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finding act of state doctrine inapplicable in action concerning whether an official act constitutes force majeure under the terms of a contract
Summary of this case from Petersen Energia Inversora, S.A.U. v. Argentine RepublicOpinion
No. 02 Civ. 0795 (CBM)
August 6, 2003
MEMORANDUM OPINION AND ORDER
Plaintiff Lyondell-CITGO Refining, LP ("LCR") has brought suit against defendants Petroleos de Venezuela, S.A. ("PDVSA") and its wholly owned subsidiary, PDVSA-Petroleo, S.A. ("Petroleo"), claiming that defendants breached a contract for the delivery of extra-heavy crude oil to LCR's newly-built refining facility in Texas. This court has jurisdiction pursuant to 28 U.S.C. § 1330(a) because PDVSA is a "foreign state" as defined in 28 U.S.C. § 1603(a) as well as pursuant to 28 U.S.C. § 1332(a)(2) because LCR is a citizen of a state (a limited partnership organized under the laws of Delaware with its principal place of business in Houston, Texas) and PDVSA and Petroleo are citizens of a foreign state (corporations organized under the laws of Venezuela with their principal places of business in Venezuela).
Defendants have moved under Fed.R.Civ.P. 12(b)(6) to dismiss the case pursuant to the act of state doctrine and for other reasons. For the reasons that follow, defendants' Motion is granted in part and denied in part.
BACKGROUND
The facts recited in this decision are drawn from the Complaint. As it must when considering a motion to dismiss, the court assumes these facts to be true. York v. Association of Bar of City of New York, 286 F.3d 122, 125 (2d Cir. 2002) (citation omitted).
The parties to this action entered into two contracts for the purchase and sale of extra-heavy crude oil ("XHC"). XHC is thicker and denser than traditional crude oil. It contains higher concentrations of sulfur and heavy metals, which makes it harder to refine but cheaper to purchase. In other words, a company willing to build the appropriate refinery will be able to purchase the unrefined fuel at a lower cost and thereby turn a profit.
Venezuela is the world's largest producer of XHC, and in 1993 it was trying to create a market for it. Fortuitously, Lyondell Petrochemical Company (predecessor to Lyondell Chemical Company ("Lyondell")) owned a crude-oil refinery in Houston, Texas which was built in 1920 and was overdue for repair. Lyondell entered a joint venture with CITGO (a PDVSA subsidiary) to refurbish the Houston refinery so that it could process XHC. CITGO would provide some of the capital needed for the refurbishment, and PDVSA would commit to providing a steady source of XHC. Plaintiff LCR claims that it would never have agreed to the joint venture and renovate its refinery, at the high cost of $1.1 billion, in the absence of an agreement with PDVSA and Petroleo to supply a continuous flow of XHC.
The Crude OH Supply Agreement and the Supplemental Supply Agreement
The parties entered two written agreements for the purchase and sale of XHC. Under the Crude Oil Supply Agreement ("COSA"), Petroleo committed to supplying up to 230,000 barrels a day to the LCR refinery, an amount equal to roughly 86% of the refinery's total capacity. The COSA contains a force majeure provision, however, under which, owing to circumstances beyond its control, Petroleo is relieved of the obligation to provide the contracted amount of XHC. In such force majeure circumstances, Petroleo
may reduce, withhold or suspend deliveries under this Agreement to such extent as may be reasonably required to prorate deliveries by PDVSA and its subsidiaries of crude oil in satisfaction of their aggregate existing contractual obligations to [LCR] and other purchasers. . . .
Pl.'s Mem. in Opp, Ex. B ("COSA"), § 2.12. The same section of the agreement lists several situations which would constitute forces majeures, including "acts, regulations, laws or restraints imposed by the government of any sovereign nation or state or any agency, branch, political subdivision or other similar body thereof." Id. The only qualifier to that definition is that the governmental action must be beyond the reasonable control of PDVSA and its subsidiaries.Id.
In the event that Petroleo is unable to deliver the contracted amount of XHR without a valid force majeure excuse, the COSA specifies that LCR is entitled to a shortfall payment of roughly $3-4 per barrel.Id., § 2.13.
