Borusan Mannesmann Pipe U.S. v. Hunting Energy Servs.

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BORUSAN MANNESMANN PIPE US, INC., Appellant v. HUNTING ENERGY SERVICES, LLC, Appellee

No. 14-21-00694-CV

Court of Appeals of Texas, Fourteenth District

August 24, 2023

On Appeal from the 80th District Court Harris County, Texas Trial Court Cause No. 2020-38984

Panel consists of Justices Wise, Jewell, and Poissant.

MEMORANDUM OPINION

Margaret "Meg" Poissant Justice

Appellant Borusan Mannesmann Pipe US, Inc. ("Borusan") appeals a judgment in favor of appellee Hunting Energy Services, LLC ("Hunting") following a bench trial. In six issues, Borusan argues the trial court erred when it (1) found that Hunting did not owe Borusan defense and indemnity; (2) denied Borusan's claims for breach of contract and breach of warranty; (3) granted Hunting's claim for breach of contract; (4) granted Hunting's claims for negligence and negligent representation; (5) found that Borusan must indemnify Hunting; and (6) awarded expert witness and mediation fees to Hunting. We affirm in part and reverse in part.

I. Background

Borusan manufactures steel pipes by sourcing flat, raw steel material and forming it into a rounded, longitudinal tube. The abutting edges of the tube are then fused together through a process called electronic resistance welding ("ERW"), which uses a high frequency electric current, creating a weld seam or fusion line that runs longitudinally across the entire length of the pipe. Borusan then sells these steel pipes, sometimes with a threaded connection added to the pipes.

Hunting offers a service whereby it swages (or expands) and threads steel pipe with its proprietary threaded connection called Tec-Lock Wedge ("TLW"). Hunting's TLW connection does not require an external coupling to connect joints of pipe because the connection consists of expanding one end of the pipe and threading it on the inside of the pipe body (the "box end"), and then connecting the box end to a corresponding end of pipe that has been threaded on the outside of the pipe body (the "pin end").

Borusan markets and sells a turnkey, finished-end steel pipe product finished with Hunting's proprietary TLW connection specifically: 5 1/2" 23.00# 0.415W P110CY ERW R2 Casing Hunting Tec-Lock Wedge Special Clearance Borusan Reg Mil and 5 1/2" 20.00# 0.361W P110CY ERW R3 Casing Hunting Tec-Lock Wedge Borusan Reg Mil. Borusan sold this finished-end pipe with Hunting's TLW proprietary connection to its customer Sooner Pipe LLC ("Sooner"). Sooner is a pipe distributor; the end user of the steel pipe underlying this dispute is Concho Resources, Inc. ("Concho").

A. The Lawsuit

On June 30, 2020, Hunting filed the underlying lawsuit against Borusan. In its live pleading, Hunting alleged that, "[a]s part of manufacturing and selling its turnkey product, Borusan guarantees the quality of its manufacturing processes and steel, and certifies that its pipe, among other things, satisfies API 5CT and is fit for intended purposes, including swaging." Hunting further alleged:

In early 2020, Borusan suffered a number of failures with its products, all of which were conclusively caused by defects in Borusan's steel and manufacturing processes. Borusan's defective products and manufacturing process not only caused harm to Borusan's customer, but also caused harm to Hunting and reflected poorly on Hunting and Hunting's intellectual property. Borusan's defective products and manufacturing processes also constituted a breach and default of the Parties' written Purchase Orders and a breach of the representations and warranties that Borusan made to Hunting about its product.

Hunting asserted causes of action for breach of contract based on the written purchase orders between Borusan and Hunting; declaratory judgment, seeking in relevant part declarations that Hunting has no obligation to indemnify Borusan and that Borusan is required to indemnify Hunting; negligence based on Borusan providing Hunting with defective, negligently manufactured pipe and by misrepresenting the quality of the pipe it provided, as well as the risks associated with its defective and substandard pipe; fraud and fraudulent inducement, based on false, material misrepresentations by Borusan to Hunting concerning Borusan's pipe and its manufacturing process; fraud by non-disclosure; negligent misrepresentation; breach of implied warranties of fitness; breach of implied warranty of merchantability; and "marketing defect."

