08-1115_ECO RESOURCES, INC_Settlement Agreement0 0
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Agreement") is made and dated as of November
15, 2008 between the City of San Juan Capistrano, California (the "City"), and ECO Resources,
Inc., a corporation organized and existing under the laws of the State of Texas ("ECO").
RECITALS
WHEREAS, the Capistrano Valley Water District (the "Districf') and ECO Resources,
Inc. executed a Service Contract for the Design, Construction, Financing and Operation of the
San Juan Basin Desalter Project on September 3, 2002 (the "Service Contract"; capitalized terms
used but not otherwise defined herein shall have the meanings set forth in the Service Contract);
WHEREAS, following execution of the Service Contract, the District merged with the
City pursuant to subsection 16.9(C) of the Service Contract, and the City has assumed all of the
rights and obligations of the District under the Service Contract;
WHEREAS, on July 3, 2007, the City and ECO entered into a Settlement Agreement,
which provided, among other things, for the development and construction of two additional
Wells at sites to be specified by the City and for the installation of a new encased pipeline under
Interstate 5 (the "July 3, 2007 Settlement Agreement");
WHEREAS, ECO has asserted certain claims against the City for unpaid service fees,
extra work expenses and lost profits, amounting to approximately $3,750,000 (the "ECO
Claims");
WHEREAS, the City has asserted certain claims against ECO for, among other items,
failing to comply with the Water Delivery Guarantee, failing to provide notice of Plant
shutdowns, failing to comply with the Water Treatment Guarantee, failing to manage the Project
in accordance with the Contract Standards, failing to comply with the Production Efficiency
Guarantee, failing to comply with the Hydraulic Transients Guarantee, failing to provide work
for Noncompliance of Performance Guarantees, and failing to comply with the terms of Contract
Administration Memorandum #8, amounting to approximately $3,495,000, (the "City's
Claims");
WHEREAS, the parties have mutually agreed to a termination of the Service Contract, as
amended by the July 3, 2007 Settlement Agreement, and wish to enter into this Agreement in
order to settle, compromise and resolve, in good faith, all of the differences, disagreements and
disputes between them as provided herein below.
NOW THEREFORE, for consideration agreed to have been made and accepted mutually,
the parties hereto agree as follows:
1. Recitals The recitals set forth above are hereby incorporated into this Settlement
Agreement.
2. Termination of the Service Contract The City and ECO mutually agree to a
termination of the Service Contract for the convenience of the parties. It is further agreed that
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the effective date of this termination is October 31, 2008, which is the date when ECO
transferred the operation of the Plant to the City.
3. Resolution of All Disputes between the Parties By this Agreement, the parties
intend to resolve all issues and disputes between them which relate in any way to the Service
Contract, including the release of any outstanding duties or other obligations of the parties
provided in the July 3, 2007 Settlement Agreement, as set forth in Paragraph 4 below. Under the
terms of this Agreement, no monetary consideration will be paid by either party to the other.
4. Mutual General Release
4.1 The City and ECO, including their officers, directors, shareholders,
partners, board members, employees, representatives, agents, predecessors, successors, assigns,
subsidiaries, parent corporations and affiliated entities, agree to fully release each other from all
claims, demands, actions, causes of action, duties, obligations, costs, expenses, attorney's fees,
damages, losses and liabilities of whatsoever nature, character or kind, whether known,
suspected or unsuspected, material or contingent, which concern or relate in any way to the
Service Contract, the ECO Claims, the City's Claims and the July 3, 2007 Settlement
Agreement, subject to the provisions in Paragraph 5 and 6 of this Agreement.
4.2 With regard to the claims released herein, the City and ECO agree that,
except as provided in Paragraphs 5 and 6, this release is given with the intention to expressly
waive all rights provided by Section 1542 of the Civil Code of the State of California, which
provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must
have materially affected his settlement with the debtor."
In connection with such waiver and relinquishment, the City and ECO hereby
acknowledge that they are aware that they or their attorneys may hereafter discover claims or
facts in addition to or different from those which they now know or believe to exist with respect
to the subject matter of or any part to this Agreement, but that it is the intention of the City and
ECO to hereby fully, finally and forever settle and release all of the disputes and differences
between them, whether known or unknown, suspected or unsuspected, which concern, arise out
of or are in any way connected with the Service Contract, the ECO Claims, the City's claims,
and the July 3, 2007 Agreement, subject to the provisions in Paragraph 5 and 6 below.