Under the Supplemental Supply Agreement ("SSA"), in the event that there were a shortfall and no shortfall payments by Petroleo, PDVSA agreed either to deliver the appropriate amount of oil or make the shortfall payments itself. Additionally, PDVSA agreed to deliver the shorted barrels or make shortfall payments even in the event that Petroleo claimed a force majeure situation as a result of the acts of the Venezuelan government, unless the governmental acts in question consisted either of "(1) a general embargo . . . prohibiting the export of Crude Oil to all purchasers located in the United States . . . or (2) [a] health, police, military, judicial or regulatory measure of general applicability having the effect of temporarily impeding the production or export of Crude Oil in the Republic of Venezuela." Def. Mem. in Opp., Ex. C. ("SSA"), § 2.1(iii)(b).
Both the COSA and the SSA were dated May 5, 1993 and have a 25 year term which expires on December 31, 2017. Both agreements include a provision requiring parties "to act in good faith and observe reasonable commercial standards of fair dealing. . . ." COSA, § 5.13; SSA, § 2.5. The COSA states that its provisions will be governed by and construed in accordance with Venezuelan law. COSA, § 5.1. It contains a choice of forum provision requiring that any litigation arising from its terms be brought in New York in either state or federal court.Id., § 5.4. The SSA states that its terms are governed by and construed in accordance with New York law, SSA, § 4.1 and incorporates the COSA's choice of forum clause by cross-reference.Id., § 2.5.
The Shortfalls
According to the Complaint, Petroleo declared itself in a force majeure situation on two separate occasions: first, on April 16, 1998, it claimed that the Venezuelan Ministry of Energy and Mines ("the Ministry") had instructed it to cut production of certain grades of crude oil to comply with a directive from the Organization of Petroleum Exporting Countries ("OPEC"); second, on February 9, 2001, it announced another force majeure, in connection with yet another OPEC directive resulting in instructions from the Ministry to cut production. As a result of these situations, LCR was denied roughly 31 million barrels of XHC that would have been due had there been no force majeure declarations.
The above instructions from the Ministry to cut production will be referred to collectively as "the instructions" in this decision.
In addition to the force majeure declarations, on several occasions, Petroleo refused to deliver the contracted 230,000 barrels of XHC per day without any justification, merely claiming that it is not required to do so under the COSA and SSA as long as it is willing to make the requisite shortfall payments. Indeed, according to the Complaint, Petroleo has credited LCR over $12 million in shortfall payments. Plaintiff alleges that during the time that defendants were failing to deliver the contracted amount of oil (both due to the forces majeures and for other reasons), they were selling XHC on the "spot" market, to customers with whom they did not have an existing contract.
Plaintiff's Claims
The complaint contains a ten count cause of action, with the first five counts against Petroleo and the last five against PDVSA. Against Petroleo, LCR asserts that the force majeure declarations were invalid and that the failure to supply the agreed amounts of XHC in the absence of a force majeure violated the good faith provision of the COSA. Against PDVSA, LCR asserts that even if the force majeure declarations were valid, the SSA's narrower description of what circumstances would excuse PDVSA's performance were not met and thus that PDVSA was required either to deliver the shorted barrels of XHC or to make shortfall payments. Against Petroleo
Plaintiff claims the force majeure declarations were invalid for four reasons. First, OPEC's directives are non-binding on its member states. Therefore, Venezuela was not compelled to reduce its oil production by OPEC; it's decision to do so was voluntary. Furthermore, Venezuela's oil minister is currently the President of OPEC, and so any OPEC related decisions are not beyond the ressonable control of PDVSA. Second, the instructions from the Ministry do not have the force and effect of an official government act under Venezuelan law. Third, defendants could have maintained their oil shipments to LCR even under the instructions issued by the Ministry, since those instructions did not specify exactly how to reduce oil production, only that it be reduced. They could have cut shipments to other customers and maintained LCR's. Finally, plaintiff asserts that Petroleo's ability to sell XHC on the spot market indicates that the force majeure did not in fact prevent it from producing oil in sufficient quantities.
