Full opinion text
ORDER BLATT, Chief Judge. I. INTRODUCTION This is an action by the plaintiffs, Aiken County and Aiken County Public Service Authority (hereinafter collectively referred to as “Aiken County”), to recover damages arising out of the construction of the Horse Creek Pollution Control Facility (the “project”), located near Aiken, South Carolina. Both plaintiffs are political subdivisions of the State of South Carolina with the capacities to sue and be sued. Envirotech Corporation (“Envirotech”) and Insurance Company of North America (“INA”) are corporations organized and existing under the laws of a state other than South Carolina and during the contract period were authorized to, and were doing, business in South Carolina. Bay-Con General, Inc., (“Bay-Con”) and Travelers Indemnity Company, (“Travelers”) are corporations created and existing under the laws of a state other than South Carolina and during the contract period were authorized to, and were doing, business in South Carolina. Davis and Floyd, Inc. (“Davis & Floyd”) is a South Carolina corporation. The original dispute between the parties began with an arbitration proceeding between Aiken County and Bay-Con. On January 23, 1981, Aiken County commenced this action against Envirotech and its surety, INA, alleging breach of warranty, breach of contract, and fraud in supplying equipment for the heat treatment and dissolved air flotation (“DAF”) systems of the project. Envirotech brought in Bay-Con, Travelers and Davis & Floyd as third-party defendants, and all parties filed counterclaims and cross-claims. On November 5, 1981, with the consent of all parties, the arbitration proceeding was abandoned and all claims were submitted to this court for trial non-jury. As discussed later, this order is limited to Aiken County’s claims regarding the heat treatment equipment and the related defenses and cross-actions. Specifically, I have limited these findings of fact and conclusions of law to Aiken County’s third, fourth, fifth, and sixth causes of action and the defenses and cross-actions related thereto. These allegations can be summarized as follows: Aiken County’s causes of action against Envirotech alleging breach of warranty, breach of contract, fraud, and liability of INA as surety; Aiken County’s causes of action against Bay-Con alleging breach of warranty, breach of contract, negligence, and liability of Travelers as surety; and Aiken County’s cause of action against Davis & Floyd alleging breach of contract. In addition, Bay-Con, Davis & Floyd and Envirotech each asserted claims for indemnification, including attorneys’ fees, against the other. The trial commenced on September 1, 1982. After several weeks of trial, it was agreed by all parties and the court that Envirotech should clean and inspect the heat treatment equipment and that, thereafter, Aiken County and Davis & Floyd would test it. This effort began in January, 1983, and continued until June, 1983. The trial recommenced in January, 1984, at which time, on motion of Aiken County and Davis & Floyd, the court decided, that the most efficient way to dispose of this case was to bifurcate the issues and try first Aiken County’s claims with regard to the heat treatment equipment, and the related defenses and cross-actions. The trial on the heat treatment issue was concluded on December 11, 1984. This case involved the most extensive discovery and the longest trial that this Court encountered in fifteen (15) years on the trial bench. There were thirty-eight people deposed over a total of seventy-four days. The documents produced by all parties could only be counted by the box. The trial consumed fifty-two days, exclusive of many motion days, during which twenty-one witnesses testified, and the transcript includes approximately 6,690 pages. II. MOTIONS A. Bifurcation and Rule 54(b) Certification Under the authority granted by Rule 42(b), the Federal Rules of Civil Procedure, and on motion of Aiken County and Davis & Floyd, I determined that Aiken County’s heat treatment claim (hereinafter “heat exchanger claim”) should be tried first. The heat exchanger claim was a separate claim in that it presented an aggregate of facts giving rise to an enforceable right. Gottesman v. General Motors Corp., 401 F.2d 510, 512 (2d Cir. 1968). Moreover, it was the largest and most important issue in the case, and the Court felt it would be inadvisable to dilute the court’s focus on that issue by a lenghty trial of numerous unrelated defective equipment and delay claims. Martin v. Wyeth, Inc., 96 F.Supp. 689, 697-98 (D.Md. 1951), aff’d 193 F.2d 58 (4th Cir.1951). These other issues were based on separate facts and would not involve relitigation of the facts in the heat exchanger claim. In addition, the Court felt that bifurcation would most likely result in savings of time and expenses to the parties and the court. See, Value Line Fund, Inc. v. Marcus, 161 F.Supp. 533 (S.D.N.Y.1958). Envirotech was the only party to object when the court asked for the parties’ written positions on the issue of bifurcation. The Court could see no prejudice to Envirotech in this procedure. The burden of transporting a witness back to court on the later issues is one which will be shared by the other parties. Any claim that Envirotech’s witnesses might have to travel greater distances was a de minimis consideration given the size of this case and the number of trips made to the separate trial sessions already held. The Court also found no prejudice in separating Envirotech’s heat treatment delay claim. First, the two claims were conceptually and factually distinct; second, Envirotech was allowed to litigate all affirmative defenses found to be relevant. Trial on the heat exchanger claim having concluded, Aiken County and Davis & Floyd have moved for the entry of a final judgment as to them pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. In rendering a decision, the court must first find that there are multiple claims for relief and that at least one claim has been finally decided. The court must then find that, in its discretionary judgment, the equities favor a determination that no just reason for delay in entering judgment exists. Curtiss-Wright Corporation v. General Electric Co., 446 U.S. 1, 100 S.Ct. 1460, 64 L.Ed.2d 1 (1980). Pursuant to Rule 54(b), I find that there are multiple claims, that the heat exchanger claim has been finally decided, and that no just reason for delay in entering judgment exists. The parties have presented evidence concerning all issues related to the design and function of the heat treatment equipment and the responsibility therefor. Having made a decision on this claim, nothing remains for the court to do but execute the judgment. United States v. Arkansas, 632 F.2d 712 (8th Cir.1980). Aiken County’s claims that other equipment is defective and that completion of the plant was delayed, along with Bay-Con and Envirotech’s shop drawing delay claims, are separate and independent claims. Aiken County’s heat exchanger claim resolves the issues of the defectiveness of said heat exchanger, the responsibility for the alleged defects, Envirotech’s knowledge of those defects, the alleged fraudulent conduct of Envirotech toward the owner and engineer, the influent issues, and all affirmative defenses of Envirotech and Bay-Con relevant to this claim. These issues are factually separate from the question of whether Davis & Floyd took excessive time