Hess Corporation v. Schlumberger Technology Corporation
MEMORANDUM OPINION AND ORDER granting in part and denying in part 29 MOTION to Dismiss Defendant's Motion to Dismiss Second Amended Complaint Under Rule 12(b)(6) (Signed by Judge Sim Lake) Parties notified. (aboyd, 4)
United States District Court
Southern District of Texas
June 29, 2017
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
David J. Bradley, Clerk
CIVIL ACTION NO. H-16-3415
MEMORANDUM OPINION AND ORDER
Pending before the court is Defendant's Motion to Dismiss
Second Amended Complaint Under Rule 12(b) (6)
(Docket Entry No. 29).
For the reasons stated below,
the motion will be granted in part and denied in part.
Factual and Procedural Background
This case arises
( "Schlumberger") . 1
sale and subsequent failure
Hess and Schlumberger set out the terms of the
"Commercial Agreement") . 2
to the Commercial Agreement
The following facts are presented as alleged in Plaintiff's
Second Amended Complaint (Docket Entry No. 25).
Exhibit 1 - Tab 1 to Plaintiff's Second Amended Complaint,
Docket Entry No. 25-1.
Section 2.10 of the exhibit, titled "Engineering, Design Reviews &
Safety Critical Equipment," states:
"Contractor equipment shall
specifications, e.g.,- API, ASME, ANSI, ASTM, ASNT, ISO, etc., as
required by local/federal regulations, specified by the Company or
identified within the Contract." 4
The Commercial Agreement, along with other documents concerning
the terms of the purchase, was subject to Master Service Contract
No. 7525 (the "MSC"), entered into by the parties in February of
The MSC states that it "shall control and govern all work
performed by [Schlumberger] for [Hess] , and shall be deemed to be
incorporated in full in every subsequent oral and/or written work
or purchase order, service agreements or other project documents. " 6
The MSC also states that "[u]pon [Hess] notifying [Schlumberger] of
will commence furnishing same
contained herein and in any applicable work order, purchase order,
Id. at 72-81.
Id. at 76-77.
Exhibit 1 - Tab 3 to Plaintiff's Second Amended Complaint,
Docket Entry No. 25-3.
See id. at 3,
contains the following express warranty:
products, materials and other items furnished hereunder
(1) be new if specified by [Hess]; (2) be free
from defects in design, materials, fabrication and other
workmanship; and (3) conform to AHC's specifications,
or other descriptions
applicable service agreement, purchase order, work order
or other project document. [Schlumberger] warrants that
all work and other services performed hereunder (whether
by [Schlumberger] , its subcontractors or other parties
for whom it is responsible) shall be free from all faults
and defects and of a quality consistent with the
prevailing standards of workmanship for experienced
contractors with expertise in the particular type of work
or service being performed. 8
The MSC limits Schlumberger's warranties to "a period of one
year after [Schlumberger's] delivery and/or installation . .
The MSC expressly and conspicuously disclaims all other express or
[SCHLUMBERGER] MAKES NO OTHER WARRANTY AS TO PRODUCTS,
WORKMANSHIP OR MERCHANTABILITY, WHETHER EXPRESSED OR
IMPLIED (INCLUDING, WITHOUT LIMITATION, THAT THE PRODUCTS
OR SERVICES SHALL BE FIT FOR ANY PARTICULAR PURPOSE),
EXCEPT AS EXPRESSLY STATED HEREIN OR IN AN EXPRESS
AMENDMENT HERETO . 10
The SSVs at issue were purchased for wells in the Tubular
located 135 miles southeast of New Orleans on the
Id. at 3 ,
Id. at 4,
2 (a) .
Outer Continental Shelf. 11
Hess is the operator of the Tubular
The SSVs for Wells D,
and C were installed in
April 2014, June 2014, and April 2015, respectively. 12
on Well D began on January 14,
and ceased due
Production on Well
B began on
December 14, 2014, and ceased due to valve failure on January 29,
Production on Well C began on July 21, 2015, and ceased due
to valve failure on July 28, 2016. 15
Hess reported each well failure to Schlumberger.
investigated the failures and concluded that the primary cause of
the valve failures was the quality of the Metal Spring Energized
On April 29,
Schlumberger issued a report
stating that it had identified an issue with the seals and had
engaged in a worldwide recall of all SSVs in inventory manufactured
from 2012 to 2015. 16
The MSE seals identified in the investigation
were part of the suspect batches.
Schlumberger's engineers also
informed Hess that the issues with the MSE seals may have been
Plaintiff's Second Amended Complaint, Docket Entry No.
p. 12 ~ 27.
12Id. at 15, ~~ 41-43.
Id. ~ 44.
Id. ~ 45.
15Id. at 16, ~ 46.
