BRC Rubber & Plastics Inc v. Continental Carbon Company
Filing
110
OPINION AND ORDER: Pla is entitled to damages from Dft in the amount of $982,643.11. Clerk DIRECTED to enter judgment in favor of Pla BRC Rubber & Plastics Inc and against Dft Continental Carbon Company in the amount of $982,643.11. Signed by Magistrate Judge Roger B Cosbey on 2/11/2014. (lns)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
BRC RUBBER & PLASTICS, INC.,
Plaintiff,
v.
CONTINENTAL CARBON COMPANY,
Defendant,
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)
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)
CAUSE NO. 1:11-cv-190
OPINION AND ORDER
I. INTRODUCTION
These Findings of Fact and Conclusions of Law follow a two-day bench trial held on
September 8-9, 2013, on the amount of damages due Plaintiff BRC Rubber & Plastics, Inc.
(“BRC”), as a result of Defendant Continental Carbon Company’s (“Continental”) breach and
repudiation of a Supply Agreement between the parties.1 (Docket # 93-94.) Under the
Agreement, Continental agreed to supply all of BRC’s requirements for carbon black from
January 1, 2010, to December 31, 2014.2
Following the preparation of a transcript,3 counsel submitted post-trial briefs and
responses (Docket # 97, 102-03, 105-07), as well as proposed findings of fact and conclusions
1
Diversity jurisdiction exists under 28 U.S.C. § 1332(a). Jurisdiction of the undersigned Magistrate Judge
is based on 28 U.S.C. § 636(c), all parties consenting. (Docket # 36.)
2
On June 27, 2012, the Court concluded as a matter of law that the Supply Agreement is a requirements
contract and not, as Continental contended, an open offer for orders or an agreement to sell a specific quantity of
carbon black. (Docket # 46.) A year later, on June 5, 2013, the Court granted BRC’s motion for summary judgment,
and concluded that Continental materially breached and repudiated the Agreement and, as a result, BRC was entitled
to immediately terminate the Agreement in June 2011 and seek damages. (Docket # 80.)
3
Reference to the trial transcript is made as “(Tr. __)”, trial exhibits as “(Ex. __)”, and deposition excerpts
as “(__ Dep. __)”.
of law (Docket # 98, 101).4 After examining the entire record, considering the arguments of
counsel, and determining the credibility of the witnesses, the Court makes the following
Findings of Fact and Conclusions of Law in accordance with Federal Rule of Civil Procedure
52(a) based upon a preponderance of the evidence.
II. FINDINGS OF FACT5
A. Relationship of the Parties
BRC is a manufacturer of rubber products for use in the automotive industry. (Tr. 14950.) Continental is one of only five suppliers in the United States of furnace grade carbon
black, a raw material filler used in rubber products. (Tr. 18-19, 150; Nunley Dep. 4.)
Continental had supplied BRC’s requirements of carbon black for at least twenty years prior to
the parties entering into the Supply Agreement. (Tr. 182; Nunley Dep. 3.) The amount of
carbon black in million pounds that BRC purchased from Continental from 2003 to 2009 was:
2.01 in 2003; 2.13 in 2004; 2.12 in 2005; 1.89 in 2006; 2.30 in 2007; 2.43 in 2008; and 2.02 in
2009. (Ex. 79; Tr. 93.) These purchases make BRC a “small carbon black user” in the market
(Tr. 189), as Continental produces approximately 500 million pounds annually (Tr. 227, 251).
B. The Parties Enter Into the Supply Agreement as of January 1, 2010
In 2009, Continental’s president asked his sales team to negotiate as many long-term
4
At the trial, Continental objected to the testimony of Michael Cornwell, BRC’s Vice President of
Materials, concerning BRC’s “future damages”–that is, its damages from July 1, 2013, through December 31, 2014.
(Tr. 007-13.) The Court overruled Continental’s objection, but granted it leave to file a post-trial motion to strike
(Tr. 014), which it did on November 1, 2013 (Docket # 99). The Court in a separate Opinion and Order has now
GRANTED Continental’s motion to strike, excluding Cornwell’s testimony concerning future damages.
Continental did not, however, seek to exclude Cornwell’s testimony of BRC’s “actual damages”–that is, its damages
through June 30, 2013.
5
Any Finding of Fact deemed to be a Conclusion of Law is hereby incorporated into Section III, and any
Conclusion of Law in Section III deemed to be a Finding of Fact is hereby incorporated into this Section.
2
contracts with its customers as possible in order to get long-term volume commitments.
(Nunley Dep. 2.) Accordingly, Thomas Nunley, a salesperson for Continental who had
handled BRC’s account since 1997, negotiated the terms of the Supply Agreement with Mike
Cornwell, BRC’s Vice President of Materials. (Tr. 21-22; Nunley Dep. 1, 5-7, 11; Exs. 1-4.)
