Raytheon Co. v AES Red Oak, LLC

[*1] Raytheon Co. v AES Red Oak, LLC 2005 NY Slip Op 52306(U) [12 Misc 3d 1184(A)] Decided on December 7, 2005 Supreme Court, New York County Freedman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 7, 2005
Supreme Court, New York County

Raytheon Company, Plaintiff,

against

AES Red Oak, LLC, Defendant.



603550/04



Attorneys for Plaintiff Raytheon Company

Bingham McCutchen LLP

399 Park Avenue

New York, New York 10022

By: Mark M. Elliott, Esq. and Philip L. Blum, Esq.

(212) 705-7000

(Of Counsel)

Bingham McCutchen LLP

150 Federal Street

Boston, MA 02110

(617) 951-8000

By: Jonathan M. Albano, Esq., Thomas J. Hennessey, Esq.,

David Yamin, Esq., Sean C. Flynn, Esq.

Attorneys for Defendant AES Red Oak, LLC

Marcus Rosenberg & Diamond LLP

488 Madison Avenue

New York, New York 10022

(212) 755-7500

By: David Rosenberg, Esq.

Bradley Arant Rose & White LLP

One Federal Place

1819 Fifth Avenue North

Birmingham, AL 35203-2104

(205) 521-8000

By: Joseph B. Mays, Jr., Esq., James F. Archibald, III, Esq. Rhonda Richardson Caviedes, Esq.

Bradley Arant Rose & White LLP

1200 G. Street, NW, Suite 550

Washington, DC 20005

(202) 393-7150

By: Jeffrey Komarow, Esq.

Helen E. Freedman, J.

Motion sequence numbers 003 and 004 are consolidated for disposition.

The first motion is made by plaintiff Raytheon Company (Raytheon) for an order, pursuant to CPLR 3212, granting partial summary judgment in its favor with respect to the first, third and fourth causes of action set forth in the complaint, dated October 27, 2004 (Complaint). Specifically, Raytheon contends that it is entitled to immediate return of the proceeds of a wrongful draw made by Red Oak against a letter of credit, in the sum of $16,311,171.00.

In the second motion, Raytheon moves for an order, pursuant to CPLR 3016(b) and 3211(a)(1), (a)(5) and (a)(7) dismissing the fourth and fifth counterclaims set forth in the Amended Answer and Counterclaim, dated February 18, 2005 (Answer) of defendant AES RED OAK, LLC's (Red Oak or Owner).

BACKGROUND

The Project, the Parties and their Agreements

This action arises out of the construction of a 800 megawatt combined cycle power plant in Sayreville, New Jersey (the Project). On October 15, 1999, Red Oak, the owner of the Project, retained a former subsidiary of Raytheon, Raytheon Engineers & Constructors, Inc.(RE&C), as general contractor for the Project, pursuant to an agreement entitled "Engineering, Procurement and Construction Agreement" (the EPC Agreement).[FN1] Under the EPC Agreement, RE&C agreed to design and construct the Project, and Red Oak agreed to pay $290,417,000 to RE&C, subject to adjustment as provided thereunder. Pursuant to a guaranty, dated the same day, Raytheon guaranteed the obligations of RE&C under the EPC Agreement (the Guaranty).

In April 2000, Morrison Knudsen Corp. purchased RE&C and certain other Raytheon subsidiaries. The new entity, named Washington Group International, Inc. (WGI), succeeded to RE&C's rights and obligations under the EPC Agreement. Raytheon's obligations under the Guaranty remained in place after the sale of RE&C and its merger into WGI.

In May 2001, after WGI filed a petition for bankruptcy relief, Raytheon assumed the role of performing guarantor of construction of the Project under the EPC Agreement. WGI also [*2]assigned to Red Oak the outstanding subcontracts, and vendor contracts relating to the Project (defined as the "Owner Assumed Contracts").

