LITTON INDUSTRIES, INC. et al. v. IMO INDUSTRIES, INC., VARO, INC., BAIRD CORPORATION, et al.

(NOTE: The status of this decision is published.)
 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1444-06T11444-06T1

LITTON INDUSTRIES, INC.

and LITTON SYSTEMS, INC.,

Plaintiffs-Respondents/

Cross-Appellants,

v.

IMO INDUSTRIES, INC., VARO, INC.,

BAIRD CORPORATION, and OPTIC-

ELECTRONIC INTERNATIONAL, INC.,

Defendants-Appellants/

Cross-Respondents.

 

Argued December 18, 2007 - Decided

Before Judges Winkelstein, Yannotti and LeWinn.

On appeal from the Superior Court of New Jersey, Law Division, Mercer County, L-1730-97.

George C. Lamb III (Baker Botts LLP) of the Texas Bar, admitted pro hac vice, argued the cause for appellants/cross-respondents (Duane Morris LLP and Mr. Lamb, attorneys; Frank A. Luchak, John J. Coughlin and Mr. Lamb, on the brief).

James T. Smith argued the cause for respondents/cross-appellants (Blank Rome LLP, Norman E. Greenspan (Blank Rome LLP) of the Pennsylvania bar, admitted pro hac vice; and Rebecca D. Ward (Blank Rome LLP) of the Pennsylvania bar, admitted pro hac vice, attorneys; Stephen M. Orlofsky, and Mr. Smith, on the brief).

PER CURIAM

Plaintiffs, Litton Industries, Inc. and Litton Systems, Inc. (collectively, Litton or plaintiff), purchased defendants' optical system business in 1995. A provision of the purchase agreement (the Agreement) prohibited defendants from making any bid or contract that would result in a net loss. Plaintiff claims that defendants breached the Agreement and committed fraud with regard to a contract defendants bid with the Army for eyesafe laser rangefinders for M1A2 Abrams tanks (the Tank Contract), causing plaintiff to sustain a multimillion dollar loss.

The case was tried to a jury over twenty-nine days between September 21 and November 15, 2004. Following the court's denial of defendants' motion for judgment at the close of the evidence, the jury returned a verdict that defendants violated section 5.3(ii) of the Agreement and awarded plaintiff $2.3 million, and the court awarded counsel fees and prejudgment interest. The court entered a final judgment on October 6, 2006, for $2.1 million in compensatory damages (the parties agreed to reduce the $2.3 million verdict), prejudgment interest of $1,204,536.29, and counsel fees and costs of $5,975,903. By order of November 6, 2006, the court reduced the amount of prejudgment interest to $810,504.03. Defendants have appealed and plaintiff has cross-appealed from these orders.

Defendants claim that the court erred in denying their motion for judgment because section 5.3(ii) of the Agreement did not apply to the Tank Contract; a letter agreement signed several months after the Agreement absolved defendants of liability; and plaintiff brought its action beyond the Agreement's limitations period. Defendants also appealed from the court's counsel fee and prejudgment interest awards, contending that they were either improper or excessive. In its cross-appeal, plaintiff asserts that the court made numerous evidentiary rulings and improperly barred plaintiff from asserting claims for lost profits and administrative costs.

Although we find no merit to the majority of the parties' arguments, because the court improperly precluded plaintiff's claims for lost profits and administrative expenses, we reverse the final judgment and remand for further proceedings.

I.

Defendant IMO manufactures night vision components and systems, laser and other optical products. Defendant Varo is a wholly owned subsidiary of IMO, and was also in the business of designing and manufacturing night vision components and systems. Defendant Baird sold substantially all of its assets to Varo and defendant Optic-Electronic International is a Varo subsidiary.

A. The Agreement

Experiencing financial difficulties, in January 1995 IMO approached Litton, seeking to sell Litton two parts of its business, night vision equipment and military lasers. On February 7, 2005, H. Thomas Hicks, a Litton vice-president, wrote a letter of intent to William Brown, IMO's chief financial officer, agreeing to purchase those parts of defendants' business for $52 million. The transaction was subject to conditions, which included a more definitive agreement, and approval by "all governmental authorities necessary to consummate a proposed transaction."

Consequently, on May 11, 1995, Litton and IMO entered into an agreement, identified on the first page of the document as the "PURCHASE AND SALE AGREEMENT." The agreement called for the transfer of assets to take place on the later of May 31, 1995, or "the fifth business day following the day on which the conditions set forth in Sections 6 and 7 are satisfied or waived." Those sections provide conditions precedent to the parties' obligations to close. The conditions included approval by governmental authorities.

The parties entered into a second agreement on June 2, 1995. The cover sheet to that agreement, labeled as "APPENDIX A," states as follows:

PURCHASE AND SALE AGREEMENT

AMONG

[PLAINTIFF]

AND

[DEFENDANTS]

May 11, 1995

AMENDED AND RESTATED

AS OF JUNE 2, 1995

Appendix A also included a table of contents, a list of exhibits, a list of schedules and a definition section, all of which were not included in the agreement signed on May 11. The definition section, titled "Appendix I," states that the definitions were "[a]s used in the Purchase and Sale Agreement dated as of May 11, 1995 (amended and restated as of June 2, 1995)." Page one of the second agreement states the agreement was "made and entered into on and as of May 11, 1995 (amended and restated as of June 2, 1995)."

The second agreement changed the date assets were to be transferred from May 31 to June 2, 1995. Sections 3.12(a)(iv) and 5.3(ii) of both agreements, the provisions that Litton claimed defendants breached, were substantially unchanged from the May 11 agreement to the June 2 agreement. Both agreements, in section 12.17, contained the following language: "This Agreement . . . constitute[s] the entire agreement and understanding between the parties . . . and supersedes and cancels any and all prior . . . agreements between the parties . . . ." On the last page of the second agreement, above the signatures of the parties, the agreement states: "the parties . . . have caused this Agreement to be executed . . . on and as of May 11, 1995."

B. The Tank Contract

Defendants' primary competition for Army laser contracts was the Hughes Aircraft Company. IMO's director of marketing, retired Army Colonel Alexander Evans, believed that the government favored Hughes, which was the contractor for non-eyesafe laser rangefinders in M1A2 Abrams tanks. In 1993, Hughes submitted an unsolicited proposal to the Army to replace the non-eyesafe units with eyesafe laser rangefinders (ELRFs). Varo submitted a similar unsolicited proposal. The Army suggested that Varo convert ten non-eyesafe lasers to ELRFs at no cost to the Army.

The Army had 5000 M1A2 tanks and approximately 10,000 Bradley tanks, and Varo could potentially retrofit the M1A2 laser into the Bradley, which gave Varo "enormous potential." Accordingly, Varo delivered the prototypes to the Army in early 1994. That fall, the Army requested an estimate for 1000 ELRFs. Jeff Sheridan, Varo's marketing manager, asked Colonel Christopher Cardine, the Army's project manager for Abrams tanks, when he was going to release the solicitation for the ELRF for the M1A2; Cardine allegedly responded: "[T]hat belongs to Hughes."

As a result, Evans filed a complaint with the Army. Although the Army took no action on the complaint, in January 1995 it issued a formal solicitation for bids for the ELRF for its M1A2 Abrams tanks. Colonel Evans testified: "We absolutely had to win this contract." The M1A2 contract had the potential for follow-up business for the 10,000 Bradley units. Evans declared a "must-win" strategy to Varo's highest-ranking manager, Dwayne Attaway; Optic-Electronic's general manager, Pat Thurman; Optic-Electronic's director of engineering, research and development and proposal manager, Thomas Milson; and Optic-Electronic's comptroller, Ann Barney. Barney recalled a February 1, 1995 memo from Milson to the team working on Varo's strategy, that winning the Tank Contract would enable Varo to "continue as a viable competitor for the armored vehicle eyesafe laser market. If we do not win this procurement, we will most likely be excluded from further US armored vehicle eyesafe laser business."

