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finding that "[t]he parties clearly did not consider themselves bound by the terms in the 2001 drafts" because they "continued actively to negotiate until at least June," "continued to trade drafts, albeit sporadically, until the end of October 2001," and "never abandoned the objective of obtaining a written agreement"
Summary of this case from Caddell Constr. Co. v. Danmar Lines Ltd.Opinion
03 Civ. 2625 (SAS)
May 3, 2004
Gerald Zingone, Esq., Thelen, Reid Priest, LLP, Washington, DC, for Plaintiff
Lawrence S. Hirsh, Esq., Thelen, Reid Priest, LLP, Washington, DC, for Plaintiff
Michael Evan Jaffe, Esq., Thelen, Reid Priest, LLP, Washington, DC, for Plaintiff
John J. Sullivan, Esq., Hill, Rivkins Hayden, LLP, New York, NY, for Defendant
Richard H. Webber, Esq., Hill, Rivkins Hayden, LLP, New York, NY, for Defendant
OPINION AND ORDER
PCS Sales (USA), Inc. ("PCS") brings this diversity action against Nitrochem Distribution Ltd. ("Nitrochem"), seeking a declaratory judgment that PCS had no contractual obligation to purchase ammonia from Nitrochem in 2002. Nitrochem counterclaims, arguing that there was a valid and binding contract, which PCS breached. A bench trial was held on March 31 and April 1, 2004. At the close of the trial, Nitrochem moved for judgment as a matter of law. For the reasons set forth below, Nitrochem's motion and counterclaim are denied and PCS's application for declaratory judgment is granted. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law.
Specifically, PCS seeks a "declaratory judgment from this Court that the automatic renewal provision — and in particular, its written notice requirement — contained in the unsigned 2001 contract relied on by Nitrochem is void and unenforceable." First Amended Complaint for Declaratory Judgment ("Compl.") ¶ 16. PCS seeks a declaratory judgment pursuant to the Declaratory Judgment Act. See 28 U.S.C. § 2201. PCS also requests that this Court award it the costs of bringing this lawsuit. See Compl. ¶ 17.
See Transcript of March 31 — April 1, 2004 Bench Trial ("Tr.") at 269.
I. FINDINGS OF FACT
"The facts of this case sound like the delight of a contracts professor, if no one else." PCS, a Delaware corporation headquartered in Northbrook, Illinois, is a subsidiary of Potash Corp. of Saskatchewan. PCS's primary business is the sale of fertilizer and chemical products produced by affiliated companies for use in various agricultural and industrial applications. Additionally, PCS purchases various fertilizer and chemical products, including ammonia, for resale to its affiliates or to unaffiliated customers.
Axelson, Inc. v. McEvoy-Willis, 7 F.3d 1230, 1231 (5th Cir. 1993).
See Joint Pretrial Order ("JPTO") ¶ 1; Tr. at 18 (testimony of Bernard Rock, Vice President of Industrial Sales for PCS).
See JPTO ¶ 3.
Nitrochem, a Swiss corporation with its principal place of business in Binningen, Switzerland, is represented in the United States by its agent, Altus Corp. ("Altus"), a New Jersey company. Nitrochem is engaged in the business of selling anhydrous ammonia and other chemical products produced by JSC Togliattiazot, a Russian corporation.
See id. ¶ 5; 1/1/98 Agency Agreement Between Altus and Nitrochem, Defendant's Exhibit ("Def. Ex.") M.
See JPTO ¶ 4.
A. The 1998-2000 Ammonia Supply Agreements
In each of the first three years of their relationship, the parties negotiated and entered into one-year written agreements. Specifically, the parties met and, by December of each year, signed an agreement for the sale and purchase of anhydrous ammonia in the following calendar year. Among other common provisions, each of the contracts provided for the calculation of the sale price solely by reference to a published index, and the delivery of the ammonia in shiploads of 35,000 metric tons. There were, however, slight differences between the contracts in terms of volume, and the presence of an automatic renewal, or "evergreen clause." Specifically, the 1999 contract contained an evergreen clause, but the 1998 and 2000 contracts did not.
