IPSCO Tubulars Inc v. Ajax TOCCO Magnathermic Corporation
ORDER: The Eighth Circuit affirmed the verdict of this case on March 4, 2015, but remanded for specific findings on damages because its review was "hindered without additional explaination". The parties were asked to submit proposed finding s of fact as to damages. Having reviewed the parties' proposed findings on damages, 198 and 201 , plaintiff IPSCO Tubulars, Inc's proposed findings, 198 are adopted as set forth in this Order. Signed by Chief Judge Brian S. Miller on 11/24/2015. (jak)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF ARKANSAS
IPSCO TUBULARS, INC.
d/b/a TMK IPSCO
CASE NO: 3:10CV00021 BSM
AJAX TOCCO MAGNETHERMIC
This case was tried to the bench between May 6 and May 23, 2013. The parties filed
post-trial briefs before making closing arguments on August 16, 2013, and a plaintiff’s
verdict in the amount of $5,162,298.55 was rendered on September 25, 2013. The Eighth
Circuit affirmed the verdict on March 4, 2015, but remanded for specific findings on
damages because its review was “‘hindered’ without additional explanation.” IPSCO
Tubulars, Inc. v. Ajax TOCCO Magnathermic Corp., 779 F.3d 744, 752 (8th Cir. 2015).
In that almost two years elapsed between the time the case was tried and the issuance
of the circuit’s opinion, the parties were asked to submit proposed findings of fact as to
damages. Having reviewed the parties’ proposed findings on damages [Doc. Nos. 198, 201],
plaintiff IPSCO Tubulars, Inc.’s proposed findings are adopted as set forth below.1
Outside Processing Costs
The findings set forth below are taken directly from IPSCO Tabulars, Inc.’s Proposed
Findings on Damages [Doc. No. 198] because it accurately states the court’s position. Although
this is true, for simplicity, this order does not contain quotations to IPSCO’s proposed findings.
IPSCO was awarded $3,967,954.74 for costs incurred in sending pipe to outside
processors. While these costs included $23,539 in outside processing costs for seamless
pipe, they did not include costs for casing. Moreover, these costs were not awarded as
consequential damages, but as costs reasonably expended incidentally to Ajax’s breach.
Do Outside Processing Costs Include Costs for Casing and Seamless Pipe?
The damages awarded for outside processing costs included the costs for seamless
pipe but not for casing.
IPSCO built the Blytheville, Arkansas, heat treat facility to get a stronger foothold in
the market for heat treated pipe. Murray Giesbrecht testified that in the mid-2000’s, there
was a substantial demand for higher grades of oil country tubular goods produced by heat
treat process. Test. Giesbrecht, Trial Tr. at 358:4–11, Doc. No. 148. During that period,
IPSCO was already producing both electric resistance welded (“ERW”) and seamless oil
country tubular goods, both of which could be converted to higher API grades through the
heat treat process. IPSCO, however, did not have the capacity to produce enough of these
goods at API specifications and had to use third-party processors for heat treatment. Id. This
increased IPSCO’s manufacturing costs for heat treated oil country tubular goods. Id.
IPSCO therefore built the Blythville facility to reduce these costs, and contracted for the heat
treat equipment supplied by Ajax as the centerpiece of that facility.
Although IPSCO anticipated that most of the pipe processed at Blythville would be
ERW pipe, it also expected to heat treat seamless pipe at the facility. Test. Rick Hart, Trial
Tr. 1785:11–1786:1, Doc. No. 154. To this end, IPSCO drafted requirements that outside
suppliers would have to meet if they sent pipe to be heat treated at Blytheville, and those
requirements applied to both ERW and seamless pipe. Id. Moreover, nothing in IPSCO’s
contract with Ajax limited the use of the Ajax equipment to the heat treatment of ERW pipe.
The testimony at trial did not prove that Ajax believed IPSCO would refrain from using its
heat treat equipment to produce higher grades of seamless oil country tubular goods.
Stephen Buffo, Ajax’s damages expert, testified that IPSCO expended $23,539 in
outside processing costs for seamless pipe. Test. Buffo, Trial Tr. 2506:4–6, Doc. No. 157.
Based on the credible testimony of Lonnie Barker, IPSCO’s employee in charge of outside
processing, it was determined that outside processing costs did not include costs for casing.
Test. Barker, Trial Tr. 1280:14–16, Doc. No. 151. Accordingly, Thomas Groskopft,
IPSCO’s damages expert, included outside processing costs for seamless pipe, but not for
casing, in the total outside processing costs.