Cornwell told Nunley at the time that BRC planned to grow “both organically and through
acquisitions,” and thus, BRC’s volumes would begin to “ramp up from the doldrums [it] had
seen in 2008.” (Tr. 83.)
BRC was negotiating a similar agreement with Sid Richardson Carbon Company at the
time, whereby Sid Richardson would become BRC’s exclusive supplier. (Tr. 22-24, Ex. 2.)
Cornwell credibly testified that although Sid Richardson’s base prices were lower than
Continental’s, BRC ultimately chose to enter into the Supply Agreement with Continental
because it “was a better value overall.” (Tr. 27.)
On January 1, 2010, BRC and Continental executed the Supply Agreement obligating
Continental to supply, and BRC to purchase, all of BRC’s requirements of three grades of
carbon black (referred to in the industry as N339, N550, and N762) through December 31,
2014. (Exs. 1, 5; Docket # 46.) The Agreement estimated BRC’s annual requirements at 1.8
million pounds and provided a pricing formula of firm, baseline prices per pound for each of
the three grades of carbon black with monthly feedstock oil and natural gas adjustments. (Ex.
5; Docket # 46 at 14.) It also included a rebate/penalty program. (Ex. 5.)
The rebate/penalty program provided that as long as BRC purchased between 1.5 and
2.1 million pounds of carbon black a year, the price remained the same. (Ex. 5.) But if it
purchased more than 2.1 million pounds a year, it would receive a $.005 rebate per pound, and
3
if it purchased less than 1.5 million, it would pay an additional $.005 per pound penalty. (Ex.
5.) The rebate/penalty increased to $.01 if BRC purchased more than 2.2 million pounds in a
year or less than 1.4 million pounds. (Ex. 5.) The rebate/penalty program further provided:
“Should the normal annual volume for BRC shift significantly BRC and Continental agree to
establish new upper and lower limits.” (Ex. 5.)
C. After Continental Breaches and Repudiates the Supply Agreement,
BRC Terminates It on June 2, 2011, and Files This Lawsuit
In 2010, during the first year of the Supply Agreement, Continental projected that it
would supply BRC with 1.95 million pounds of carbon black, but it actually supplied 2.612
million pounds. (Tr. 92; Ex. 79.) In 2011, Continental designated 2.734 million pounds to
BRC in its annual operating plan (Ex. 79); likewise, in May 2011, BRC estimated its 2011
requirements of carbon black at approximately 2.7 million pounds. (Tr. 94-95, 134; Exs. 9, 13.)
Continental failed to ship all of BRC’s requested May and June 2011 orders, and in
doing so, breached the terms of the Supply Agreement.6 (Docket # 80 at 18.) Continental then
repudiated the terms of the Supply Agreement by failing to provide adequate assurance of
performance to BRC (Docket # 80 at 22), and BRC terminated the Supply Agreement on June
2, 2011, and filed the instant lawsuit (Ex. 17; Docket # 1).7
6
To substitute for this missed shipment, BRC purchased 130,300 pounds of carbon black from Sid
Richardson, paying $20,287.71 more than it would have paid under the Supply Agreement. (Tr. 42-43, 50; Exs. 11,
51, 72.) That is, it paid $.73 per pound to Sid Richardson, when it would have paid $.58 per pound under the Supply
Agreement. (Ex. 72.)
7
Tom Carroll, Continental’s Vice President and Chief Financial Officer, credibly testified, and without
dispute, that at the time BRC terminated the Supply Agreement, the price per pound that BRC was paying to
Continental was $.0225 above the “Notch” market data price for N550; $.0326 above for N762; and $.0233 below
for N339. (Tr. 218-19, 223-24; Ex. 89.) The Notch report is the only industry standard available for carbon black
market pricing, tracking data on a monthly or quarterly basis from medium to large customers who buy carbon black
in bulk, meaning by rail or truck under annual contracts. (Tr. 228, 252-53, 261; Ex. 70.)
4
D. BRC Purchases Carbon Black From
Cabot for the Remainder of 2011
Cornwell, whose job involved purchasing BRC’s raw materials, credibly testified that
based upon first-hand knowledge the carbon black market was “tight” when BRC terminated
the Supply Agreement (Nunley Dep. 9-11; Tr. 229, 250), and thus, he knew it would be
difficult to obtain the product on the open market. (Tr. 44.) The only supplier who would
commit to supplying BRC with any substantial quantity of carbon black at the time was Cabot
Corporation. (Tr. 46-50.) BRC was able to negotiate an agreement with Cabot to supply
carbon black for the remainder of 2011, but Cabot refused to enter into a longer-term contract.
(Tr. 46-50.)