According to William Wilson, Litton's vice-president of engineering, the rangefinders were required to operate at specific wavelengths; fire once per second for two minutes; repetitively range on a moving target; and range targets 2.3 by 2.3 meters from a distance of 200 to 7990 meters with a range error not to exceed 10 meters.

Sheridan was the Army's point person for the ten M1A2 ELRF prototypes. He recalled that the Army had not issued specifications when the prototypes were built, but that the prototypes used the APD (Avalanche Photo Diode) receiver. He traveled to Arizona in April 1995 with Jerry Baker and Mark Walker, Varo engineers, for the Army's testing of two of the prototypes. Both units failed the range accuracy tests.

Sheridan, Baker and Walker returned to Garland, Texas, where Varo was located, and told management what had occurred. In a meeting with Brian Morgan, Varo's manager for the M1A2 program, and Milton Woodall, a Varo engineer, Sheridan learned that Varo intended to obtain "spec relief" and replace the APD receiver with a less expensive PIN receiver (which was used in the MELIOS units). Dale Gentry, a consultant hired by Thurman to provide an independent cost estimate, wrote to Milson in January 1995 that Varo had to submit "a real lowball price if we are to have a chance" to win the contract.

Anthony Johnson, a consultant on Varo's M1A2 ELRF proposal, explained that to attain the desired range of approximately eight kilometers, the receiver had to have a certain sensitivity. The Varo "technical people" all concurred that the APD receiver was necessary to meet the Army's specifications.

Milson confirmed that Varo originally "envisioned using a PIN diode," which was less expensive than the APD, but in January 1995 it became clear from testing and discussions with Tony D'Agosto, an Army systems engineer, that the PIN was not acceptable because of its lesser performance. Milson recalled that in March 1995, Woodall attempted to convince the Army to allow use of the PIN instead of the APD. Christine Hansen, an Army price analyst, testified that when Varo considered a proposal to change the performance specification to lower the sensitivity of the receiver, which would lower the cost, the Army responded that Varo should submit a proposal as soon as possible, but unless the specifications were amended, compliance was required.

Peter Morris, a Varo employee, obtained pricing for the parts needed for the M1A2 ELRF. Morris had three and one-half weeks to complete the assignment, but some of the complex mechanical parts required at least six to eight weeks to price. He testified that his task was "virtually impossible if you're going to get good, solid data." He said that the parts list, known as the bill of materials, included a Marconi receiver, which was a PIN receiver, which had not been "tested as a good part to be used in a laser system." The list also omitted other items, and did not account for Army options to purchase additional units.

According to Michael Quintanilla, a Varo manufacturing engineer, in February 1995 his supervisor, Dale Boyette, asked him to generate "labor touch hours" for the M1A2 laser rangefinder. "Touch hours" are hours in which hourly employees expend physical labor to build or assemble a product, "such as turning nuts, bolts, screws, bonding." Varo engineer Jerry Baker showed Quintanilla the components of the M1A2 rangefinder and demonstrated how to disassemble and retrofit it with an eyesafe laser unit. In accordance with Boyette's directions, Quintanilla assumed that the design was perfect, that the unit would pass its test the first time, that the materials would arrive on time and be 100% compliant with the drawings, and that there would be no further technical issues after the fiftieth unit. Based on these assumptions, Quintanilla determined that it would take 18.34 hours to disassemble, realign and test the laser.

Boyette directed Quintanilla to "revise and scrub" his estimate, to ensure that it represented "the perfect world" and was as lean as possible. Quintanilla revised his estimate to 14.96, which he did not believe was realistic. Gentry told Quintanilla to delete time needed to ensure quality. Quintanilla shared his concern with Boyette, who responded that "the environment is that we generate a table of numbers with touch hours that are at the bare minimum."

Soon after, Gentry directed Quintanilla to further reduce his estimate. Quintanilla submitted a final draft on February 20, 1995, setting 13.71 hours to retrofit the M1A2 ELRF. Quintanilla also provided a labor, or "new build," estimate for the M1A2 ELRF, assuming that the new parts were cleaned and ready, at 12.63 hours, which Boyette reduced to 11.88 hours. Quintanilla noted that the MELIOS unit was comparable to the ELRF, which took approximately forty hours per unit to build. He estimated the cost of testing the ELRF at $7118, based solely on a testing setup that Baker had made. Quintanilla was not aware of, and had not been provided with, the performance specifications for the ELRF.

Joe Swearingen, an Optic-Electronic's cost estimator, was responsible for rolling, or adding up, the Tank Contract cost estimate. He used the PIN receiver in his bill of materials. The total materials cost for the refurbished units using the PIN was $2754; using the APD would have increased the cost to $4857.

The type of receiver to be used, either the PIN receiver or the APD receiver, was the subject of substantial testimony during the trial as the decision about which receiver to use would substantially affect the bid. There was extensive testimony as to which of defendants' employees directed that the PIN receiver be used, which employees directed that the APD receiver be used, and when those decisions were made. Swearingen recalled that sometime between February 10 and 22, 1995, Barney directed him to replace the APD receiver with the PIN. On February 23, 1995, Gary Denney, Varo's optics design manager, wrote a memo to Morgan, which said: "Due to technical difficulties (i.e., meeting spec), it is necessary to put the APD receiver back into the cost along with the added power supply (8 volt) AMI."

Morris recalled that at the end of a February 24, 2005 meeting, Thurman "rolled back in his chair . . . and said, it's going to be Litton's problem anyway." Swearingen testified that at that meeting he was directed to use the cost of the PIN receiver. When Morgan asked Morris to sign an approval of the bid proposal of February 27, 1995, which included the cost of the PIN receiver, Morris refused because he "did not believe it was achievable." Swearingen received Denney's February 23 memo a few days later, but did not change his cost roll-up to include the additional cost of the APD because Barney told him to use the PIN.

On March 13, 1995, the day before the bid for the Tank Contract was to be submitted, Barney informed Scott Williams, an estimator, that she wanted to review the backup. Williams provided cost and pricing (CAPE) sheets, and the bill of materials listed two different receivers from different suppliers at different prices. After Barney called Woodall and asked which receiver should be used, she instructed Williams to put the more expensive receiver in the bill of materials and delete the less expensive receiver. Barney explained that the cost of the APD was higher than the amount set forth on the CAPE sheet, but Morris said there would be cost savings in other materials. Barney thus felt comfortable that the proposal could go out. Morris denied telling Barney that cost reductions in other materials would offset the price of the APD receiver. Thurman explained that, although the APD receiver was more expensive, he was told that there would be other cost savings that would offset the additional cost.

Varo submitted its bid on March 14, 1995, noting that the bid was "fully compliant with all required specifications in the solicitation." According to Milson, the cost included the APD receiver, but Evans said that the final cost included the PIN receiver.

In April 1995, the Army requested a list of parts, with their respective prices, that were common to both MELIOS and the M1A2 ELRF. Although Swearingen provided Morgan with a list that included the PIN receiver, Sheridan responded to the Army's request with a list that did not include the PIN receiver and, according to Sheridan, was "absolutely not" truthful. He recalled that on May 9, 1995, the Army issued Varo an "item for discussion" (IFD), stating that Varo had not selected a receiver for the ELRF. Sheridan was aware that Varo had selected the PIN receiver, and that it was not compliant with the specifications, but he responded to the IFD that Varo had selected the APD receiver. He later admitted that his response was not truthful.

On May 10, 1995, Sheridan, Milson, Woodall and Morgan met with Army representatives including Hansen and Tim Donohoe, the Army's contracts representative, to discuss Varo's bid. Donohoe "indicated that the Government didn't believe that [Varo] could do the job for the price quoted." Hansen told the Varo representatives that she believed that their price was low and that they might want to revise it.