16 Schlumberger Field Return Analysis Report Rev. 7, dated
April 29, 2016, Exhibit 3 to Plaintiff's Second Amended Complaint,
Docket Entry No. 25-10, p. 30.
during which high-pressure bleed off may have damaged or at least
compromised the seals. 17
Schlumberger informed Hess that destruc-
tive testing confirmed that the MSE seals in the Well B valve
suffered from the same issue as those in the Well D valve.
On May 17, 2016, Hess notified Schlumberger that it revoked
acceptance of the Schlumberger Safety Valves used in Wells D and B
2.608 of the Texas Business & Commerce Code. 18
revoked acceptance of the SSV used in Well C on July 29, 2016, on
the same basis. 19
Hess now seeks to recover damages for breach of
Schlumberger moved to dismiss Hess's Original Complaint on the
Because the court could not determine the viability of
Hess's claims from its Original Complaint, the court allowed Hess
to amend in order to clarify its allegations.
Hess was instructed
to identify specific contractual obligations with which the valves
articulate a test for distinguishing between claims that sound in
contract and warranty claims
Plaintiff's Second Amended Complaint, Docket Entry No. 25,
Hess now alleges that the SSVs containing the defective MSE
substantially impaired the value of the SSVs to Hess.
several ways in which SSVs were non-conforming, but each of Hess's
allegations falls into one of two categories:
the SSVs were
or tested according to the relevant
contractually agreed standards (e.g., American Petroleum Institute
(API) , International Organization for Standardization (ISO) , etc.) ,
or (2) the SSVs failed to perform as specified (e.g., non-commanded
closures and a completion life span of less than 10 -years) . 20
seeks to recover for breach of contract pursuant to
Texas Business and Commerce Code.
2.711 of the
Schlumberger moves to dismiss
pursuant to Federal Rule of Civil Procedure 12(b) (6), citing its
disclaimer and the fact that each of the installed SSVs functioned
for a period of at least one year.
Hess asserts a separate breach-of-contract claim that makes
no reference to Chapter 2 of the Texas Business and Commerce Code.
Hess alleges that "Schlumberger breached its contract obligations
with respect to the manufacture and inspection of the Schlumberger
Safety Valves that Schlumberger delivered to Hess that failed."
Plaintiff's Second Amended Complaint, Docket Entry No. 25, p. 30
The alleged result of Schlumberger' s breach was that
"Schlumberger delivered Schlumberger Safety Valves to Hess that
were unable to function under the required contractual conditions
and according to the required contractual configurations." Id. at
31, ~ 102. Because the substance of this claim is the same as the
first - i.e., that Schlumberger breached its contract by delivering
non-conforming goods - the court concludes that the claims are
indistinguishable and that Chapter 2 of the Texas Business and
Commerce Code provides the applicable law.
Rule 12 (b) (6)
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.'"
681 F. 3d 215,
plaintiff's obligation to provide the grounds of his entitlement to
relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do."
(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
plain-tiff'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 . . .
Neitzke v. Williams,
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
(internal quotation marks
Texas Business and Commerce Code
entitled "Revocation of Acceptance in Whole or in Part" states:
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
non-conformity would be cured and it has not been
seasonably cured; or
without discovery of such non-conformity if
his acceptance was reasonably induced either by the
difficulty of discovery before acceptance or by the
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
Whether a buyer properly revoked acceptance is a fact issue.
Trading Corp. v. Technology Ventures, Inc., 563 F. App'x
(1) initial acceptance (with a reasonable assumption that
the non-conforming item would be cured and it is not
cured, or without discovery of the non-conforming item if
acceptance was induced by difficulty of discovery or by
seller's assurance); (2) of non-conforming item; (3) such
non-conformity substantially impairs the value to the
buyer; (4) and revocation occurs within a reasonable
time; (5) in any event, the revocation must occur before
a substantial change in the condition of the goods occurs
(which change is not caused by defect of the goods) . The
determination of each of these elements is a question of
Neily, 724 S.W.2d at 913-14 (citing Vista Chevrolet v. Lewis, 704
S.W.2d 363, 368 (Tex. App. - Corpus Christi 1985), rev'd on other
grounds, 709 S.W.2d 176 (Tex. 1986)).
The only element disputed at
concludes that Hess has alleged facts that plausibly support each
of the remaining elements and will therefore limit its analysis to
the disputed element.
Whether Hess's allegations raise an actionable claim depends
acceptance of the SSVs after the contractual warranty period had
Hess alleges that it properly revoked its acceptance of
the Schlumberger valves because Schlumberger breached its contract
by delivering non-conforming goods.
Schlumberger argues that the
disclaimer in the Master Service Contract precludes Hess's claims,
which Schlumberger argues are disguised warranty claims.
having extensively researched and briefed the issue,
have provided no binding precedent that squarely addresses the
issue before the court.