See id. ¶¶ 7, 9-10, 15; see also 1998 Contract, Plaintiff's Exhibit ("PI. Ex.") 2; 1999 Contract, PL Ex. 3; 2000 Contract, Pl. Ex. 4.
See JPTO ¶¶ 6-7, 10, 14-15.
See id. ¶¶ 11, 16, 51.
The 1998 contract provided for the sale of approximately 420,000 metric tons of ammonia, JPTO ¶ 8; the 1999 contract was for 560,000 metric tons, id. ¶ 11; and the 2000 contract provided for the sale of approximately 630,000 metric tons, id. ¶ 16. See generally PL Exs. 2-4.
The clause states: "The supply period shall commence on January 1, 1999, and continue through December 31, 1999, and year to year thereafter unless terminated at the end of any such period, by written notice of either party at least three months prior to the end of any applicable term." JPTO ¶ 12.
Id. ¶ 17.
B. The 2000-01 Contract Negotiations
In late September or early October 2000, PCS and Altus met at PCS's Illinois offices to discuss contract terms for the year 2001, In particular, the parties addressed the possibility of adding an automatic renewal clause and implementing a pricing mechanism based on negotiation, rather than published indices. The parties also agreed that it would be mutually beneficial for them to continue doing business while negotiating a contract for 2001. Thus, Rock, speaking on behalf of PCS, notes that he and his associate, George Alleyne, stated that:
Tr. at 23 (Rock testimony).
Id. at 24 (Rock testimony); id. at 200 (testimony of Alien Spirytus, president and owner of Altus Corp.). To that end, the drafts exchanged in 2000 and 2001 included a provision for the negotiation of prices to take place at least ten days before the bill of lading date for each delivery. The fall-back pricing mechanism was the same method used in each of the prior years' contracts — price to be determined by reference to published indices. See, e.g., 1/22/01 Draft Contract for 2001, PL Ex. 16; Pl. Exs. 2-4; see also Tr. at 237 (Spirytus testimony) (discussing price mechanisms).
Id. at 26 (Rock testimony), 62 ("[I]t was clear at the beginning of the year that we wanted to develop a contract between the two companies for 2001 and that we had a basis for that based upon — they had the ability to perform, we had the ability to perform based on the previous year, so they had expressed the same intention of delivering to us, of continuing to supply us. . . . So, yes, we said okay, it is our intent we need 18 cargoes for our supply system for 2001.").
it was [PCS's] intention . . . to have 16 or 18 cargoes [in calendar year 2001] . . . and we developed a logistical program that could manage that amount and [Nitrochem] expressed that [it] felt it was important business for [it]. [Nitrochem] didn't want to change anything per se so between [the parties, so] we said let's continue to do business together while we negotiate a contract for 2001 and then in the event that we are able to conclude a contract for 2001, that those shipments would become part of that. . . .
Id. at 26-27 (Rock testimony). Rock further indicated that while it is not ordinarily PCS's preferred business practice to do business in the absence of a signed, written contract, PCS does do this periodically. Additionally, PCS does do "spot business" as a buyer and as a seller. Id. at 27 (Rock testimony).
Following this meeting, Altus and PCS exchanged numerous drafts, but by the end of December 2000, they had not reached an agreement that both parties were willing to sign. Nonetheless, in January 2001 Nitrochem delivered, and PCS accepted, shipments of ammonia. For each shipload of ammonia delivered to PCS in 2001, Altus prepared and transmitted to PCS a set of payment documents, including a price calculation, commercial invoice, ocean bills of lading, certificate of quantity, and certificate of quality. On each of these invoices, Nitrochem wrote the following: "Re: . . . Delivery in accordance with the contract for 2001." The price for these shiploads was determined by the published index method, and the deliveries were made at regular intervals throughout the year. There were no demurrage charges applied to any of these shipments.
See Pl. Exs. 5-13 (e-mail correspondences and accompanying drafts exchanged through the end of December 2000).
Specifically, Altus sent a first draft to PCS on October 3, 2000; PCS returned a draft response on November 10; Altus sent a new draft on December 9, which PCS returned on December 21. See JPTO ¶¶ 24-30.
During calendar year 2001, Nitrochem delivered nineteen shipments, each consisting of approximately 35,000 metric tons of ammonia, plus one partial shipment of 3,250 metric tons, for a total of approximately 668,250 metric tons. See Def. Exs. L1-L20 (documentation of 2001 shipments, including the bills of lading and commercial invoices).