to review shop drawings submitted by Envirotech and Bay-Con. If Davis & Floyd failed to return the shop drawings within an agreed time period, it may have caused Envirotech to spend more time on the job than planned, but that delay is unrelated to the issues of whether the equipment worked when installed and whether Envirotech defrauded Aiken County when it sold this equipment. An analogous situation arose in another complicated construction case, Hartford Accident and Indemnity Co. v. Boise Cascade Corp., 489 F.Supp. 855 (N.D.Ill.1980). That action involved the completion of a project by a contractor’s surety after the contractor failed to perform. Upon the surety’s completion, the owner refused the surety’s demand for payment of the remaining contract balance, and the surety filed an action seeking recovery of the remaining contract balance. Boise, the owner, counterclaimed for losses it suffered due to the delay in completion. In deciding that the surety, Hartford, was entitled to the balance due on the project and that Rule 54(b) certification was appropriate, the court stated: Although Boise’s counterclaim arises from the same general transaction as does Hartford’s claim and thus may be termed compulsory under Fed.R.Civ.P. 13(a), this in itself poses no bar to certification. Cold Metal Process Co. v. United Engineering, 351 U.S. 445, 452, 76 S.Ct. 904, 908, 100 L.Ed. 1311 (1956). Indeed, despite its compulsory nature, the claim and counterclaim herein raise distinct factual questions. Whereas Hartford’s claim involves the question of whether it finished the project and the amount due as a result thereof, Boise’s counterclaim raises the issue of when Hartford finished the project and the extent of damages suffered as a result of any delay in completion. 489 F.Supp. at 859. The issues in Aiken County’s heat exchanger claim are whether the equipment functions properly and whether Aiken County was defrauded by Envirotech in the sale of this equipment. The other claims, however, involve unrelated alleged defective equipment, alleged delay in completion of the project attributable to both contractor and supplier delays, and excessive shop drawing review time. It is clear that these claims are monetarily small in comparison to the heat exchanger claim and sufficiently separate and distinct for Rule 54(b) certification. The other claims and counterclaims do not prevent the certification of a claim under Rule 54 because of a possible set-off of damages. In Curtiss-Wright, supra, the Supreme Court noted that “counterclaims, whether compulsory or permissive, present no special problems for Rule 54(b) determinations; counterclaims are not to be evaluated differently from other claims.” 446 U.S. at 9, 100 S.Ct. at 1465. The Court further finds that the equities favor the entry of a final judgment, in that no just reason for delay exists. In making this finding, the following factors are controlling: 1. The adjudicated claims are independent of the nonadjudicated claims and will not require the court of appeals to hear the same issues twice. The only remaining issues in a second appeal would be other defective equipment, delays, and the computation of the amount of attorneys’ fees. 2. There will be no later issues before this court which have already been before the court of appeals. 3. No future developments at the district court level will moot the issues on appeal. 4. The sum involved here is large, when compared to the sums involved in the remaining issues, and is allegedly needed by Aiken County to replace the defective equipment in its plant. This equipment is essential to the daily operation of the plant. It is impossible for the plant not to treat incoming waste as there is no bypass mechanism; therefore, if the heat exchangers plug, the heat treatment system would be rendered inoperable, precluding sludge processing, and crippling the plant, which as noted infra at 1346, handles waste for a large geographic area, included in which are two cities and numerous manufacturing facilities. A final, favorable judgment will allow Aiken County to pursue collection now and to contract for replacement, rather than waiting months or years for the remaining issues in this litigation to end, during which time the cost of construction will certainly increase due to inflation. 5. While Envirotech is pursuing a delay claim based in part on the heat exchanger system, I find that this claim does not prevent entry of a final judgment. There is no claim or indication that Davis & Floyd or Aiken County would be unable to pay a judgment if one is entered. 6. Determination of this claim on appeal may moot trial of all or a greater part of the other issues by creating a greater potential for settlement. Curtiss-Wright Corp. v. General Electric Co., 446 U.S. 1, 8 n. 2, 100 S.Ct. 1460, 1465 n. 2, 64 L.Ed.2d 1 (1980). One of the reasons for trying the heat treatment claim first was its size and the thought that its resolution might cause the other claims to settle. This approach recognizes that an appeal will probably be necessary before any party will accept liability on such a large issue. B. Bay-Con’s Motions for Directed Verdict At the conclusion of the plaintiffs’ case, and again at the conclusion of all the testimony, both Envirotech and Bay-Con moved for a directed verdict as to the plaintiffs’ claims against each, respectively. As will be seen from the findings of fact and conclusions of law to follow, Envirotech’s motion was denied. Regarding Bay-Con’s motion, the plaintiffs failed to establish their claim of negligence against Bay-Con or Travelers; therefore, the Court granted their motion for a directed verdict on the second cause of action alleging negligence. (Tr. 5/7/84 at 54). At the conclusion of all the testimony, Bay-Con moved for a directed verdict on its claim for indemnification against Envirotech. The contract between Envirotech and Bay-Con (Exhibit 407), provides in part: § 32. Warranties and Guarantees. The Subcontractor (Envirotech) warrants to (Bay-Con) and the Owner ... that all of the Work will be of good quality, ... will be free from faults and defects, will be in conformance with the requirements of this Subcontract and of the Prime Contract, and will function as intended by the designer of the Work ... As will be more fully discussed in the findings of fact, it was proved that Envirotech’s heat treatment equipment is defective and fails to comply with the express warranties in the specifications. There was no proof that Bay-Con acted negligently in connection with the design, manufacture, installation or operation of this equipment. Therefore, Bay-Con is entitled to indemnification from and against Envirotech for any damages for which it is responsible arising out of this action. In the case of Stuck v. Pioneer Logging Machinery, Inc., 279 S.C. 22, 301 S.E.2d 552 (1983), the South Carolina Supreme Court held: According to equitable principles, a right of indemnity exists whenever the relation between the parties is such that either in law or in equity there is an obligation on one party to indemnify the other, as where one person is exposed to liability by the wrongful act of another in which he does not join. This rule is also thoroughly discussed in 41 Am.Jur.2d Indemnity § 2 (1968) and 42 C.J.S. Indemnity § 21 (1944). See also, Addy v. Bolton, 257 S.C. 28,183 S.E.2d 708 (1971). III. FINDINGS OF FACT I find the following facts were proved by the greater