On or about November 21, 2001, Raytheon and Red Oak entered into a Supplemental Agreement. They agreed, among other things, that the terms of the EPC Agreement would continue to define their rights and obligations in connection with Raytheon's performance under the Guaranty.[FN2] In the Supplemental Agreement, Red Oak appointed Raytheon as its agent with respect to the Owner Assumed Contracts, and authorized Raytheon to exercise all of its rights thereunder. The parties agreed, in section 2.4. of the Supplemental Agreement, that, notwithstanding the creation of said agency, "Raytheon shall not have, or be deemed to have, any fiduciary or other duties associated with an agency relationship to Owner beyond those expressly set forth in the Guaranty or herein."

Construction Stages Under the EPC Agreement

With respect to the construction, the EPC Agreement defines a number of construction completion events, in order of finality, to wit: (a) Provisional Acceptance; (b) Final Acceptance; and (c) Project Completion. The first, Provisional Acceptance, occurs when the Project is able to operate safely and reliably at certain operating capacities pursuant to a "Completed Performance Test," as defined by the EPC Agreement. Upon achievement of Provisional Acceptance, the owner takes over care, custody and control of the Project (EPC Agreement, §§ 6.3, 7.2). The term "Construction Progress Milestones" (Milestones) is used in the EPC Agreement to signify the completion of various specified portions of the Project.

Retainage and/or Posting a Letter of Credit under the EPC Agreement

Section 4.2.4 of the EPC Agreement, titled "Retainage" provides that Red Oak shall withhold from each payment to Raytheon, as retainage, an amount equal to ten percent thereof. In lieu of retainage, that section allows Raytheon to post a letter of credit, in a specified amount and format.

In March 2002, Raytheon posted the Letter of Credit in the amount of approximately $30 million as security for construction activity under the terms of the EPC Agreement. This $30 million amount represented ten percent of the Milestone payments received by Raytheon and its predecessors in interest under the EPC Agreement.

Applicable Default and Remedy Provisions in the EPC Agreement

There are three remedy provisions arguably applicable here. First, there is section 16 of the EPC Agreement (for failure to achieve Final Acceptance of the Project), second, there is section 6.7.3 of the EPC Agreement (for failure to achieve Project Completion), and third, there is section 15 of the Agreement (for termination).

With respect to the failure to meet Final Acceptance, Red Oak's rights are governed by section 16.1(i)(2) of the EPC Agreement. That section authorizes Red Oak to declare Raytheon in default for failure to achieve Final Acceptance by the Guaranteed Final Acceptance Date as defined therein. Section 16.1, entitled "Contractor's Default," states, in relevant part: Contractor shall be immediately in default of its oblations hereunder upon the [*3]occurrence of any one or more of the following events, acts or conditions:

* * *

(i) Either of the following events or conditions shall have occurred or exist:

* * * (2) Final acceptance of the Facility shall not have occurred by the Guaranteed Final Acceptance Date; and Contractor is not proceeding in accordance with a Plan that has been approved and/or modified by Owner in accordance with Section 7.2.1(b) or 7.6.2(b) hereof.

Section 16.2 of the EPC Agreement, which lays out Red Oak's remedies against Raytheon for a breach of the above quoted section, provides, in relevant part: In the event that Contractor is in default of its obligations hereunder pursuant to section 16.1 hereof, Owner shall have any or all of the following rights and remedies (in addition to any other rights and remedies that may be available to Owner hereunder or at law or in equity) and Contractor shall have the following obligations:

* * *(c) Owner . . . shall have the right . . . to have the Services finished and to exercise any rights or remedies available to it hereunder or at law or in equity (including without limitation demanding the payments from Contractor pursuant to Section 15.3 hereof); and(d) Owner may exercise any other remedy it may have hereunder or at law or in equity, including seeking the recovery of damages subject to any applicable limitations on Owner's remedies and/or Contractor's obligations and liabilities that are expressly set forth in this Agreement.