Plaintiff further contends that the sale of XHC on the spot market represents an independent breach of the contract, which specifies that in the event of a shortage of XHC, Petroleo must pro-rate the reductions between the customers with whom it has existing contracts. Such a breach invalidated the declaration of a force majeure, according to plaintiff. Additionally, LCR argues that Petroleo's decision to reduce its shipments without a force majeure declaration, opting to make shortfall payments instead, is a violation of the good faith provision of the contract.
Against PDVSA
LCR argues that even if the force majeure declarations were valid, the instructions do not fit either of the narrow exceptions specified in the SSA; they constitute neither a general embargo prohibiting the export of crude oil to all purchasers in the United States nor a health, police, military, judicial or regulatory measure of general applicability that has the effect of temporarily impeding the production or export of crude oil in Venezuela (hereinafter "acts of general applicability"). That the instructions do not require a general embargo seems clear enough — Petroleo continued to supply XHC to LCR, but in reduced quantities.
LCR argues that the instructions are not the above-specified acts of general applicability for several reasons. First, under Venezuelan law, such acts have two components: (1) they must be enacted in accordance with an express legislative provision, and (2) they must be published in the Official Gazette of the Bolivarian Republic of Venezuela. These instructions had neither component. Second, the instructions were not generally applicable because they allowed Petroleo to use its discretion in deciding to whom it would reduce its shipments of XHC. Finally, the instructions do not, according to LCR, have the affect of temporarily impeding the production or export of crude.
Relief Requested
LCR seeks: (1) actual damages or, in the alternative, damages equal to the shortfall payments owed to LCR for the reduced shipments of XHC; (2) specific performance of the COSA and SSA; (3) a declaratory judgment invalidating the force majeure declarations or, in the alternative a declaratory judgment ruling that whenever a force majeure declaration is in effect, Petroleo may not sell XHC to spot customers without an existing contract for XHC; and (4) a declaratory judgment that Petroleo may not reduce shipments of XHC without an operational justification. Plaintiff also seeks an award of costs (including fees for attorneys and expert witnesses) as well as an award of pre- and post-judgment interest.
DISCUSSION
Legal Standards on a Motion to Dismiss
Perhaps no area of federal law is as well-settled as the standard of review for a motion to dismiss pursuant to Rule 12(b)(6): the court must accept as true all facts as pled in the Complaint, York v. Association of Bar of City of New York, 286 F.3d 122, 125 (2d Cir. 2002), and may not dismiss the Complaint unless defendants have demonstrated "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); accord Hishon v. King Spalding, 467 U.S. 69, 73 (1984); Cortec Indus., Inc. v. Sum Holding, L.P., 949 F.2d 42, 49 (2d. Cir. 1991),cert. denied, 503 U.S. 960 (1992). The same standard of review applies to a motion sounding in the act of state doctrine. See Ramirez de Arellano v. Weinberger, 745 F.2d 1500, 1534 (D.C. Cir. 1984) (before granting a motion to dismiss based on the act of state doctrine, "the court must be satisfied that there is no set of facts favorable to the plaintiffs and suggested by the complaint which could fail to establish the occurrence of an act of state"), vacated on other grounds, 471 U.S. 1113 (1985). The burden of establishing that the doctrine is applicable rests on the party invoking it.See Galu v. Swissair, 873 F.2d 650, 654 n. 4. (2d Cir. 1989) (citing Restatement (Third) of the Foreign Relations Law of the United States § 443 comment i (1986)).
Act of State Doctrine
Defendants argue that the act of state doctrine prohibits the further progression of this law suit. The doctrine "is rooted in notions of separation of powers [and] reflects judicial recognition that the conduct of foreign relations is properly within the province, not of the judiciary, but of the political, and particularly the executive branches of government." WMW Machinery, Inc. v. Werkzeugmaschinenhandel, GMBH im Aufbau, 960 F. Supp. 734, 744-45 (S.D.N.Y. 1997) (Parker, J.) (citing Underhill v. Hernandez, 168 U.S. 250, 252 (1897);Allied Bank Int'l v. Banco Credito Agricola de Cartago, 757 F.2d 516, 520 (2d Cir.), cert. denied, 473 U.S. 934 (1985)).