Borusan filed an answer and asserted counterclaims for breach of contract and declaratory judgment. In Borusan's amended answer, it asserted counterclaims for breach of contract, breach of warranty, and declaratory relief, seeking declarations that Borusan's terms and conditions of purchase applied to the pipe at issue, that Hunting is responsible for providing a defense to Borusan for any claims by Sooner or Concho, and that Hunting is responsible for indemnifying Borusan.

On September 2, 2021, the parties' claims were tried to the bench. After Hunting rested its case in chief, the trial court granted Borusan's motion for directed verdict on Hunting's claims of fraud, fraudulent inducement, and fraud by nondisclosure. On November 3, 2021, the trial court signed findings of fact and conclusions of law, which we summarize below.

B. Findings of Fact

This dispute concerns a turnkey, finished-end pipe that was sourced, manufactured, marketed, sold, and put into the stream of commerce by Borusan. Finished-end pipe means that the plain-end pipe has been "finished" with a connection, and Borusan markets and sells the product as being finished with Hunting's proprietary TLW connection. In late 2019 and early 2020, Borusan issued several written purchase orders ("POs") to Hunting, pursuant to which Borusan sold the turnkey, finished-end product to Sooner.^[1]

Borusan certifies and promises that its steel complies with both the testing and performance requirements of the American Petroleum Institute's Specification 5CT ("API 5CT"),^[2] as well as Borusan's promised performance requirements, which are set forth both in API 5CT and in Borusan's commercial documents and representations. Hunting's only role with regard to Borusan's product is as a third-party vendor. Hunting was hired by Borusan for "threading services"-the application of Hunting's TLW connection to "finish" Borusan's plain-end pipe- so that Borusan can sell the turnkey, finished-end product to Sooner.

As part of Hunting's "threading services," Borusan requires that Hunting expand Borusan's pipe to a certain degree. Hunting plays no role in the manufacturing or certification of Borusan's plain-end pipe and has no responsibility for the metallurgy or integrity of Borusan's steel, the performance of Borusan's steel, or Borusan's compliance with any of Borusan's promised performance standards. In the threading POs, Borusan represents that its plain-end pipe will meet certain minimum performance standards, including the standards set forth in API 5CT.

Borusan also promises that its plain-end pipe satisfies the express representations made by Borusan in the performance data sheets that Borusan provides to Hunting. Specifically, Borusan promises that its plain-end P110 pipe has a minimum yield strength of 110,000 PSI, a maximum yield strength of 125,000 PSI, and a minimum tensile strength of 125,000 PSI. Hunting's connection and threading process operates within these promised performance criteria.

Hunting represents that its TLW connection will meet the standards set forth in the data connection sheets it provides to Borusan. There is no dispute that Hunting's TLW connection met all criteria and specifications set forth by Hunting.

Borusan's representations regarding the quality and performance capabilities of its plain-end pipe were false and material. As agreed by Borusan, and as confirmed by express incorporation into the Borusan-Sooner POs, both Hunting's standard terms and conditions and Borusan's standard terms and conditions of purchase apply to the threading POs.

In February, April, and May of 2020, a number of Borusan's finished-end products failed in the field. When Borusan notified Hunting of the pipe failures, Hunting hired third-party expert Element Materials Technology ("Element") to perform an investigation and conduct testing to determine the root cause of the pipe failures. Element issued reports on April 29, 2020 and May 12, 2020. Both reports conclude that the pipe failures were caused by Borusan's defective steel sourcing and/or defective manufacturing processes that necessarily resulted in plain-end pipe and turnkey, finished-end pipe that did not meet the standards Borusan represented it would, including those set forth in API 5CT and/or Borusan's performance data sheets.

At the same time, Sooner and Concho investigated the pipe failures by hiring another third party, Viking Engineering ("Viking"), to perform a failure analysis and publish reports documenting its testing and inspection results, findings, and conclusions. Like the Element reports the Viking reports conclude that the cause of the pipe failures was Borusan's defective products and substandard manufacturing processes and not Hunting's work. Various forms of testing and examination by Viking revealed several types of metallurgical defects in Borusan's steel. The Viking reports conclude that Borusan's steel contains excessive levels of inclusions that prevent the weld line from fusing together in random, intermittent areas, resulting in a very brittle material that is susceptible to failure when loads are applied, and that these metallurgical defects were the result of Borusan's defective sourcing of raw material, Borusan's defective ERW manufacturing process, or both. Thus, Viking concluded in its reports that...