Section 15.3 of the EPC Agreement ("Consequences of Termination"), which is mentioned above, in section 16.2(c), provides, in relevant part: (b) In the event of any termination hereof, Owner may, without prejudice to any other right or remedy it may have, at its option, finish the Services by whatever method Owner may deem expedient. If such termination was by Owner pursuant to section 16.2 hereof, then . . . Owner shall be entitled (i) to recover from Contractor, and Contractor shall pay to Owner upon demand, any costs reasonably incurred by Owner in completing the Services. . . ; and (ii) to exercise any rights or remedies available to Owner hereunder or at law or in equity, subject to any applicable limitations on Owner's remedies and/or Contractor's obligations and liabilities that are expressly set froth in this Agreement.

Thus, under section 16.2, if Raytheon fails to achieve Final Acceptance, Red Oak has [*4]"the right to have the services finished and to exercise any rights hereunder or at law or in equity (including without limitation demanding the payments from [Raytheon] pursuant to Section 15.3 hereof)." Section 15.3(b), in turn, provides that "[Red Oak] shall be entitled . . . to recover from [Raytheon] . . . any costs reasonably incurred by [Red Oak] in completing the Services."

With respect to any alleged failure to meet the Project Completion Deadline, Red Oak's remedies are governed by Section 6.7 of the EPC Agreement, entitled "Project Completion." That section provides, in relevant part: Section 6.7.3 Project Completion Deadline. Contractor shall be obligated hereunder to achieve Project Completion not later than ninety (90) days after Final Acceptance of the Facility (the "Project Completion Deadline"). If Contractor does not achieve Project Completion on or before the Project Completion Deadline or if Contractor is not proceeding with all due diligence to complete the Services in order to achieve Project Completion by such deadline, Owner may retain another contractor to complete such work and Contractor shall pay to Owner upon demand any and all costs reasonably incurred by Owner in completing the Services in the event and only to the extent such costs exceed the remaining unpaid portion of the contract Price that would have been payable to Contractor hereunder to complete the Services had this Agreement been performed.

Thus, in the event of a failure by Raytheon to meet the Project Completion Deadline, section 6.7.3 entitles Red Oak to complete the work, and obligates Raytheon to pay to Red Oak upon demand any and all costs reasonably incurred by Red Oak in completing the work.

Ongoing Disputes Between the Parties

Both before and after Raytheon's assumption of duties, there were a series of construction performance-related disputes between Red Oak and Raytheon and/or its predecessors in interest. Numerous letters were exchanged between the parties. One such letter, dated July 24, 2002, from WGI to Red Oak, was ten pages long, and referenced numerous other agreements, notices and letters between the parties. The July 24, 2002 letter reported on the status of 44 distinct items, many of which were in contention. One item was the vibration of the heat recovery steam generators, and stated:

13. HRSG Vibration Foster Wheeler ("FWEC") performed an internal inspection on all heat recovery steam generators ("HRSGs") on July 9 & 10, 2002 and found no evidence of damage to the liner plates or studs. FWEC has cleared the units for continued operation. FWEC plans to perform vibration tests on a HRSG to determine if any vibrations exist during operations that exceed allowable limits, and to identify the source and mode of the 24-hertz harmonic. In the event further actions are necessary under the terms of the Agreement, they will be handled as part of the normal punch list or warranty administration process. Based on the above, this is not a Mechanical Completion issue.

In a Settlement Agreement, dated August 6, 2002, Raytheon and Red Oak resolved a number of their issues, including those listed in the July 24, 2002 letter. The Settlement [*5]Agreement provided that, in exchange for Raytheon paying Red Oak the sum of $5 million, Red Oak would acknowledge that Raytheon had achieved important construction milestones, and would grant Raytheon a specific and general release of claims. Specifically, the parties agreed, inter alia, that Raytheon achieved Provisional Acceptance of the Project, effective August 12, 2002, and that Raytheon would continue to work to achieve Final Acceptance and Project Completion with respect to the items of work set forth therein.