Because of the deference owed to the executive in matters involving foreign relations, the act of state doctrine "precludes the courts of this country from inquiring into the validity of the public acts a recognized foreign sovereign power committed within its own territory."Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 401 (1964);Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 698 (1976); Galu, 873 F.2d at 653. Defendants argue that the Complaint requires this court to undertake precisely such a prohibited inquiry. Accordingly, the dispositive question for the court on this Motion is as follows: assuming the validity of the instructions given to Petroleo and PDVSA by the Ministry of Energy and Mines, do the facts as alleged in the Complaint demonstrate a breach of the COSA and/or SSA? The answer to that question is yes.
The Alleged Breaches
Plaintiff alleges several theories under which the force majeure declarations were invalid. While one of them runs afoul of the act of state doctrine, the rest do not. The court will address them in order, beginning with the claims against Petroleo under the COSA and proceeding to the claims against PDVSA under the SSA.
Claims Against Petroleo
First, LCR alleges that the cuts [in XHC shipments] were not beyond the reasonable control of Petroleo because Petroleo had discretion in deciding whom to cut. This allegation challenges the way in which Petroleo exercised its discretion and questions whether Defendants could have cut other customers and still fulfilled its obligations to LCR. This question presumes the validity of the Ministry's instructions.
Pl. Mem. at 22 (emphasis in original). While the court agrees with defendants that plaintiff "has no such right to better treatment than is due Defendants' other costumers," Def. Reply at 14, the question of whether defendants could have cut other customers' supply of XHC (thereby maintaining the contract levels to LCR) without violating their contracts is a question of fact easily resolved after discovery. If plaintiff is unable to demonstrate how defendants could have adjusted their deliveries to other customers, defendants will be entitled to summary judgment with respect to this theory. At this stage, however, plaintiff has stated a valid claim for relief.
Second, LCR alleges that Petroleo was not "prevented" from supplying crude to LCR because Petroleo was simultaneously selling extra-heavy crude on the spot market and took on new customers while the force majeure was declared. This claim requires only a determination of whether Petroleo was selling extra heavy crude on the spot market and to new customers at the same time it was shorting LCR under [the COSA]. . . . The validity of the Ministry's instructions is simply not implicated by this inquiry.
Pl. Mem. at 23 (emphasis in original). Plaintiff relies on the Second Circuit's decision in Callahan v. Prince Albert Pulp Co. Ltd., 581 F.2d 314 (2d Cir. 1978) for the proposition that a defendant who takes on new customers while decreasing shipments to existing costumers is "not entitled to rely on force majeure in curtailing shipments to its contract customers." Id. at 318.
Defendants respond that Callahan does not support vitiating the force majeure declarations, but rather only supports relief based on "the total amount of such voluntary deliveries . . . apportioned theoretically and ratably among all of [defendants' pre-existing] contract customers] who did not benefit from its largesse." Id. at 319. While defendants arguably have the better reading of Callahan's precise holding, that case was decided after trial, id. at 316, whereas the instant argument concerns a motion to dismiss. The Callahan court had the benefit of a well developed factual record and so could determine exactly how extensive and widespread the "voluntary deliveries" were and to what extent they affected all of defendant's contracts. See id. at 318 ("[substantially similar reductions were made with regard to [defendant's] other contract customers"). In the instant case, if plaintiff can show that defendants in fact could have met their obligations under the COSA and SSA but declared a force majeure in order to sell XHC on the spot market or to new customers at higher prices, it will have essentially demonstrated that the force majeure declarations were invalid. The COSA's Force Majeure provision specifies that only those causes which are "beyond the reasonable control of PDVSA and its subsidiaries" and which "delay or prevent" performance actually excuse performance. COSA, § 2.12. If defendants sold an amount of XHC on the spot market comparable to what it shorted plaintiff, it cannot claim that it was "prevented" from performing by forces beyond its control, unless the instructions from the Ministry specifically commanded it to do so.