Outside Processing Costs are Recoverable Damages
Section 12.1 of the parties’ contract limits recovery for certain types of consequential
damages and provides that consequential damages are not recoverable for “loss of profits,
loss of revenue, loss of anticipated business, loss of use, downtime costs or costs of capital
suffered or incurred by the Owner or for exemplary or punitive damages. . . .” Gen.
Conditions of Contract, Ex. A, § 12.1, Doc. No. 53. Ajax failed to prove its affirmative
defense that outside processing costs are unrecoverable consequential damages under section
12.1. Contrary to Ajax’s contention, the record indicates that these are not consequential
Ajax failed to prove that outside processing costs are
unrecoverable consequential damages.
“Whether damages are consequential is a question of fact.” IPSCO, 779 F.3d at 751
(quoting Dickson v. Delhi Seed Company, 760 S.W. 2d 382, 389 (Ark. Ct. App. 1988)). Ajax
had the burden of proving its affirmative defense that outside processing costs were
unrecoverable consequential damages. See Vent v. Johnson, 303 S.W.3d 46, 52 (Ark. 2009);
Ross v. Garner Printing Co., 285 F.3d 1106, 1113 (8th Cir. 2002). IPSCO correctly points
out that Ajax did not put on any evidence at trial that satisfactorily shows outside processing
costs were one of the consequential damages listed in section 12.1 of the contract.
Defense counsel merely stated during closing arguments that IPSCO’s outside
processing costs are barred by section 12.1 because they are “premised on the assumption
that Ajax’s downtime and loss of full use of the equipment required pipe to be sent out.”
Def’s Closing Arg., Trial Tr. 2788:3–11, Doc. No. 168. This passing reference is merely
conclusory and therefore insufficient to prove that IPSCO’s outside processing costs are
unrecoverable consequential damages. Importantly, these costs are not for downtime or loss
of use because IPSCO was, in fact, able to use the Ajax equipment. Moreover, nothing in
the record shows that these were costs for labor or other general overhead items that IPSCO
was unable to cover, thereby losing some benefit because it could not use Ajax’s equipment
at all. The outside processing costs were not incurred because the equipment was shut down,
but because the equipment could not process the heat treated product to the specifications
provided by the contract. Test. Giesbrecht, Trial Tr. 2631:1–4, Doc. No. 158; Test.
Groscopft, Trial Tr. 2569:18–2570:10, Doc. No. 158.
Ajax could not prove that IPSCO’s outside processing costs are consequential
because they were awarded as incidental damages.
IPSCO’s outside processing costs are incidental damages because they were
reasonably incurred to avoid the losses that would have resulted from the deficient
performance of the Ajax equipment. Buyers of defective goods are permitted to recover
incidental damages, which include any reasonable expenses incident to the breach. Ark.
Code Ann. §§ 4-2-714, 715. The costs of obtaining substitute performance for equipment
that does not perform as contracted are incidental, not consequential, damages. See Mead
Corp. v. McNally-Pittsburg Mfg. Corp., 654 F.2d 1197, 1210, 1210 n. 19 (6th Cir. 1981)
(costs incurred to obtain substitute performance represent damages falling within the concept
of cover, “they would not come under the definition of consequential damages”).
In Mead, the plaintiff contracted with the defendant for a loading scale meeting the
certification requirements of the Inspection Bureau. Id. at 1210. The scale provided by the
defendant, however, failed to meet these requirements and the Bureau refused to certify it,
forcing the plaintiff to incur substantial costs in obtaining alternative weighing services,
including transportation costs. Id. The court held that these costs did not fall under the
definition of consequential damages, but could more appropriately be construed as cost of
cover. Id. at 1210 n. 19. As such, the court essentially held that these costs were incidental
damages. See Kohlenberger, Inc. v. Tyson’s Foods, Inc., 510 S.W.2d 555, 560 (Ark. 1974)
(defining incidental damages as costs of cover and any other reasonable expense incident to
The plaintiff’s substitution of the defective performance of the loading scale in Mead
is similar to IPSCO’s substitution of the defective performance of the Ajax equipment.
IPSCO contracted with Ajax for equipment capable of heat treating pipe at the rate of 96 feet
per minute so that IPSCO could produce API specified pipe for its customers. The
equipment provided by Ajax failed to perform as contracted, resulting in production of nonAPI specified pipe. To prevent some of the losses it would have suffered if it could not
produce the API specified pipe, IPSCO was forced to incur substantial expenses to obtain
alternative heat treatment. These included transportation and third-party processing costs.