In section 2.1 of Article 2, entitled "Releases of Claims, Preservation of Rights and Obligations," subject to certain exceptions not applicable here, Red Oak released Raytheon from "all claims, causes of action, damages, liabilities, losses and costs, known or unknown, which may exist and which arise hereafter against Raytheon . . . with regard to all of the issues identified in the Owner Correspondence (which includes the correspondence that led to the July 24, 2002 letter)." In section 2.2, with certain exceptions, not applicable here, the parties gave each other general mutual releases.

Section 6.7, entitled "Entire Agreement," provides that: "[t]his Settlement Agreement contains the entire agreement among the Parties and supersedes any and all prior written and oral agreements, proposals, negotiations, understandings and representations pertaining to the subject matter thereof."

Article 5 contains "Representations and Warranties." Section 5.2 (b) provides: b. Owner represents and warrants that the matters addressed int his Settlement Agreement and identified in the Owner correspondence encompass all of its known concerns regarding Mechanical Completion and Provisional Acceptance.

Pursuant to its terms, after the date of the Settlement Agreement, Red Oak maintained exclusive custody and control of the Project, and generated electricity and derived revenue from its operation of the Project, while Raytheon continued its above-described work.

Disputes Regarding Project Completion and Red Oak's Draw on the Letter of Credit

On July 22, 2003, Raytheon delivered a Notice of Final Acceptance to Red Oak pursuant to the terms of the EPC Agreement. On August 10, 2003, Red Oak rejected the Notice, and refused to issue the requested "Final Acceptance Certificate." Raytheon then, informed Red Oak that its rejection of the Notice of Final Acceptance was wrongful. While this dispute was ongoing, Raytheon continued to work to achieve Project Completion by addressing the items listed on a Punch List as well as any legitimate claims submitted by Red Oak.

The disputes did not abate. On July 28, 2004, Red Oak banned Raytheon from any further access to the Project claiming that: (a) the Project Completion Deadline, as defined in the EPC Agreement, had passed; or alternatively (b) Raytheon failed to meet the "Guaranteed Final Acceptance Date" for the Project.

On August 23, 2004, Red Oak drew the entire $30.3 million balance of the Letter of Credit by directing a sight draft to JP Morgan Chase Bank. The sight draft was accompanied by a certificate signed by Red Oak's president stating that Raytheon substantially breached the EPC Agreement and the Settlement Agreement causing damages to Red Oak.

According to Raytheon, of the roughly $30 million drawn upon by Red Oak, $16,311,171 represented anticipated Project-related construction work that Red Oak might seek to perform at [*6]the Project at some future time.[FN3]

Commencement of this Action

Raytheon commenced this action against Red Oak claiming that its draw on the Letter of Credit was wrongful. In the Complaint, Raytheon asserts legal and equitable claims against Red Oak for, among other things, breach of contract, fraud, and tortious interference with contractual rights.

In the first cause of action, titled "Fraudulent Letter of Credit Draw under NY UCC 5-109(b) Equitable Relief," Raytheon seeks the imposition of a constructive trust restraining Red Oak's use of the proceeds of the Letter of Credit during the pendency of this action in order to maintain the status quo herein. In the third cause of action, Raytheon requests a judgment declaring that "the conditions for . . . assuming and completing the work never occurred as defined in the EPC Agreement" (Complaint, ¶65), and that Red Oak "was not allowed to recover costs, damages or other amounts, or to draw the Letter of Credit based on the estimated cost to perform future work as [Red Oak] had not reasonably incurred' any expense for these items as of the date of the wrongful draw, much less made demand upon Raytheon for payment of those reasonable expenses as of the date of the draw as required by the EPC Agreement" (Complaint, ¶66). In the fourth cause of action, Raytheon alleges that Red Oak breached the relevant contracts (i.e., the EPC Agreement, the Supplemental Agreement and the Settlement Agreement) by refusing to acknowledge Raytheon's Notice of Final Acceptance and issue a certificate of Final Acceptance, by assessing impermissible rebates and damages, and by claiming entitlement to damages for alleged unaccrued items of damage (Complaint, ¶68). Raytheon further alleges that Red Oak "breached the EPC Agreement by liquidating the Letter of Credit in order to pay itself for these meritless claims in breach of the EPC Agreement, Supplemental Agreement and the Settlement Agreement, and by refusing to return the wrongfully liquidated funds to [*7]Raytheon" (Complaint, ¶69).