Defendants actually concede that the allegations of spot sales may constitute a separate contract breach not related to the force majeure claims and therefore not susceptible to challenge under the act of state doctrine. They request, however, that for the sake of clarity, the Court dismiss the instant Complaint and allow these claims to be refiled. Def. Reply at 15.
Third, LCR alleges that the cuts were not beyond the reasonable control of Petroleo within the meaning of the [COSA] because Venezuela's decision to follow OPEC's directives was voluntary. . . . The only issue properly presented by Defendants' motion to dismiss is whether such a factual determination requires this Court to pass judgment on the validity or invalidity of an act of state.
Pl. Mem. at 23 (emphasis in original). This contention defeats itself. Venezuela's decision was precisely that — Venezuela's decision, an act of state. The government of Venezuela controls defendants, not the other way round, a point plaintiff does not dispute. The government made the decision to follow OPEC and directed defendants to do so. That constitutes a public act of a sovereign state immune to challenge on the basis that the government was not required to do so. Sabbatino, 376 U.S. at 401.
Finally, LCR argues that the instructions do not constitute a force majeure because they do not constitute a government act, regulation [,] law or restraint. . . . The determination is not precluded because it does not require this Court to determine whether the instructions were properly issued, but merely whether letters are "an act, regulation, or order" within the meaning of the [COSA's] force majeure provision. . . .
Pl. Mem. at 24 (emphasis in original). Defendants offer two seminal cases which appear to address this particular argument; both, however, are distinguishable from the instant case. In Sabbatino, the Supreme Court held that "[t]he courts below properly declined to determine if issuance of the expropriation decree [the challenged governmental act in the case] complied with the formal requisites of Cuban law," including the "argued invalidity [of the decree] if not properly published in the Official Gazette in Cuba." Sabbatino, 376 U.S. at 415 n. 17. The court explained its reasoning in part as follows:
. . . Chief Justice Marshall declared that one nation must recognize the act of the sovereign power of another, so long as it has jurisdiction under international law, even if it is improper according to the internal law of the latter state. This principle has been followed in a number of cases. [Citations omitted.] An inquiry by United States courts into the validity of an act of an official of a foreign state under the law of that state would not only be exceedingly difficult but, if wrongly made, would be likely to be highly offensive to the state in question.Id.
In the instant case, however, unlike in Sabbatino, the parties resisting inquiry into whether the governmental acts in question satisfy the conditions of force majeure in the contract have explicitly invited such an inquiry. The COSA states that "THE PROVISIONS OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE REPUBLIC OF VENEZUELA." COSA, § 5.1 (capitalization in original). It further specifies that any law suits "arising out of this Agreement shall be brought only in the Supreme Court of the State of New York . . . or the United States District Court for the Southern District of New York. . . ." Id., § 5.4 (emphasis added). Having specified in the COSA that the agreement's terms are to be tested for validity under the laws of Venezuela only in the courts of New York, defendants cannot now claim that they are offended by plaintiffs attempt to comply with the terms of the contract.
The second seminal case upon which defendants rely, Interamerican Refining Corp. v. Texaco Maracaibo, Inc., 307 F. Supp. 1291 (D. Delaware 1970), is likewise inapplicable to the instant case, to the extent that it did not involve a defendant who had explicitly agreed to resolve disputes about the meaning of certain contract terms in the courts of New York. Interamerican, in fact, was an anti-trust case; there was no contract in dispute. Id. at 1292. Additionally, with respect to the act of state doctrine, Interamerican was essentially a recapitulation of the Sabbatino holding.See, e.g., 307 F. Supp. at 1299,1301 (citingSabbatino). To the extent that Sabbatino is not controlling on this case, Interamerican loses its persuasive value.
