Hess Corporation v. Schlumberger Technology Corporation

Filing 13

MEMORANDUM OPINION AND ORDER (Amended Complaint due by 2/15/2017.) (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)

United States District Court
Southern District of Texas

ENTERED
January 27, 2017

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

HESS CORPORATION,

§
§
§
§
§
§
§
§
§
§

Plaintiff,
v.

SCHLUMBERGER TECHNOLOGY
CORPORATION,
Defendant.

David J. Bradley, Clerk

CIVIL ACTION NO. H-16-3415

MEMORANDUM OPINION AND ORDER

Pending

before

the

court

Corporation's

( "Schlumberger")

Rule 12 (b) ( 6)

("Motion to Dismiss")

reasons

stated below,

is

Schl umberger

Motion

to

Technology

Dismiss

(Docket Entry No. 8) .

Under
For the

Hess will be ordered to file an amended

complaint or face dismissal of this action.
I.

This

case

Subsurface

Factual and Procedural Background

arises

Safety

Schlumberger. 1

from

Valves

the

alleged

("SSVs")

failure

purchased

by

of

several

Hess

The valves were purchased under terms set forth in

a contract entered into by the parties on February 2, 2000.
contract

from

expressly covered all

"services,

products,

The

equipment,

materials or other items" provided by Schlumberger to Hess and

1

The following facts are presented as alleged in Plaintiff's
Original Complaint (Docket Entry No. 1).

defined the rights,

remedies,

and liabilities of both parties. 2

Schlumberger disclaimed all implied warranties and provided express
warranties "for a period of one
delivery

and/or

installation"

(1)
of

year after

[Schlumberger' s]

valves. 3

the

Schlumberger

warranted that its valves would "(1} be new if specified by [Hess];
( 2)

be free from defects in design,

other workmanship;

and

( 3)

materials,

conform to

fabrication and

[Hess's]

specifications,

drawings or other descriptions contained in the applicable .
ff4

purchase order .

The valves at issue were purchased for wells in the Tubular
Bells

Field,

located

approximately

135

New Orleans on the Outer Continental Shelf.
Wells D,
April

B,

2015,

and C,

miles

Production

of

The safety valves for

were installed in April 2014,

respectively.

southeast

on

Well

May 2014,
D

began

and
on

January 14, 2015, and ceased due to valve failure on August 10,
2015. Production on Well B began on December 14, 2014, and ceased
due to valve failure on January 29,

2016.

Production on Well C

began on July 21, 2015, and ceased due to valve failure on July 28,
2016.
In the wake of each failure Hess called in Schlumberger to
conduct

troubleshooting,

but

efforts

2

to mitigate

the

failure,

See Master Service Contract ("the Contract"), Exhibit A to
Defendant's Motion to Dismiss, Docket Entry No. 8-2, p. 3, § 2(a).
3

Id. at 3-4,

§

4

Id. at 3,

2(a).

§

2(a).

-2-

restore

the

well,

or

resume

production

were

unsuccessful.

Schlumberger continued to investigate the failures and concluded
that the primary root cause of the valve failure was the quality of
the Metal Spring Energized

("MSE")

seals.

On January 18,

2016,

Schlumberger told Hess that it had identified an issue with the
seals and had engaged in a

worldwide

recall of

inventory manufactured from 2012 to 2015.

all valves

in

The MSE seals identified

in the investigation were part of suspect batches that decreased
reliability.

Schlumberger' s

engineers also told Hess that the

issues with respect to the MSE seals may have been exacerbated by
Schlumberger's

own

Factory

Acceptance

Testing,

wherein

high-

pressure bleed off during the Factory Acceptance Test either fully
damaged the seals or at least compromised them.
Schlumberger communicated to Hess that destructive testing
confirmed that the MSE seals in the Well B valve suffered from the
same issue as those in the Well D valve.
notified

Schlumberger

that

it

revoked

On May 17, 2016, Hess
acceptance

of

the

Schlumberger Safety Valves used in Wells D and B pursuant to Texas
Business & Commerce Code

5

§

2.608. 5

Hess revoked acceptance of the

This statute states:

(a)
The buyer may revoke his acceptance of a lot or
commercial unit whose non-conformity substantially impairs its
value to him if he has accepted it
(1) on the reasonable assumption that its non-conformity
would be cured and it has not been seasonably curedi or
(continued ... )
-3-

SSV used in Well C on July 29,

2016,

on the same basis.