weight or preponderance of the evidence. In 1970, the Environmental Protection Agency (“EPA”) identified Horse Creek Valley as one of the most polluted areas in the United States. The creek was virtually an open sewer for two cities and two large textile industries. EPA undertook to provide grants to clean up Horse Creek Valley, as well as many other sites. The congressional scheme was to provide grants for capital improvements, but not for maintenance and operation. The acknowledged purpose and effect of this approach was to encourage publicly owned sewerage treatment works to acquire the best available treatment plants and equipment and to minimize operation and maintenance costs. Davis & Floyd published an engineering report, which presented its study of the Horse Creek Valley problem, and proposed a regional wastewater treatment plant that would treat all of the area’s waste. (Exhibit 8034). The project was intended to treat the effluent from four major customers: (1) the City of Aiken, (2) the City of North Augusta, (3) Graniteville Company, and (4) United Merchants and Manufacturing Company. It was projected that about half of the waste would be domestic and half industrial, and that the load would vary depending on seasons, economic fluctuations, plant closings, changes in demography over time, and various other factors. The capacity of the project was to be an average 20 million gallons per day in the year 1995. The project can best be described as a sophisticated wastewater treatment facility, comprising several major process equipment systems. It was designed to treat industrial and domestic waste (Tr. 9/3/82 at 403). Although the scope of this part of the trial, as heretofore explained in Section II-A, is limited to the heat treatment system, a description of the entire process is necessary. The purpose of the plant is to remove solids from the wastewater and dispose of them in landfills, or old strip mines. Solids are removed by settling or floating them out of the wastewater. The wastewater enters the plant through a bar screen with 2-inch grids to catch large debris. It is then raised by large pumps from a wet-well so that it can flow by gravity through the plant. It next passes through a smaller bar screen and grit chamber, which removes additional debris and sand. From there is goes to one of four (4) primary clarifiers where the primary (thicker) sludge is separated and pumped to the day (holding) tanks adjacent to the heat treatment facility. The remaining waste is aerated in one or more of the five (5) large basins, so that the bacteria will digest the solids and make them more amenable to settling or floating. The aerated material is then pumped to one of four (4) secondary clarifiers, which separates the clean water and sends this water on to the Savannah River. A portion of the secondary waste (the waste activated sludge -WAS) is pumped to the DAF equipment, which concentrates the waste again by flotation and settlement. This concentrated waste is mixed with the primary waste in the day tank, and, the mixed primary and WAS (hereafter referred to as “sludge”) is pumped into the heat treatment unit through a grinder. In the heat treatment unit it flows through the inner pipe of the heat exchanger into a reactor where it is broken down and sterilized by heat and pressure. It then passes through the outer shell (called the “annular space” or annulus”) of the heat exchanger and into decant tanks where it is further concentrated. The process of treating the sludge with heat is designed to allow the sludge to be dewatered more easily and to sterilize it. As sludge passes through the heat exchanger, heat is exchanged from the hot sludge leaving the reactor to the cold sludge coming to the reactor. Each vertical loop of the heat exchanger stands 4 feet high and consists of a pipe within a pipe. The inner pipe is approximately 2lh inches in diameter and the outer pipe is approximately 4 inches in diameter. The annular space is % inch across. (Tr. 1/25/84 at 484). The inner pipe is supported inside the outer pipe by small, curved metal spacers. (See Model, Exhibit 5070). There are 216 spacers in the system. (Tr. 1/26/84 at 521). At the bottom of each loop the outer pipe has a cross-over connection to the next loop. The inner pipe is not in this crossover as it continues and makes a loop at the bottom (Exhibit 5069). Thus, the heat exchanger is simply a series of concentric tubes within tubes in which the sludge flows to and from the reactor. The sole purpose of the heat exchanger is to make the process more efficient and, therefore, more economical by transferring heat from the hot sludge to the cold sludge. (Tr. 7/9/84 at 136). From the decant tanks, the sludge is vacuum filtered to remove the water, which comprises more than 90% of the sludge, and the solid residue is hauled off to a landfill. The process is designed to allow clean water to be discharged to the river and solid waste to be hauled to a landfill. The remaining liquid circulates through the plant. Aiken County engaged Davis & Floyd to design a process which would treat the incoming waste. They also engaged Davis & Floyd to prepare plans and specifications, to review the bids, to perform onsite inspections, and to certify the equipment as complying with the plans and specifications. The project was publicly advertised and the low bid was received from Bay-Con on December 22, 1976. On April 6, 1977, Aiken County entered into a construction contract with Bay-Con for the lump sum of Nineteen Million Nine Hundred Ninety-Six Thousand and No/100 ($19,996,000.00) Dollars. (Exhibit 54). As a condition of its contract, Bay-Con provided Aiken County with a performance bond from Travelers to guarantee that the work would comply with the contract plans and specifications. (Exhibit 4101). Bay-Con commenced construction in May 1977, and the plant began receiving waste on November 19, 1979. Envirotech entered into a contract with Bay-Con to design and supply the following equipment: the primary clarifier mechanisms, the secondary clarifier mechanisms, the DAF mechanisms, the day and decant tank mechanisms, the vacuum filters, and all of the heat treatment equipment, including pumps, grinders, heat exchanger, reactor, boilers, piping, controls, and many other smaller items. Bay-Con’s contract with Envirotech dated March 31, 1977, was for $2,801,560.00 It specifically required Envirotech to comply with the contract plans and specifications. (Exhibit 407). The heat treatment specifications required suppliers to demonstrate experience with the equipment or, in the alternative, to provide Aiken County a performance bond in lieu of experience. Envirotech provided a bond from INA for $2,070,399.00 to guarantee the replacement of the heat treatment equipment in lieu of demonstrating its experience. (Exhibit 5041). Envirotech was sold in 1982 to Baker International Corporation and is a wholly-owned subsidiary of Baker. It was clear from its financial reports that Baker purchased all the stock in Envirotech and consolidated Envirotech into its operation both functionally and financially. This was not disputed by Envirotech. (Exhibits 5084, 5085; and colloquy Tr. 5/1/84 at 263-68). In the 1970s, Envirotech was a major manufacturer and supplier of waste treatment equipment. One of its principal products was heat treatment equipment. During this period there was only two major manufacturers of heat treatment