5. Assignment of Warranties ECO agrees to assign any warranties still in effect to
the City. As of the date of this Agreement, the only such warranty involves the reverse osmosis
membrane elements provided by Toray Membrane America USA, Inc.
6. Indemnity Aereement ECO will agree to defend, indemnify, and hold the City
harmless from any claims asserted against the City by any subcontractors or material suppliers of
ECO who performed work or furnished materials in connection with the replacement of the
media and reverse osmosis membranes, which took place earlier this year. ECO will also agree
to defend, indemnify, and hold the City harmless from any claims asserted against the City by
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any third party, including any governmental agency with jurisdiction over the operation of the
Plant, through the date of termination of the Service Contract; provided, however, that this
indemnity shall only be effective as to claims asserted against the City on or before November 1,
2012, and ECO's maximum exposure to liability under this indemnity agreement shall be capped
at $100,000.
7. Compromise This Agreement and the releases contained herein affect the
compromise and settlement of disputed and contested claims and nothing contained herein shall
be construed as an admission by any party hereto of any liability of any kind to any other party.
Each party hereby expressly denies that it is in any way liable or indebted to any other party to
this Agreement.
8. Binding Effect This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their respective heirs, executors, administrators, trustees, directors,
officers, shareholders, members, successors, and assigns.
9. Governing Law This Settlement Agreement shall be governed by and interpreted
in accordance with the laws of the State of California.
10. Further Assurances The parties agree that, upon a request of the other party, they
will execute and deliver such further documents and undertake such further actions as may
reasonably be required to effect any of the agreements and covenants contained in this
Agreement.
11. Counterparts This Settlement Agreement may be executed and delivered in
multiple counterparts, and all counterparts so delivered and executed shall constitute one and the
same instrument and be enforceable as such.
12. Entire Agreement All agreements, covenants, representations and warranties,
express and implied, oral and written, of the parties hereto concerning the subject matter hereof
are contained herein. No other agreements, covenants, representations or warranties, express or
implied, oral or written, have been made by any party hereto to any other party concerning the
subject matter hereof. All prior contemporaneous conversations, negotiations, possible and
alleged agreements, representations, covenants and warranties concerning the subject matter
hereto are merged herein. This is an integrated Agreement.
13. Attorneys' Fees Each of the Parties hereto agrees to pay its own attorneys' fees
except that, in the event any action, suit or other proceeding is instituted to remedy, prevent or
obtain relief from breach of this Agreement, or pertaining to a declaration of rights under this
Agreement, the prevailing party shall recover its reasonable attorney's fees and court costs, or
costs incurred for an arbitration, and other non -reimbursable litigation or arbitration expenses
incurred in each and every such action, suit or other proceeding, including any and all appeals or
petitions therefrom.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the date first set forth above.
CITY OF SAN JUAN CAPISTRANO, ECO RESOURCES, INC.
Omar Sandoval, City Attorney
By:
Name: Tom O'Neill
Title: Vice President, Western Region
Ci
32400 PASEO ADELANTO
SAN JUAN CAPISTRANO, CA 92875
(949) 493.1171
(949) 493-1053 FAX
www.sanjuancapistrano.org
TRANSMITTAL
TO:
Tom O'Neill
SouthWest Water Company
2230 East Bidwell Street, Suite 200
Folsom. CA 92530
FROM: Maria Morris, Deputy City Clerk (949) 443-6309
DATE: November 25, 2008
RE: Settlement Agreement — ECO Resources, Inc.
Enclosed:
Original, executed agreements as referenced above
Cc: Omar Sandoval, City Attorney
Cindy Russell, Assistant City Manager
John O'Donnell, Utilities Director
MEMBERS OF THE CITY COUNCIL
San Juan Capistrano: Preserving the Past to Enhance the Future
`J Printed on 100Y recycled paper
SAM ALLEVATO
THOMAS W. HRIBAR
MARK NIELSEN
JOE SOTO
DR LONDRES USO
SouthVftd
V tw Company
MEMORANDUM
TO:
Omar Sandoval (City of SJC- Legal Counsel)
FROM:
Tom O'Neill (SWWC Western Regional V.P.)