JPTO ¶ 59. There is no evidence that anyone other than Rita Kirk, for whom these words lacked any significance, knew that this phrase was printed on each invoice. See Tr. at 186 (testimony of Rita Kirk, Manager of International Sales Administration for PCS). In other words, both Rock and Alleyne were unaware of this language.
See Def. Exs. L1-L20; Tr. at 218-19 (Spirytus testimony) (no actual demurrage charges). "Demurrage" refers to payments typically owed to the shipper as compensation for delays in loading or unloading. See, e.g., 3/17/04 Testimony De Bene Esse of Stephen Francis Dowdle, Vice President of Fertilizer Sales for PCS, Pl. Ex. 45, at 31.
The parties continued to trade drafts for the 2001 contract in January and February, and on March 28, 2001, apparently growing impatient, PCS submitted to Nitrochem a signed contract. Rather than countersign the agreement, Nitrochem sent an email to PCS on May 2, 2001, indicating that there were several provisions to which it would not agree. In particular, Nitrochem objected to the "competitive provision" and the inspection, warranty, indemnification, termination, and remedies clauses, in their entirety, as well as some of the language in the "taxes" and "complete agreement" clauses.
The drafts of the proposed 2001 contract contained the following contract duration clause:
The term of this contract shall commence as of January 1, 2001, and shall expire on December 31, 2001; provided however that this contract shall automatically be extended for successive renewal terms of one year each unless either party provides written notice of termination to the other party at least three months prior to the commencement of any such renewal term.
Any adjustments or changes to the contract for the next renewal term shall be proposed and agreed upon not later than six months prior to the renewal term. If no agreement is reached, the parties shall meet within thirty days and arrive at a resolution of all differences with regard to the proposed changes. If the parties are unable to resolve the differences, either party may terminate this contract in accordance with the termination procedure described above.See Pl. Exs. 6, 8, 10, 13, 16, 18, 22, 25, 31.
See Tr. at 28 (Rock testimony) (recalling impatience regarding the lack of a written contract); Pl. Exs. 14-20 (drafts and accompanying e-mail messages exchanged in January and February of 2001); Pl. Exs. 20, 22 (cover letter and copies of signed contract). PCS could not locate a copy of the original contract conveyed to Nitrochem in March — as such, Exhibit 22 is the March contract that Nitrochem countersigned in November.
See PL Ex. 24; see also Tr. at 163 (Spirytus testimony).
See PL Ex. 25. The "competitive provision" referred to Nitrochem's obligation to meet the lower price offered by a competitor when properly notified by PCS. See id. ¶ 7.
Thereafter, the parties continued their negotiations, exchanging drafts and comments over the next several months with the objective of entering into a written, signed contract. Although the parties had almost reached an agreement by the end of June 2001, ultimately PCS and Nitrochem could not agree on contract language acceptable to both parties. In particular, they disputed the content of the force majeure and complete agreement clauses. By the end of June, active negotiations between the parties for the 2001 contract had essentially ceased. Consequently, when the parties met in Chicago on September 11, 2001, the focus of their discussions had shifted from the 2001 contract negotiations to PCS's 2002 requirements. It was during this meeting that PCS's representatives, Rock and Dowdle, informed Nitrochem's agents that their needs for 2002 would be reduced from prior years — at most, PCS would require eight firm and eight optional cargoes of ammonia. Rather than argue that such a reduction was prohibited under the "terms" of their agreement, Nitrochem's representatives looked for alternative purchasers for Nitrochem's ammonia.
See JPTO ¶¶ 38-41. Given the number of drafts that were exchanged between the parties during the negotiations, it is not surprising that at least one of these drafts was inadvertently omitted from the record. See Tr. at 99-100 (statements of the Court) (noting that there is a missing draft, which was submitted between March and June of 2001, an oversight that the parties acknowledged after close inspection of the drafts in evidence).
