past work for the Navy on the THUNDERBOLT and other PC class vessels. However, from the perspective of Navy Carderock Engineer Chris Foeller (the most knowledgeable Navy Engineer at the time of the THUNDERBOLT availability regarding PC class structural steel renewals), it was unlikely that the use of "good ship-fitting practices" would ensure the Vessel's structural integrity. Trial Tr. 1367. Critically, such viewpoint: (1) was never shared with ECR prior to the availability or at the time the PCP requirement was announced by the Navy; (2) was grounded in the Navy's newly discovered undisclosed superior knowledge, purportedly learned during the prior Bahrain PC availabilities; and (3) was the viewpoint of Mr. Foeller/Carderock, and was not a fact proven by Defendant by a preponderance of the evidence.[7]

         14. Prior to the 2011 PC class availabilities in Hampton Roads, the only time the Navy had invoked a PCP for structural steel repairs on a PC class vessel was the Navy-terminated availability on the THUNDERBOLT at MHI shipyard. Such availability was terminated around the same time that a structural steel PCP had been finalized, although the PCP that the Navy approved for the MHI availability was relatively basic and covered a relatively small amount of structural work.

         15. As to the earlier Bahrain availabilities, the Navy had not required a PCP, but did require that the Bahrain shipyards "provide a sequence and a plan." Trial Tr. 1350. Such required sequence/plan used in Bahrain is similar to a PCP, but is not the same, because the "plan" in Bahrain merely consisted of "general guidelines" of what the shipyard would do, and would not do, when replacing steel. Id. For example, the Bahrain shipyard would be prohibited from working on two side-by-side structural steel frames at the same time. Id. In contrast, the PCP ultimately mandated by the Government for the THUNDERBOLT availability required that every frame, every cut, be ...

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