Dana Herra Jun. 5, 2015, 10:54am

A San Diego-based maker of custom-built air handling and air conditioning units, which manufactures its products in Mexico, will be allowed to press its breach of contract claim against a northwest suburban commercial heating, ventilation and air conditioning contractor, after a federal judge ruled the contract between the two companies for new HVAC units for a CTA project is not necessarily voided by a law requiring the equipment be made in the U.S.

U.S. District Judge Marvin E. Aspen on June 2 denied a motion to dismiss the litigation brought by Energy Labs Inc., of San Diego, against Elk Grove Village-based Edwards Engineering, a company Energy Labs contends had hired Energy Labs to build air-conditioning units, only to later back out of the purchase agreement unexpectedly.

Edwards Engineering had been contracted by the Chicago Transit Authority to rehabilitate the heating and air-conditioning systems at the CTA’s 103rd Street repair facility. According to court documents, Edwards held the contract with the CTA, and subcontracted Energy Labs to manufacture and deliver 13 custom air-conditioning units.

Energy Labs used a manufacturing facility in Tijuana, Mexico, to fill the order. Because the CTA project was federally funded, it falls under the Buy American Act, which states certain construction components in federally-funded transportation systems must be made in the United States. Since it couldn’t use Energy Labs’ made-in-Mexico units, Edwards canceled the order and bought the units from a different manufacturer.

Last September, Energy Labs sued Edwards and a related company, W.E. Bishop & Co., for breach of contract, quantum meruit and promissory estoppel.

Edwards filed a motion to dismiss the lawsuit, asserting the contract was illegal and unenforceable.

Aspen, however, disagreed.

In the original complaint, Energy Labs states that the two purchase orders it received from Edwards did not mention the Buy American Act. The suit claims an Edwards executive visited and toured the manufacturing facility in Tijuana, and never mentioned either the Buy America Act or that Edwards would not be able to use units built in Mexico for the CTA project.

Sometime after that tour, the Federal Transit Administration told Edwards and Energy Labs the project fell under the Buy American Act’s provisions, and the FTA determined Energy Labs’ Mexican-made units could not be used for the CTA project. The FTA had determined the air conditioning units should be classified as “components” of the project and not “subcomponents,” as the companies had attempted to argue, according to court documents.

At that point, Edwards canceled the order, leaving Energy Labs on the hook for nearly $1 million it had already spent on completing the purchase orders, according to federal court papers.

In his opinion, Aspen noted it was not the court’s place to decide the merits of the case, only to decide if Edwards’ motion to dismiss was valid. The motion to dismiss says that the lawsuit itself demonstrates the contract was illegal and unenforceable, and that a plaintiff can’t recover equity on an illegal contract. In denying the motion, the court found that the contract was not illegal, and even if it was, was not unenforceable.

According to the complaint, the contract between Edwards and Energy Labs simply required Energy Labs to build the specified units and Edwards to buy them. The Buy American Act applies to the contract between Edwards and the CTA, and Energy Labs contends it did not know the act would come into play in its work. While government contractors can be reasonably expected to ask about procurement requirements on a given project, the same standard cannot be applied to subcontractors, who may not even know they are working on a government project, the court decision says.

In addition, Aspen wrote, neither party claims Edwards was required to use federal funds to purchase the units, even if that was its intention.

Edwards Engineering is represented in the action by attorneys from the firm of Querrey & Harrow, Ltd., of Chicago.

Energy Labs is represented by Gordon & Rees LLP, of Chicago.

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