BRC purchased 810,000 pounds of carbon black from Cabot in 2011, paying
$116,066.56 over what it would have paid to Continental under the Supply Agreement, prior to
any rebate. (Exs. 27, 72.) The price per pound that BRC paid to Cabot ranged from $.70 to
$.73, while the price under the Supply Agreement prior to any rebate would have been $.56 to
$.57.8 (Ex. 72.) In total, BRC purchased 2,951,350 pounds of carbon black in 2011 from
Continental, Sid Richardson, and Cabot. (Exs. 27, 72.) The Court finds Cornwell’s largely
unchallenged testimony and the related spreadsheet he prepared (Ex. 72) about BRC’s
purchase of carbon black in 2011 to be credible and supported by the evidence.
E. BRC Solicits Bids for a Three-Year
Supply Agreement Beginning in 2012
In mid-2011, BRC solicited bids from all five domestic carbon black suppliers–Evonik,
Columbia, Cabot, Continental, and Sid Richardson–to enter into a new supply agreement
8
As stated earlier, Continental does not challenge the price that BRC paid Cabot in 2011 for substitute
carbon black.
5
beginning in 2012. (Tr. 54-57, 97, 134-35.) Charles Chaffee, BRC’s Chief Executive Officer
and someone with a global view of the industry, credibly testified that BRC had already bid
business in reliance on the five-year Supply Agreement, and thus, he wanted reasonable
assurance that BRC would have the carbon black necessary to meet those outstanding customer
contracts. (Tr. 189, 200.) Also, BRC told Cabot that BRC’s lawyers recommended a threeyear term for ease of computing damages for this lawsuit.9 (Ex. 28; Tr. 106-08.)
Evonik initially made an offer to BRC, but withdrew when it was informed its pricing
was higher than the other suppliers. (Tr. 57.) Columbia simply informed BRC that it could not
supply any carbon black. (Tr. 134-35.) Cabot offered to enter into a three-year agreement, but
only if it incorporated adjustable pricing on a quarterly basis. (Tr. 54-56.) BRC rejected
Cabot’s offer because it lacked pricing stability. (Tr. 54-56.)
BRC proposed contract terms to Continental that included a three-year term through
December 2014, the same base pricing as in the terminated Supply Agreement, and a “supply
cap” of 2.7 million pounds per year. (Ex. 87; Tr. 97.) BRC also asked Continental to
reimburse it for $10,000 in legal fees; $20,287 for the shipment it had purchased from Sid
Richardson in May or June 2011; and to pay Cabot up to $90,000 as a “break up fee.” (Ex. 87.)
Continental counter-offered to BRC with a sixteen-month term ending December 2012,
base pricing increased by $.03 for N550 and $.04 for N762, an annual maximum volume of 2.9
million pounds, and BRC’s release of its right to litigate Continental’s breach of the Supply
9
In a tight market, it is generally in a buyer’s best interest to seek a shorter-term agreement to avoid
locking in high market prices for a long term. (Tr. 250.)
6
Agreement.10 (Ex. 88; Tr. 58, 135-38, 146, 246, 249-50, 268.) Daryl Huntley, Continental’s
new sales manager at the time, told Cornwell that he had a significant amount of flexibility in
what he could offer in negotiating the agreement, and that Continental’s proposal would save
BRC well over a million dollars in the next three years compared to the other suppliers BRC
was considering.11 (Tr. 246-47.) But Cornwell declared that BRC was firm in its proposal. (Tr.
102-03, 246-47, 278-79.) By this time, both Cornwell and Chaffee understandably doubted
Continental’s trustworthiness and reliability, and feared that it would simply raise its prices
again–fears exacerbated by the termination of Nunley, BRC’s long-standing and sole contact at
Continental. (Tr. 136-38, 148, 183-87, 198, 205-06.)
After BRC’s negotiations failed with Evonik, Columbia, Cabot, and Continental,
BRC’s only remaining alternative supplier was Sid Richardson, and it ultimately entered into a
three-year requirements contract with BRC. (Tr. 54-56, 60-61; Ex. 34.)
F. In September 2011, BRC and Sid Richardson Executed a
Pricing and Supply Agreement for 2012 Through 2014
In September 2011, BRC and Sid Richardson executed a Pricing and Supply
Agreement with a term of January 1, 2012, to December 31, 2014 (the “Sid Richardson
Agreement”), in which Sid Richardson would supply all of BRC’s requirements of carbon
black “to a maximum of 3.0 million pounds per calendar year.” (Ex. 34; Tr. 61, 96-97, 13435.) The Sid Richardson Agreement, like the Supply Agreement, provided for fixed base
prices of carbon black, as adjusted on a monthly basis by feedstock oil and natural gas factors.
10
During the summer of 2011, while attempting to settle this dispute, Continental sold another six railcars
of carbon black to BRC. (Tr. 59.) But after September 2, 2011, Continental refused to sell any more carbon black to
BRC unless BRC entered into a new contract with Continental that included a price increase. (Tr. 59.)
11
Continental had terminated Nunley’s employment in May 2011. (Nunley Dep. 1; Tr. 257.)
