Provide a report that assesses the contract rights and the remedies available to Heartland for the failure of Level 3 and 4 and the failure to process 95,000 tons of steel per month. To the extent that you find the contract did not cover Heartland’s expectations provide how you would have changed (improved) the contract prior to its execution.

FACTUAL BACKGROUND

Heartland was to become the largest independent flat rolled steel processor in the United States with the expected capacity of 1.1 million tons a year. As a flat rolled steel processing and tolling facility, third parties would provide the coils of flat rolled steel to be processed by Heartland.

In order to accomplish its goal, Heartland planned to construct a 800,000 square foot facility on a 200 acre site in Terre Haute, Indiana, which would allow Heartland to offer, through a technologically advanced facility, a unique range of steel services, including a continuous pickle line, temper mill, two-stand reversing cold mill, hot dip galvanizing line, hydrogen batch annealing and coil slitter in one facility (the “Project”).

Through the use of a highly sophisticated, four-level computer control and information system (the “Information System”), Heartland was to deliver its services using less manpower, resulting in costs lower than those of its competitors. A facility of this size would expect to employ 300 employees but Heartland expected to employ 50.

The Information System was key to the success of the Project.

Each of the processing lines at Heartland was to be controlled by its own computer system, utilizing the first two levels of the Information System (“Level 1” and “Level 2”).

The third level (“Level 3”) was to be a software/hardware system which would coordinate the automated customer interface and production capabilities from Levels 1 and 2, allowing inter alia, real time and direct customer communication, production scheduling, quality recording, and real time inventory tracking.

The fourth level (“Level 4”) was to be based on information collected by Level 3 and would provide automated accounting and billing information.

Heartland management, while highly experienced in steel production and processing, had no information systems and/or computer experience. As a result, Heartland management knew, and communicated to its potential suppliers during the Project planning phase, that it was essential that the turnkey contractor selected by Heartland for the Project have such expertise.

In selecting a turnkey contractor to meet Heartland’s functional requirements for the Project, Heartland had three (3) primary criteria:

1. That there be a single turnkey contractor;
2. That the turnkey contractor be willing to invest capital into the Project and take an equity position in Heartland; and
3. That the turnkey contractor be capable of and willing to assume responsibility for all phases of the Project, including software.

On or about June 15, 1998, Heartland and Kvaerner entered into the Amended and Restated Contract for the Supply of Equipment for the Project (the “Equipment Contract”), and Kvaerner began construction of the Heartland facility. The Equipment contract was the only written agreement entered into by the parties Kvaerner took an equity position in Heartland and an officer of Kvaerner was elected to the Heartland Board of Directors.

Construction of the facility began in August 1998. By March 31, 1999 all of the physical plant including all physical equipment to provide the various steel services was installed and operational. Discussions proceeded throughout the Fall of 1998 as to the specific capabilities of Level 3 and Level 4 software and were reflected in memos created after each meeting which were initialed by both parties..( The software was considered a service and not a good) The work on the software was billed to Heartland on a time and materials basis, i.e. the agreed hourly rate for any individual assigned to the software project plus expenses which Heartland paid. The first steel coils were processed in May,1999 and the product lines were in continuous operation thereafter although the lines never produced the volume of treated coils that had been represented in the pre contract negotiations.

Despite the fact that the parties agreed Level 3 system was initially to have been completed by April2, 1999, by early 2000, the Level 3 system was not functioning in accordance with the performance specifications agreed to by the parties. Accurate information on the steel coils being processed was not being passed on from one line to the next. In fact, the faulty Level 3 system was dumping inaccurate information in the Information System and corrupting the data. .

As a result, while Level 3 was intended to reduce the number of employees required to man the Facility, the problems with the Level 3 system were so severe that Heartland was forced to hire 42 additional employees just to manually track its products. In addition, regular Heartland employees were forced to work a considerable amount of overtime in an attempt to keep the plant at even a modest level of production; and expected production could not be met.

Additionally, Heartland was unable to provide its customers with real time information regarding the status of their order(s) and/or of their coils. This deficiency was particularly problematic for Heartland because, as a flat rolled steel processing and tolling facility, Heartland was actually processing flat rolled steel coils that had been supplied by its customers (or other third parties) for processing, not its own coils, yet Level 3 as provided by Kvaerner did not allow Heartland to locate consistently the customers’ coils. The steel coils provided to Heartland had different specifications and accordingly, were not interchangeable.

The specifications provided to Kvaerner required the plant to produce 95,000 tons per month of treated steel coils and in negotiations leading up to the execution of the agreement assurance were given that the production goals would be met. The highest production for an individual month was 75,000 tons and most months because of equipment malfunctions the tonnage averages 50,000. As of January 2002 the two stand reversing cold mill was still not functioning.

In January 2002 your employer Smith Consulting was given the engagement to advise the Board of Directors of Heartland as to its contractual rights against Kvaerner and whether the contract relationship between Heartland and Kvaerner accomplished the goals set by Heartland in entering into the transaction. Among other issues raised by the Board is whether Heartland can recover the funds expended for Level 3 and 4 software and what other contractual remedies Heartland has against Kvaerner for the failure of the processed monthly steel quota to reach 95,000 tons. The contract that is Tab 2 in the Course Packet is the only written contract entered into between Kvaerner and Heartland. All monies owed under the contract in Tab 2 have been paid.

Provide a report that assesses the contract rights and the remedies available to Heartland for the failure of Levels 3 and 4 and the failure to process 95,000 tons of steel per month. To the extent that you find the contract did not cover Heartland’s expectations provide how you would have changed (improved) the contract prior to its execution.

Answer rating: 100% (QA)

REPORT CONTRACT RIGHTS AND REMEDIES FOR HEARTLAND Introduction Heartland entered into a contract with Kvaerner for the supply of equipment and software for its flat rolled steel processing facility Th... View the full answer