equipment, Envirotech and Zimpro. These two companies were vigorous competitors, each having a guarded and proprietary process. The Zimpro heat exchange process involves passing sludge through the inner tube into a reactor and then out through the annulus. At some point, air is injected which causes oxidation. The air also causes significant turbulence within the piping. This process is referred to as wet air oxidation; the exchange of heat was direct from the hot sludge to the cold sludge. (Exhibit 3016(B)). Envirotech installed its first heat treatment unit in the United States in the late 1960s with an installation at Colorado Springs, Colorado. (Exhibit 5073 at 73). This heat exchanger employed a similar design to the . Zimpro, except that air injection was prohibited as it was a patented process. (Tr. 1/26/84 at 513). This equipment failed. Envirotech described the failure as follows: Not long after the process operation began, the heat exchanger plugged on the raw sludge side ... The heat exchanger is essentially a pipe within a pipe design____ When the heat exchanger was cleaned, it was found that short pieces of ground synthetic materials had formed large balls inside the pipe annulus clogging the flow. (Exhibit 5016). In addition to its own experience at Colorado Springs, Envirotech received similar reports of plugging from plants in Europe and the United Kingdom (Exhibit 8026). Envirotech replaced the Colorado Springs equipment with a sludge to water design. (Tr. 1/25/84 at 450). This design had water in the outer tube as the heat transfer medium instead of sludge, and thus the heat transfer was indirect. This modification was 100% effective in eliminating plugging or clogging in the outer tube. Thereafter, Envirotech marketed only this design and supplied approximately 29 of these sludge to water systems between its development of the system at Colorado Springs in late 1969 and its design of the Aiken County system in 1977. (Exhibit 5080). During the planning for the Aiken County project, Davis & Floyd had many contacts with Envirotech through its sales agent, the Taulman Company. In 1972, Taulman requested that samples of the wastewater be sent to Envirotech for analysis. (Exhibit 1002). Davis & Floyd secured composite samples from the textile industries and municipalities and sent them to Envirotech. (Exhibit 8036). Envirotech, through Taulman, later provided its analysis. (Exhibit 8037). In 1974, the Taulman Company sent Davis & Floyd Envirotech’s sales literature, which stated that Envirotech’s heat treatment equipment was sludge to water. (Exhibit 1005). In 1975, Taulman sent Davis & Floyd sample design drawings showing a sludge to water system—its “standard system.” (Exhibits 6021 and 3010). Taulman’s personnel became familar with the industries which would discharge waste to the project. (Exhibit 6026). As late as May, 1976, Envirotech proposed a heat treatment system with a sludge to water heat exchanger and sent to Davis & Floyd a set of suggested specifications for such a system. (Exhibit 8018). In the fall of 1976, Davis & Floyd issued its plans and specifications for the project. (Exhibit 5019). The heat treatment section (15S) provided for the Zimpro wet air-oxidation system and, as an alternate, the Envirotech system with a sludge to water heat exchanger. (Exhibit 421). On November 23, 1976, Taulman met with Davis & Floyd and requested that an addendum be added to the specifications which would allow a spiral heat exchanger. (Exhibit 5073 at 92). Davis & Floyd did not agree to this suggestion and did not alter its specifications, but Davis & Floyd did require a supplier, not having experience with a particular piece of equipment, to post a replacement bond. (Exhibits 6035 and 1023). Taulman’s representative testified that on the day of bidding, Envirotech again changed its position and bid a sludge to sludge, tube-in-tube heat exchanger. (Tr. 7/11/84 at 479; 7/12/84 at 586-87). This was the first time a sludge to sludge heat exchanger was suggested by Envirotech since its failure in Colorado Springs in 1969. (Tr. 2/2/84 at 903.) Envirotech bid a system with a sludge to sludge heat exchanger because its sludge to water heat exchanger was at a competitive price disadvantage to the Zimpro process. Envirotech’s project manager, Frank Breedlove, testified: “In the sludge to water heat exchanger, it takes approximately twice the number of tubes as sludge to sludge.” (Tr. 1/25/84 at 475-76). Envirotech’s bid was a part of a plan designed to secure the contract but to leave Envirotech’s options open to select one of three types of heat exchangers after they had secured the contract. (Exhibit 3002; Tr. 1/25/85 at 463). Although it was more price competitive, Envirotech’s engineers saw many problems with the design and operation of a sludge to sludge heat exchanger. On June 24, 1977, Gene Pecci, Envirotech’s project engineer for the Horse Creek project, identified “serious expensive problems” with a sludge to sludge design saying “No way on primary sludge—published data says plugging evident” and that Envirotech “should use contingency money and convert to sludge to water.” (Exhibit 413). This was not the first time Envirotech recognized this problem. Prior to bidding, Mr. Pecci’s predecessor, Jay Johnson, wrote a memo listing five problems with the sludge to sludge system, including “plugging” and “solvent cleaning.” (Exhibit 3001). Envirotech met with Davis & Floyd on June 29, 1977, and advised that they were considering three designs for the heat treatment: (1) the sludge to water as originally proposed and as called for in the specifications; (2) the spiral; and (3) the sludge to sludge. (Exhibit 4012). Mr. Pecci’s memo of this meeting expressed concern over the effect of textile waste on the sludge to sludge system (Exhibit 414). After testing, the spiral heat exchanger was determined to be unsatisfactory. (Exhibit 417). The internal discussion was then between sludge to water and sludge to sludge. The evidence revealed a divergence of opinion within Envirotech management personnel. The sludge to water proponents included the project manager, Frank Breedlove, and Envirotech’s engineering department. They concluded in a memo dated July 8, 1977, that the decision on the heat exchanger “must be based on solid engineering principles, substantiated by test data, where possible.” (Exhibit 415). The sludge to sludge proponents were led by Envirotech’s president, Paul Castenholtz. On July 22, 1977, Envirotech’s engineering department issued a report calling for a sludge to water heat exchanger for Aiken County, saying this was the only reliable heat exchanger with “100% confidence factor (no plugging).” (Exhibit 420). They also reported that the metal spacers would catch fibers and cause plugging. On July 26, 1977, a meeting was held by Castenholtz, the engineers, and Breedlove to review the engineering report and decide which heat exchanger to provide. At that meeting Paul Castenholtz made the decision to overrule his engineers and Breed-love and to provide Aiken County with a sludge to sludge system. (Exhibit 426). This decision was made solely for financial gain and was, in total disregard of sound engineering principles. Two days later, on July 28, 1977, Envirotech met with Davis & Floyd to advise of its decision to use sludge to sludge. At this meeting, Envirotech got a copy of the Davis & Floyd pilot plant study. (Exhibit 6385). Although