Hess

alleges that it was not aware of the issues with respect to the MSE
seals contained in the SSVs when it accepted the valves and could
not have become aware of the issues with respect to the MSE seals
without conducting destructive testing on the valves.
alleges

that

the SSVs

containing the

Hess also

defective MSE seals were

non-conforming goods and that the non-conformities substantially
impaired the value of the valves to Hess.
Hess now seeks to recover for breach of contract pursuant to
§

2.608.

Schlumberger moves to dismiss pursuant to Federal Rule of

Civil Procedure 12(b) (6).
II.

Legal Standard

In a motion to dismiss under Rule 12(b) (6),

the court must

"'accep[t] all well-pleaded facts as true and vie[w] those facts in
the light most favorable to the plaintiff.'"
5

( •••

Bowlby v.

City of

continued)
(2) without discovery of such non-conformity if his
acceptance was
reasonably
induced either by the
difficulty of discovery before acceptance or by the
seller's assurances.

(b)
Revocation of acceptance must occur within a
reasonable time after the buyer discovers or should have
discovered the ground for it and before any substantial change
in condition of the goods which is not caused by their own
defects.
It is not effective until the buyer notifies the
seller of it.
(c)
A buyer who so revokes has the same rights and
duties with regard to the goods involved as if he had rejected
them.
Tex. Bus. & Com. Code

§

2.608.
-4-

Aberdeen, Miss.,

681 F.3d 215, 219

(5th Cir. 2012).

"[A] plain-

tiff's obligation to provide the grounds of his entitlement to
relief requires more than labels and conclusions, and a formulaic
Bell

recitation of the elements of a cause of action will not do."
Atlantic

Corp.

v.

Twombly,

127

S.

Ct.

1955,

1964-65

(2007)

(internal quotation marks omitted) . "Factual allegations must be
enough to raise a right to relief above the speculative level[.]"
Id. at 1965.

Dismissal under Rule 12(b) (6) is appropriate when a

plaintiff's legal theory is incorrect:

"When a complaint raises an

arguable question of law which the district court ultimately finds
is

correctly

resolved

against

the

plaintiff,

Rule 12(b) (6) grounds is appropriate .
10 9

s. Ct. 18 2 7

I

18 3 3

( 19 8 9) .

"

" [W] hen

dismissal

on

Neitzke v. Williams,
the

allegations

in a

complaint, however true, could not raise a claim of entitlement to
relief, this basic deficiency should . .

be exposed at the point

of minimum expenditure of time and money by the parties and the
court."

Twombly,

127 S.

Ct.

at 1966

(internal quotation marks

omitted).
III.

Application

The parties dispute the nature of Hess's claim.

Hess argues

that the SSVs with the defective seals were non-conforming goods
and that Schlumberger failed to fulfill its obligations under the
Contract.

Schlumberger

contends

that

Hess

is

attempting

to

circumvent the time-limited express warranty to which the parties
agreed by mislabeling what is in fact a breach of warranty claim.
-5-

Whether Hess can assert a viable claim turns on the nature of the
alleged non-conformity.

Because

Hess's

allegations

are

still

somewhat unclear on that point, the court concludes that the course
of action most consistent with the Federal Rules of Civil Procedure
is to allow Hess the opportunity to amend its claims. 6
In cases of non-conforming goods,
breach

of

blurred.

contract

and

breach

of

the distinction between

warranty

claims

can

become

Some courts appear to have held that breach of contract

claims are limited to non-delivery and that claims for delivered
non-conforming goods must be for breaches of warranty. 7

Other

courts have held that delivering non-conforming goods may reflect
either a breach of contract, a breach of warranty, or both. 8