Red Oak, in the "Amended Answer and Counterclaim," dated February 18, 2005 (Answer), denies any wrongful conduct on its part, and asserts that: (a) its draw on the Letter of Credit was proper because Raytheon breached the EPC Agreement, the Supplemental Agreement and the Settlement Agreement; and (b) the Settlement Agreement should be rescinded based on fraud.

The Answer contains counterclaims for breach of contract and breach of warranty based on Raytheon's alleged failure to properly design and install the steam cycle systems, including the HRSGs and turbines. The fourth and fifth counterclaims, based on fraud, concern these same alleged Project design and function deficiencies.

In the fourth counterclaim, titled "Fraudulent Misrepresentation," Red Oak seeks rescission of the Settlement Agreement, and an award of damages against Raytheon, including liquidated damages and performance rebates under the EPC Agreement. This counterclaim is predicated upon Red Oak's assertions that: (a) in entering into the Settlement Agreement, Raytheon represented to Red Oak certain facts regarding the performance characteristics of the combustion turbines, and that the supplier of the HRSG units, Foster Wheeler, had cleared the HRSG units for continued operation; (b) these representations about combustion turbines and the HRSG units were false and known to be false by Raytheon; and (c) based on these misrepresentations, Red Oak was fraudulently induced to enter into the Settlement Agreement, recognizing Provisional Acceptance and Mechanical Completion of the Project.

In the fifth counterclaim, titled "Fraudulent Suppression," Red Oak claims that: (a) pursuant to the terms of the Supplemental Agreement, Red Oak appointed Raytheon to be its agent for purpose of purchasing combustion turbines from Siemens-Westinghouse Power Corp. (SWPC); (b) as agent, Raytheon owed a duty to disclose certain facts about the combustion turbines that it procured to Red Oak; (c) Raytheon failed to disclose and/or concealed these facts about the combustion turbines from Red Oak; and (d) consequently, Red Oak was fraudulently induced to sign the Settlement Agreement, recognizing Provisional Acceptance and Mechanical Completion of the Project. On this counterclaim, Red Oak seeks the same relief as is sought on the fourth counterclaim (i.e., rescission of the Settlement Agreement, and an award of damages in its favor).

DISCUSSION

Raytheon's First Motion for Partial Summary Judgment

Raytheon seeks partial summary judgment with respect to the first, third and fourth causes of action in the Complaint, as follows: (a) entry of a money judgment in Raytheon's favor in the amount of $16,311,171, plus interest, costs and fees (fourth cause of action), or, in the alternative; (b) granting declaratory judgment and equitable relief in Raytheon's favor (i) declaring that, as a matter of law, Red Oak was not entitled to draw on the Letter of Credit for amounts attributable to future construction activity for which costs had not been incurred, and demand not been made, prior to August 23, 2004 (third cause of action); and (ii) ordering Red Oak to segregate and deposit an amount of no less than $16,311,171 in an account in the court's direction with earnings thereunder accruing for Raytheon's benefit during the pendency of this action (first cause of action).

It is well settled that the interpretation of an unambiguous contract is a question of law for the court, and that provisions of a contract delineating the rights of the parties prevail over [*8]the allegations set forth in the complaint (see Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150 [1st Dept 2001]; see also Taussig v Clipper Group, L.P., 13 AD3d 166 [1st Dept 2004]; Sterling Fifth Assoc. v Carpentille Corp., Inc., 9 AD3d 261 [1st Dept 2004]).