7
(Exs. 5, 34.) BRC’s annual requirements of carbon black were forecasted at 2.65 million
pounds in the Agreement, but the Agreement provided that “[q]uantities may exceed the
maximum amount if mutually agreed upon.” (Ex. 34; Tr. 96-97.)
G. BRC’s Request for “Actual Damages” Through June 30, 201312
The Court finds Cornwell’s testimony and the spreadsheet he prepared (Ex. 72) about
BRC’s damages in 2012 and from January through June of 2013 to be both credible and
logically compelling. In 2012, BRC purchased 3,036,050 pounds of carbon black under the
Sid Richardson Agreement, paying $478,650.25 more than it would have under the Supply
Agreement, prior to any rebate. (Tr. 62-65; Exs. 40, 55-63, 72.) The price per pound that BRC
paid to Sid Richardson in 2012 ranged from $.68 to $.82, while the price under the Supply
Agreement prior to any rebate was $.54 to $.65. (Ex. 72.)
For January through June of 2013, BRC purchased 2,145,450 pounds of carbon black
under the Sid Richardson Agreement, paying $337,949.59 more than it would have under the
Supply Agreement. (Ex. 72.) The price per pound that BRC paid to Sid Richardson during this
period ranged from $.69 to $.78, while the price under the Supply Agreement prior to any
rebate was $.55 to $.61. (Ex. 72.)
Carroll, who compared the data, noted that the prices BRC paid to alternative suppliers
from May 2011 through June 2013 averaged above the Notch marketing data by $.0534 per
pound for N339, $.0817 for N550, and $.0869 for N762. (Exs. 18, 40, 41; Tr. 220-21.)
12
Continental does not object to BRC’s method of calculating its actual damages through June 30, 2013,
“or the numbers that are behind it.” (Tr. 65.) Rather, as will be discussed infra, Continental simply contends that the
volume BRC ordered was unreasonably disproportionate to the stated estimate in the Supply Agreement, and that the
price BRC paid under the Sid Richardson Agreement was unreasonable. (Tr. 65.)
8
III. CONCLUSIONS OF LAW13
A. BRC’s Orders in Excess of 2.90 Million Pounds Annually Are
“Unreasonably Disproportionate” to the Stated Estimate in the Supply Agreement,
and Thus, Are Not a Basis for Damages
BRC seeks to recover as damages the cost of the carbon black it purchased from May
2011 through June 2013 from Cabot and Sid Richardson, less the price it would have paid to
Continental for such quantities under the Supply Agreement.14 As stated earlier, in total, BRC
ordered 2,951,350 pounds of carbon black in 2011; 3,036,050 in 2012; and 2,145,450 in 2013.
Continental contends, however, that under Indiana Code § 26-1-2-306(1) BRC cannot
recover damages for orders that are “unreasonably disproportionate” to the stated estimate of
1.8 million pounds articulated in the Supply Agreement. Continental emphasizes that it never
supplied, or forecasted to supply, BRC with an annual quantity of carbon black greater than the
2.734 million pounds it forecasted to supply in 2011. As Continental sees it, any amount in
excess of 2.734 million pounds is “unreasonably disproportionate” to the stated estimate, and
13
“When a federal court hears a case in diversity, it does not necessarily apply the substantive law of the
forum state; rather, it applies the choice-of-law rules of the forum state to determine which state’s substantive law
applies.” Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) (citing Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941)). The choice of law rule for Indiana “calls for applying the law of
the forum with the most intimate contacts to the facts.” Emp’rs Ins. of Wausau v. Recticel Foam Corp., 716 N.E.2d
1015, 1024 (Ind. Ct. App. 1999). Here, as explained in the Court’s June 27, 2012, and June 5, 2013, Orders (Docket
# 46 at 9 n.5; Docket # 80 at 12 n.5), the Supply Agreement involved the sale of goods from Continental, which has
its principal place of business in Texas, to BRC, which has its principal place of business in Indiana; and the parties
do not dispute that both Texas and Indiana have adopted the Uniform Commercial Code (“UCC”) and that no
substantive differences exist between the two states’ enactments of the provisions relevant to this case. “If the
purposes and policies of two potential rules are the same, the forum should apply the forum law.” Hartford Acc. &
Indem. Co. v. Dana Corp., 690 N.E.2d 285, 291 (Ind. Ct. App. 1997); see Int’l Adm’rs v. Life Ins. Co., 753 F.2d
1373, 1376 n.4 (7th Cir. 1985). Accordingly, the Court will apply the UCC as adopted in Indiana and look to
interpretations of the UCC from Indiana and other jurisdictions.
14
As explained earlier, BRC also sought to recover “future damages” for the period of July 1, 2013,
through December 31, 2014. But since BRC’s future damages theory depended on Cornwell’s testimony, which has
been stricken, BRC has not proven its entitlement to future damages. See, e.g., Von der Ruhr v. Immtech Int’l, Inc.,
570 F.3d 858, 866 (7th Cir. 2009) (articulating that plaintiff could not prove its entitlement to lost profit damages
where it rested upon inadmissible lay opinion testimony).