DATE:
November 21, 2008
SUBJECT:
Settlement Agreement
Dear Mr. Sandoval,
Enclosed please find two originals of the agreed upon Settlement Agreement. Please sign
both and return one fully executed original to:
2230 East Bidwell St. Suite 200 Folsom, CA 95630
Thanks,
Tom O'Neill
C) (e S. —
0
32400 PASEO ADELANTO
SAN JUAN CAPISTRANO, CA 92675
(949) 493.1171
(949) 493.1053 FAX
www. sanjuancapistrano. org
October 7, 2008
Thomas O'Neill, Vice President
Western Region, ECO Resources, Inc.
c/o SouthWest Water Company
One Wilshire Building
624 S. Grand Ave., Suite 2900
Los Angeles, CA 90017
MEMBERS OF THE CITY COUNCIL
Re: Termination of Service Contract Between ECO Resources, Inc.
("ECO") and CVWD/City of San Juan Capistrano ("City")
Dear Mr. O'Neill:
SAMALLEVATO
THOMAS W. HRIBAR
MARK NIELSEN
JOE SOTO
DR. LONDRES USO
This letter acknowledges the City's receipt of ECO's notice of termination of the
above -referenced Service Contract, which was hand -delivered by Dave Stanton,
SouthWest Water Company's Chief Operating Officer this morning.
At our meeting this morning, the City confirmed its intention to pay for services
rendered in September and October. The parties at the meeting agreed that
ECO would continue to operate the desalter plant through the closed of business
on October 31, 2008. The City agreed that it would pay pursuant to the terms of
the Service Contract for services rendered through that date for the time plant
operations delivers water to the City pursuant to the Service Contract.
Mr. Stanton further acknowledged that the Service Contract allows the City the
option to hire ECO's existing operators, which the City is considering pursuing.
Finally, the parties agreed that we will continue to meet and discuss our
differences with respect to each party's claim under the Service Contract with an
interest in settling the parties' claims against each other in an amicable and
responsible manner in an effort to avoid the expense of arbitration and litigation.
Please let us know should your understanding conflict with the City's
understanding as presented in this letter.
Sincerely,
Dave Adams
City Manager
San Juan Capistrano: Preserving the Past to Enhance the Future
A
�� Printed on 100% regckd Paper
• • SouthWest
Water Company
One Wilshire BuildingRE^EIVED 624 Suth Grand
Avenue
Suite 2900
AD 21 I Los Angeles, CA 90017
R7 Phone 213.929.1800
Fax 213.929.1888
CITY CLERK WWW.SWWC.COM
October 6, 2008 SAN JUAN CAPISTRANO
Capistrano Valley Water District
32400 Paseo Adelanto
San Juan Capistrano, CA 92675
Re: Contract between ECO Resources, Inc., ("ECO") and Capistrano Valley
Water District ("District")
To Whom It May Concern:
Please be advised that pursuant to Section 13.4, Events of Default by the
District, ECO terminates this contract effective immediately.
As you are aware, ECO has demanded payment for services from the District
since February 2008, and continues to demand payments for its services. The District
has refused to pay ECO its legitimate fees for services rendered; consequently the
District has materially breached the contract. This material breach entitles ECO to
terminate the contract immediately since it has repeatedly demanded payment in
writing, satisfying all notice requirements. The District has not complied with such
demands in a timely or acceptable manner.
ECO is willing to enter into a Time and Materials Contract to continue
performance of duties needed by the District until such time as the District can make
other plans. Alternatively, ECO will take the necessary actions to shut plant operations
down. Please advise of your desires immediately.