Envirotech contended at trial that its decision to supply sludge to sludge was based upon the pilot plant study, I find that this was not the case, since the decision to provide a sludge to sludge heat exchanger had already been made at the meeting on July 26, 1977, two days before receipt of this study. Furthermore, there is no credible evidence that upon receipt of the pilot plant study, Envirotech’s concerns in supplying a sludge to sludge heat exchanger were eliminated by information contained in that study. Mr. Pecci, who testified to this effect, conceded that there was no documentation in support of his contention. (Tr. 10/30/84 at 224-25). I find this testimony not to be credible and reflective of Envirotech’s corporate attitude. This contention is belied by their subsequent internal actions. Envirotech also reported to Davis & Floyd on July 28,1977, “that test work was still in process on spacer designs to minimize the possibility of plugging in the annulus.” (Exhibit 6385). Envirotech originally selected seven possible spacer designs. A testing program was outlined in March, 1977. (Exhibit 4046). Tests were run in August or September, 1977. Three of the proposed spacers were tested. The test report concluded each failed due to plugging. (Exhibit 431). The spacer design installed in the heat exchanger in Aiken County was never tested. (Tr. 1/25/84 at 504). Faced with management’s decision to supply a sludge to sludge heat exchanger, Envirotech’s engineers demanded testing which would address their previously expressed fears. The following chronology demonstrates the importance which Envirotech’s engineers felt spacer tests had to the successful design of the equipment. (1) The engineering report dated July 22, 1977 says: “There is insufficient data to prove what design eliminates, let alone minimizes, the hang up on spacers.” (Exhibit 420 at 4) (2) Mr. Breedlove’s memo dated August 3, 1977, quotes Castenholtz as instructing: “Engineering proceed immediately to develop and test an acceptable spacer design.” (Exhibit 426). (3) Another Breedlove memo of August 3, 1977 states: “Action Recommended: (2) Engineering to complete design and test of non-clog spacers as soon as possible but not later than November 1, 1977.” (Exhibit 425). (4) Mr. Pecci’s memo of September 22, 1977, states: “I am certain that everyone involved feels that testing is the only sure way of determining the best design____” (Exhibit 429). (5) Mr. Breedlove’s memo of September 26, 1977, states: “Testing of spacer designs for the sludge configuration must be implemented before this unit is installed____ I believe it is mandatory that tests be performed at the earliest possible date on Engineering’s proposed spacer designs. (Exhibit 430, emphasis added). (6) Mr. Chemicky’s memo dated September 29, 1977, concerning the design parameters for Aiken County’s heat exchanger states: “The sludge may contain solids up to V2” size plus fibrous and stringy material. Therefore the exchanger must be designed to prevent hangup and resultant plugging by this material.” (Exhibit 432). (7) Engineering’s department memo dated September 29, 1977, states: “We must keep in mind that short fibers, which reassociate into long fibers, will have a tendency to wrap around the best spacer design.” (Exhibit 431). (8) Mr. Breedlove’s memo of October 3, 1977, states: “Today engineering advised there was not funding, manpower nor time available to accomplish the recommended test____ In light of our exposure, I feel it is mandatory that the spacer selections be tested before installation, if not before completion of fabrication of the heat exchangers.” (Exhibit 433, emphasis added). Despite this apparent engineering commitment to testing, management disregarded these recommendations and proceeded with the design without testing the spacers for Aiken County. This was apparent in Pecci’s memo of October 24, 1977, in which he states: “[I]n a meeting attended by P. Castenholtz, ... it was decided that there will be no heat exchanger spacer design testing for Aiken, S.C.” (Exhibit 436). Another concern of Envirotech during the design period was the method of cleaning this heat exchanger. The specifications called for all stainless steel tubes, which could be cleaned with nitric acid. Envirotech’s engineers acknowledged that “[h]ot nitric will do a better job than inhibited HCL.” (Exhibit 400 at 1). Envirotech’s standard sludge to water heat exchanger is made of carbon steel tubes, which cannot be cleaned with nitric acid. (Exhibit 400 at 1). However, with their standard system, cleaning of the outer tube, or annulus, of the heat exchanger is virtually unnecessary since there is only water in this space. The inner tube is effectively cleaned mechanically with a bullet-like device with bristles called a “poly-pig” which is possible to use since there are no obstructions in this space. Members of Envirotech’s engineering department argued repeatedly that stainless steel piping and nitric acid cleaning should be used and, later, that the effectiveness of the hydrochloric acid (“HCL”) cleaning selected in lieu of nitric acid should be tested, as demonstrated by the following: (1) Jay Johnson’s memo of November 15, 1976, states: Zimpro—Zimpro has had years upon years of experience with sludge to sludge units, yet they have not attempted to reduce costs by using carbon steel in the cooler section. Why do they continuously rely on solvent cleaning alone, when the poly pig is available to them for cleaning the inner tube, where their highest concentration of scaling undoubtedly occurs? Is it not possible 180°F nitric acid is used to reduce build up in the annulus, as well as scaling of the inner tube? (Exhibit 3001). (2) The engineering report of July 22, 1977, which recommended that sludge to sludge not be used in Aiken County, noted that Zimpro has used nitric acid to clean its stainless steel heat exchangers, but that it cannot be used at Horse Creek unless the material is changed to stainless steel. (Exhibit 420). (3) Mr. Hannah, who authored the July 22, 1977 report (Exhibit 420), reported on September 29, 1977, that the effectiveness of inhibited HCL, chosen for Aiken’s heat exchanger because it is made of carbon steel, should be tested “to determine whether [it] will dissolve and remove the inorganic materials that cause plug-ups in the annulus of a heat exchanger.” (Exhibit 431). (4) Mr. Breedlove’s memo of October 3, 1977, states: "... [T]he effectiveness of inhibited HCL in removing scale and fibrous plugging should be demonstrated before the Aiken exchangers are installed.” (Exhibit 433, emphasis added). As with the spacers, no inhibited HCL tests were performed. In Mr. Breedlove’s letter of February 24,1978, sent to Davis & Floyd and Bay-Con as justification for change order number 5, he justified the use of HCL acid in lieu of the specified nitric acid as follows: “BSP’s practice is to use an inhibited hydrochloric acid solution and our experience has been that this system does a satisfactory job of cleaning the exchanger.” (Exhibit 5081, emphasis added). Upon questioning by the court, Mr. Breed-love stated that the terms “practice” and “experience” were poor word choices. The record fails to indicate that they had any experience, and the court finds that Envirotech’s claims of experience and testing were material misrepresentations. (Tr. 2/6/84 at 1064-68). Envirotech failed to test the spacers or the effectiveness of