9
thus, is not a basis for damages.
As this Court explained in its June 5, 2013, Order (Docket # 80), in a requirements
contract, “[t]he seller assumes the risk of all good faith variations in the buyer’s requirements .
. . .”15 Empire Gas Corp. v. Am. Bakeries Co., 840 F.2d 1333, 1337-38 (7th Cir. 1988); accord
Seelyville, 698 N.E.2d at 1260. But as Continental emphasizes, § 2-306 also states that a
quantity ordered under a requirements contract must not be “unreasonably disproportionate to
any stated estimate or in the absence of a stated estimate to any normal or otherwise
comparable prior . . . requirements . . . .” Ind. Code § 26-1-2-306(1).
Comment 3 to § 2-306 directly addresses stated estimates:
If an estimate of . . . requirements is included in the agreement, no quantity
unreasonably disproportionate to it may be . . . demanded. Any minimum or
maximum set by the agreement shows a clear limit on the intended elasticity. In
similar fashion, the agreed estimate is to be regarded as a center around which
the parties intend the variation to occur.
Ind. Code § 26-1-2-306(1) cmt. 3; see N. Ind. Pub. Serv. Co. v. Colo. Westmoreland, Inc., 667
F. Supp. 613, 636 (N.D. Ind. 1987) (explaining that § 2-306 and comment 3 “constrains the
range of variance when the parties do not do so themselves”). Some courts consider a variety
of factors when determining whether a quantity is unreasonably disproportionate to a stated
estimate, including the amount of the increase, whether the seller had a reasonable basis upon
which to forecast the increase, the amount by which the market price exceeds the contract
price, whether the increase in market price was fortuitous, and the reason for the increase in
15
There is no evidence of bad faith on the part of BRC; that is, that its purchases of carbon black were for
stockpiling or resale in the open market. (Tr. 86-86); see generally Ind.-Am. Water Co. v. Town of Seelyville, 698
N.E.2d 1255, 1260 (Ind. Ct. App. 1998) (“The most common problem arising out of a requirements contract is the
situation where the price of the commodity is advantageous to the buyer who then demands a quantity unseasonably
in excess of his needs in order to resell the excess at a profit, placing himself in competition with the seller.”).
10
requirements. See Orange & Rockland Util. v. Hess Corp., 397 N.Y.S.2d 814, 819 (N.Y. App.
Div. 1977) (“It would be unwise to attempt to define the phrase ‘unreasonably
disproportionate’ in terms of rigid quantities.”); see also McLouth Steel Corp. v. Jewell Coal &
Coke Co., 570 F.2d 594, 606 (6th Cir. 1978) (identifying the “critical feature” of the dispute as
whether the conduct of the parties in the prior years interpreted the contract as calling for
additional tonnage up to 26,643 tons where the stated estimate was 18,000 tons).
As the Court observed in its June 5, 2013, Order, although the stated estimate in the
Supply Agreement was 1.8 million pounds, the rebate program, by design, created an incentive
for BRC to purchase at least 2.2 million pounds annually.16 (Docket # 80 at 17.) And, in fact,
BRC’s course of performance under the Supply Agreement reflects exactly that, as it
purchased 2.6 million pounds in 2010. Further, Continental’s 2011 operational plan designated
2.734 million pounds to BRC. Therefore, although the quantity of 2.734 million pounds
significantly exceeds the 1.8 stated estimate in the Supply Agreement, the parties’ course of
performance under the Supply Agreement makes the annual quantity of 2.734 million pounds
not “unreasonably disproportionate” under § 2-306(1). See Lenape Res. Corp. v. Tenn. Gas
Pipeline Co., 925 S.W.2d 565, 583 (Tex. 1996) (“[I]t is not enough that a demand for
requirements be disproportionate to the stated estimate; it must be unreasonably so in view of
the expectation of the parties.” (emphasis omitted) (quoting Orange, 397 N.Y.S.2d at 819)).
Having said that, the Court must determine what quantity above 2.734 million pounds,
16
BRC rehashes its prior argument that the 1.8 million pounds in the Supply Agreement was included for
purposes of the rebate, not as a stated estimate of its requirements. (Pl.’s Post-Trial Br. 8-9.) But the Court has
already held in its June 27, 2012, Order that “the only reasonable meaning is that the 1.8 million pounds was an
estimate of BRC’s annual requirements.” (Docket # 46 at 14.) Therefore, this issue has already been determined as a
matter of law and will not be revisited here.
11
if any, is “unreasonably disproportionate” under § 2-306(1). Compare Westmoreland, 667 F.
Supp. at 636 (stating in a contractual dispute governed by Indiana law that there was no reason
to conclude that a 45% variance from a stated estimate was “too much”), with A & A Mech. v.