Sincerely,
z v
Thomas O'Neill
Vice President
Western Region
ECO Resources, Inc.,
i •
RECEIVED
ECO Resources, IncIN AUG 28 P 21 1 S
A So,nhn. ,t W Berl Company
CITY CLERK
SAN JUAN CAPISTRANO
August 27, 2008
VIA FACSIMILE AND U.S. MAIL
City of San Juan Capistrano
32400 Paseo Adelanto
San Juan Capistrano, CA 92675
Attention: Meg Monahan, City Clerk
Re: Response to City's Claim of Finished Water Production Shortfalls And
Potential Assessment of Liquidated Damages;City's Failure to Pay
Monthly Service Fee; Notice of Event of Default
Dear Madame Clerk:
It has come to the attention of ECO Resources, Inc. ("ECO") that the City
of San Juan Capistrano ("City") is contemplating the assertion of a liquidated damages
claim in the approximate amount of $2.8 Million against ECO for ECO's alleged failure
to meet the Water Delivery Guarantee provided for in the Services Contract for the
Design, Construction, Financing and Operation of the San Juan Desalter Project
("Contract"). The purpose of this letter is to reassert ECO's position, communicated to
the City in September 2006, that the insufficiency of the Wellfield supply of Raw Water
relieves ECO from its obligation to meet this Guarantee.
It is also the purpose of this letter to address the City's failure to pay ECO
the Contract's monthly service fee billings since March 2008. To the extent that
payments have been withheld as a result of the City's claim for Water Supply Guarantee
liquidated damages, that withholding constitutes a material breach and an Event of
Default pursuant to the terms of the Contract. ECO hereby gives formal notice of said
Event of Default and demands that past due monthly service fee payments be released to
ECO immediately.
ECO Resources, Inc. — Western Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (fax) • www.ecoresources.cvm
1250973.1
ECO Resources, Inc.
AS. aA,,e,, Warcr�Compv�y
Meg Monahan
City Clerk
August 27, 2008
Page 2
Factual Background
As the City is aware, the Contract contemplated that eight wells would be
drilled and operated to produce Raw Water sufficient to meet the City's Finished Water
demands. Unfortunately, due to conditions outside the control of ECO, hvo of the eight
wells were insufficient to produce Raw Water and therefore, only six wells are in
operation. As a result, the Project has never been able produce Raw Water at its planned
design capacity. This problem is compounded by the low groundwater levels in the San
Juan Basin which impacts the water quality, including causing excessive levels of iron
and manganese and changing the chemical profile of the iron and manganese such that it
is incompatible with the original system design. These problems have had a significant
adverse impact upon ECO's ability to deliver the Finished Water meeting the Contract's
Enhanced Standards in response to the City's water demands.
ECO Is Relieved From Water Delivery Guarantee
On September 15, 2006, ECO submitted formal notice to the City under the
Contract that there was an insufficiency in the Wellfield supply of Raw Water.
Specifically, ECO advised the City that under section 9.3 of the Contract, because of that
condition, ECO was relieved of its obligation to comply with the Contract's Water
Delivery Guarantee. ECO also advised the City that the insufficiency of Raw Water
constituted an Uncontrollable Circumstance under the terms of the Contract and ECO
was relieved of its obligation to meet the Water Delivery Guarantee on that alternative
basis. The City never responded to or took issue with that notice.
It has been understood by both the City and ECO that the resolution of this
problem would only be achieved through the installation of two additional wells, which
was first proposed by ECO during the construction of the project. The necessity of the
two additional wells to meet the Raw Water supply needs was acknowledged in the
Settlement Agreement, dated July 3, 2007. In this Agreement, the City acknowledged its
ECO Resources, [ne. — Western Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (fax) • www.ecoresources.com
1250973.1
ECO Resources, Inc.
A Sourhuxsr Warcr ♦ComFany
Meg Monahan
City Clerk
August 27, 2008
Page 3
intent to develop two additional wells at sites to be specified by the City. Once the
location of these sites is determined, the City is required to notify ECO of the City's
decision to proceed forward with the design and construction of these new wells. In
order to enable the construction of the new wells to occur, the City is also required,
pursuant to the terms of the Settlement Agreement, to issue a Change Order authorizing
payment to ECO for this extra work. None of these events has occurred. Even though the
Settlement Agreement was signed more than a year ago, the City has yet to make a final
decision on the location of the two wells, and no written notice has been issued to ECO
enabling it to proceed with the design and construction of those two new wells. Since the
City has not authorized the design and construction of these wells, the insufficient Raw
Water supply condition continues to exist, relieving ECO from the obligation of meeting
the Water Delivery Guarantee.