Interestingly, the background facts of Interamerican — but not those that led to the invocation of the act of state doctrine — are quite similar to those of the instant case. Plaintiff in Interamerican had contracted for the delivery of Venezuelan oil through intermediaries and had relied upon those contracts in making the decision to rent a refinery from another company (Petroleum Separating Company ("Separating")), which refinery was specifically outfitted for processing the low-cost Venezuelan crude. 307 F. Supp. at 1292-93. The Venezuelan government, for reasons that were never fully revealed, issued an order prohibiting any company with which it did business from supplying Interamerican with its oil. Id. at 1293. Interamerican invoked the force majeure clause in its rental contract with Separating, which disputed said invocation in an arbitration proceeding. Id. "At the arbitration proceedings, [Interamerican] vigorously maintained that the Venezuelan compulsion had deprived it of the ability to obtain oil, and that such compulsion was within the force majeure clause of the contract. It introduced substantial evidence to prove the compulsion, but . . . the arbitrators made an award against it." Id. at 1296. That decision was affirmed by the Second Circuit. Id. In their papers, neither party discussed the relevance of the arbitration panel's decision denying an invocation of force majeure in Interamerican, probably because there are insufficient facts recited in the district court opinion. This court, however, is curious to learn on what basis the arbitration panel concluded that Interamerican had not demonstrated a force majeure and also whether Interamerican invoked the act of state doctrine in its defense during the arbitration proceedings.
Defendants also rely on International Ass'n of Machinists and Aerospace Workers (IAM) v. Organization of Petroleum Exporting Countries (OPEC), 649 F.2d 1354 (9th Cir. 1981) ("IAM"). Like Interamerican, IAM was an anti-trust case not involving a contract with specific choice of law and choice of forum provisions. As such, it is distinguishable from the instant case.
Furthermore, LCR is not, under this theory, arguing that the instructions are without force or invalid. Rather, it contends that they do not constitute forces majeures under the COSA's terms. As with the spot market argument, this contention will likely be easily resolved at the summary judgment stage, after both parties have had a chance to brief the court on Venezuelan law and the intent of the parties who negotiated the COSA. To dismiss the claims right now, however, would be premature.
Claims Against PDVSA
The SSA is more explicit than the COSA with respect to exactly what types of government actions constitute a force majeure which excuses performance by PDVSA. The acts must be either:
(1) a general embargo instituted by the Republic of Venezuela prohibiting the export of Crude Oil to all purchasers located in the United States . . . or
(2) any health, police, military, judicial or regulatory measure of general applicability having the effect of temporarily impeding the production or export of Crude Oil in the Republic of Venezuela. . . .
SSA, § 2.1(iii)(b). The SSA incorporates the COSA's choice of forum provision, SSA, § 2.5, but states that the governing law shall be that of the State of New York, SSA, § 4.1 (unlike the COSA's, which, as noted above, is governed by the laws of Venezuela). To the extent that there are more (and more precise) terms included with respect to the exact conditions required to excuse PDVSA's performance, plaintiff has an even stronger argument than with the COSA that the relief it is seeking is based in contract construction, not in a declaration that the Ministry's instructions are without effect.
Commercial Activities Exception to the Act of State Doctrine
To the extent that the court has decided that the act of state doctrine does not shield defendants at this stage in the suit, it need not address the thorny question of whether there exists a commercial activities exception to the act of state doctrine. Nevertheless, certain elements of this case suggest that it is ripe for an application of the exception. InAlfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 706 (1976), a plurality of the Supreme Court, but not the entire Court, "decline[d] to extend the act of state doctrine to acts committed by foreign sovereigns in the course of their purely commercial operations." In Braka, the Second Circuit decided to "leave for another day consideration of the possible existence in this Circuit of a commercial exception to the act of state doctrine underDunhill." Braka, 762 F.2d at 225.
As noted above, both agreements at issue in this case specify the courts of New York as the exclusive forum for suits arising out of them. Additionally, the COSA contains the following provision, which all but begs for an application of the exception: "Supplier [Petroleo] represents and warrants to purchaser that the execution by Supplier of this Agreement, and the performance by Supplier of its obligations hereunder, constitute private and commercial acts of Supplier rather than governmental or public acts." COSA, § 5.3(a).