Thermal Equip. Sales, 998 S.W.2d 505, 512 (Ky. Ct. App. 1999) (determining that a 29%
increase over the stated estimate was unreasonably disproportionate), and Shea-KaiserLockheed-Healy v. Dep’t of Water & Power, 140 Cal. Rptr. 884, 890 (Cal. Ct. App. 1977)
(finding a 20% increase was unreasonably disproportionate), and Orange, 397 N.Y.S.2d at
821-22 (concluding that an order for more than twice the stated estimate in a requirements
contract was unreasonably disproportionate).
BRC, of course, asserts that all of its annual quantities–2.95 million pounds in 2011,
3.04 in 2012, 2.15 in 2013–are reasonable since Continental had always supplied its
requirements, suggesting, in essence, that BRC was entitled to an unlimited quantity under the
stated pricing terms of the Supply Agreement. But the parties agreed to establish new upper
and lower limits for the rebate/penalty “should the normal annual volume for BRC shift
significantly.” (Ex. 5.) Thus, although BRC had mentioned to Continental its plan to grow
both organically and by acquisition, the rebate structure reflects that the parties placed some
limits on the elasticity of the stated estimate under the pricing formula in the Supply
Agreement.
Moreover, when BRC sought a new three-year supply agreement in 2012, it proposed
to Continental a “supply cap” of 2.7 million pounds annually, and Continental counter-offered
with an annual maximum of 2.9 million pounds. (Exs. 87-88.) This provides additional insight
into the reasonable expectations of the parties with respect to the quantity of BRC’s
12
requirements under the Supply Agreement. And in the Sid Richardson Agreement, BRC
agreed to an annual maximum of 3.0 million pounds, which could only be exceeded if mutually
agreed upon by the parties. See Orange, 397 N.Y.S.2d at 821-22 (holding that an order for
more than double the contract estimate was unreasonably disproportionate as a matter of law,
but cautioning that it was not creating a rigid yardstick and emphasizing that the analysis
should be flexible, based on the reasonable expectations of the parties).
Furthermore, when the parties entered into the Supply Agreement in January 2010, the
parties’ course of dealing reflected seven years of annual quantities ranging from 1.89 to 2.43
million pounds. BRC’s rather sudden expansion in demand occurred in 2010 after the Supply
Agreement was executed, with its requirements jumping in a single year from a forecasted 1.9
million pounds to an actual demand of 2.6. See Ind. Code § 26-1-2-306 cmt. 2 (“[A] sudden
expansion of the plant by which requirements are to be measured would not be included within
the scope of the contract as made but normal expansion undertaken in good faith would be
within the scope . . . . One of the factors in an expansion situation would be whether the
market price had risen greatly in a case in which the requirements contract contained a fixed
price.”). Cornwell admitted that although BRC had expected in 2009 to grow in its business
and conveyed that expectation to Continental, it “certainly didn’t know at what rate.” (Tr. 133;
see also Tr. 33-34.)
Accordingly, the Court concludes that an annual quantity in excess of 2.90 million
pounds (Continental’s proposed annual “supply cap” for 2012 through 2014)–that is, an
overage of 62% from the stated estimate of 1.8 million pounds–is, as a matter law, particularly
in the tight market conditions then prevalent, “unreasonably disproportionate” to the stated
13
estimate of 1.8 million pounds in the Supply Agreement. See, e.g., State, Dep’t of Fisheries v.
J-Z Sales Corp., 610 P.2d 390, 394 (Wash. Ct. App. 1980) (finding that a demand for nearly
two-thirds over the estimate for salmon carcasses, together with a demand for three times the
estimate of salmon eggs, particularly in the falling market conditions then prevalent, was
“unreasonably disproportionate”). As such, BRC is not entitled to damages for purchases of
carbon black in excess of 2.90 million pounds in any given year under the Supply Agreement.
B. BRC Is Entitled to Actual Damages Based on
the “Cover” It Purchased Through June 30, 2013
BRC seeks damages for the “cover” it obtained because of Continental’s breach and
repudiation of the Supply Agreement. “‘Cover’ is the UCC term for purchasing substitute
goods when the seller fails to deliver acceptable goods.” Rexnord Indus., LLC v. Bigge Power
Constructors, 947 F. Supp. 2d. 951, 955 n.1 (E.D. Wis. 2013) (citation omitted). After such a
breach, “the buyer may ‘cover’ by making in good faith and without unreasonable delay any
reasonable purchase of or contract to purchase goods in substitution for those due from the
seller.” Ind. Code § 26-1-2-712(1); see Rash Ranco Corp. v. B.L.B., Inc., 762 F. Supp. 1339,
1340-41 (N.D. Ill. 1991). The buyer may then recover from the seller as damages, “the
difference between the cost of cover and the contract price together with any incidental or
consequential damages . . . , but less expenses saved in consequence of the seller’s breach.”
Ind. Code § 26-1-2-712(2).