Raytheon submits that, based on the information set forth in Red Oak's March 9, 2004 letter, when Red Oak drew on the Letter of Credit, it had not incurred any actual expense with respect to the performing the $16,311,171 of estimated work, nor made any demand upon Raytheon for repayment of any such expenses.

According to Raytheon, under the EPC Agreement, Red Oak's right to recover against Raytheon is limited to the costs that Red Oak "reasonably incurred" for necessary work actually performed by Red Oak in completing the construction activity, and for which Red Oak made prior demand upon Raytheon for payment of such costs. Based on the above, Raytheon reasons that any draw upon the Letter or Credit for anticipated future expenditures is not authorized by the EPC Agreement. Raytheon thus maintains that this $16,311,171 sum must be returned since, on August 23, 2004 (i.e., the date of the draw), Red Oak had not actually incurred these costs, nor made demand upon Raytheon for payment of such sums, which represented, at most, anticipated future damages.[FN4]

Raytheon further submits that this conclusion is not altered by Red Oak's allegation that Raytheon was in breach of contract for failing to meet the Guaranteed Final Acceptance date and/or the Project Completion Deadline. Raytheon argues that even if it did breach the EPC Agreement (something Raytheon vehemently denies), Red Oak had no right, under any of the applicable sections of the EPC Agreement, to draw on the Letter of Credit for reimbursement' for potential future expenditures (EPC Agreement ¶¶ 6.73, 16.2).

In opposition, Red Oak argues that the agreements between the parties, as well as applicable New York law, authorize Red Oak's draw against the Letter of Credit to obtain funds necessary to repair and complete the work that Raytheon failed to perform or performed defectively. Alternatively, Red Oak submits that it has incurred actual damages exceeding the entire amount of the Letter of Credit.

Red Oak contends that Raytheon breached the EPC Agreement in many respects, culminating in its breach for failure to achieve both Final Acceptance and Project Completion. Red Oak maintains that these breaches constituted defaults by Raytheon under section 16.1(i)(2) of the EPC Agreement, which, in turn, entitled Red Oak to exercise the available remedies provided for under section 16.2 of the EPC Agreement, and that its draw on the L/C was proper and authorized by the terms of the EPC Agreement. Red Oak further contends that, since sections 16.2 and 15.3(b) of the EPC Agreement give Red Oak the right "to exercise all rights or remedies available to Owner hereunder or at law or in equity," it is entitled to assert any remedy available under New York law, including a damage claim for the estimated cost of finishing or repairing defective work (see Brushton-Moira Central School District v Fred H. Thomas Assoc., P.C., 91 NY2d 256, 261-262 [1998]). Therefore, Red Oak asserts that its draw on the Letter of Credit funds was proper under both New York law and the terms of the EPC Agreement.

Courts should construe a contract so as to give meaning to all of its language and avoid [*9]an interpretation that effectively renders meaningless a part of the contract (see Rodrigues v N & S Building Contractors, Inc., - NY3d , 2005 WL 2663500 [2005]; Helmsley-Spear, Inc. v New York Blood Center, Inc., 257 AD2d 64, 69 [1st Dept 1999]; see also Two Guys from Harrison-N.Y., Inc. v S.F.R. Realty Assocs., 63 NY2d 396, 403 [1984]). Reading the contractual provisions at issue here (i.e., sections 16.2 and 15.3 of the EPC Agreement) in the manner urged by Red Oak, would render meaningless the more specific provisions of the EPC Agreement authorizing Red Oak to collect from Raytheon, upon demand, any costs reasonably incurred in completing the claimed work. These provisions demonstrate that the EPC Agreement did not give Red Oak the unfettered right to collect any damages permitted by New York law, but instead restricted Red Oak to recovery of such reasonably incurred costs, upon demand. Therefore the construction urged by Red Oak is unwarranted and in that it fails to give"... practical interpretation to the language employed and the parties' reasonable expectations" (see Slamow v DelCol, 174 AD2d 725, 726 [2d Dept 1991], affd 79 NY2d 1016 [1992]).