HCL, despite its admitted lack of experience and its representation to Davis & Floyd. The decision was made to use carbon steel, which cannot be cleaned with nitric acid—the only method known to be effective. These decisions were reached because of the desire to save money and were made knowing that they were probably unsound based on the advice of Envirotech’s own engineers. The disingenuousness of these decisions is underscored by the later false claim that the Envirotech system had been tested and was engineeringly sound. Envirotech designed the heat treatment system (Tr. 11/6/84 at 181-82); Davis & Floyd questioned the performance and reliability of the equipment. (Exhibit 8011). Davis & Floyd asked what the pressure loss across the annulus would be for a “clean” heat exchanger and for one which was “dirty”. Envirotech advised Davis & Floyd that the pressure loss was not an indication as to when the heat exchanger needed cleaning. (Exhibit 5079). Envirotech stated that the criterion for cleaning was the temperature differential; however, pressure loss is the primary criterion for evaluating the operation of the equipment, a fact which Envirotech concealed during design and construction, but admitted at trial. (Exhibit 5023-B). Davis & Floyd’s questions culminated in a meeting at Envirotech’s offices in California in February, 1978. Emmett Davis, the president of Davis & Floyd, testified regarding the meeting and his testimony was not contradicted. He stated that at this conference Castenholtz took him aside and specifically advised him that Envirotech had tested the equipment and that, if it did not work, Envirotech would replace it. Mr. Davis testified that they would not have allowed Envirotech to install this equipment if they had known of the July 22,1977, engineering report. (Tr. 12/10/84 at 22). Aiken County and Davis & Floyd relied upon Castenholtz’s representations and approved change order number 5, which allowed Envirotech to design, manufacture, and install a sludge to sludge heat treatment system on the project. (Exhibit 8000). I find that Mr. Castenholtz’s statements were material, false, intended to mislead, and did, in fact, mislead Davis & Floyd. I also find that Envirotech’s failure to advise Davis & Floyd of its engineering report recommending against the sludge to sludge design and against carbon steel tubing constituted fraudulent conduct. Envirotech completed the installation of the heat treatment equipment in the summer of 1979. The plant received wastewater on November 19, 1979, but, other than testing, the heat treatment system was not operated until late 1980 due to insufficient quantities of sludge and other mechanical equipment failures. (Tr. 1/23/84 at 108; Exhibit 237). The heat treatment system’s first performance test in August, 1980, failed. (Exhibit 6296A). In late 1980 and early 1981, Davis & Floyd and Aiken County observed problems with clogging, or plugging, in the annulus of the heat exchanger. (Tr. 1/23/84 at 108-115; Exhibit 8041, 8042). Restrictions of material in the sludge in the annulus of the heat exchanger cause a loss of automatic control and necessitate frequent cleaning. These restrictions are reflected as a loss of pressure between the inlet and the outlet of the annulus. As the sludge leaves the reactor and enters the annulus a gauge records the pressure. As the sludge leaves the annulus another gauge records its pressure. The difference between these readings is the pressure differential—also referred to as the “delta p”—and indicates the amount of restrictions in the annulus. More than a year prior to the time Aiken County and Davis & Floyd observed this plugging problem, soon after waste was received into the plant, Envirotech recognized the equipment failure due to this plugging, which was the very problem it had anticipated during the design phase. The following chronology demonstrates its internal acknowledgment of responsibility: (1) On January 3, 1980, Mr. Breedlove prepared an “exposure analysis” stating that the equipment might require redesign due to plugging and recommending a “most likely” exposure of $1,051,000.00. (Exhibit 8007). (2) On January 11, 1980, Mr. Breedlove received information that resin-based fibers were coming into the plant. He recognized that this increased the probability that Envirotech “will encounter heat exchanger annulus problems.” (Exhibit 8006). (3) On January 11, 1980, Mr. Breedlove revised his “exposure analysis” to recommend a “most likely” exposure of $1,301,000.00, and a maximum exposure of $2,391,000.00. (Exhibit 8007A). (4) On March 9, 1980, Mr. Breedlove recorded in his diary that Envirotech personnel had observed pressure loss in the outer tube and that plugging was occurring. (Exhibit 400). During training, Aiken County’s operators were not told by Envirotech what the normal pressure loss would be, (Tr. 5/2/84 at 36), nor does the original operations and maintenance manual describe the consequences of such pressure loss. (Exhibit 5023). In early 1981, the operational problems of the heat treatment equipment became more severe, and when the second performance test was run in April, 1981, Davis & Floyd refused to certify the equipment due to mechanical problems. (See Exhibit 5055). On April 8, 1981, Davis & Floyd requested an explanation from Envirotech for the pressure loss. (Exhibit 8001). This request was again made in July, 1981. (Exhibit 5043). The evidence showed that the equipment did not pass the performance test, that it required manual operation during this test due to plugging, (Tr. 1/31/84 at 699), and that Envirotech did not respond to Davis & Floyd’s questions concerning the significance of the pressure loss (Tr. 2/1/84 at 752). Envirotech finally provided Aiken County with a revised manual for operation in October, 1983, after this trial had been underway for a year, which stated that pressure loss is the primary criterion for determining the system’s performance. (Exhibit 5023-B). I find that Envirotech anticipated plugging problems with its equipment and willfully concealed this knowledge from Davis & Floyd and Aiken County. There was considerable testimony as to which constituents in the waste caused the clogging. It was evident, and confirmed by the court’s own observation of a sample introduced in evidence, that strings, fibers, sand and miscellaneous black substances were present. (See Exhibit 8039). It was conceded by Envirotech that, if the equipment had carried water in the annular space, there would have been no restrictions in the flow. The following quote from an Envirotech publication describing how it overcame similar problems at its original installation at Colorado Springs, and that plant’s subsequent successful operation, is very relevant to this case; Initially short pieces of ground synthetic fibers and other materials were found to have reconstituted into strands or balls and blocked the annular opening between the inner and outer tubes. By essentially dividing the heat exchanger in half and adding a closed circuit with a circulating water pump, a closed circuit with a circulating water pump, a closed coupled water to sludge heat exchanger was created. This simple step effectively eliminated all blockage problems and the heat exchanger has not been dismantled for cleaning or washed with any cleaning solvents since February of 1969. The system has operated continuously, 168 hours per week, now for four years except for maintenance