Veolia Water Technologies, Inc. v. Antero Treatment LLC.
2024 COA 126. No. 23CA0897. Contracts Terms—Breach of Contract—Incorporation by Reference—Damages—Economic Loss Doctrine—Intentional Fraud.
December 19, 2024
Antero Resources Corporation and its subsidiaries Antero Midstream Corporation, Antero Midstream Partners LP, and Antero Treatment LLC (collectively, Antero) are in the business of producing natural gas and oil in the Appalachian Basin. Antero is headquartered in Denver. Antero operated a facility to treat wastewater from natural gas hydraulic fracturing (fracking) operations in West Virginia (the facility) where it primarily relied on deep well injection to discard fracking wastewater in disposal wells. Because this process presented economic, technological, and environmental challenges, Antero approached Veolia Water Technologies, Inc. (Veolia) to design and build the facility to separate and crystallize the solids within fracking wastewater to create waste salt to be landfilled, thus leaving water clean enough to reuse or release into surface waterways. Veolia submitted a proposal, and Antero authorized Veolia to conduct preliminary testing and design through two limited notices to proceed (LNTP) before the parties entered into a design/build agreement (DBA) in 2015, which was the principal contract governing the facility’s construction. As relevant here, the DBA included two key requirements for the facility, one relating to the characteristics of the waste salt and the other relating to the facility’s power consumption. Veolia later proposed a design alteration designated as Change Order 1 (CO-1), which was directed at treatment of the waste salts.
As to the waste salt, the facility began treating wastewater and producing waste salt in 2017, but because some of the waste salt (4B waste salt) was so wet and unstable, Antero was unable to landfill it without mixing in expensive amounts of fly ash, which Antero’s initial landfill permit prohibited. Antero canceled the DBA after learning that the salt issue would not be resolved and that Veolia disclaimed responsibility. As to the power consumption, the DBA contained a power consumption guarantee by Veolia for the facility, as power consumption directly affected the facility’s economic viability. Because Veolia’s initial design ended up exceeding power requirements, it implemented a work-around. But the facility faced repeated mechanical failures that led to outages, prevented it from reaching its full operating capacity, and caused frequent shutdowns. As a result of the 4B waste salt problems and mechanical and design failures, the facility never met the DBA’s contractual milestones: (1) a substantial completion performance test (SCPT), and (2) by December 12, 2017, a final completion performance test (FCPT). Veolia attempted an SCPT twice in 2019 and argued the facility had passed, but Antero disagreed and contended that Veolia had not completed the required work under the DBA or met the SCPT process requirements. Antero subsequently halted operations at the facility. Antero terminated the DBA in September 2019 before Veolia completed an FCPT.
Veolia and Antero separately sued each other in 2020, and the cases were consolidated. As relevant here, Antero sued for breach of contract and fraud. The district court found that Veolia breached the DBA by failing to meet the DBA’s SCPT and FCPT deadlines. As a result, even if Veolia had passed the SCPT in March 2019, delay liquidated damages (DLDs) began to accrue and hit the DLD cap in June 2019, causing Veolia to default. The district court also found that the CO-1 created specific salt requirements when it incorporated by reference an email from Veolia’s Project Director Pietropaoli and that Veolia breached the DBA and CO-1 by failing to provide compliant 4B waste salt. The district court further found that Veolia failed to construct the facility in accordance with industry practice as defined by the DBA, failed to deliver to Antero a turnkey facility, and did not complete the work required by the DBA. Accordingly, Veolia had breached the DBA and CO-1. The district court further found that Veolia fraudulently induced Antero to sign the DBA and fraudulently induced Antero into signing CO-1. Lastly, the district court awarded damages, finding that the economic loss rule did not bar Antero’s recovery of damages for fraud because, at the time of Veolia’s misrepresentations, there was no contract with Antero because the proposal and the LNTPs did not form a “network of interrelated agreements.”
On appeal, Veolia contended that the district court erred by finding that it breached the DBA by producing 4B waste salt that did not meet the DBA’s requirements. However, the terms detailed in Pietropaoli’s email were added to the DBA as part of CO-1 and created specific requirements for the waste salt consistent with Veolia’s obligations. The record thus supports the district court’s finding that Veolia breached the DBA by failing to meet these physical property requirements.
Veolia also argued that the district court erred by finding that it breached the DBA by failing to build the facility in accordance with industry practices, failing to meet its contractual milestone deadlines, failing to deliver to Antero a turnkey facility, and failing to complete the work required by the DBA. However, record evidence supports the failure to adhere to prudent industry practices, which also supports the district court’s findings that Veolia never delivered a turnkey facility and thus had not completed its work under the DBA.
Veolia further asserted that Antero breached the DBA and caused the disruptions to facility’s operations by providing influent containing guar gum, biocides, and scale inhibitors and that these substances materially impacted the facility’s operation. However, the district court highlighted conflicting record evidence on these points, and the court of appeals may not reweigh competing evidence.
Veolia additionally contended that the district court erred by finding that the economic loss rule did not bar Antero’s fraud claims and that the court need not have reached the fraud claims at all because the damages would not have exceeded the DBA’s damages cap regardless. The court first concluded that the proposal, the LNTPs, and the DBA were part of an interrelated network of contracts, so all of Veolia’s misrepresentations were made after the contracts were executed. Thus, to the extent the district court found that the economic loss rule did not bar Antero’s fraud claims because they were made before the DBA was signed, this was error. However, the economic loss rule does not bar Antero’s fraud claims because (1) the fraud concerned aspects of Veolia’s performance over which Veolia had no discretion, which undermines the implied duty of fair dealing’s application; (2) Antero is not using tort claims to pursue damages explicitly prohibited by the DBA; and (3) the DBA explicitly permitted additional damages in the event of fraud. And the record supports the district court’s findings that Veolia concealed information to induce Antero to enter into the DBA and CO-1, which caused Antero damages.
Veolia also contested the damages award. The court determined that (1) the district court did not abuse its discretion in selecting market value as the appropriate measure of damages, because Antero provided sufficient evidence that repairing the facility would constitute economic waste; (2) the district court’s benefit-of the-bargain damages calculation has record support; and (3) the district court did not erroneously conflate Antero’s value as a business with the facility’s value as a facility. Therefore, the damages award must stand.
Lastly, both parties requested appellate attorney fees and costs under C.A.R. 39 and 39.1. Concluding that Antero is the prevailing party on appeal, under the DBA, and in accordance with C.A.R. 39.1, the court awarded Antero its reasonable appellate attorney fees and costs.
The judgment was affirmed and the case was remanded for the district court to calculate Antero’s reasonable appellate attorney fees and costs.