Silverliner Playbook: What SEPTA’s contract with Hyundai Rotem means for fixing the regional rail mess

The defect that has sidelined a third of SEPTA’s regional rail fleet will cost someone a lot of money.

Just how that bill gets split up, though, remains to be seen.

Under SEPTA’s $274 million contract with manufacturer Hyundai Rotem, a defect affecting more than five percent of the 120 Silverliner rail cars over a 12-month period constitutes a “fleet defect.” On Friday, SEPTA discovered cracks in equalizer bars on 115 cars.

The supply contract’s fleet defect provisions seem to greatly expand the scope of Hyundai Rotem’s warranty, and shift contractual risk for large service disruptions to the manufacturer.

In addition to repairing or replacing the faulty parts, Hyundai Rotem also faces liquidated damages for such fleet defects set at $200 per day, per car. Those damages will only begin to accrue 14 days after SEPTA discovered the fleet defect.

SEPTA has had trouble with the Silverliner Vs ever since it awarded Hyundai Rotem the contract in 2006.  Final delivery of the order came in 2013, three years late. Under a similar, $200 per day per car liquidated damages provision in the contract, Hyundai-Rotem was liable for around 65,000 late days, totaling $13 million. That money was used to overhaul 33 regional rail push-pull cars at the South Philadelphia facility.

Should SEPTA pursue liquidated damages against Hyundai Rotem, it would likely be unable to recoup any other costs incurred during the Regional Rail service disruption. That means that the lost fare revenues, increased bus operation expenses, costs of leasing replacement railcars from other agencies, the expenses of renting additional repair facilities, and other associated costs would fall to SEPTA. If those exceed the $200 per day per car amount, SEPTA’s budget would have to absorb the blow.

That all assumes that Hyundai Rotem will agree that the contract’s warranty covers these equalizers’ cracks. Despite how broadly written the warranty is, there are enough contractual ambiguities and factual uncertainties to provide a number of outs for the manufacturer, should the service disruption result in litigation.

The warranty comes with exceptions, and does not “cover defects or failures due to accident, vandalism, neglect and improper or lack of proper maintenance or storage by SEPTA.”

It’s still unclear whether the cracks were caused by poor design, shoddy workmanship, or some combination thereof. But if this is a design flaw, things could get messier for SEPTA. Hyundai Rotem could argue that SEPTA was responsible for this particular design flaw by specifying the part supplier, and thus should not be held to the warranty.

SEPTA explicitly required in its technical specifications that the equalizers be “plate steel as provided by the Buckeye Steel Castings Company, or steel forgings as provided by the Canton Drop Forge Company.” Hyundai Rotem went to Buckeye Steel, which changed its name to Columbus Steel Castings, and then just Columbus Castings after being purchased by a private equity firm in 2008. SEPTA also specified the type of steel to be used: “cast steel to AAR Specification M-201, Grade ‘B’.”

Columbus Castings were the major supplier of the Silverliver V trucks, the part holding the wheels and axles and connecting them to the passenger carbodies.

The Silverliner V specifications were written by LTK Engineering Services; if the specifications were to blame, they might also face liability. SEPTA also paid STV, Inc. $8.1 million to shepherd construction and engineering of the railcars. If faulty welding or a failure to follow construction specifications caused the cracks, then STV could also find itself pulled into the legal imbroglio.

Design is an unlikely culprit, says Jonathan Klein, a Philadelphia-based consultant with decades of railroad fleet management experience, including work with Amtrak and SEPTA. While Klein said that the Canton Drop Forge bars were superior—and more expensive—the plate steel beams built by Columbus Castings have been widely used in a number of different models of railcars for years.

According to Klein, if the equalizer beams were built to specification, things should have been fine. “This is like designing a brick,” he said. Assuming LTK and SEPTA did not authorize a design change from the standard plate steel equalizers, the problem would more likely lie with the manufacturing of the equalizer bar itself or when the plates were welded into place. That would put responsibility squarely on Rotem for either failing to supervise its suppliers by ensuring they did not cut corners, or botching the assembly itself by improperly welding the parts together.

During the Silverliner V’s frequently delayed construction, problems with workmanship, including welding quality, were widely reported.

SEPTA won’t be rushing to the courthouse anytime soon. While SEPTA officials have privately complained about Hyundai Rotem’s sluggish response to this crisis, SEPTA publically maintains that Hyundai Rotem has been cooperative and supportive. Under the warranty, SEPTA has the option of having Hyundai Rotem perform the repair and replacement work, or to perform that work itself or via another contractor, and then charge Hyundai. For SEPTA, having Hyundai do the work itself would be the easiest solution; so maintaining a relatively non-hostile relationship is critical. Under Pennsylvania’s statutes of limitations, SEPTA has up to four years to file a lawsuit related to this contract.

To further complicate matters, the private equity firm that owns the Columbus Castings, Constellation Enterprises, LLC, entered Chapter 11 bankruptcy in May, meaning it is restructuring its debts while maintaining operations. Constellation purchased Columbus Casting in 2008, when it was still called Buckeye Steel Castings Company.

According to the Columbus Dispatch, financial problems at Columbus Castings contributed to Constellation Enterprises’ decision to seek financial restructuring. As of May, just 23 workers remain at the foundry, which once employed 800. A call to Columbus Castings went unanswered, and the company’s voicemail mailbox was full. A spokeswoman for Constellation returned PlanPhilly’s call, but was unable to provide comment for this story on Wednesday.

When Rotem first bid for the Silverliner V contracts in 2004, it received the lowest technical rating of the four bids from SEPTA’s engineering staff. Then operating under the name United Transit Systems (UTS), Hyundai Rotem was a recently formed conglomerate with no experience building rail cars in America, meaning it had limited familiarity with U.S. federal railroad regulations and U.S. supply chains. The UTS 2004 bid came in the lowest, and the SEPTA Board awarded it to the green company. Another bidder with a slightly higher bid, Kawasaki, sued, arguing that the lack of American experience disqualified UTS under the terms of SEPTA’s request for proposals.

Ultimately, SEPTA called a bid do-over. In the subsequent 2006 round, Kawasaki’s bid jumped $46 million, whereas UTS’s only went up by $8 million, and its technical rating score improved, leading SEPTA to again pick the newer company.

Klein lambasted that decision, saying that SEPTA’s then Board of Directors traded safety and reliability for unrealistic savings.

“You can’t blame SEPTA’s executive management for their predecessor’s choosing a clearly inexperienced prime contractor,” said Klein. “That was a political decision. It is not constructive nor will it help the riders to blame people for their predecessor’s remarkable shortsightedness.”

Representatives for Hyundai Rotem and its largest shareholder, Hyundai Motor Group, have not responded to PlanPhilly’s multiple requests for comment.  

Given the multiple parties, factual uncertainties, and possibility for competing contractual interpretations, any potential lawsuit would likely turn into a messy and elongated affair.

Veteran railway attorney Edward Toole said that both sides will be motivated to resolve all of this as quickly as possible, and that a lawsuit in the near future won’t help that happen. SEPTA is likely more interested in getting its fleet back online and relieving passenger headaches, whereas Hyundai Rotem probably wants to mend its bruised reputation so it can continue to compete for contracts, including one for bi-level cars with SEPTA.

“You have an entirely new dynamic that’s interjected into the problem. And that dynamic is a question of damages,” said Toole. “That’s not necessarily in the best interest of the manufacturer and it’s certainly not in the best interest of the buyer like SEPTA.”

Aaron Moselle contributed reporting to this article.

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