On May 31, 1995, defendants submitted their "Best and Final Offer," known as a BAFO, to the Army. Under the BAFO, the charge for the refurbished units was $10,754 each for the first order period, with a minimum quantity of 100 and a maximum of 600. The charge for the new units was $18,048 each for the first order period, with a minimum quantity of 25 and a maximum of 266. Hughes charged $26,000 per unit for similar laser systems.

When Varo submitted its BAFO on May 31, 1995, it had not performed tests on the prototypes to determine if the design would meet the specifications. But, Milson insisted that its proposed costs were "consistent with the use of the APD receiver for both new and refurbished units." It was his opinion that defendants' design, although untested, had a high probability of meeting the spec requirements.

Many of defendants' employees testified that the Tank Contract was bid at a profit. Consequently, Barney testified that the Tank Contract was not included in the Agreement's schedule of contracts in which IMO anticipated a loss.

An issue at trial was whether Litton had properly reviewed Varo's proposal before entering into the Agreement. According to Hicks, federal law required government approval of agreements such as the one between Litton and defendants, so as to avoid an unfair monopoly, restraint of trade, or collusion. Thus, Litton did not review the Tank Contract before it closed because Hicks was concerned about jeopardizing that approval. He did not consider it to be "appropriate for [Litton] to be exposed to the details of that program at that stage," so as to avoid allegations of collusion. Nor did he want Litton to be liable for decisions made before it owned the business.

A week after the June 2 transfer date, on June 9, 1995, the Army awarded the Tank Contract to Varo. Wilson managed the M1A2 program upon its transfer from Varo to Litton. He planned to do the engineering in Garland, Texas and the manufacturing in Orlando, Florida. Litton had sixty-five percent excess capacity in Orlando in July 1995, and the transfer of Varo's programs there increased its utilization of the facility.

After the Tank Contract was awarded, Wilson asked Morgan to prepare a budget. Morgan informed Wilson that without "spec relief" he could not prepare a budget that would show a profit because Varo "had bid a receiver technology [the PIN] that didn't meet the specification."

At a post-award meeting with Army representatives, Wilson questioned whether the $1.5 million Varo had budgeted for the program would be sufficient. Although Morgan told Wilson that the design had been validated, that information was incorrect, as the design work had not been finished. Wilson was aware that the design was proceeding with the PIN receiver; he was also concerned about the rest of the design.

Wilson assigned Tim Albrecht, a Litton electrical engineer, to Garland as project engineer. According to Albrecht, at the time the production of the product was transferred from Texas to Florida, the product did not meet specifications and required more work. Significant tests remained behind schedule.

In 1993, Rodney Doster, a Varo optical engineer, designed the lenses for the ELRF for use with a PIN receiver. Although he was aware that the prototypes used the APD receiver, after the Tank Contract was awarded he was instructed to prepare a new optical design using a PIN receiver. In formulating his design, Doster did not consider a number of technical factors or whether certain temperature testing on the prototype had been performed.

Wilson said that he offered employment in Orlando to all of the Varo engineers; but, between June and September 1995, after completing work on the M1A2 design, thirty-eight key people, including Morgan and the project engineer, resigned. Wilson testified that the resignations had little effect on Litton's ability to execute the M1A2 program because by that time the design had been accomplished.

Wilson had approximately seventy engineers reporting to him in Orlando, as opposed to Varo's twelve engineers, and, according to Wilson, "Litton's bench strength" in the engineering area was "much superior" to Varo's. Wilson would have preferred to take all the Varo personnel from Garland, but he had "ample engineering resources in Orlando to do the job" and the departure of Varo employees was not "a catastrophe."

According to Albrecht, in early August 1995, before he arrived in Garland, key members of the M1A2 design team had not been offered positions in Orlando. Albrecht explained that the departure of key people caused delay and placed him "in a tough spot in terms of getting the design work done properly and off the floor."

Albrecht and Woodall agreed that the PIN receiver could not meet the specifications and discussed obtaining spec relief for range performance. Woodall followed up with a memo to D'Agosto, the Army systems engineer, recommending a change to allow use of the MELIOS PIN receiver in the product.

First article testing, which is used to verify the system's performance pursuant to the specifications, began in January 1996. The units failed as a result of the use of a PIN receiver instead of an APD receiver. Problems also remained with output energy and voltage fluctuations.

According to Wilson and Albrecht, Varo's estimates for building the telescope component of the ELRF were inadequate, causing Litton to purchase the telescopes from Hughes. However, certain Varo drawings that Litton supplied to Hughes were erroneous, and as a result, the telescopes that complied with the drawings were inoperable. Litton also spent several hundred thousand dollars to design and build test equipment; Varo had allotted $8500 for that purpose.

In February 1996, the Army stopped the testing. D'Agosto and Yick Lo, an Army mechanical engineer, visited Litton's facility in Florida. Following their visit, they were concerned about "Litton's apparent lack of understanding of the Varo ELRF design." Though Albrecht reiterated a request for spec relief so Litton could use the PIN receivers, the Army was not willing to relax the requirements and would not accept a PIN.

When Wilson returned from Garland to Orlando in March or April 1996, he directed Albrecht to insert the APD receivers. The change to the APD receiver resulted in delay and an additional cost of approximately $2200 per unit for materials, plus an additional power supply, and other unanticipated costs.

Litton and the Army reached an agreement in late spring or early summer 1996. First article testing recommenced at the end of May 1996. The tests revealed problems. Even with the APD receiver, Varo's design did not meet the required run time.

In June or July 1996, Albrecht traveled to Fort Knox to test the ELRF on an M1A2 tank. The unit would not operate because of Varo's design. The following September, the Army found another problem, and Litton had to replace another part of Varo's design. In October, the M1A2 ELRF passed first article testing, and Litton obtained the Army's conditional approval. In February 1997, the Army gave Litton complete approval.

According to Wilson, the scope of required engineering work was far greater than Varo's estimate. Varo's allocation for the first article test was also inadequate.

Another issue raised at trial was whether Litton timely notified defendants of its loss. According to Hicks, sometime after November 1995, "it started to come clear that there was going to be difficulty on the M1A2 contract." He spoke regularly to William Brown of IMO to provide "a heads-up" about the problem. Hicks testified that the complexity of the program and Litton's attempts to solve problems and minimize the loss delayed an evaluation of the loss. On November 26, 1996, Hicks sent Brown a notice of loss. An attached document summarized Litton's losses and demanded $9.1 million. IMO's general counsel responded on December 26, 1996, disputing "the nature, validity, and amount of the loss" and asserting that the notice was not timely.

At trial, Litton presented evidence that it cost approximately $22 million to perform the contract, resulting in a cost overrun of $14.5 million. According to Russell Cedoz, Litton's M1A2 test engineering group manager, Varo's test equipment was inoperable and his group designed and built the test equipment to ensure that the M1A2 ELRF met the performance specifications. Cedoz said it was impossible to design and fabricate all of the necessary test equipment for the $8553 that Varo allocated for that purpose.

L. Carlton Salter, plaintiff's expert in the design of military laser systems, prepared an independent cost model of what it would cost "to move the design from where it was at the time of the [BAFO] . . . to a design that would be ready to go into first article testing." He compared Varo's bid and Litton's actual expenditures:

Varo's Proposed Expenditures

Litton's Actual Expenditures

Engineering Design

$ 204,927

$1,057,481

Program Management

$ 25,235

$ 267,881

First Article Testing

$ 64,740

$ 398,840

Tooling and Testing Equipment

$ 8,553

$ 751,668

Data Requirements

$ 25,471

$ 241,799

Total

$ 328,926

$2,7[17,669]

Salter opined that Varo's proposed expenditures on each item were inadequate and unreasonable, and that the amounts that Litton spent were fair and reasonable.

