Global Octanes Texas, L.P. v. BP Exploration & Oil Inc. , 154 F.3d 518 ( 1998 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-20588
GLOBAL OCTANES TEXAS, L P
Plaintiff - Appellant-Cross-Appellee,
versus
BP EXPLORATION & OIL INC,
formerly known as BP Oil Company
Defendant - Appellee-Cross-Appellant
Appeals from the United States District Court
for the Southern District of Texas
September 14, 1998
Before REYNALDO G. GARZA, HIGGINBOTHAM, and EMILIO M. GARZA,
Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This is a suit on a contract for the sale of a gasoline
additive. The district court granted summary judgment for the
seller, concluding that the buyer had no contractual right to
terminate and had breached the contract in doing so. It then
applied a provision of the contract to limit damages to $500,000.
BP Exploration, the purchaser, urges that the district court erred
in rejecting its right to terminate the contract. Global Octanes,
the seller, attacks the limitation of damages and defends the
finding that BP breached the contract. We affirm.
I
Environmental regulation created a market for methyl tertiary
butyl ether, MTBE, an additive designed to raise octane levels and
oxygenate gasoline. On August 26, 1991, Global and BP executed a
Product Supply Agreement obligating Global to sell and BP to buy
minimum quantities for a five-year period. The contract has a take
or pay feature in that BP was obligated to pay for the minimum
amounts whether purchased or not. The prices were set by a
formulae and did not fluctuate with the market. The market price
dropped creating a difference between the market price and the
contract prices of approximately $1,000,000 for each month of
purchases. Global declined BP’s request to negotiate new price
terms. The market prices continued at this lower level and over
the three-year period the contract was in force, the difference
between the contract price and the market price summed to over
$40,000,000, or roughly 40,000 each day. BP, nonetheless, did not
invoke the damage cap of $500,000 it would later rely upon.
Rather, on September 5, 1995, after EPA issued rules in January and
July 1995, BP gave Global written notice of termination. It relied
upon paragraph 14(b) of the contract, a provision treating changes
in law. This suit followed.
II
BP’s claimed right to terminate the five-year contract turns
on the applicability of the agreement regarding changes in law
found in paragraph 14(b) which provides:
14(b) Changes in Law. If, during the
term of this agreement the Clean Air Act, PL
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101-549, is amended and becomes effective,
or any final, non-appealable rules or
regulations promulgated thereunder become
effective, so as to no longer require the
use of reformulated motor gasoline (as
defined in the Clean Air Act) in an area or
areas of the United States wherein the Buyer
markets motor gasolines, thereby eliminating
the Buyer’s requirements for MTBE Product as
an oxygenate (the “Amendment”), then either
party hereto may, upon thirty (30) days
notice to the other, convene a meeting to
discuss an equitable resolution of any
alleged hardship resulting to such party as
a result of the Amendment; provided,
however, that if such meeting does not lead
to a resolution within sixty (60) days from
the date of commencement, either party may
terminate this Agreement upon sixty (60)
days’ written notice to the other party.
The district court in its carefully crafted order detailed
three required triggers to a right to terminate the agreement under
its change in law provision. First, changes in the Clean Air Act
or its implementing regulations. Second, reformulated motor
gasoline must no longer be required “in an area or areas of the
United States wherein the Buyer markets motor gasolines.” Third,
the EPA action must eliminate the buyer’s requirements for MTBE
Product as an oxygenate”. The first two were ultimately not at
issue and we turn to the third. It had two aspects.
The first is a contention that product as used in the change
in law provision means only product from the Deer Park facility.
The changes in EPA rules eliminated the need for MTBE in Western
Pennsylvania, an area where BP sold motor gasolines, and which had
required 80,000 barrels per month of MTBE. BP points to the
language, “so as to no longer require the use [RFG]...in an area or
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areas of the United States wherein [BP] markets motor gasolines,
thereby eliminating [BP’s] requirements for MTBE Product as an
oxygenate....” The argument continues that the EPA rules thus
ended the use of product in an area in which BP marketed its
gasoline; that this ended a need for MTBE in an amount in excess of
the 75,000 barrels per month required to be purchased by the
agreement. The argument, more nuanced before the district court,
has narrowed to the present contention that the EPA rules
eliminated BP’s requirements for MTBE Product manufactured at
Global’s Deer Park facility. As the district court pointed out,
this reading of product is in tension with other provisions of the
agreement, such as the provision for “suspension of deliveries”
dealing with replacement product, a term not limited to the Deer
Park facility.
We need not travel the semantical paths of this aspect, for
BP’s contention suffers a more fundamental flaw in its second
aspect. As the district court noted, without a qualifying phrase
such as “in such area or areas” following the elimination of
buyer’s requirements language in the agreement, the provision means
that a change in law does not trigger a right to terminate unless
BP’s need for MTBE as an oxygenate is eliminated entirely, not just
in an area in an amount in excess of its required purchase under
the agreement. BP’s need for MTBE as an oxygenate was reduced, but
it was never eliminated.