To the extent that this court has discretion over when the act of state doctrine should apply, it holds that the circumstances of this case, specifically the contract agreements regarding choice of law, choice of forum and definition of the transactions as commercial, not governmental, do not implicate the act of state doctrine at this stage, with only one exception. The court's decision is based in part on the fact that defendants seek to use the act of state doctrine as a shield at such an early stage of the proceedings. This decision should not be understood to prevent defendants from raising the defense again on summary judgment, should the evidence gathered during discovery warrant it.
In W.S. Kirkpatrick Co., Inc. v. Environmental Tectonics Corp., Int'l, 493 U.S. 400, 409 (1990), the Supreme Court at least implied that whether or not to apply the act of state doctrine is within the discretion of the lower courts: "sometimes, even though the validity of the act of a foreign state within its own territory is called into question, the policies underlying the act of state doctrine may not justify its application."
The only exception to this holding is with respect to plaintiff's argument that Venezuela's decision to follow OPEC directives is voluntary and therefore beyond the scope of the COSA's and SSA's terms. The inquiry into that question would truly be offensive to Venezuela and is therefore foreclosed by the act of state doctrine.
The court is aware that in some cases, the act of state doctrine may be applicable at this stage. Braka, for example, was decided on a motion to dismiss. 762 F.2d at 222.
Good Faith and Reasonable Commercial Standards
Plaintiff seeks actual damages not limited to the liquidated damages specified in the contracts on the grounds that defendants acted "in bad faith" by cutting deliveries below the level "justified by force majeure." Complaint, ¶¶ 44, 65 (Count I), 84 (Count VI). Additionally, Count V alleges that Petroleo exercised such right [to cut deliveries] in a manner that exceeds the bounds of good faith and commercial reasonableness," id., ¶ 79, and Count X alleges that by "participating and encouraging Petroleo's opportunistic breach of the Crude Oil Supply Agreement, and by acting in bad faith . . . PDVSA breached the implied covenant of good faith and fair dealing."Id., ¶ 99.
Defendants argue that plaintiff's reach exceeds its grasp, since the "courts will uphold liquidated damages clauses even in the event of a '"willful" breach of the contract by defendant.'" Def. Mem. at 27 n. 39 (quoting Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 192 A.D.2d 83, 86 (1st Dep't 1993) ("[P]laintiff has proved no more than a breach of contract, albeit deliberate. It is well settled that a breach of contract is compensable by contract damages alone"), (internal citation omitted),aff'd, 84 N.Y.2d 430, 435 (1994) ("[W]hether the breaching party deliberately rather than inadvertently failed to perform contractual obligations should not affect the measure of damages")). Accordingly, defendants argue that plaintiffs are not entitled to actual damages and that Counts V and X, which rely on a showing of bad faith, fail to state a claim. Def. Mem. at 27 n. 39.
With respect to the claims against Petroleo pursuant to the COSA, which category includes Count V, defendants' arguments sounding exclusively in New York law are misplaced; the COSA is to be enforced in accordance with Venezeulan law. COSA, § 5.1 Neither party has briefed the court on whether demonstrated bad faith entitles a party to actual damages beyond liquidated damages under Venezuelan law. For now, then, the court declines to dismiss Count V.
With respect to the claims against PDVSA under the SSA, however, the citation to New York law is appropriate, since the SSA is to be "enforced in accordance with the laws of New York State." SSA, § 4.1. The holding of Metropolitan Life is controlling on the facts of this case, since, as in that case, see 84 N.Y.2d at 437, the contract at issue here contains a limitation on liability. SSA, § 2.5 (incorporating § 2.13 of the COSA, which states that "in no event, as a result of a breach by Supplier of the Agreement, shall Supplier be liable for any special incidental or consequential damages including, but not limited to, loss of profits or revenue, or any loss, as the case may be, related to claims by customers of Purchaser for such damages"). Accordingly, Count VI is hereby dismissed. Count X, however, which alleges a violation of the implied duty of good faith and fair dealing (which attaches to every sales contract governed by the U.C.C.) states a separate and valid cause of action, and the court will not dismiss it at this stage.
CONCLUSION
For the foregoing reasons, the court dismisses Count VI of the Complaint but declines to dismiss the remaining counts.SO ORDERED.