Hildreth Walker, plaintiff's expert in "labor, material [and] support in connection with manufacturing processes and procedures," determined that Litton suffered an initial loss of $2,045,549, representing the difference between use of the PIN receivers and APD receivers. After reviewing individual items listed in the bill of material and other expenses, Walker opined that Litton's cost growth of $1,538,848 for materials, $2,121,688 for touch labor, and $792,376 for the telescopes was reasonable and necessary.

Stephen Kalos, another of Litton's damages witnesses, calculated that Litton spent approximately $17.5 million, and that Varo bid costs of only approximately $5.7 million. The difference represented Litton's damages.

II.

Litton filed suit against defendants in May 1997. In its complaint, it alleged that defendants committed fraud and violated section 3.12(a)(iv) of the Agreement. In that provision, defendants warranted that they did not reasonably anticipate that any of their government bids and contracts would result in a loss. Plaintiff amended the complaint in June 2003, adding an additional claim of breach, contending that defendants violated section 5.3(ii) of the Agreement, which prohibited them from making any government bid or contract that they estimated in good faith would result in a loss. Litton alleged that as a result of the Army awarding the Tank Contract on June 9, 1995, it lost approximately $16 million in fulfilling its obligations. It demanded compensatory and punitive damages, interest, costs and counsel fees.

Prior to trial, the judge barred plaintiff's claims for lost profits and general administrative expenses. At trial, after the close of the evidence, the judge denied defendants' motion to dismiss plaintiff's complaint. In its verdict on November 15, 2004, the jury determined that defendants breached section 5.3(ii) of the Agreement, but did not breach section 3.12(a)(iv) of the Agreement or commit fraud. The jury set damages at $2.3 million, which the parties agreed to reduce to $2.1 million "to compensate for an error in Litton's damage model at trial." Defendants moved for judgment notwithstanding the verdict, and plaintiff moved for counsel fees, costs and prejudgment interest.

With the parties' consent, the trial judge appointed retired New Jersey Supreme Court Justice Stewart Pollock as Special Master to assist him in setting the amount of counsel fees. Justice Pollock recommended $4,741,959 for services rendered by plaintiff's attorneys, paraprofessionals, experts and consultants.

The trial judge issued a written decision On September 13, 2006, denying defendants' motion for judgment notwithstanding the verdict; awarding plaintiff legal fees of $3,858,725 (reducing the lodestar by ten percent to account for partial success), plus expert fees and costs; and awarding prejudgment interest at the simple interest rate from the date the initial complaint was filed.

III.

We first address defendants' contention that the Agreement's effective date was June 2, 1995, and consequently, because the Tank Contract was bid on May 31, 1995, that contract did not fall under the provisions of section 5.3(ii). Litton replies that May 11, 1995, was the date of the Agreement, and June 2 was simply the transfer date. It asserts that the delay between May 11 and June 2 was intended to give the federal government an opportunity to review the proposed transaction before the business was transferred. Plaintiff argues that if section 5.3(ii) applied only to bids and contracts made after June 2, it would not apply to any transaction that defendants transferred to plaintiff because on June 2 the transfer was complete.

Defendants raised their challenge to the applicability of section 5.3(ii) in a motion for judgment at the close of the evidence. R. 4:40-1. Such a motion is properly denied if the evidence favorable to the plaintiff and the reasonable inferences from the evidence could sustain a judgment in favor of the plaintiff. Dolson v. Anastasia, 55 N.J. 2, 5 (1969). Here, in denying defendants' motion, the judge ruled, without comment, that section 5.3(ii) was applicable.

The parties signed two purchase contracts; the first on May 11, 1995, and the second on June 2, 1995. The disputed provision of the Agreement, section 5.3(ii), was identical in both documents. It provided:

From and after the date of this Agreement and until the Transfer Date, IMO and each Seller covenant and agree that:

. . . .

5.3 Contracts, Bids, and Government Bids.

[T]he Sellers shall not . . . make or enter into any Contract, Government Bid, or Bid respecting . . . (ii) Contracts for which the total cost estimate at the time of execution thereof or at the time of the Government Bid or Bid, as the case may be, as estimated in good faith by the Sellers, would result in a net loss on the applicable Contract . . . .

[emphasis added]

The provision was thus operative from "the date of this Agreement until the Transfer Date." Under section 2.1, the "Transfer Date," which is the date on which "the transactions provided for in this Agreement" were consummated, was June 2, 1995. Consequently, if, as defendants argue, the date of the Agreement was June 2, the same date as the transfer date, the covenant section 5 provides to plaintiff that defendants "shall not . . . make or enter into" any bids or contracts would never become effective.

The most reasonable interpretation of the Agreement is that May 11 is its effective date. First, the gap in time between May 11 and June 2 is consistent with the testimony that time was required for the government to review the proposed transaction. More to the point, the plain language of the second agreement supports this conclusion. Appendix A of that agreement included a definition section, titled "Appendix I," which stated that the definitions were "[a]s used in the Purchase and Sale Agreement dated as of May 11, 1995 (amended and restated as of June 2, 1995)." Page one of the second agreement states that the agreement was "made and entered into on and as of May 11, 1995 (amended and restated as of June 2, 1995)." On the signature page of the agreement, it states that the parties "have caused this Agreement to be executed by their authorized representatives on and as of May 11, 1995." The parties' signatures appear immediately below that language.

Both agreements, in section 12.17, contain the following language, which defendants claim shows that the June 2 agreement superseded the May 11 agreement: "This Agreement . . . constitute[s] the entire agreement and understanding between the parties . . . and supersedes and cancels any and all prior . . . agreements between the parties . . . ." We conclude that this boilerplate language is not controlling in view of the specific references to the May 11 date in the second agreement as we have just described. Furthermore, if the parties intended to nullify all of section 5 of the first agreement, it is reasonable to assume that they would have omitted section 5 in its entirety in the June 2 version. When the parties entered into the restated version on June 2, they were aware that June 2 was also the transfer date. The inclusion of section 5 indicates that they intended that it would apply to some period of time.

Section 12.10 of both agreements provides that Texas law governs their construction, interpretation and enforcement. The test to determine the intent of the parties therefore is to examine the writings as a whole, harmonizing and giving effect to all of the contract provisions so as not to render any specific provision meaningless. Broesche v. Jacobson, 218 S.W.3d 267, 271 (Tex. App.) (citations omitted), review denied, 2 007 Tex. Lexis 614 (Tex. 2007); Certain Underwriters at Lloyd's v. KKM, Inc., 215 S.W.3d 486, 490-91 (Tex. App. 2006), review denied, 2 007 Tex. Lexis 521 (Tex. 2007). Here, as we have explained, defendants' interpretation would literally mean that section 5 would be rendered meaningless.

Defendants alternatively argue that their May 31, 1995 BAFO was the same as their initial March 14, 2005, bid; as a result, section 5 does not apply because the initial bid preceded the May 11, 1995 Agreement date. The Agreement does not, however, except final bids, or BAFOs, from the requirement of section 5.3(ii) simply because they are unchanged from preliminary bids.

Defendants also claim that they are excused from liability because Litton declined to review the Tank Contract bid. That argument too is without merit. There was no requirement in the Agreement for Litton to review defendants' bids or contracts before section 5 would be implicated.

Accordingly, we agree with the trial judge that section 5 was applicable to the Tank Contract bid, which defendants made on May 31, 1995. And because the Agreement does not identify the Tank Contract bid or subsequent contract as a potential loss, whether defendants breached section 5.3(ii) was properly sent to the jury. Defendants' remaining arguments on this issue are without sufficient merit to warrant additional discussion. R. 2:11-3(e)(1)(E).