Just as in Mead, these costs were incurred to prevent further losses and are therefore
incidental in nature. Importantly, these damages cannot fit the definition of consequential
damages. Dickson v. Delhi Seed Co., 760 S.W.2d 382, 389 (Ark. App. 1988) (defining
consequential damages as losses ... which could not have reasonably been prevented by cover
The Downstream Equipment
The evidence shows that IPSCO’s downstream equipment never prevented the Ajax
equipment from processing pipe at 96 feet per minute. Giesbrecht, Trial Tr. at 419:5–8; Test.
Joyner, Trial Tr. at 934:6–8, Doc. No. 150; Test. Manfredi, Trial Tr. at 632:13–21, Doc. No.
149. Moreover, the Blytheville heat treat process is designed to be a continuous process, in
which the pipe flows continuously from the beginning of the process to the end of the
process. This process can, however, be operated as a detached process, in which there are
outlets to which products can be sent at various stages. The outlets would be used to hold
product temporarily if a downstream piece of equipment were not operating properly.
Manfredi, Trial Tr. 626:23–627:17. Because of IPSCO’s ability to operate this way, it would
not have needed to send pipe to outside processors even if its downstream equipment had
been unable to keep up with the Ajax equipment.
Joyner, Trial Tr. at 931:3–18.
Consequently, no downstream equipment contributed to IPSCO’s need to incur outside
The evidence does not support Ajax’s assertion that downstream
equipment constraints prevented its equipment from operating at 96 feet per minute.
While the flume was being enlarged in Spring 2008, IPSCO evaluated cycle times for
its downstream equipment to ensure that it would be capable of running at the 96 feet per
minute that the Ajax equipment was expected to run. Joyner, Trial Tr. at 931:3–18.
Although enlarging the flume did not enable the Ajax equipment to run at 96 feet per minute,
by the time the flume was enlarged in June, 2008, credible testimony shows that every piece
of IPSCO’s equipment was capable of running at 96 feet per minute. Moreover, when
integrated together, all of IPSCO’s equipment could run at 96 feet per minute. Manfredi,
Trial Tr. 625:6–626:13; Joyner, Trial. Tr. 931:3–18. Accordingly, it was determined that
IPSCO’s downstream equipment could run at 96 feet per minute independently from the Ajax
Costs Incurred as a Result of Selling Downgraded Pipe
Whether the costs incurred by IPSCO in selling the downgraded pipe at a reduced
price amounts to lost revenue under section 12.1 of the General Conditions was not
considered in awarding IPSCO $784,964.82 in damages for the downgraded pipe because
neither party addressed the issue. As discussed above, whether this award constitutes lost
revenue, and is thereby barred by section 12.1, is an affirmative defense for which Ajax had
the burden of proof. See Vent, 303 S.W.3d at 52. Ajax failed to carry its burden. It must be
noted that had Ajax sufficiently raised this issue at trial, however, it would have been
determined the $784,964.82 award represents lost revenue because it was awarded as the
difference between the price IPSCO received for the downgraded pipe and the price it would
have received for the pipe as specified.
Although this award could have included the costs of shipping the lower grade of pipe
for resale and for finding new buyers, the record lacks evidence supporting that conclusion.
Consequently, had Ajax properly raised this affirmative defense at trial, it would have been
successful because the $784,964.82 was awarded for lost revenue, which is barred under
IV. Application of the Refinement Period to Damages
for the Reduced Selling Price of Downgraded Pipe
IPSCO incurred damages in the form of outside processing costs because the Ajax
equipment was not capable of heat treating pipe at the contractually specified productivity
rate of 96 feet per minute. Damages were not awarded for the first eight months of
production because the evidence indicated that it typically takes eight months to commission
and refine this type of equipment to maximize its level of productivity, and to reach its
specified production rate. This eight-month refining period, however, does not apply to
damages awarded for the reduced selling price for downgraded pipe.
Ajax attempted to place blame for defects that led to downgraded pipe on issues such
as IPSCO’s material chemistry, incoming bent pipe, pipe surface imperfections, wall
thickness variations, and improper maintenance procedures. That evidence, however, was
unconvincing when considered alongside the trial exhibits, see IPSCO Post Trial Br. ¶4, Doc.
No. 163, and the credible testimony. Heat treating equipment that damages the pipe being
processed is far different from heat treating equipment that must be refined to enable it to run
at its specified productivity rate. The most reasonable inference from all the evidence is that
while a refinement period might have been necessary to enable IPSCO to maximize the speed
at which the equipment could process pipe, no refinement period should have been necessary
to prevent the equipment from damaging pipe to the point that it could not be sold for its
intended purpose. While there was testimony related to the connection between the
refinement period and productivity, no witness provided credible testimony that a refinement
period was necessary to enable the heat treat equipment to process pipe without damaging
ENTERED this 24th day of November 2015.
UNITED STATES DISTRICT JUDGE
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