ECO's Mitigation Efforts
ECO has taken steps to mitigate these problems, including the recent
replacement of the existing membranes, the conversion of the sand filter to a green sand
filter, and adding chlorination to treat the manganese before the Raw Water passes
through the R/O membranes. However, because of the low groundwater levels, which
have been exacerbated by the extreme drought conditions that exist in southern
California, the only way to resolve the insufficient Raw Water supply problem to allow
ECO to meet the Water Delivery Guarantee is to install and produce Raw Water from the
planned additional two wells. Pursuant to the Settlement Agreement, before those wells
can be installed the City must 1) determine the locations for the new wells, 2) provide
ECO with written notice that it intends to proceed with the installation of the additional
wells, and 3) provide funding for the installation and development of the new wells.
Again, the City has failed to take any of these steps.
City's Failure to Pay Service Fee Constitutes an "Event of Default"
Under Section 12.7(A) of the Contract, the District is required to pay the
Service Fee to ECO in monthly installments. Section 12.7(B) provides that the Service
ECO Resources, Inc. — Western Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (fax) • www.ecoresourees.com
1250973.1
ECO Resources, Inc.
A Somh„ese %,a,*Company
Meg Monahan
City Clerk
August 27, 2008
Page 4
Fee for each month shall be on account of the Operation Services rendered in the prior
month. The District is required to pay ECO's invoice within forty-five days of receipt
and the District is required to pay interest on all late payments.
The Contract does not authorize the District to withhold payments even in
the face of a dispute over the payment of liquidated damages.' Neither the payment
provisions nor the provisions relating to the assessment of liquidated damages authorize
the District to assert an offset against monies due ECO for its monthly service fee.
Instead, the Contract contemplates that at the end of a Contract Year, there will be an
accounting and any water shortages or other factors that impact the Service Fee paid to
ECO, including the imposition of contractual liquidated damages .2
The City has failed to pay ECO's monthly service fee billings since March
2008. Moreover, ECO has not received any notification that the City disputes any
portion of those bills. As of this date, the following billings are outstanding and overdue:
March 31, 2008 $ 104,004.55
April 30, 2008 $ 104,004.55
May 31, 2008 $ 104,004.55
June 30, 2008 $ 104,004.55
Total $ 416,018.20
1 The Contract specifically provides that the City is obligated to pay ECO its monthly
service fee even with the occurrence of Uncontrollable Circumstance that affects ECO's
3erformance. (See Contract, Section 14. 2.(A))
Although the City first identified alleged water shortfalls in late 2005, it has never
followed the contractual procedure to seek to offset its liquidated damages claims in the
final year end accounting that has taken place at the end of each of the last two contract
years.
ECO Resources, Inc. — Westem Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (fu) • www.ecoresources.com
1250973.1
ECO Resources, Inc.
A ,S.u,A,uea %,r ,*G,mp.,
Meg Monahan
City Clerk
August 27, 2008
Page 5
Section 13(A)(2) of the Contract provides that the City's failure to pay
amount requested to be paid to the Company within 60 days following the date for such
payment constitutes an Event of Default that would permit ECO to terminate the Contract
for cause. The City has failed to pay ECO's March 31, 2008 and April 30, 2008 invoices
and has failed to identify any objections to the charges included in those billings.
Payment was due and owing on ECO's March invoice or before May 15, 2008 and on its
April invoice on or before June 15, 2008. Sixty days have passed since those payments
were due.
Therefore, pursuant to Section 14.4 (A)(2) of the Contract, this letter
constitutes formal notice to the City that should ECO's March and April invoices not be
paid within thirty (30) days of this letter, ECO reserves its right to terminate this Contract
for cause and to seek all damages arising from said termination, including its lost profits
through the end of the term of the Contract. Additionally, ECO demands that the City
immediately pay its May and June service fee invoices, which are also overdue.
ECO has been committed to a long-term relationship with the City to meet
the San Juan Desalter Project goals. Notwithstanding the problems that ECO has
encountered, which are beyond its control, ECO has invested substantial monies to
improve the system, without requesting reimbursement from the City. The genesis of this
entire problem was the inability of ECO, through no fault of its own, to operate the eight
wells that were contemplated by the Project design. ECO gave notice to the City in
September 2006 — almost two years ago — that the lack of Raw Water relieved ECO of its
obligation to meet the Raw Water Guarantee. The City apparently agreed with ECO
because it never responded to nor disputed that position. Frankly, to be accused of water
shortfalls when all parties have understood the reason for the shortfalls and the steps that
are necessary to resolve them, is extremely disappointing. It is the only the City's failure
to approve the installation of these two wells that has created the current state of affairs.