IV.

We next address defendants' claim that a letter agreement dated November 21, 1995 (the letter agreement) absolved them of liability for plaintiff's claim. In the letter agreement, the parties accepted a Final Closing Balance Sheet (the FCBS). The letter agreement said that the FCBS

accurately and completely reflects the parties' final agreement on all estimated costs at completion . . . and all appropriate adjustments and reserves for reasonably anticipated potential losses on all programs, including without limitation, the estimated costs at completion for, and losses and potential losses on, the MELIOS, SOFLAM and Singapore programs.

Notwithstanding the foregoing, Litton is not hereby waiving any rights with respect to breaches of representation or warranty.

Litton asserts that under the letter agreement, the parties accepted the FCBS as of June 2, 1995, which was before the Tank Contract was awarded, and thus the letter agreement could not have accounted for losses arising out of that contract. Litton also argues that the letter agreement addressed specific programs and did not constitute a waiver of all damages under the Agreement. The judge agreed with Litton that the letter agreement did not defeat plaintiff's right to pursue its claims against defendants.

Hicks negotiated the letter agreement. He testified that the FCBS was an accounting from the date the Agreement was signed until closing, to "see how the business performed." He asserted that when the letter agreement was signed, Litton did not anticipate a loss on the Tank Contract. He denied that the purchase price was adjusted or decreased because of the Tank Contract bid.

In the letter agreement, Litton acknowledged that the FCBS reflected its "final agreement on all estimated costs at completion." That language could not reasonably have prohibited Litton from asserting a claim for breach of the Agreement as it pertained to the Tank Contract, however, because it was unaware at the time it signed the letter agreement that it would have a claim arising out of the Tank Contract. In addition, the letter agreement referred to "estimated costs," not final costs. It stated that the parties reasonably anticipated potential losses on three specific programs, none of which was the Tank Contract.

Nevertheless, defendants assert that the FCBS included the M1A2 program. They cite to Hicks's testimony that the estimated costs of completion set forth in the FCBS included the M1A2 contract, and to a proposed balance sheet adjustment pertaining to M1A2 demonstration samples. Plaintiff disputes that allegation, relying on Miller's testimony that the M1A2 contract "wasn't an asset that was considered" in the FCBS. Furthermore, plaintiff points to Hicks testimony that the FCBS was simply an accounting as of the closing date, June 2, 1995, not a full and final accounting. We agree with the trial judge that a fact issue existed that was sufficient to defeat defendants' Rule 4:40-1 motion on this issue.

Defendants further assert that by November 1995, Litton was aware of everything "that could possibly be needed to make an informed decision about the profit or loss prospects on the M1A2 program." We disagree. Soon after the award of the Tank Contract, Morgan told Wilson that the preliminary engineering design was complete and validated, which was incorrect. He also said that "engineering believed they could get spec relief." In August or September 1995, Albrecht believed that the Army would grant spec relief. In October or November 1995, the first completed unit failed environmental testing. Hicks testified that it was not until after November 1995, as Litton integrated the newly purchased business, that "it started to come clear that there was going to be difficulty with the M1A2 contract." First article testing did not begin until January 1996, and revealed many problems. This evidence was more than sufficient for the jury to believe that in November 1995 Litton did not have sufficient information "to make an informed decision about the profit or loss prospects on the M1A2 program." The issue therefore properly survived defendants' Rule 4:40-1 motion.

Defendants' final argument on this issue is that plaintiff's retention of its "rights with respect to breaches of representation or warranty," as set forth in the letter agreement, does not apply because section 5.3(ii) of the Agreement was not a representation or warranty; it was a covenant. Defendants are technically correct. In section 3 of the Agreement, defendants make "representations and warranties." In section 5 of the Agreement, defendants "covenant and agree."

Nevertheless, the letter agreement covered "reasonably anticipated potential losses on all programs." Giving plaintiff the benefit of its favorable testimony and its reasonable inferences, a jury could conclude that the loss on the Tank Contract was not reasonably anticipated as of November 1995, and was therefore not covered by the letter agreement.

V.

We next turn to defendants' contention that plaintiff's claims were barred by an eighteen-month limitation period set forth in section 11.6 of the Agreement, and plaintiff failed to provide the prompt notice required by section 11.3 of Agreement. The complaint was initially filed in May 1997, more than eighteen months after the June 2, 1995 transfer date. Although defendants concede that plaintiff's November 1996 notice of claim was within the required eighteen months, they contend that it was inadequate because it referred only to a claim under section 3.12(a)(iv) of the Agreement and did not assert a claim under section 5.3(ii) of the Agreement, which was the provision under which plaintiff prevailed at trial. Plaintiff claims that it was not necessary to list each breached provision of the Agreement to preserve its claim.

Under section 11.1 of the Agreement, defendants agreed to indemnify and reimburse plaintiffs for

any and all Losses suffered or incurred by the Buying Interests . . . resulting from or arising out of . . . (b) Any breach or nonfulfillment by IMO or any Seller of any of their covenants, agreements, or any other obligations set forth in this Agreement . . . .

Section 11.3 of the Agreement provided:

In the event that any of the Buying Interests . . . shall have (i) suffered any Loss . . . and in respect of which indemnification may be sought by such party pursuant to this Section 11, the party who shall have suffered such Loss . . . and who shall seek indemnification in respect thereof (the "Indemnified Party") shall give the other party from whom indemnification may be sought (the "Indemnifying Party") prompt written notice of such Loss . . . setting forth in reasonable detail such information as it shall have pertaining to such claim and the Indemnified Party's demand for indemnification in respect to such claim.

. . . provided, however, that the failure of any Indemnified Party to give timely notice shall not relieve the Indemnifying Party of any liability which the Indemnifying Party might have to the Indemnified Party except to the extent (and only to the extent) such failure materially prejudices the Indemnifying Party's position.

Under section 11.6(b)(ii) of the Agreement, "Claims for indemnification under Section 11.1(b) shall survive for a period of 18 months following the Transfer Date to the extent made with respect to obligations performed or to be performed by IMO or any Seller on or prior to the Transfer Date . . . ." Section 12.9 of the Agreement provides that,

No failure or delay in the enforcement of any provision of this Agreement shall operate as a waiver of such provision . . . and the failure of a party to enforce at any time any provision of this Agreement shall not be deemed a waiver of any right of any such party to subsequently enforce such provision. No breach of any covenant, agreement, warranty, or representation shall be deemed waived unless expressly waived in writing by the party who has the right to assert such breach.

Defendants raised this limitations issue on their motion for judgment notwithstanding the verdict. The same issue had previously been addressed by another judge when plaintiff moved to file an amended complaint. The motion judge concluded that Litton's original notice was timely, and gave adequate notice of the subsequent claims. The trial judge agreed with the motion judge's ruling. We also agree.

Plaintiff's November 26, 1996 notice of claim was comprehensive; all that was missing was the specific provision of the Agreement that defendants allegedly breached. Plaintiff fully informed defendants of the existence of a claim, with detailed information pertaining to its claim and a demand for indemnification as required by section 11.3 of the Agreement. The information plaintiff provided to defendants was sufficient to set forth a claim for the loss, affording defendants an opportunity to assess plaintiff's claim. See State Farm & Cas. Ins. Co. v. Vandiver, 970 S.W.2d 731, 746 (Tex. App. 1998) (notice of claim is sufficient if it sets forth a claim for the loss and affords a defendant an opportunity to settle); Easter v. Mut. of Omaha Ins. Co., 535 S.W.2d 700, 703 (Tex. App. 1976) (notice must be reasonable "in relation to the particular loss and depends upon all of the circumstances surrounding the particular case").

