Gas Plant Design and Construction Dispute
The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.
Contract Termination and Damages Analysis
Stella-Morris Plant Partners v. Freya International Litigation
I. The Dispute
A dispute has arisen between Freya International Mimir River Project, LLC (Freya International), Stella Co. (Stella), and Stella-Morris Plant Partners (Stella-Morris) relative to several contracts. On September 5, 2001, Freya International notified Stella that Stella was in default relative to two contracts, which hereafter will be referred to as Contracts 1 and 2. Additionally, Freya International indicated that Stella’s default under Contracts 1 and 2 constituted a default by the joint venture of Stella-Morris under two separate contracts, which will be referred to as Contracts 3 and 4.
On September 19, 2001, Stella-Morris filed a lawsuit against Freya International seeking payment for the work Stella-Morris performed relative to Contracts 3 and 4. Shortly thereafter, in October 2001, Freya International filed its response to Stella-Morris’s lawsuit and filed a counterclaim seeking damages from Stella-Morris.
II. Contract Formation and Termination
The following graphic illustrates the relationships among the parties involved in all four (4) contracts.
Relationships among the Parties
Freya International entered into two (2) lump sum EPC contracts with Stella: the Celeste Gas Plant (hereafter Contract 1) and the Lordureaux Fractionation Plant (hereafter Contract 2). The parties executed both contracts on October 29, 1999, with original contract values of $13.5 million and $29 million, respectively. The final completion date for both contracts was November 30, 2000....
The timing of the contract events surrounding the subject matter of this lawsuit are illustrated in this section. The following graphic is a timeline of significant contract events occurring during the execution of Contracts 1 through 4 to the time of termination. The timeline identifies the time when the contracts were executed, the planned completion dates, Freya International’s acknowledgement of mechanical completion, Freya International’s termination dates of Contracts 1 through 4, and when the plants under Contracts 1 and 2 were producing contract specification product according to Freya International.
Timeline of Significant Events
III. Summary of Opinion
It is Interface Consulting’s opinion that Stella-Morris is entitled to additional compensation due to Freya International’s actions and inactions. Stella-Morris is due $2 million for the fixed-fee portion of Contracts 3 and 4 from Freya International for work performed under Contracts 1 and 2 (this amount is included in the following calculations). If the court finds that Freya International failed to perform its obligations under Contracts 3 and 4, then Stella-Morris is entitled to damages from Freya International in the amount of $3,349,154 for work it performed, indirect costs, and profit. Alternatively, if the court finds that Freya International terminated Contracts 3 and 4 for convenience, then Stella-Morris is entitled to damages from Freya International in the amount of $383,852 for work it performed, indirect costs, and profit. The following table summarizes Interface Consulting’s findings relative to the amount due Stella-Morris.
Stella-Morris Damages – Contracts 3 and 4
In addition, Freya International failed to comply with Contracts 1 and 2 by withholding and refusing to pay Stella for work Freya International directed Stella to perform. Freya International’s refusal to pay Stella severely impacted Stella’s ability to pay its vendors and subcontractors. Freya International also wrongfully terminated Stella on Contracts 1 and 2 and improperly invoked the cross default clause to declare Stella-Morris in default on Contracts 3 and 4. Mr. Andy Ausmus, who was and is in charge of Freya International’s operations management, testified that Stella had complied with the Basis of Design and there was no basis to terminate the contracts.
Mr. Andy Ausmus, Freya International
Contracts 1 and 2
Stella fully performed under Contracts 1 and 2, but for Freya International’s delays, interferences, and lack of payment to Stella. Freya International either failed to pay Stella for appropriate changes in a timely manner or not at all, which compromised Stella’s ability to pay its subcontractors and vendors. Freya International wrongfully terminated Stella’s Contracts 1 and 2, and Stella is entitled to compensation for the additional work Stella performed but was not paid for. Additional observations and findings are summarized as follows.
Freya International increased the capacity of the fractionation plant (Contract 2) by 40%.
Freya International increased Stella’s scope of work under Contracts 1 and 2; Stella valued the additional work at $23.3 million.
Freya International Increased Stella’s Scope of Work by 55%
Of the additional work on Contracts 1 and 2, Freya International failed to pay Stella for additional work performed, totaling $9.0 million, that was tallied on a captured items list kept by Stella and provided to Freya International.
Freya International failed to provide adequate project management.
Freya International failed to extend the project schedule to incorporate delays and additional scope of work mandated by Freya International.
Freya International wrongfully terminated Stella under Contracts 1 and 2.
Contracts 3 and 4
Stella-Morris was performing its work under Contracts 3 and 4 in accordance with its contract at the time Freya International terminated Stella-Morris’s work. Freya International wrongfully terminated Contracts 1 and 2, as well as Contracts 3 and 4. Freya International has also alleged Stella-Morris was failing to perform, but Freya International’s allegations are unsubstantiated by project documentation. Freya International failed to comply with Contracts 3 and 4 by failing to make payments to Stella-Morris for contract milestones that Freya International admitted Stella-Morris had achieved. Stella-Morris is entitled to damages from Freya International for Freya International’s wrongful termination and failure to comply with the contract.