BP explains that it intended that the provision allow it to
terminate the contract when a change in law caused it to need less
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MTBE as an oxygenate than it was obligated to purchase from Global.
BP had a contract with ARCO for MTBE that lacked a change in law
provision. It insisted upon the change in law provision in the
agreement with Global, anticipating that a loss of a market area
might eliminate its need to purchase MTBE as an oxygenate from a
source other than ARCO. This is a rational explanation of what BP
wanted in the agreement. The difficulty is that the contract,
plainly and unambiguously describes an elimination of need for
product, not the elimination of need for a second source of supply.
III
Paragraph 11 of the agreement provides in relevant part:
In no event shall the liability of either party under
this Agreement (other than the obligation to pay for
delivered Product or provide timely credit for
replacement Product, each of which shall be
unconditional) exceed $500,000.
The district court enforced this provision as a cap on damages
for breach of the agreement. Since any damages indisputably
exceeded the cap, the district court entered summary judgement for
Global in the amount of $500,000, together with prejudgment
interest.
Global first urges that the district court failed to give it
adequate opportunity to confront BP’s limitation of remedy defense,
entering summary judgment, sua sponte. Second, paragraph 11 fails
under Tex. Bus. & Com. Code, § 2.719, because it is not an
exclusive remedy, alternatively, it fails of its essential purpose.
The argument continues that it is not exclusive because its text
provides no cap on damages for buyer’s non-payment and BP’s actual
5
performance of the agreement makes plain that Paragraph 11 was not
intended to limit damages for wrongful termination of the
agreement. Third, the damages specified are disproportionately and
unreasonably low, this is a liquidated damages clause, and fails
under § 2.718.
BP replies that the sua sponte summary judgment was
appropriate, the limitation on damages enforceable, the exclusive
remedy analysis inapplicable, the purpose did not fail, no penalty
analysis is appropriate and there was no error in not considering
the BP’s asserted “performance” of the agreement.
1
We turn first to Global’s contention that the district court
failed to give it a fair opportunity to address the cap of damages,
specifically, notice of its intent to grant summary judgment, sua
sponte. Global filed its “final” motion asserting that it was
dispositive on all issues. It had filed two separate responses
regarding BP’s limitation of damages defense and evidence in
support of its responses. These filings included oral depositions
in which witnesses from BP and Global testified about the cap. We
are persuaded from our review of the record that Global had a full
and fair opportunity to develop the record and marshal its
arguments. See British Caledonia Airways, Ltd. v. First State Bank,
819 F.2d 593 (5th Cir. 1987).
2
Global contends that because the obligation to pay for
“delivered Product “ is unconditional in the parenthetical in
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paragraph 11, the district court erred in limiting Global’s
recovery to $500,000 for its breach. Under Texas law, “contracting
parties can limit their liability in damages to a specified
amount,” see Vallance & Co. v. Anda, 595 S.W.2d 587, 590 (Tex. Civ.
App.--San Antonio 1980, no writ) (non-U.C.C. case regarding
services contract); Tex. Bus. & Comm. Code § 2.719(a)(1) (West
1994), and “it is immaterial whether a limitation of liability is
a reasonable estimate of probable damages resulting from a breach.”
Vallance, 595 S.W.2d at 590. Paragraph 11, by its very terms,
limits the damages that may be collected by both parties to
$500,000. The parenthetical in paragraph 11 makes clear that BP
must still pay for MTBE that is delivered to it by Global and the
words “other than” in the parenthetical indicate that payment for
delivered product is not to be included in a computation of
damages.
Global proposes a definition for “delivered Product” that
includes MTBE delivered by Global to third parties on the spot
market. As we read it, however, the term “delivered Product”
refers to MTBE delivered to BP. For example, paragraph 9 of the
Agreement, which governs the risk of loss for MTBE delivered to BP,
states that “the Product shall be delivered FOB the Terminal.”
Global's stretch of the meaning of “delivered Product” to fall
within the exception in the parenthetical in paragraph 11 is
unconvincing.
Paragraph 4(c) of the Agreement states, in pertinent part:
It is acknowledged and agreed that, except as otherwise
expressly provided in this Agreement, the only
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obligations of the Buyer are to accept delivery of, and
pay for, delivered Product.
Under this paragraph, BP has two obligations, to accept delivery of
MTBE and to pay for delivered Product. The parenthetical in
paragraph 11 refers only to BP's obligation to pay for delivered
Product. Paragraph 4(c) and 11 are not inconsistent with reading
“delivered Product” to refer to MTBE that is delivered to BP.