The next question, then, is whether section 11.3 of the Agreement, which requires prompt notice of loss, conflicts with section 12.9 of the Agreement, which provides that delay in enforcement of the Agreement is not a waiver. The trial judge concluded that section 12.9 "essentially trumps the difficulties and issues that are raised by 11.3." The court found that it was "highly unfair . . . to preclude the plaintiffs' case from going forward" as a result of an untimely notice. The judge reasoned that "whether or not a loss indeed occurred was an ongoing question." He referred to the request for a waiver from the Army, the uncertainty of the extent of the loss, and to plaintiff's "effort to minimize losses and make the contract profitable." The judge found that defendants had received verbal notice, as Hicks had testified. The court pointed to the "ongoing dialogue between the parties" and found that to preclude plaintiff from proceeding on the notice issue would create "a Draconian result."

The judge also addressed whether defendants were prejudiced by the timeliness of the notice:

[E]ven if there's a breach of the notice requirements . . . the consequence is only to the extent that there's material prejudice to the defendants . . . which the defendants would have to show. And I'm not so sure that has been developed in this trial at all.

Defendants claim that they were prejudiced because, by the time that Litton notified them, Litton claimed over $9 million in losses and it was too late for defendants to take action, such as helping Litton "minimize or avoid cost overruns by bringing to bear the expertise that Litton lacked." The judge noted, however, that defendants took no action for thirty days after they received notification, and presented no evidence of any "corrective measures" that they could have taken to minimize damages if they had earlier notice.

We agree with the trial judge and affirm his ruling on this issue substantially for the reasons he placed on the record. Section 12.9 of the Agreement provides that delay in enforcement does not constitute a waiver of a party's rights. Although section 11.3 requires prompt notice, in the absence of prejudice it does not preclude a party's claims. And defendants have not shown that they were prejudiced by plaintiff's notice. Defendants' assertion that they might have reduced or avoided plaintiff's loss by providing expertise that plaintiff lacked is speculative and contrary to the evidence. Wilson testified that plaintiff's engineering strength was superior to defendants', that he had seventy engineers reporting to him in contrast to Varo's twelve engineers, and that the departure of Varo employees had a minimal effect on Litton's ability to execute the M1A2 program.

Plaintiff described numerous instances of defendants' inadequate or incomplete design. Defendants' presented no evidence that their expertise might have minimized or eliminated costs necessary to correct these problems, which, affording reasonable inferences to the testimony of plaintiff's engineers, were caused by defendants' lack of expertise.

Many of the problems were not due to a lack of expertise, but to defendants' cost estimates, which included the less expensive PIN receiver, when the evidence shows that defendants knew that the APD receiver was necessary to meet the Army's specifications. Defendants' less than candid representation to the Army that they were using the APD receiver also contributed to Litton's problems.

Accordingly, reading the Agreement as a whole, we conclude that defendants are not relieved from their obligation to indemnify plaintiff. Defendants did not suffer any material prejudice from plaintiff's failure to provide an earlier or more specific notice.

VI.

Next, we turn to counsel fees. Defendants contend that the judge erred by awarding counsel fees to plaintiff. In his written opinion following post-trial motions, the judge determined that Litton was entitled to an award of counsel fees pursuant to section 11 of the Agreement. Under section 11.1, defendants agreed to indemnify and reimburse plaintiff for

any and all Losses suffered or incurred by the Buying Interests (whether suffered or incurred with respect to any Third-Party Claim or otherwise) and arising from or arising out of each of the following:

. . . .

(b) Any breach or nonfulfillment by Imo or any Seller of any of their covenants, agreements, or other obligations set forth in this Agreement . . . .

"Loss" is defined in the Agreement as "all demands, claims . . . actions or causes of action . . . losses, damages, costs, expenses, liabilities, judgments, awards . . . and amounts paid in settlement (including reasonable attorneys' fees and costs incident to any of the foregoing)."

The first question is whether the award of counsel fees is a substantive issue, to which Texas law would be applied under the terms of the Agreement, or a procedural issue, which would call for the application of New Jersey law. We conclude that an award of counsel fees is procedural, and thus New Jersey law applies. As the New Jersey Supreme Court explained in N. Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 568-70 (1999), "the procedural law of the forum state applies even when a different state's substantive law must govern. . . . [A]ttorneys' fees are a matter of practice and procedure, rather than of substantive law." Id. at 569 (citations omitted). Thus, we apply New Jersey law. In doing so, we agree with the trial judge that a counsel fee award is called for by the terms of the Agreement.

Though New Jersey traditionally follows the "American rule," where each party is required to pay its own fees and other litigation expenses, Rule 4:42-9(a) recognizes certain exceptions. Kellam Assocs., Inc. v. Angel Projects, LLC, 357 N.J. Super. 132, 138 (App. Div. 2003). One of those exceptions applies here, that is, where a claim is based on a contract, "the rule does not preclude a party from agreeing by contract to pay attorneys' fees." Ibid.

Applying this exception, even with a strict construction of the definition of loss in the Agreement, see ibid. ("contractual provisions establishing such arrangements are strictly construed"), the only reasonable interpretation of the Agreement is that counsel fees may be awarded in connection with litigation under the Agreement. The definition of loss is expansive; it includes "actions or causes of action . . . losses, damages, costs, expenses, liabilities, judgments, awards . . . and amounts paid in settlement (including reasonable attorneys' fees and costs incident to any of the foregoing)." A reasonable reading of the definition of loss, therefore, includes an award of counsel fees for a number of situations that are the substantial equivalent of litigation. Accordingly, we conclude that an award of counsel fees was contemplated by the terms of the Agreement.

VII.

That said, we next address defendants' objection to the amount of the counsel fee award, $3,858,725, plus costs and fees for experts and consultants. Defendants argue that the award was disproportionate to the recovery, and that the judge failed to make an adequate reduction to eliminate fees for services related to unsuccessful claims. Plaintiff acknowledges that an apportionment is required when a litigant does not recover on all of its claims, but contends that a fee reduction was not required because the claims were interrelated and involved a common core of facts.

To assist it in determining the quantum of fees, the court appointed a Special Master "to determine and recommend to the Court a lodestar amount for the attorneys['] fees and costs reasonably incurred by Plaintiffs in the litigation of . . . the claim on which Plaintiffs prevailed at trial." The court would then "conduct its proportionality analysis and determine the amount of any fee award." In his report to the judge, the Special Master determined that "the 5.3(ii) claim on which plaintiffs recovered is sufficiently related to . . . the 3.12(a)(iv) claim, to justify including all services and costs, including those for experts, in the lodestar for the 5.3(ii) claim." He explained that the "interrelationship between the contractual claims highlights the difficulty of identifying specific hours to be eliminated and suggests that the more appropriate means of adjusting the requested fee is through a proportionality analysis."

Litton was seeking a counsel fee of $4,294,177 (plus expert, consultant and other costs). The Special Master reasoned that because Litton was unable to allocate specific services attributable to each of its three claims (the two contract claims and the fraud claim), a deduction of one-third, to account for the unsuccessful fraud and punitive damage claims, would be reasonable. The Special Master therefore recommended an award consisting of the following, subject to the trial court's proportionality analysis:

Attorneys and Paraprofessionals

$2,971,295.00

Expert Witnesses

$ 896,919.53

Other Consultants

$ 180,717.96

Costs and Disbursements

$ 693,026.96

TOTAL

$4,741,959.45

A trial court's counsel fee determination "'will be disturbed only on the rarest of occasions, and then only because of a clear abuse of discretion.'" Packard-Bamberger & Co., Inc. v. Collier, 167 N.J. 427, 444 (2001) (quoting Rendine v. Pantzer, 141 N.J. 292, 317 (1995)). The first step in establishing a reasonable counsel fee is to calculate the lodestar amount, "the number of hours reasonably expended by the attorney, multiplied by a reasonable hourly rate." Id. at 445. The court should also consider other factors, including the degree of success and circumstances that affected the extent of counsel's effort. Id. at 446.