Rule 12(b) (6)
focus on the language of
Hess argues that whether the buyer has finally accepted
the goods is the "critical factor" in determining what remedies are
available to the buyer. 22
The Structural Metals case provides the
closest support for Hess's argument.
In the context of revocation, the court in Structural Metals
distinguished when a plaintiff may assert a
breach of contract
claim and when the plaintiff is limited to warranty claims based on
the delivery of non-conforming goods.
2012 WL 5208543 at *7.
electrical system purchased from the defendant.
Id. at *1-2.
an earlier order the court had granted summary judgment for the
defendant on the plaintiff's breach of contract claim.
Id. at *3.
The court had relied on a case holding that "[o]nce a buyer has
accepted the goods and can no longer revoke that acceptance, it is
limited to recovering under section 2.714 of the UCC for breach of
warranty if the goods are defective or nonperforming."
Bra-Tech Corp. v. Purity Water of San Antonio, 681 F. Supp. 2d 791,
7 9 6 n. 4
2 010) .
"In deciding the motion for summary
Docket Entry No. 34.
Id. at 15 (citing Structural Metals, Inc. v. S & C Electric
Co., 2012 WL 5208543 at *7, Civil Action No. SA-09-CV-984-XR (W.D.
Tex. 2 012) ) .
the Court's primary focus was on the fact that SMI was
complaining about defects in the goods as opposed to non-delivery
or a failure to perform."
Id. at *6.
On reconsideration the court held that "[a]lthough a failure
to deliver or perform gives rise to a breach-of-contract claim,
whether delivery of non-conforming goods or performance gives rise
to breach-of-warranty or breach-of-contract remedies depends on
(citing Contractor's Source,
2009 WL 6443116
(S.D. Tex. Dec. 29, 2009) and noting that the case law "is murkier,
non-conforming goods) .
"[T]he critical factor in determining the
remedies available to the buyer is whether the buyer has finally
accepted the goods,
not whether the buyer is complaining about
defects or non-conformities."
Id. at *7 (citing Selectouch Corp.
v. Perfect Starch, Inc., 111 S.W.3d 830,
2003, no pet.)
(Tex. App.- Dallas
The holding in Structural Metals thus supports the
position that a latent defect at the time of the delivery may be
grounds for later revocation if the buyer has not finally accepted
the goods with knowledge of the defect.
Schlumberger extrapolates a different rule from the case law:
"When a seller delivers nothing or delivers different goods than
the goods ordered, the seller has failed to comply with a contract
When a seller delivers an inferior or defective version of
In support of its rule, Schlumberger cites a number
of cases that at least tangentially address the issue before the
court, but the different contexts and claims in those cases limit
The court does not cite them here to avoid
further muddying an already murky area of law. 24
Schlumberger's position is best illustrated by a Fifth Circuit
from warranty claims.
Reynolds Metals Co. v. Westinghouse Electric Corp., 758 F.2d 1073
manufacturer sold electrical equipment
included in the bargain a "competent" engineer who was to supervise
installation of the equipment.
Id. at 1074.
During final inspec-
tion and startup of the equipment the manufacturer sent an engineer
who lacked extensive experience with the type of equipment being
installed and who understood his role to be providing technical
assistance rather than supervising.
system designed to warn of internal problems in the equipment was
and the equipment,
which had an expected
Defendant's Motion to Dismiss, Docket Entry No. 29, p. 24.
Schlumberger acknowledges that the difference between "different"
and "defective" goods is case-specific and can be difficult to
Id. at 15.
Assuming Schlumberger' s distinction is
relevant, such a determination would best be made after a full
presentation of the facts at trial. Indeed, none of Schlumberger's
cited cases resulted in dismissal on the pleadings. The court is
skeptical that these issues can be resolved on summary judgment.
The court nevertheless assures the parties that it has read
and analyzed each case.
life-span of twenty to thirty years, failed less than a year after
being put into service.
The buyer submitted a warranty claim.
The manufacturer denied the claim on the ground that its
warranty had expired.
Id. at 1076.
The buyer sued, asserting both warranty and contract claims. 25
At the close of the evidence the district court granted an
instructed verdict that eliminated the buyer's warranty claims.
Id. at 1076-77.
But the court concluded that the manufacturer's
warranty disclaimers did not necessarily bar a breach of contract
claim based on the manufacturer's failure to provide a competent
engineer to supervise installation.
Id. at 1077.
in favor of the buyer on its contract claim.
