United States District Court, W.D. Kentucky, Louisville
MEMORANDUM OPINION AND ORDER
THOMAS B. RUSSELL, Senior District Judge.
In exchange for over $2.5 million, Northern Electric, Inc. ("NEI") contracted to perform electrical work in a chemical plant for Michelin North America, Inc. ("Michelin"). NEI completed the work in a timely and satisfactory manner, but in the process two of its employees allegedly caused a temporary power outage in the plant's manufacturing system, costing Michelin over $3 million. At issue here is whether Michelin has a contractual right to withhold three monthly payments to NEI until it has been compensated for the damage allegedly caused by NEI's employees. NEI claims that Michelin's withholding is a breach of contract and has moved for summary judgment to collect these payments. For the reasons that follow, the Court will deny the motion.
NEI agreed to demolish old and install new electrical work in a chemical plant for Michelin. In exchange, Michelin agreed to pay NEI $2, 640, 000 in monthly progress payments. NEI eventually completed the project, and Michelin was satisfied with NEI's final product. Nonetheless, Michelin refused to pay NEI's invoices for February, March, and April-which totaled $590, 071.57-so NEI sued for breach of contract.
Michelin refuses to pay these invoices because of an incident that occurred at the plant on January 21, 2013. According to Michelin, two NEI employees entered an area of the plant known as the "Old Glass House" without the requisite work permit to perform some electrical work. They removed a panel cover and inadvertently caused fifteen circuit breakers to shut off. This cut off some lights and, more importantly, shut down several system monitoring and flow devices in Michelin's manufacturing processes for 35 minutes.
That turned out to be an expensive 35 minutes. This plant manufactures rubber for Michelin tires. Several stages of pre-heaters keep the rubber hot and in a viscous state, capable of flowing from one section to another. When the power was shut off, the rubber stopped flowing, but the pre-heaters kept heating. Some of the stagnant rubber basically cooked in three of the pre-heaters, causing significant damage not only to the ruined rubber but also to the preheaters. It took Michelin two weeks to manually repair the damage. Because of property damage, product losses, repair costs, and lost use, Michelin claims the power outage cost it approximately $3, 300, 000.
Shortly after the January 21 power outage, Michelin contacted NEI for information and statements from key personnel. In a report dated February 20, Michelin concluded that two NEI employees were responsible for switching off the circuit breakers and causing the power outage.
Meanwhile, NEI kept working and Michelin did not signal that it was withholding payment or abandoning the contract. In fact, on February 12, despite the ongoing investigation, Michelin authorized a reduction in retainage from 10% to 5% (in response to NEI's request), which was billed to Michelin and paid on March 20. Yet the unpaid monthly invoices piled up. On May 9, with three invoices outstanding, Michelin finally demanded indemnity from NEI and announced that it was withholding payment on all three statements.
Michelin's position is that the contract entitles it to withhold the $590, 071.57 until NEI pays for the damage it caused. For its part, NEI says that the contract does not allow Michelin to withhold funds under these circumstances. And even if it did, NEI says, Michelin should still pay immediately because the grounds for withholding payment have been removed. This alternative theory is based on insurance; NEI claims that its commercial general liability policy (issued by a company called "CNA") will cover any damages resulting from the January 21 incident. To date, CNA has not issued a reservation of rights letter and has signaled that it does not intend to do so under the current circumstances.
The contract specifically defines when Michelin may withhold payment. Section 3.7 provides that Michelin "may withhold... the whole or a part of any progress or final payment to such extent as may be necessary to protect [Michelin] from loss on account of" a list of grounds, including two that are relevant here:
a. Defective or damaged work not remedied; [and]
g. Failure of [NEI] to perform properly and completely any one or more of its material ...