shutdowns. Maintenance shutdowns are scheduled for one week periods to replace valves and reline or point up boiler brick at least once a year. (Exhibit 8029). Envirotech, however, dropped its heat treatment product line in November, 1979, and does not have the capability to make similar modifications at Aiken County. (Exhibit 2055). A witness for Davis & Floyd testified that the velocity of the flow in the annulus at the cross-over was not sufficient to keep the solid material in suspension and that, as the sludge passes into the next “upriser,” the solids drop out and cause a blockage in the outer pipe. (Tr. 2/9/84 at 99-102). This blockage was observed by Envirotech personnel in 1983. Envirotech knew that it was furnishing a heat exchanger which was inherently subject to plugging. Its failure to provide adequate velocity to prevent blockage in the cross-over pipes compounds the owner’s problems. The plugging problem was aggravated by Envirotech’s failure to provide an effective method to clean the annulus of the heat exchanger. Envirotech did not provide a method to mechanically clean the annulus. The only methods provided were flushing with water, steam or acid. These methods have proved to be inadequate. Mr. Breedlove testified that the equipment should be cleaned until the pressure differential across the annulus reaches 150 p.s.i. Envirotech also sets this forth in its supplemental operations and maintenance manual (Exhibit 5023B). The operator of the Aiken County heat treatment system, Brent Midgett, testified that he had never achieved that level of cleanness. (Tr. 5/2/84 at 68). In conclusion, I find that Envirotech supplied Aiken County a heat treatment system that was defective in that it plugged and could not be efficiently or effectively cleaned. Further, I find that Envirotech committed the following fraudulent acts in connection with its design and supply of the heat treatment system: (1) In furnishing a design which it knew or should have known would not meet the design specifications. (2) In falsely representing that the heat treatment system would be and had been tested, when, in fact, it decided not to test the equipment due to cost. (3) In falsely representing that the heat exchanger could be effectively cleaned by the use of HCL acid when, in fact, it had not tested such use and HCL is not effective. (4) In failing to disclose that the equipment would likely plug, and in failing to disclose the methods for identifying the plugging problem when it occurred. The first three acts, which occurred before change order number five (Exhibit 8000) was approved in March, 1978, were designed to induce Aiken County and Davis & Floyd to allow the use of this system. The fourth act was intended to conceal from Aiken County and Davis & Floyd known defects in the performance of the equipment. Not only did Envirotech’s acts defraud Aiken County, but such acts are the proximate cause of Aiken County’s failure to receive equipment which met the required specifications. The specifications set forth definite criteria for determining whether the equipment met acceptable performance standards. The first requirement stated: “[T]he system[] furnished shall be complete in all details and shall be placed in operation ready to operate continuously on a 24-hour per day basis with not more than 15 percent of total time required for maintenance and repairs.” (Exhibit 421, paragraph 155.-1). There was much testimony about the meaning of this provision of the contract. I find the most reasonable interpretation of this provision to be that no more than 15% of the time the equipment actually operated should be spent on maintenance and repair. Although it should be able to operate 24 hours a day, continuously, if it operates less than that, then the 15% would apply to the actual time that it operated. (Tr. 2/1/84 at 782-783). The following equation illustrates this performance parameter: time spent on maintenance and repairs total time operating on sludge. Paragraph 15S.7.1 of the specifications requires that the equipment “be capable of being operated with all automatic and safety features functioning.” Finally, Paragraph 15S.16 provides: “In the event that the sludge processing system cannot be operated in a practical manner, even with corrective changes, the Owner shall have the option of having the Contractor and equipment supplier remove the entire system at no cost to the Owner or to allow further revisions and/or replacements.” (Exhibit 421). The parties introduced summary charts and testimony relating to the equipment’s performance beginning in late 1980 through December, 1983. During the trial, in January-February 1983, Envirotech was allowed to clean and examine the equipment and had an opportunity to make any modifications. After spending approximately four weeks cleaning the heat exchangers, Envirotech ran the system on cold water. It never operated the system on sludge to see what the pressure differential would be on sludge. When Aiken County operated the system on sludge after this cleaning, the pressure differential was 180 p.s.i. (Tr. 11/7/84 at 379). Following this inspection and cleaning, Davis & Floyd analyzed the performance both from on-site observations and from a review of operating data for the period February 21, 1983, through June 1, 1983. (Exhibit 8046). They concluded that the equipment operated unsatisfactorily—without all automatic and safety features—50 percent of the total time. (Tr. 11/7/84 at 452). In addition to Davis & Floyd’s evaluation, the court instructed Aiken County’s chief of operations, Ron Bibb, to analyze the equipment operation during the period October through December, 1983. His analysis included a run-by-run review of the total time the equipment was operated on sludge, the total time spent cleaning, and the total time for other maintenance and repairs. (Ct. Exhibit 2). His evaluation concluded-that, in October, 1983, the equipment was cleaned, maintained or repaired a total of 139.25 hours, while operating on sludge only 194 hours. Using the most liberal interpretation of the performance criteria in the specifications, I find that 42 percent of the total time was spent on maintenance and repairs in October, 1983. Maintenance and repairs during November, 1983, constituted 36 percent of the total time, and those during December, 1983, were 42 percent of the total time. (Tr. 2/8/84 at 1187). Further analysis of this data reveals that, for the months of October, November, and December, 1983, the non-cleaning repairs and maintenance were 17 percent, 18 percent and 9 percent, respectively, of the total hours, while cleaning maintenance amounted to 25 percent, 18 percent and 33 percent, respectively, of the total time. I find that the heat treatment system at Aiken County requires much more than the 15 percent maximum time for repairs and maintenance; that it cannot be operated for a reasonable time with all automatic and safety features functioning; that it cannot be operated in a practical manner as contemplated by the parties and as required by the specification; and that it cannot be efficiently and effectively cleaned using the methods supplied by Envirotech. Bay-Con and Travelers offered no evidence in defense of Aiken County’s claims and relied totally on their right to indemnification from Envirotech. I find that Bay-Con, Travelers, Envirotech and INA are jointly and severally liable to Aiken County for breach of contractual