“The test of proper cover is whether at the time and place the buyer acted in good faith
and in a reasonable manner, and it is immaterial that hindsight may later prove that the method
of cover used was not the cheapest or most effective.” Ind. Code § 26-1-2-712 cmt. 2; see
Fortney v. Tennekoon, No. 95-4685, 1998 WL 159047, at *12 (E.D. Pa. Mar. 13, 1998) (“That
14
in hindsight this choice was not the most economical does not make the plaintiff’s choice, at
the time it was made, unreasonable.”). “The critical time to examine is the time of the breach.”
Rockland Indus., Inc. v. E+E (US), Inc., 991 F. Supp. 468, 474 (D. Md. 1998). “The burden of
proof rests with the seller to establish that the buyer acted unreasonably in failing to prevent
his own loss.” Simeone v. First Bank Nat’l Ass’n, 73 F.3d 184, 189 (8th Cir. 1996).
Here, Continental asserts that BRC acted unreasonably when it obtained cover under
the Sid Richardson Agreement for 2012 through 2014.17 Continental first contends that BRC’s
refusal to consider anything less than a three-year term was not commercially reasonable in
light of the tight carbon black market and high prices at the time. As Continental sees it, BRC
was primarily motivated by its lawyers’ recommendation of a three-year term for purposes of
calculating its damages in this lawsuit.
Second, Continental argues that the Sid Richardson Agreement was commercially
unreasonable because it provided carbon black pricing at least $.08 above the Notch market,
and $.11 to $.15 above the pricing that Continental was offering at the time. According to
Continental, BRC’s refusal of prices just $.03 to $.04 higher than those in the Supply
Agreement and its failure to engage in negotiations with Continental was not in good faith, and
instead may have been to “punish Continental” or “maximize its damages in this lawsuit.”
(Def.’s Proposed Findings of Fact and Conclusions of Law 12); see 1 James J. White & Robert
S. Summers, Uniform Commercial Code § 7:13, p. 553 (6th ed.) (explaining that the UCC “has
established both a subjective standard for measuring good faith (honesty in fact) and an
objective one (observance of commercial standards of fair dealing in the trade)”).
17
Continental does not challenge the cover BRC obtained from Cabot and Sid Richardson in 2011.
15
But Continental has a heavy burden to carry, as BRC’s cover from Sid Richardson “is
presumed to be proper.” Dakota Gasification Co. v. Didion, No. 1:10-cv-015, 2011 WL
2848524, at *6 (D.N.D. July 15, 2011); accord Red River Commodities, Inc. v. Eidsness, 459
N.W.2d 811, 817 (N.D. 1990). Although Continental argues that BRC acted unreasonably by
not purchasing the carbon black from Continental at just $.04 higher than the prices in the
Supply Agreement, “the Court will not force a buyer to continue performing its contract with a
seller who was unable to meet its contractual obligations.” Dakota Gasification, 2011 WL
2848524, at *6; see Eberspaecher N. Am., Inc. v. Nelson Global Prods., Inc., No. 12-11045,
2012 WL 1247174, at *6 (E.D. Mich. Apr. 13, 2012) (reasoning that “cover” must mean that
“a buyer is obligated to search for an alternative source of supply other than the breaching
seller,” otherwise “the obligation to cover would reward a breaching seller’s efforts at
extorting a price increase by mandating that the buyer pay that price”). “There is an
understandable reluctance among courts to require parties, under the duty to mitigate, to deal
further with the breaching party, especially if the breaching party’s alternative terms differ
substantially from the terms of the original contract.” Dakota Gasification, 2011 WL 2848524,
at *6.
At bottom, the remedy of “cover” should put BRC “in as good a position as if the other
party had fully performed.” Ind. Code § 26-1-1-106(1). BRC’s preference for a three-year
term provides BRC with supply and pricing stability through December 31, 2014–the date the
five-year Supply Agreement would have expired–and thus, is consistent with the remedy’s
purpose. Both Cornwell and Chaffee credibly expressed that although Continental was
initially offering lower pricing, BRC feared that Continental would seek another price increase
16
at the end of the shorter term it was proposing, if not before. (Tr. 137-38, 205 (“At the end of
the one-year duration to the 2012, they might have wanted 10 cents, 20 cents, 50 cents, a
dollar.”).) Cornwell and Chaffee further testified that by this time, and for good reason, BRC
had lost trust in Continental’s reliability due to its demand for a price increase in 2009, and
because it had fired Nunley, BRC’s long-time, and trusted, contact at Continental. (Tr. 136-37,
183-87, 198, 205.) Chaffee persuasively explained that after all that had transpired, he wanted
reasonable assurance that BRC would receive the necessary carbon black to meet its
customers’ needs and at the price negotiated, and (given the already limited universe of
suppliers) the only way he could get that assurance was through Sid Richardson. (See Tr. 189
(“I knew I signed a contract [with Sid Richardson] for more money. I knew . . . that’s the only
thing I could do to assure myself of getting carbon black.”).)