The jury found
The Fifth Circuit affirmed the viability of the
contract claim, reasoning:
If [the manufacturer] had provided a competent engineer
to supervise installation of the transformer, and that
engineer had not performed as expected, there would be a
breach of warranty but not a
performance. In contrast, if [the engineer] did not even
qualify as a "competent" engineer and did not believe
that it was his duty "to supervise" [the buyer] in the
installation, then by supplying him [the manufacturer]
failed to perform at all as promised under the contract.
Id. at 1078.
Both of the parties' proposed rules are correct -- as far as
they go -- and are compatible.
Hess is correct in pointing out
The buyer also alleged causes of action in negligence and
strict liability, but those claims were barred by applicable
statutes of limitation.
distinguish between non-conformity with
warranty terms and other contractual obligations.
correctly argues that failure to perform sounds in contract whereas
defective performance sounds in warranty.
The court concludes that
the parties' actual disagreement lies in whether the SSVs conformed
to the terms of the contract at the time of delivery.
argues that the SSVs were conforming, as evidenced by the fact that
each functioned throughout the warranty period.
Hess contends that
Schlumberger's failure to perform its contractual obligations when
manufacturing the SSVs rendered them non-conforming upon delivery
conformity involved a warranty or other contractual term.
question before the court on a motion to dismiss is whether Hess
has plausibly alleged that Schlumberger's SSVs were non-conforming
at the time of delivery.
Because Hess alleges that Schlumberger
did not fulfill its contractual obligations when manufacturing the
SSVs, and because Hess alleges that Schlumberger's failure resulted
in delivery of the allegedly defective non-conforming MSE seal that
was present at the time of deli very,
court concludes that
Hess's claim is plausible.
Schlumberger's proposed rule provides the second basis for
Hess's breach-of-contract claim,
as illustrated by applying the
reasoning in Reynolds to this case.
Schlumberger argues that Hess
valves and that Hess received
alleges that it contracted not only for SSVs of a certain size but
for SSVs that complied with API 14A industry standards.
these standards is the requirement that "SSSV equipment," such as
the equipment Hess ordered, "shall be manufactured to drawings and
specifications that are substantially the same as those of the
size, type, and model SSSV equipment that has passed the validation
test. " 26
the SSVs were manufactured using a
different spring than the one used in the design that had passed
the API validation test.
Hess does not allege that the spring was
defective or inferior but different (i.e., non-conforming).
bargained for a part designed and tested under API standards.
alleges that the components of the part it received had not been so
Accepting Hess's allegations as true for the purposes of
a motion to dismiss and viewing them in the light most favorable to
Hess, Hess's claim sounds in contract.
Schlumberger had provided API-compliant SSVs and those valves had
warranty but not totally failed to perform.
SSVs were not the APr-compliant SSVs Hess contracted for,
Schlumberger failed to perform as promised under the contract.
API Specification 14A § 6. 3. 2. 2, Exhibit 1
Tab 5 to
Plaintiff's Second Amended Complaint, Docket Entry No. 25-5, p. 11
(page number at bottom of document)
contractually agreed-upon features of
they sound in
support its breach-of-contract claim under either of the rationales
to revoke acceptance of
because they did not maintain the ability to remain in the open
position and did not have a 10-year functional life span.
allegations involve the failure of the SSVs to perform as expected,
not a latent defect present at the time of delivery.
correctly argues that allowing revocations on the basis of the
failure of goods to perform after the expiration of their warranty
alleges that it contracted for SSVs that would have the ability to
be held open in the open position, but, as the disclaimers in the
MSC make clear, Schlumberger did not warrant that the valves would
do so indefinitely.
Schlumberger explicitly warranted performance
of the parts for one year only.
Schlumberger' s contractual obligation to deliver API-compliant
on the other hand,
is not time-limited.
Either the SSVs
were APr-compliant on delivery or they were not compliant.
is an "extremely
sophisticated" party, that Hess bargained for a one-year warranty,
and that the parts performed for one year.
But that argument cuts
Hess also bargained for specific parts that had been
designed and tested to rigorous standards.
If the valves or their
components did not meet those standards, then Schlumberger did not
assumed the risk if it could not have known the SSVs were nonconforming at the time of delivery.
Conclusions and Order
For the reasons stated above,
the court concludes that Hess
has pled sufficient facts to support a viable revocation claim.
But that is for the trier of fact to determine.
may proceed with its claims based on the alleged non-conformity of
the SSVs at the time of delivery.
Hess may not proceed with its
claims based on the failure of the SSVs to function after the
warranty period had expired.
The court has not attempted to apply
parties should endeavor in good faith to apply the court's ruling
to Hess's claims before the upcoming scheduling conference in order
to streamline the case and to inform the scope of discovery.
Motion to Dismiss
(Docket Entry No.
GRANTED IN PART and DENIED IN PART.
SIGNED at Houston, Texas, on this the 29th day of June, 2017.
UNITED STATES DISTRICT JUDGE
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