warranties. I find that Bay-Con and Travelers are entitled to have indemnification over against Envirotech and INA. INA’s liability is limited to the penal sum of its bond (Exhibit 5041), $2,070,399.00, plus interest from the date of this order. I find that Envirotech is liable to Aiken County for its fraudulent conduct. I do not find any liability on the part of Davis & Floyd to Aiken County, Bay-Con, Travelers, Envirotech or INA. IV. AFFIRMATIVE DEFENSES AND CROSS-CLAIMS Although it is difficult to distinguish upon which affirmative defenses Envirotech and INA relied, the court finds their affirmative defenses can be consolidated into the following factual allegations upon which evidence was offered at trial: first, that Aiken County accepted the equipment; second, that the problems with the heat treatment equipment, if any, were the fault of Davis & Floyd, due to their failure to alert Envirotech to the unexpected characteristics of the incoming wastewater; third, that Aiken County failed to give timely notice as required by the bond; and, fourth, that Aiken County is limited to specified liquidated damages. The court further finds that Envirotech and INA have failed to prove these affirmative defenses by the greater weight or preponderance of the evidence. A. Acceptance As discussed in detail above, I find that the heat treatment equipment is defective and does not meet the specifications. The overwhelming credible testimony supports a finding that it has never been accepted by Aiken County or Davis & Floyd. Although Aiken County has used the equipment for approximately five (5) years, the contract specifically provides that the owner may accept the equipment for operation prior to the successful completion of the performance tests. (Exhibit 421). The performance tests have never been successfully completed. (Tr. 2/1/84 at 754). B. Wastewater Characteristics Davis & Floyd was employed by Aiken County to select the process and design a waste treatment plant suitable to treat the wastewater being discharged into the Savannah River by the Cities of Aiken and North Augusta and the textile mills of United Merchants and the Graniteville Company. In performing this task, Davis & Floyd sampled the wastewater discharged by the industries and municipalities and provided a detailed description of the textile waste, plant by plant, to Envirotech, which indicated that it would be difficult to treat. (Tr. 11/5/84 at 51). The engineering report prepared by Davis & Floyd (Exhibit 6044) cited the standard textbooks regarding the characteristics, composition and treatability of textile waste, (e.g. Exhibit 8038). Davis & Floyd also did a pilot plant study and report to confirm its preliminary engineering report conclusion. (Exhibit 6047). The plant was designed to biologically degrade textile waste using extended aeration. All of this material was discussed with agents of Envirotech while the work was in progress, and final copies were furnished to them. Davis & Floyd also talked with representatives of various equipment suppliers and visited several installations containing both Zimpro and Envirotech heat treatment systems. Based on their investigation, experience, and expertise, they specified two alternate heat treatment systems: Zimpro’s air-assisted sludge to sludge and Envirotech’s sludge to water. It is uncontested, and I so find, that if Envirotech had supplied its sludge to water system there would be no plugging in the annulus of the heat exchanger. {See note 26, supra). Envirotech’s defense on this issue is that the waste contains polyvinyls, acrylics, and acetates—generally described as “latex-like” substances—which it did not anticipate. There is no dispute but that the waste does contain polyvinyls, acrylics and acetates; the parties disagree as to Envirotech’s knowledge, the quantities in the waste, and the effect of these substances on the equipment. The evidence clearly establishes that Envirotech knew that textile mills were major contributors to the project. (Tr. 1/25/84 at 448). All the experts agreed that polyvinyls, acrylics, and acetates are common compounds used in the textile industry. Many synthetic fibers are made from acrylics and acetates, and polyvinyls are commonly used in the sizing process at textile mills. {See note 40, supra). Envirotech, through its local sales representative, was kept informed of Davis & Floyd’s study. (Tr. 11/5/84 at 46, 67). Envirotech had experience with textile waste and studied a sample of this particular waste. (Tr. 11/5/84 at 31 and Exhibit 8035). Davis & Floyd and Envirotech observed the test work jointly. Envirotech reported that the sample contained a great deal of high molecular weight material. (Tr. 11/5/84 at 38). Such material includes the normal constituents of textile waste such as synthetic resins, sizes, polyvinyl alcohol, polyvinyl acetate, and textile dyes. In fact, the content was so high that Envirotech suggested that it be used for fuel. (Tr. 11/5/84 at 44 and Exhibit 8047). Based on the credible testimony of the witnesses, I find that the quantities of poly-vinyls, acrylics, and acetates found in the influent to the project, were within the expectations of the parties, (Tr. 11/15/84 at 14-18), and I find no credible proof that these quantities were unusual or more than what would normally be anticipated for this type of wastewater. In reaching this conclusion, I have particularly considered the testimony of Envirotech’s expert, George Aseff, regarding the quantities that he found to exist in the wastewater. Envirotech placed great reliance on a letter written by Aiken County's executive director, Stan Wagher, on March 5,1981, to the industries referring to a large quantity of latex-like material found on the plant's bar screens. (Exhibit 6205). However, Envirotech could not connect this isolated instance to any problems with its equipment. This was an isolated occurrence and had no identifiable effect on the heat treatment operation. (Tr. 1/24/84 at 282-85). Finally, if this occurrence did cause a problem to the equipment, the problems were corrected when Envirotech cleaned the equipment in January, 1983. As noted above, I considered the equipment performance after January, 1983, in determining that the equipment failed to meet the specifications. Envirotech asserted that the polyvinyls, acrylics, and acetates were the sole cause of the plugging which led to excessive cleaning time and loss of automatic control. This contention was refuted by Aiken County and Davis & Floyd personnel who observed the equipment cleaned on numerous occasions. They testified that the material removed from the equipment during cleaning was mostly string and fibers. (Tr. 5/2/84 at 400; Tr. 11/7/84 at 386-87). However, some of the tiers of pipe comprising the heat exchanger did contain the latex-like materials. (Tr. 11/7/84 at 355-60). These materials are adhesive, especially polyvinyl acetate, which is a constituent of Elmer’s glue. (Tr. 7/16/84 at 137). They would undoubtedly compound any clogging problem due to fibers. Despite the presence of the latex-like material, not all of the bundles of fibers flushed from the heat exchanger during cleaning were stuck together by these substances. (Tr. 11/7/84 at 387). Therefore, I find that both the fibers alone, and the fibers in conjunction with the latex-like material, caused the plugging of the heat exchanger. Envirotech sales literature which was sent to Davis & Floy