6

"[These rules]
should be construed,
administered,
and
employed by the court and the parties to secure the just, speedy,
and inexpensive determination of every action and proceeding.
Fed. R. Civ. P. 1.
11

7

See, e.g., A.O. Smith Corp. v. Elbi S.p.A., 123 F. App'x 617,
619 (5th Cir. 2005) (per curiam) ("Texas law forbids conflating
breach of warranty and breach of contract:
There is a
definitive distinction between failure to conform and failure to
deliver.
(internal quotation marks and citation omitted) ; Chilton
Ins. Co. v. Pate & Pate Enterprises, Inc., 930 S.W.2d 877, 890
(Tex. App. -- San Antonio 1996, pet. denied) (holding that breach
of contract damages are available for failure to perform, but not
for delivery of non-conforming goods) .
11

)

8

See Contractor's Source Inc. v. Hanes Companies, Inc., Civil
Action No. H-09-0069, 2009 WL 6443116, at *6 (S.D. Tex. Dec. 29,
2009) (holding that a breach of contract remedy is not wholly
foreclosed in a case involving defective or non-conforming goods
rather than failure to deliver); Morgan Buildings and Spas, Inc. v.
Humane Society of Southeast Texas, 249 S.W.3d 480, 491 (Tex. App -Beaumont 2008, no pet.) (holding that a buyer could recover under
breach of contract for non-conforming goods) .
-6-

The problem is

that

either rule

seems

On the one hand,

outcomes in some cases.

to

lead to unjust

sellers should not be

able to disclaim all warranties to the extent that they need not
even fulfill the terms of the contract.

On the other hand, breach

of contract claims should not subsume all breaches of warranty.
Judge

Ellison

offered

the

following

solution

in

Contractor's

Source:
[W]here the non-conformity alleged relates to the
specific obligations of the seller under the terms of the
contractual
agreement,
the
buyer's
remedies
fall
primarily under a breach of contract claim. If, however,
the non-conformity arises solely from the seller's
express or implied warranties outside of its contractual
obligations, or from generally defective goods, the
buyer's sole remedy is for breach of warranty.
2009 WL 6443116 at

*6.

Under this analysis when a

good with

particular characteristics or composition is specified under the
the

contract,

duty

to

provide

an

item

conforming

to

the

specifications is a contractual obligation rather than a warranty
of quality or future performance.
or

time

limited.

otherwise

When

defective,

the

the

As such, it cannot be disclaimed

item meets

buyer's

specifications

remedies

are

but

limited by

is
the

seller's warranties or disclaimers.
In this case, it is not clear whether Hess is alleging that
the

SSVs

or their MSE

specifications
delivery. 9

If

or

that

Hess

is

seals
they

did not
were

merely

9

not

conform to
"free

alleging

that

of

the

contract

defects"
the

goods

upon
were

Compare
Hess
Corporation's
Response
To
Schlumberger
Technology Corporation's Motion To Dismiss, Docket Entry No. 10,
(continued ... )
-7-

defective, it has no viable breach of contract claim.
Hess

is

alleging

that

the

parts

were

nonconforming

If instead
based

on

obligations in the contract other than those found in the express,
time-limited warranties, it may have a claim.

Hess will therefore

be given an opportunity to amend its Complaint.
IV.

Order

Hess is ORDERED to file an amended complaint by February 15,
2017, that states a viable breach of contract claim.

If Hess fails

to do so, Schlumberger's Motion to Dismiss will be granted.
SIGNED at Houston, Texas, on this 27th day of January, 2017.

SIM LAKE
UNITED STATES DISTRICT JUDGE

9

( • • • continued)
p. 10 ("Through Commercial Agreement# 46000010410 -- entered into
specifically for
'For the Provision of Surface Controlled
Sub-surface Safety Valves' -- Schlumberger further promised that it
would 'provide SCSSV' s that comply with Company and industry
standards and specifications and in accordance with the drawing and
specifications which are
contained or referenced in this
Agreement.'") with id. ("Based on Schlumberger' s own investigation,
Schlumberger's safety valves were not 'free from defects' on the
dates Schlumberger furnished them to Hess.").

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