Additional findings are as follows:
Freya International failed to approve change requests, and engineering and technical submittals in a timely manner.
Freya International’s Delayed Response to Stella’s Change Requests*
*Only approved change requests have been analyzed at this time (Source Data: ...)
Freya International failed to approve any of Stella-Morris’s time extension requests, thus forcing Stella-Morris to accelerate its work.
Freya International made late changes to Stella-Morris’s scope of work, which disrupted Stella-Morris’s progress, yet Freya International refused to recognize justifiable schedule extensions.
Freya International failed to provide time extensions of over three (3) months to Stella-Morris for approved change requests on Contracts 3 and 4.
Freya International delayed Stella-Morris by failing to approve the Basic Design and foundation design in a timely manner or not at all.
Freya International interfered with and delayed Stella-Morris by stopping foundation work at the site and failing to provide owner-furnished permits for construction.
Freya International caused delays, and scope of work additions extended the completion date.
Freya International wrongfully terminated Stella-Morris’s Contracts 3 and 4.
Stella-Morris’s Actions Versus Freya International’s Allegations for Terminating Contracts 3 and 4:
As previously mentioned, Freya International alleged certain actions or inactions by Stella-Morris on which it based its termination of Contracts 3 and 4. The following are Stella-Morris's actions in relation to these allegations.
Payment Prerequisite Issue: Interface Consulting has seen evidence that Stella-Morris provided satisfactory confirmation to Freya International that it was making payments to its subcontractors and vendors. Additionally, Stella-Morris afforded the opportunity for Freya International to review its accounting books, but Freya International did not avail itself of this opportunity, effectively waiving its requirement to affirm that Stella-Morris was paying its bills. Furthermore, Loki assured itself that Stella-Morris was paying its bills when Loki reviewed Stella-Morris’s bank account statements and evidence of payments, approved Stella-Morris’s documentation, and approved payments from Freya International to Stella-Morris.
Replacement of Stella-Morris Representative: Stella-Morris provided written notice to Freya International that it was changing its representative, as required by the contracts; therefore, this is a Freya International allegation that has no foundation or substantiation.
Notice of Freya International-Caused Delays: Interface Consulting has seen evidence that Stella-Morris provided written notice of delays to Freya International in a timely manner as mandated by the contracts.
Project Schedule: Stella-Morris provided detailed schedules to Freya International in accordance with the contracts.
Performance of Work: Stella-Morris performed in accordance with the contracts but for the delays and interferences caused by Freya International’s actions and inactions.
Freya International Acknowledges Base Project Mechanical Completion
Improvements: These were skid-mounted components and, prior to termination, none of the skids were complete or on the construction site. Therefore, prior to the notice of default, this would not have been a justifiable reason for termination.
In conclusion, Interface Consulting has seen no evidence that Freya International had a valid reason relative to contract performance for terminating Stella-Morris’s Contracts 3 and 4.
Freya International Alleged Damages Against Stella-Morris Relative to Contracts 3 and 4:
Freya International, in its Objections and Responses to Stella-Morris Plant Partners’ First Interrogatories, outlines the following damages relative to Contracts 3 and 4.
Freya International’s Alleged Claims Against Stella-Morris
Freya International has failed to substantiate any damages it is claiming against Stella-Morris or provide support for entitlement to damages from Stella-Morris relative to Contracts 3 and 4. Freya International failed to acknowledge or account for its own delays and cost overruns due to its own mismanagement of the completion work. Interface Consulting intends to respond to Freya International’s affirmative position relative to damages when it is put forth by Freya International’s expert.
IV. Discussion of Opinion
In this section, we will discuss….
IV.A. Freya International Wrongfully Terminated Stella’s Contracts 1 and 2
Freya International Increased Stella’s Scope of Work
Freya International Failed to Provide Adequate Project Management
Contracts 1 and 2 Were Mechanically Complete and Stella Was Not in Default
IV.B. Freya International Failed to Comply with Contracts 3 and 4
IV.C. Freya International Wrongfully Terminated Stella Morris Contracts 3 and 4
Freya International Extended Stella-Morris’s Project Duration
IV.D. Analysis of Freya International’s Allegations for Terminating Stella-Morris’s Contracts 3 and 4
V. Freya International's Alleged Damages
Costs to Correct Deficiencies
Cost to Complete
Freya International Overhead
Additional Financing Costs
VI. Compensation Due Stella-Morris on Contracts 3 and 4
VI.A. Damage Model 1 – Failure to Comply with the Contract
VI.B. Damage Model 2 – Termination for Convenience