Furthermore, Continental conveniently ignores that in order for BRC to receive
Continental’s lower pricing, it would have had to not only reduce from a three-year to a
sixteen-month term, but also release its right to litigate the damages caused by Continental’s
breach of the Supply Agreement. As such, a comparison of purely pennies per pound does not
fairly represent Continental’s counter-offer.
And that BRC’s cover ultimately was not the least expensive is not fatal to its claim for
damages under § 2-712. “Presumably, the covering buyer acts in good faith unless it
knowingly and without reason avoids a less expensive market in favor of a more expensive
one.” White & Summers, supra, at 553 (emphasis added). “If the cover remedy is to work to
the benefit of an aggrieved buyer, the court should give [the] buyer wide latitude to reject the
least expensive cover when there is any reasonable basis for choosing a more expensive cover
17
(for instance, the goods are of better quality or the seller more reliable).” Id.
When considering a new supply agreement, BRC invited bids and received quotes or
responses from the only five domestic suppliers in the market. Ultimately, both Cornwell and
Chaffee credibly testified that although Sid Richardson’s offer was not the least expensive, it
was, overall, the most attractive package to BRC based on a variety of factors, including
contract term, price stability, and reliability. (Tr. 60-61, 103-04, 136, 148, 200 (“I had
assurances I would have carbon black and I made the best business decision I could make. . . .
[W]e went out and bid business based on this five-year contract. So I quoted customers based
on a contract that I had for supply, and . . . I couldn’t change those contracts.”).) Thus, the
evidence fails to show that Continental was “without good reason” when choosing to contract
with Sid Richardson rather than Continental.18 White & Summers, supra, at 553.
In sum, Continental has not established that BRC’s decision to enter into the Sid
Richardson Agreement was commercially unreasonable or made in bad faith. As a result, the
cover that BRC obtained under the Sid Richardson Agreement is a proper basis for the
computation of BRC’s actual damages.
IV. CALCULATION OF DAMAGES19
For 2011, the difference between the cost of BRC’s cover of 940,300 pounds of carbon
black and the price under the Supply Agreement was $136,354.27. BRC’s December 27,
2011, cover purchase, however, caused it to exceed the 2.90 million pounds annual maximum
18
In fact, that Continental now faults BRC for failing to choose the least expensive alternative for cover is
somewhat ironic. In 2009, BRC chose to enter into the Supply Agreement with Continental because it “was a better
value overall,” even though it had a lower-priced proposal from Sid Richardson at the time. (Tr. 26-27.)
19
The difference between BRC’s cost of cover and the price under the Supply Agreement is taken from Ex.
72.
18
by 51,350 pounds, and thus $7,255.75 (51,350 x $.1413, the applicable cost differential) must
be deducted, reducing BRC’s cover damages to $129,098.52. Since BRC purchased 2.90
million pounds in 2011, it would have been entitled to a $29,000 rebate (2,900,000 x $.01)
under the Supply Agreement, so that amount must be added ($129,098.52 + $29,000). This
brings BRC’s total damages for 2011 to $158,098.52.
For 2012, the difference between the cost of BRC’s cover of 3,036,050 pounds and the
price under the Supply Agreement was $478,650.25. BRC’s November 30, 2012, and
December 12, 2012, cover purchases, however, caused it to exceed the 2.90 million pounds
annual maximum by 136,050 pounds, and thus $21,782.50 ((117,975 x $.1638) + (18,075 x
$.1360)) must be deducted, reducing BRC’s cover damages to $456,867.75.20 Since BRC
purchased 2.90 million pounds in 2012, it would have been entitled to a $29,000 rebate
(2,900,000 x $.01) under the Supply Agreement, so that amount must be added ($456,867.75 +
$29,000). This brings BRC’s total damages for 2012 to $485,867.75.
For 2013, the difference between the cost of BRC’s cover of 2,145,450 pounds and the
price under the Supply Agreement was $337,949.59. Since BRC purchased 2,145,450 pounds
in 2013, it would have been entitled to a $727.25 rebate (145,450 x $.005) under the Supply
Agreement, so that amount must be added ($337,949.59 + $727.25). This brings BRC’s total
damages for 2013 to $338,676.84.
Therefore, the total damages that BRC will be awarded is $982,643.11 ($158,098.52 +
485,867.75 + 338,676.84).
20
Because BRC’s November 30, 2012, purchase included two different grades of carbon black that are
priced a little differently, the balance of the overage was split evenly between the two grades.
19
V. CONCLUSION
BRC is entitled to damages from Continental in the amount of $982,643.11. The Clerk
is DIRECTED to enter a judgment in favor of BRC and against Continental in the amount of
$982,643.11.21
SO ORDERED.
Enter for the 11th day of February, 2014.
S/Roger B. Cosbey
Roger B. Cosbey,
United States Magistrate Judge
21
The Court wishes to once again compliment counsel on the capable and professional manner in which
this case was litigated.
20
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