Another argument advanced by Red Oak, that the Letter of Credit was posted as an alternative to retainage, should somehow replace the contractual provisions of the EPC Agreement is also without merit.

Finally Red Oak's claim that partial summary judgment should be denied because its damages at the time of the draw significantly exceeded $30 million is also unconvincing since no demand under the EPC Agreement had been made for these additional expenditures nor are they documented here.[FN5]

Thus, Red Oak has not defeated Raytheon's demonstration of its entitlement to partial summary judgment, and the motion is therefore granted.

Raytheon's Motion for Partial Summary Judgment Dismissing Red Oak's Counterclaims

Red Oak asserts, in the fourth and fifth counterclaims, that the Settlement Agreement should be rescinded based on Raytheon's alleged fraud. Specifically, Red Oak argues that it was fraudulently induced into entering into the Settlement Agreement by Raytheon's alleged false representations with respect to the performance characteristics of the combustion turbines, and with respect to the alleged clearance of the HRSG units for continued operation by their supplier. Additionally, in the fifth counterclaim, Red Oak alleges that Raytheon was Red Oak's agent, and that Raytheon violated a duty to disclose certain pertinent facts about the combustion turbines that it procured for Red Oak. [*10]

Raytheon seeks partial summary judgment dismissing these two fraud counterclaims on the grounds that, inter alia, the counterclaims: (a) are not stated with the degree of particularity required by CPLR 3016(b); (b) are contact claims that may not be converted to fraud claims; and (c) are barred by the terms of the Settlement Agreement, which expressly supersedes any prior understandings, contains a merger clause, and contains both general and specific releases. In opposition, Red Oak contends that the two counterclaims are adequately stated, viable claims.

Raytheon has demonstrated its entitlement to partial summary judgment dismissing these two counterclaims.

It is well settled that, "[i]n an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" (Lama Holding Co. v Smith Barney Inc., 88 NY2d 413, 421 [1996], citing New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995] and Channel Master Corp. v Aluminum Ltd. Sales, 4 NY2d 403 [1958]).

CPLR 3016 (b) requires specificity as to each of these elements (Kaufman v Cohen, 307 AD2d 113, 120 [1st Dept 2003]). Red Oak's allegations of fraud are conclusory and lack sufficient particularity to satisfy the requirements of CPLR 3016 (b) (see e.g., Modell's NY, Inc. v Noodle Kidoodle, Inc. 242 AD2d 248, 250 [1st Dept 1997]).

Furthermore, the counterclaims are merely breach of contract claims which Red Oak has attempted to transform into fraud claims (see New York Univ. v Continental Ins. Co., supra, 87 NY2d at 316; see also Orix Credit Alliance, Inc. v R.E. Hable Co., 256 AD2d 114, 115 [1st Dept 1998]; Gordon v Dino De Laurentis Corp., 141 AD2d 435 [1st Dept 1988] ["it is well settled that a cause of action for fraud will not arise when the only fraud charged relates to a breach of contract"]; Raytheon Co. v Foster Wheeler Energy Corp., Sup Ct, NY County, May 14, 2004, Moskowitz, J., Index No. 600789/03). The claim that Red Oak was fraudulently induced to enter into the Settlement Agreement contravenes the merger clause in the Settlement Agreement. (Section 6.7) that provides: "[t]his Settlement Agreement contains the entire agreement among the Parties and supersedes any and all prior written and oral agreements, proposals, negotiations, understandings and representations pertaining to the subject matter thereof." (Masters v Visual Bldg. Inspections, Inc., 227 AD2d 597 [2d Dept 1996]; see also Danann Realty Corp. v Harris, 5 NY2d 317, 320-321 [1959]; General Bank v Mark II Imports, Inc., 293 AD2d 328, 328-329 [1st Dept 2002]). Moreover, paragraph 2.1 of the Settlement Agreement, Red Oak released Raytheon "from any and all claims . . which may exist and which may arise hereafter against Raytheon. . . with regard to all of the issues identified in the Owner Correspondence. . . ." In paragraph 2.2, Red Oak issued a broad general release in favor of Raytheon. These provisions, together with the merger clause discussed above, refute any claim by Red Oak that it executed the Settlement Agreement in reliance upon these alleged contrary statements (Danaan Realty Corp. v Harris, supra; see also Citibank v Plapinger, 66 NY2d 90, 95 [1985]).