"[W]hen a prevailing party has not been successful on all of its claims, an award of attorneys' fees based on an hourly rate times the hours spent may result in an excessive fee." N. Bergen, supra, 158 N.J. at 572. "In fixing counsel fees, a trial judge must ensure that the award does not cover effort expended on independent claims that happen to be joined with claims for which counsel is entitled to attorney fees." Grubbs v. Knoll, 376 N.J. Super. 420, 431 (App. Div. 2005). When the successful and unsuccessful claims are related, by either a "common core of facts" or "related legal theories," the court must consider "the overall relief obtained to determine whether those hours devoted to the unsuccessful claims should be compensated." Kluczyk v. Tropicana Prods., Inc., 368 N.J. Super. 479, 500 (App. Div. 2004).

Here, the trial judge found that the two contract claims were interrelated, and that the legal work attributable to the section 3 claim was also attributable to the section 5 claim on which plaintiff succeeded. He also determined that the fraud claim "markedly is less involved than the contract claims"; that the "fraud claim and the quest for punitive damages is the tip of the iceberg and involves but a small fraction of the total work effort."

The judge calculated the lodestar at $4,287,472 (a reduction of approximately one percent from plaintiff's $4,294,177 request). He determined that the full amount of plaintiffs' requested costs, $1,039,540, was reasonable and need not be reduced under a proportionality analysis. He adopted the Special Master's recommendations for the expert witness and consultant fees.

The judge applied a proportionality analysis to the counsel fee only, acknowledging a "meaningful difference" between the amounts of damages sought ($9 million at trial) and awarded ($2.3 million). He noted the skill of the attorneys involved and the "complex factual and legal issues that generated year after year of intense litigation efforts at the highest professional level." The judge reduced the requested legal fee by ten percent and awarded $3,858,725 (plus costs and fees for experts and consultants).

Defendants claim that the judge "gave no effect" to the limitation that the fee award should encompass only successful claims. We disagree. We find no abuse of discretion and affirm the counsel fee and costs award substantially for the reasons expressed by the trial judge. We add only the following comments.

Guided by the prevailing case law, the judge engaged in a comprehensive analysis and concluded that the two contract claims were so interrelated that the legal work spent on both was attributable to the successful section 5 claim. The record supports that conclusion. In section 3.12(a)(iv) of the Agreement, defendants represented that they did not reasonably anticipate that any of its government bids would result in a loss. In section 5.3(ii) of the Agreement, defendants agreed not to make any government bid that they reasonably estimated would result in a loss. The provisions are substantially interrelated. The primary difference between the two is their prior or prospective application. And as to the fraud claim, the record supporting the trial judge's findings that the contract issues constituted the "foundation" and "structure" of the litigation and that the fraud claims accounted for "a small fraction of the total work effort."

Case law also supports the court's conclusions. For example, in Kluczyk, supra, the plaintiff did not succeed on claims for sexual harassment and a hostile work environment, but prevailed on a wrongful termination claim based on retaliation for asserting his unsuccessful claims. 368 N.J. Super. at 499. We said that the termination of the plaintiff's employment "caused plaintiff's counsel to change his attack to one which included a wrongful discharge claim premised on the work he did incident to" the unsuccessful claims. Id. at 499-500. Here also, although plaintiff did not assert its section 5.3(ii) claim until it filed its amended complaint five years after filing the original complaint, the new claim was premised on the work performed on the prior claim. In other words, plaintiff's claims had common facts and related legal theories. See DePalma v. Bldg. Inspection Underwriters, 350 N.J. Super. 195, 218-19 (App. Div. 2002) (where the successful and unsuccessful claims had common facts and related legal theories, we upheld the counsel fee award based on the lodestar, explaining that the focus should be on "the extent of the prevailing plaintiff's overall success, and not on fractionalizing the attorney's efforts to isolate and exclude hours assigned to dismissed counts").

Next, we address whether the court should have reduced the counsel fee award based on plaintiff's limited success in obtaining a $2.1 million verdict when its initial claim was for $16 million. When "plaintiffs seek fees for legal services far in excess of the value of the benefits obtained, the trial court should consider the damages sought and the damages actually recovered." Packard-Bamberger, supra, 167 N.J. at 446. The New Jersey Supreme Court has declined, however, to "establish a per se requirement that there be a close relationship between recovery and fees awarded." N. Bergen, supra, 158 N.J. at 573. Instead, "when a substantial portion of a claim sought is ultimately rejected, that circumstance should be considered along with other factors." Id. at 573-74.

Here, the judge did consider the amount of damages sought and awarded and he acknowledged a "meaningful difference" between the two. In his written decision, he recognized that a "critical consideration" in his analysis was the relationship of the success realized compared to the amount of damages sought. The judge explained why a significant reduction in fees was not justified simply because the damages sought were substantially more than the jury's verdict. He pointed to the "extremely complex factual and legal issues that generated year after year of intense litigation"; the extensive discovery practice that required the use of a special master; and the intensity, skill and preparedness of the attorneys involved. These are "'circumstances incidental to the litigation that directly or indirectly affected the extent of counsel's efforts,'" which the Supreme Court has directed trial judges to consider when assessing counsel fees. Packard-Bamberger, supra, 167 N.J. at 446 (quoting Sczepanski v. Newcomb Med. Ctr. Inc., 141 N.J. 346, 367 (1995)). Though we may have arrived at a different result than did the trial judge, we are not satisfied that the judge abused his discretion in evaluating plaintiff's fee application.

So too with the award of costs. The judge said that the costs, as well as the legal fees, were justified because they were "tied to the contractual claims." Like an award of counsel fees, an award of costs "is subject to the discretion of the trial judge." A.J. Tenwood Assocs. v. Orange Senior Citizens Hous. Co., 200 N.J. Super. 515, 531 (App. Div.), certif. denied, 101 N.J. 325 (1985). Defendants have not demonstrated that the judge abused his discretion in declining to reduce the award of expenses.

VIII.

Next, we address both parties' objections to the judge's decision to begin prejudgment interest as of the filing date of the original complaint, May 8, 1997, and plaintiff's objection to the judge using simple interest. Defendants suggest that interest should not run until the completion of the Tank Contract in 2001, or alternatively, the date plaintiff filed the amended complaint in June 2003. Plaintiff claims it is entitled to interest from the date the assets were transferred to defendants, June 2, 1995. The judge found that establishing the date of loss would be "near impossible"; that "[t]he specific date or time frame would be a matter of serious speculation." He concluded that "[i]t is reasonable therefore to turn to the tort model as a matter of convenience to establish a commencement date." Setting the interest rate, the judge found "no unusual circumstances [] to warrant an enhancement of the simple interest rate."

"The 'equitable purpose of prejudgment interest is to compensate a party for lost earnings on a sum of money to which it was entitled, but which has been retained by another.'" N. Bergen, supra, 158 N.J. 574-75 (quoting Sulcov v. 2100 Linwood Owners, Inc., 303 N.J. Super. 13, 39 (App. Div. 1997), appeal dismissed, 162 N.J. 194 (1999)). Prejudgment interest is not a penalty. Id. at 575. The trial court may, in its discretion, award prejudgment interest on contract claims "in accordance with equitable principles," and its "exercise of discretion should not be disturbed on appeal unless it represents a manifest denial of justice." Sulcov, supra, 303 N.J. Super. at 38.