ECO Resources, Inc, — Western Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (fax) • www.eooresources.com
1250973.1
ECO Resources, Inc.
A Sovrhneso Wam�4Cumpxnp
Meg Monahan
City Clerk
August 27, 2008
Page 6
ECO remains committed to the Desalter Project and trusts that the City will
remedy its breaches and reconsider its position regarding the imposition of liquidated
damages.
Very truly yours,
Tom O'Neill
ECO Resources, Inc.
cc: Dave Adams, City Manager
John O'Donnell
ECO Resources, Inc. — Westem Region • 2230 East Bidwell Street, Suite 200 • Folsom, CA 95630
(916) 984-1116 • (916) 984-1115 (far) • www.ecoasourees.com
1250973.1
Aag.21 2008 2A9PM
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SOUTHWEST WATER
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ECO Resources, Inc.
No.6112 ' 1/1
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Western Region
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2230 bast Bidwell St. Suite 200
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Folsom, CA 95630
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Tel: (916) 984-1116
8/27/2008
# PACES TO
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(including cover sheet)
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FACSIMILE COYER SHEET',
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TO:
Mcg Monahan- City
COMPANY NAME:
City ofW.
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Clerk
FAX #
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FROM:
Tan O'Neill
PHONE:
DATE:
8/27/2008
# PACES TO
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FOLLOW:
(including cover sheet)
,NeSsage:
Plcase find attached ECO Resources, htc's forma notification to the city orsar) Juan
Capistrano regarding:
Response to City's Claim of Finished Water Production Shorfalls And Potential
Assessment of Litmidated Daniats City's Failure to Pay Monlly Service Fee: Notice of
Event of Default.
Thanks,
Tom O'Neill
Aug 21. 2008 2 08PM SOUTHWEST WATER � No 6131
ECO Resources, Inc.
A 5.0,u, r�YSrna Cmy�u�y
August 27, 2008
VIA FACSIMILE AND U.S. MAIL
City of San Juan Capistrano
32400 Paseo Adelanto
San Juan Capistrano, CA 92675
Attention: Meg Monahan, City Clerk
Re: Response to City's Claim of Finished Water Production Shortfalls And
Potential Assessment of Liquidated Damages, City's Failure to Pay
Monthly Service Fee; Notice of Event of Default
Dear Madame Clerk:
It has come to the attention of ECO Resources, Inc. ("ECO") that the City
of San Juan Capistrano ("City") is contemplating the assertion of a liquidated damages
claim in the approximate amount of $2.8 Million against ECO for ECO's alleged failure
to meet the Water Delivery Guarantee provided for in the Services Contract for the
Design, Construction, Financing and Operation of the San Juan Desalter Project
("Contract"). The purpose of this letter is to reassert ECO's position, communicated to
the City in September 2006, that the insufficiency of the Wellfield supply of Raw Water
relieves ECO from its obligation to meet this Guarantee.
It is also the purpose of this letter to address the City's failure to pay ECO
the Contract's monthly service fee billings since Match 2008. To the extent that
payments have been withheld as a result of the City's claim for Water Supply Guarantee
liquidated damages, that withholding constitutes a material breach and an Event of
Default pursuant to the terms of the Contract. ECO hereby gives formal notice of said
Event of Default and demands that past due monthly service fee payments be released to
ECO immediately.
ECO Ruoucccs, Inc, - Westem Region • 2230 put Bidwell Srrcct, Sun 200 • Folsom, CA 95630
(916)9a4-1116-(916)984-1115(roc)•a .etoresourccsmm
Arg 27, 2068 2 08PM
Meg Monahan
City Clerk
August 27, 2008
Page 2
SOUTHWEST WATER
40
ECO Resources, Inc.
d Sornlmm� \Yhw 4 Cumluny
Factual Background
•
As the City is aware, the Contract contemplated that eight wells would be
drilled and operated to produce Raw Water sufficient to meet the City's Finished Water
demands. Unfortunately, due to conditions outside the control of ECO, two of the eight
wells were insufficient to produce Raw Water and therefore, only six wells are in
operation. As a result, the Projecthas never been able produce Raw Water at its planned
design capacity. This problem is compounded by the low groundwater levels in the San
Juan Basin which impacts the water quality, including causing excessive levels of iron
and manganese and changing the chemical profile of the iron and manganese such that it
is incompatible with the original system design. These problems have had a significant
adverse impact upon ECO's ability to deliver the Finished Water meeting the Contract's
Enhanced Standards in response to the City's water demands.