Paragraph 4(c) does not help Global’s position.
Nor are paragraphs 4(b)(I) and 4(b)(ii) inconsistent with
reading paragraph 11 to cap damages at $500,000. Paragraph
4(b)(I)&(ii) provide formulae for computing BP’s or Global’s
damages for a breach. We are not persuaded that reading paragraph
11 to limit the overall damage recovery to $500,000 renders the
damage formulae in paragraph 4(b) superfluous.
3
Global urges that paragraph 11 is not an exclusive remedy
under the Agreement, pointing to paragraph 14(c) which provides:
(c) NO REMEDY EXCLUSIVE. No remedy herein conferred upon
or reserved to [BP] or to [Global] under this Agreement
is intended to be exclusive of any other available remedy
or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy
given under this Agreement or now or hereafter existing
at law or in equity or by statute.
Global notes that U.C.C. § 2.719(a) creates a presumption that
clauses prescribing remedies are cumulative rather than exclusive.
See Tex. Bus. & Comm. Code § 2.719(a) (West 1994). This argument,
however, conflates “remedies” and “damages.” Paragraph 11 limits
the amount of damages and does not restrict any other remedy, such
as injunctive relief, that Global may be entitled to under the
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Agreement.1 U.C.C. § 2.719(a)(2) provides that any remedy is not
meant to be exclusive, unless expressly agreed upon by the parties,
and this section does not refer to any limitation on the amount of
damages. Indeed, § 2.719(a)(1) explicitly provides that an
agreement “may limit or alter the measure of damages available
under this chapter . . .” See Tex. Bus. & Comm. Code § 2.719(a)(1)
(West 1994) (emphasis added).
4
Global contends that the district court abused its discretion
in excluding testimony in oral depositions that BP officials had
not read paragraph 11 to limit damages for termination; that this
testimony is “course of performance” evidence that should have been
considered by the court.
In ignoring this testimony, the district court found that the
Agreement was unambiguous and reflected the objective intent of the
parties. In the district court, Global urged that the testimony
demonstrated the subjective intentions of BP. On appeal it shifts,
recasting this testimony as “course of performance” evidence.
Assuming this testimony is “course of performance” evidence and
the shift in position aside, course of performance can only explain
or supplement terms of a contract. See Tex. Bus. & Comm. Code §§
2.202 & 2.208(b) (West 1994). It may not be used to contradict the
express terms of an unambiguous contract. Reading the Agreement as
a whole, paragraph 11 is unambiguous. The district court did not
1
Global has only sought a damage award of $ 28 million and
no other relief.
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abuse its discretion in not relying on the deposition testimony of
BP employees.
5
Global argues for the first time on appeal that even if
paragraph 11 of the contract is an exclusive remedy, it “fail[s] of
its essential purpose” under U.C.C. § 2.719(b).
Where circumstances cause an exclusive or limited remedy
to fail of its essential purpose, remedy may be had as
provided in this title. Sec. 2.719(b).
Paragraph 11 does not limit the remedies that Global can seek under
the Agreement. It limits the amount of damages that either party
can collect. Under Texas law, “contracting parties can limit their
liability in damages to a specified amount” and “it is immaterial
whether a limitation of liability is a reasonable estimate of
probable damages resulting from a breach.” Vallance, 595 S.W.2d at
590. Moreover, in Texas, an agreement “may limit or alter the
measure of damages available . . .” See Tex. Bus. & Comm. Code §
2.719(a)(1) (West 1994).
6
Global urges that in any event the specified damages are
disproportionately and unreasonably low under U.C.C. § 2.718.
U.C.C. § 2.718(a) provides:
Damages for breach by either party may be liquidated in
the agreement but only at an amount which is reasonable
in the light of the anticipated or actual harm caused by
the breach, the difficulties of proof of loss, and the
inconvenience or non-feasibility of otherwise obtaining
an adequate remedy. A term fixing unreasonably large
liquidated damages is void as a penalty.
10
This section, by its terms refers to a liquidated damages provision
and not to a limitation on the amount of damages. As the Eighth
Circuit explained, “[a] liquidated damages provision sets a fixed
amount that can be recovered upon breach without proof of any
damage. A limitation of damages provision limits the damages that
may be recovered, but proof of damages is still required in order
to recover to the limit.” Tharalson v. Pfizer Genetics, Inc., 728
F.2d 1108, 1111 (8th Cir. 1984) (citing Western Union Tel. Co. v.
Nester, 309 U.S. 582, 587-88 (1940)). Paragraph 11 is a limitation
on damages and not a liquidated damages provision. It is not
governed by U.C.C. § 2.718(a). See id. (concluding that the
reasonableness test in U.C.C. § 2.718(a) is inapplicable to a
limitation of damages provision).
AFFIRMED.
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