Thus, in light of the above provisions of the Settlement Agreement, Red Oak is precluded from claiming reliance on statements outside the parties' agreements and pursuing the fraud counterclaims.

The fifth counterclaim, which is predicated upon an alleged breach of an agent's duty to its principal, is barred by section 2.4 of the Settlement Agreement, which expressly provided [*11]that, "Raytheon shall not have, or be deemed to have, any fiduciary or other duties associated with an agency relationship" to Red Oak.

CONCLUSION

It is ORDERED that the Raytheon Company's motion for partial judgment with respect to the first, third and fourth causes of action set forth in the complaint, dated October 27, 2004, is granted to the extent that:

1. Plaintiff is granted partial judgment on the fourth cause of action in the amount of $16,311,171, together with interest as prayed for allowable by law.

2. The action shall continue as to the remaining causes of action, and as to those additional sums sought in the first, third and fourth causes of action; and it is furtherORDERED that the motion by Raytheon for partial summary judgment dismissing the fourth and fifth counterclaims set forth in the Amended Answer and Counterclaims, dated February 18, 2005 of defendant AES RED OAK, LLC is granted in all respects.

Settle Order on notice on or before December 20, 2005.

Parties are directed to appear on December 20, 2006 at 9:30 for a status conference in Room 208.

Dated: December 7, 2005 ENTER:

______________________

Helen E. Freedman J.S.C.



Appearances Footnotes

Footnote 1: Under the EPC Agreement, RE&C was referred to as Contractor, and Red Oak was referred to as Owner.

Footnote 2: According to Raytheon, since it took over construction under the EPC Agreement, it spent more than $180 million to complete Project construction for which it received only $70 million in contract payments from Red Oak.

Footnote 3: Raytheon obtained these figures from a letter, dated March 9, 2004, from Red Oak to Raytheon. In that letter, Red Oak informed Raytheon that, according to its calculations, Red Oak was owed approximately $30 million by Raytheon, consisting of the following: — $13,638,084, representing Performance Rebates due under the EPC Agreement — $13,400,177, representing anticipated cost to complete certain unfinished Punch List items — $900,000, representing anticipated cost to fix HRSG issues, including vibration problems — $1,700,000, representing reimbursement for CTG trips allegedly caused by Raytheon in June and July 2003 — $155,400, representing anticipated costs of items necessary to obtain a certificate of occupancy for the Project — $1 million, representing retainage pursuant to section 4.2.4 of the EPC Agreement for uncompleted warranty claims. Of the above-listed sums, $16,311,171 represented anticipated costs Red Oak had not yet incurred. Thus, Red Oak concluded, in the letter, that, "[u]pon completion of all work, a final adjustment will be issued based on actual costs incurred."

Footnote 4: Raytheon contends that Red Oak's draw on the entire Letter of Credit sums was wrongful, but limits this motion to the $16 million sum mentioned above.

Footnote 5:For example, Red Oak offers no support for its claim to having spent $5.1 million to cure defective work performed by Raytheon. Moreover, Red Oak claims, among other things, that Raytheon is liable for $22.5 million in Provisional Acceptance Late Completion Payments under the EPC Agreement. This is not a viable claim because, in the Settlement Agreement, Red Oak certified that Provisional Acceptance had in fact occurred, and Red Oak released Raytheon of all claims concerning any contention that Provisional Acceptance had not been achieved (see Federal Ins. Co. v Kozlowski, 18 AD3d 33, 39-40 [1st Dept 2005] [until rescission claim is litigated contractual obligations remain in effect, at least insofar as they existed prior to notice of rescission]).