ECO Is Relieved From Water Delivery Guarantee
On September 15, 2006, ECO submitted formal notice to the City under the
Contract that there was an insufficiency in the Wellfield supply of Raw Water.
Specifically, ECO advised the City that under section 9.3 of the Contract, because of that
condition, ECO was relieved of its obligation to comply with the Contract's Water
Delivery Guarantee, ECO also advised the City that the insufficiency of Raw Water
constituted an Uncontrollable Circumstance under the terms of the Contract and ECO
was relieved of its obligation to meet the Water Delivery Guarantee on that alternative
basis. The City never responded to or took issue with that notice.
It has been understood by both the City and ECO that the resolution of this
problem would only be achieved through the installation of two additional wells, which
was first proposed by ECO during the construction of the project. The necessity of the
two additional wells to meet the Raw Water supply needs was acknowledged in the
Settlement Agreement, dated July 3, 2007. In this Agreement, the City acknowledged its
BCO Resources, Inc. —Western Region • 2230?mt Bidwell Suat, Suite 200 -Folsom, CA 9$630
(916) 9841116 • (916) 984-1115 (rexj - www.ccoresourus.wm
Aug 27 2008 2 06PM SOUTHWEST WATER (\'0.6',31 P. c
0
Glh
ECO Resources, Inc.
A SamAmn 1Nmr aC,'„mpuip
Meg Monahan
City Clerk
August 27, 2008
Page 3
intent to develop two additional wells at sites to be specified by the City. Once the
location of these sites is determined, the City is required to notify ECO of the City's
decision to proceed forward with the design and construction of these new wells. In
order to enable the construction of the new wells to occur, the City is also required,
pursuant to the terms of the Settlement Agreement, to issue a Change Order authorizing
payment to ECO for this extra work, None of these events has occurred. Even though the
Settlement Agreement was signed more than a year ago, the City has yet to make a final
decision on the location of the two wells, and no written notice has been issued to ECO
enabling it to proceed with the design and construction of those two new wells. Since the
City has not authorized the design and construction of these wells, the insufficient Raw
Water supply condition continues to exist, relieving ECO from the obligation of meeting
the Water Delivery Guarantee.
ECO's Mitigation Efforts
ECO has taken steps to mitigate these problems, including the recent
replacement of the existing membranes, the conversion of the sand filter to a green sand
filter, and adding chlorination to treat the manganese before the Raw Water passes
through the R/O membranes. However, because of the low groundwater levels, which
have been. exacerbated by the extreme drought conditions that exist in southern
California, the only way to resolve the insufficient Raw Water supply problem to allow
ECO to meet the Water Delivery Guarantee is to install and produce Raw Water from the
planned additional two wells, Pursuant to the Settlement Agreement, before those wells
can be installed the City must I) determine the locations for the new wells, 2) provide
ECO with written notice that it intends to proceed with the installation of the additional
wells, and 3) provide funding for the installation and development of the new wells.
Again, the City has failed to take any of these steps.
City's Failure to Pay Service Fee Constitutes an "Event of Default"
Under Section 12.7(A) of the Contract, the District is required to pay the
Service Fee to ECO in monthly installments. Section 12.7(B) provides that the Service
aco Raourca, Inc. - Westem Region • WO Eat Bidwell Street, Suite 200 • Polsom, CA 95670
(916) 9 84-111 6 • (916) 984-1115 (fax) • www. ecoresourccs.00m
Arg 21 2008 2:08PM SOL
6Si WATER
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ECO Resources Inc.
A Soo,hnu1 'sCe.'p'
Meg Monahan
City Clerk
August 27, 2008
Page 4
ko.6';1 P. 5
Fee for each month shall be on account.of the Operation Services rendered in the prior
month. The District is required to pay ECO's invoice within forty-five days of receipt
and the District is required to pay interest on all late payments.