We find no abuse of discretion by the judge using the date the initial complaint was filed as the date to begin the accrual of prejudgment interest. See Sulcov, supra, 303 N.J. Super. at 39 (court approved date when complaint was filed as accrual point for prejudgment interest on contract claim). Nor do we find that the court erred in using a simple interest rate. Though an award of a higher interest rate may be appropriate upon the showing of special circumstances, see DialAmerica Mktg., Inc. v. KeySpan Energy Corp., 374 N.J. Super. 502, 511-12 (App. Div.), certif. denied, 184 N.J. 212 (2005), plaintiff has not pointed to any special circumstances here that would require a higher interest rate than that afforded by the trial court. In sum, we find no abuse of discretion. The parties' arguments to the contrary are without sufficient merit to warrant additional discussion. R. 2:11-3(e)(1)(E).

IX.

We turn next to Litton's cross-appeal. We begin with its contention that the judge erred in excluding evidence of Litton's general and administrative (G & A) expenses and its lost profits as part of its damage claim. Defendants reply that Litton's damages resulting from the breach of the Agreement consisted of the amount necessary to put it in the position that it would have been had there been no breach, and that G & A expenses and lost profits are not included in that calculation.

Prior to trial, the court determined that the inclusion of "general and administrative costs" in section 5.3(ii) was "an internal definition" that did not "create an additional element of potential damages." Without addressing lost profits in his opinion, the judge excluded "evidence of lost profits and [G & A] expenses associated with the M1A2 contract."

If a contract provides for a single remedy, and specifies that it is the only remedy, the parties are bound to that exclusive remedy. Bifano v. Young, 665 S.W.2d 536, 539 (Tex. App. 1983). Nevertheless, "[t]he mere fact that the contract provides a party with a particular remedy does not necessarily mean that such remedy is exclusive." Ibid. For the remedy to be exclusive, "the intent of the parties that it be exclusive" must be "clearly indicated." Ibid. Guided by these legal principles, we turn first to Litton's claim for administrative costs.

The Agreement defines the calculation of a "Contract Loss" as: "costs shall include material and labor costs, overhead, engineering costs and manufacturing costs, but shall exclude general and administrative expenses." The term "Contract Loss," however, is included in the Agreement as a means to determine if there was a breach of section 3.12(a)(iv); the provision does not indicate that it is to be considered to measure damages if such a breach occurs.

Similarly, section 5.3(ii) of the Agreement states that defendants could not make any bid or enter into any contract for which the estimated good faith total cost would result in a net loss "(with costs calculated based on those costs set forth in the definition of Contract Losses plus general and administrative costs)." The inclusion of administrative expenses here, as part of the cost calculation, was for the purpose of determining whether, under defendants' good-faith cost estimate, a contract or bid would result in a net loss, and thus whether there was a breach of section 5.3(ii). Like the provision discussed above, this provision did not address the damages available in the event of a breach.

Damages for breach of the Agreement were, however, broadly defined in section 11.1, under the section captioned "Indemnification and Reimbursement." That provision establishes the damages for a breach as "any and all Losses suffered or incurred" by plaintiff "and resulting from or arising out of" the breach. The Agreement's definition of "Loss" includes "expenses"; although it does not specify whether administrative expenses are included, it does not preclude them. In other words, the Agreement allowed for "all losses" in the event of a breach, including expenses, but, while listing some expenses, it did not exclude others. Under these circumstances, because the Agreement did not "clearly" preclude administrative costs as expenses, see Bifano, supra, 665 S.W.2d at 539, Litton was entitled to present its administrative expenses as an element of its damages claim.

Other courts have similarly permitted administrative expenses as an element of damages. In Autotrol Corp. v. Cont'l Water Sys. Corp., 918 F.2d 689 (7th Cir. 1990), the court, applying Texas law, established a test for the inclusion of overhead expenses in the plaintiff's damages for breach of contract. Id. at 692-95. The court said: "If the plaintiff can either cut his overhead expenses or recover them in a substitute contract, then he indeed has not lost them as a result of the breach and they should not be figured in his damages." Id. at 694. The plaintiff must prove that its general overhead was not only an expense, but was also a loss, in order to include it in damages. Id. at 694-95. To succeed in its claim for these types of damages, a plaintiff must "establish a reasonable probability that it would have covered its overhead expenses by means of another contract had the contract in suit never been made." Id. at 695.

Here, plaintiff was denied the opportunity to establish these proofs. Though defendants assert that plaintiff's Orlando facility was underutilized when Litton transferred production to that facility, which necessarily meant that "Litton did not have to turn down any business because of the M1A2," that conclusion is speculative. Litton was not given the opportunity to prove that it could have covered its overhead expenses by means of another contract or that its general overhead was not only an expense, but was also a loss. As the Autotrol court indicated, even if a plaintiff cannot demonstrate that it may have attracted other business, it still may have "economized on" its administrative expenses by other means, including "layoffs and other adjustments." Id. at 693. In sum, given the prevailing law and the language of section 11.1 of the Agreement, which does not preclude a claim for administrative expenses, we conclude that it was error for the court to have barred plaintiff from seeking those damages.

We turn next to Litton's claim for lost profits. The Agreement's definition of "Loss" included "special, consequential, and punitive damages." It further provided: "In calculating Loss consisting of lost profits, only profits with respect to Contracts constituting Assumed Liabilities shall be considered." The Tank Contract, disclosed on Schedule 3.12(a)(i), was an assumed liability.

"[L]ost profits damages may take the form of 'direct' damages or the form of 'consequential' damages." Cont'l Holdings Ltd. v. Leahy, 132 S.W.3d 471, 475 (Tex. App. 2003). "Profits lost on the breached contract itself, such as the amount that [the plaintiff] would have received on the contract less its saved expenses, are classified as 'direct' damages. Profits lost on other contracts or relationships resulting from the breach are classified as 'indirect' damages." Ibid. Here, the Agreement did not preclude plaintiff from seeking lost profits as a result of defendants' breach. See Bifano, supra, 665 S.W.2d at 539. Under the broad indemnification language of section 11.1 of the Agreement, which calls for defendants to reimburse Litton for "any and all losses suffered or incurred by" Litton resulting from any "breach or nonfulfillment" by defendants of any covenants of the Agreement, and given the definition of "Loss" as referred to in the previous paragraph, we conclude that Litton was entitled to present its lost profits claim to the jury.

X.

Lastly, we address plaintiff's multiple allegations of trial error, which may be summarized as follows: the trial court improperly refused to permit Litton to present rebuttal testimony; the trial court erred in its readback of testimony in response to a jury question, and further erred by failing to provide the jury with a supplemental charge in response to its question; the trial court improperly reprimanded plaintiff's counsel; the trial court erred by excluding testimony of one of Litton's experts; the trial court erred by admitting an unauthenticated document into evidence; and the trial court improperly permitted cross-examination of one of plaintiff's witnesses. In light of the extensive trial testimony and the nearly unbounded ability of all parties to present their evidence and cross-examine witnesses, we find these arguments to be without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

XI.

In sum, we affirm the verdict in favor of defendants on Litton's claim under section 3.12(a)(iv) of the Agreement and Litton's fraud claim. We also affirm that portion of the final judgment that reflects the jury's verdict that defendants breached section 5.3(ii) of the Agreement and the $2.1 million damage award as a result of that breach. We remand for a new trial limited only to Litton's right to seek G & A expenses and lost profits as a result of the breach of section 5.3(ii) of the Agreement. In all other respects, we affirm the final judgment and amended final judgment.

 
Affirmed in part, reversed in part, and remanded.

Although the parties dispute whether there were one or two agreements, see our discussion in Section III, infra, for purposes of this opinion we shall refer to them collectively as the Agreement.

The letter of intent is not included in the record on appeal.

When using a laser rangefinder that is not eye safe, a filter must be installed to prevent the rangefinder from damaging the operator's optic nerve.

A MELIOS, a Miniature Eyesafe Laser Infrared Observation Set that Optic-Electronic developed, is a hand-held rangefinder for a target up to ten kilometers away.

(continued)

(continued)

57

A-1444-06T1

January 28, 2008