The Contract does not authorize the District to withhold payments even in
the face of a dispute over the payment of liquidated damages.' Neither the payment
provisions nor the provisions relating to the assessment of liquidated damages authorize
the District to assert an offset against monies due ECO for its monthly service fee.
Instead, the Contract contemplates that at the end of a Contract Year, there will be an
accounting and any water shortages or other factors that impact the Service Fee paid to
ECO, including the imposition of contractual liquidated damages?
The City has failed to pay ECO's monthly service fee billings since March
2008, Moreover, ECO has not received any notification that the City disputes any
portion of those bills, As of this date, the following billings are outstanding and overdue:
March 31, 2008 $ 104,004.55
April 30, 2008 $ 104,004.55
May 31, 2008 $ 104,004.55
June 30, 2008 $ 104,004.55
Total $ 416,018.20
1 The Contract specifically provides that the City is obligated to pay ECO its monthly
service fee even with the occurrence of Uncontrollable Circumstance that affects ECO's
�3erformance. (See•Contract, Section 14.2.(A))
Although the City first identified alleged water shortfalls in late 2005, it has never
followed the contractual procedure to seek to offset its liquidated damages claims in the
final year end accounting that has taken place at the end of each of the last two contract
years.
ECO Resourw, Inc, - Wolem Region • 2230 Eau Didwcll Strcel, Sane 200 • Polsom, CA 95630
to 1610941116 • 14161094.1115 M.I • wwwcM mwces tom
Aug. 21
2008 2 08FM SOU .� T WATER
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ECO Resources, Inc.
A SnnJn•<n tNw •CoM,.,,
Meg Monahan
City Clerk
August 27, 2008
Page 5
0
No. 6'?1 P. 6
Section 13(A)(2) of the Contract provides that the City's failure to pay
amount requested to be paid to the Company within 60 days following the date for such
payment constitutes an Event of Default that would permit ECO to terminate the Contract
for cause. The City has failed to pay ECO's March 31, 2008 and April 30, 2008 invoices
and has failed to identify any objections to the charges included in those billings.
Payment was due and owing on ECO's March invoice or before May 15, 2008 and on its
April invoice on or before June 15, 2008. Sixty days have passed since those payments
were due.
Therefore, pursuant to Section 14.4 (A)(2) of the Contract, this letter
constitutes formal notice to the City that should ECO's March and April invoices not be
paid within thirty (30) days of this letter, ECO reserves its right to terminate this Contract
for cause and to seek all damages arising from said termination, including its lost profits
through the end of the tern of the Contract. Additionally, ECO demands that the City
immediately pay its May and June service fee invoices, which are also overdue.
ECO has been committed to a long-term relationship with the City to meet
the San Juan Desalter Project goals. Notwithstanding the problems that ECO has
encountered, which are beyond its control, ECO has invested substantial monies to
improve the system, without requesting reimbursement from the City. The genesis of this
entire problem was the inability of ECO, through no fault of its own, to operate the eight
wells that were contemplated by the Project design. ECO gave notice to the City in
September 2006 — almost two years ago — that the lack of Raw Water relieved ECO of its
obligation to meet the Raw Water Guarantee. The City apparently agreed with ECO
because it never responded to nor disputed that position. Frankly, to be accused of water
shortfalls when all parties have understood the reason for the shortfalls and the steps that
are necessary to resolve them, is extremely disappointing. It is the only the City's failure
to approve the installation of these two wells that has created the current state of affairs.
ECO Resources, Inc. — West= Region • 2230 Eut Bidwell Street, Sudc 200 • Polson,, CA 95630
AuA.21. 2008 2A9FM SCL WWEST WATER
49
ECO Resources� Inc.
ASnntLuvrl rtr 4Cungwnp
Meg Monahan
City Clerk
August 27, 2008
Page 6
0
No 61i' P. 1
ECO remains corrunitted to the Desalter Project and trusts that the City will
remedy its breaches and reconsider its position regarding the imposition of liquidated
damages.
Very truly yours,
Tom O'Neill
ECO Resources, Inc.
cc: Dave Adams, City Manager
John O'Donnell
BCO Resources, Inc. — Walem Rcgion • 2230 But Bidwcll Street, Suite 200 • Polsom. CA 95630