See Tr. at 27-28 (Rock testimony) ("[I]t was clear that both parties were making efforts to consummate this into a contract, which didn't happen of course, but nonetheless it was our desire at the time, as it was theirs, evidenced by all the work done working towards a contract, there was a desire to get there."); id. at 235 (Spirytus testimony) (noting that the "goal" was to have a signed, written agreement with terms that would bind the parties and that, to his knowledge, this goal never changed).
That the parties came close to reaching an agreement is evident from Alleyne's email to Spirytus of June 22, 2001, where he indicated, "we have forwarded your suggested changes to the Draft Contract to Legal for hopefully their final review and will revert to you shortly." PL Ex. 27.
See 6/18/01 Email to Rock Alleyne from Spirytus, PL Ex. 26; Tr. at 44-46 (Rock testimony).
See Tr. at 107 (Rock testimony).
See id. at 47 (Rock testimony) ("[S]ince we didn't have a contract that either party was happy with at that point in time [i.e., `sometime in August'] or was willing to sign, we just agreed we would discuss and trying [sic] to arrive at a number that might be appropriate for both of us. . . . for 2002."); id. at 50 (Rock testimony) ("At that point it really appeared as if we were not going to have a formal agreement for 2001 at that time. We had been conducting business on a scheduled basis between the two companies. We were receiving what our earlier indications were. They were shipping. So the point really was what were we going to do about 2002 at that point and what might that look like.").
See id. at 51 (Rock testimony); PL Ex. 45 at 21-22.
See Tr. at 52 (Rock testimony) (Nitrochem never argued that it was too late to adjust the quantity for 2002); id. at 182 (Spirytus testimony) (Nitrochem began to look for alternative customers).
After the meeting, the relationship between the parties slowly deteriorated. In October 2001, Alleyne and Spirytus exchanged revised drafts of the 2001 contract, but Rock, objecting to the automatic renewal clause, would not sign the draft and negotiations stalled again. On November, 19, 2001, Rock informed Spirytus that although PCS wanted to purchase ammonia from Nitrochem in 2002, it could not do so on a contractual basis. Nitrochem did not inform PCS that its reduction to zero contract tons was barred by the notice provision in the 2001 contract drafts. One week later, Nitrochem resurrected the March 28, 2001 contract from its files, countersigned it, and mailed it to PCS.
See Pl. Exs. 33-34 (draft cover letter and contract transmitted to Rock by Alleyne for signature, with handwritten comment by Rock indicating that he would not sign it and striking out the contract duration clause).
JPTO ¶ 54; see also Tr. at 54-55, 56 (Rock testimony); Tr. at 215 (Spirytus testimony).
See Tr. at 55-56 (Rock testimony).
See PL Ex. 22; Tr. at 152 (Spirytus testimony). Spirytus testified that this was done out of an "abundance of caution and on the advice of [his] attorney." Id. at 151-52.
In 2002, PCS purchased approximately two shiploads of ammonia from Nitrochem, as spot purchases. On March 26, 2003, Nitrochem served PCS with a notice of intention to arbitrate. On April 15, 2003, PCS filed its Complaint for declaratory judgment and injunctive relief to stay arbitration, and Nitrochem counterclaimed for breach of contract on July 24, 2003.
See Tr. at 244 (Spirytus testimony).
See Compl.; First Amended Answer and Counterclaim. PCS made a motion for an order to stay Nitrochem from initiating or continuing an arbitration against it, which this Court denied as moot on December 10, 2003.
II. CONCLUSIONS OF LAW
1. Choice of Law
A. Applicable Legal Standards
A federal court presiding over a diversity action applies the substantive law of the state in which it is located, including that state's choice of law rules. In New York, "[t]he first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved." A real conflict exists "`[w]here the applicable law from each jurisdiction provides different substantive rules.'" If there is no substantive difference, a "New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it."
Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 137 (2d Cir. 1991); Korea Life Ins. Co. v. Morgan Guar. Trust Co. of N.Y., 269 F. Supp.2d 424, 440 (S.D.N.Y. 2003).
Maryland Cas. Co. v. Continental Cas. Co., 332 F.3d 145, 151 (2d Cir. 2003) (quoting Allstate Ins. Co. and Stolarz, 81 N.Y.2d 219, 223 (1993)).
International Bus. Machines Corp. v. Liberty Mut. Ins. Co., No. 03 Civ. 7237, 2004 WL 541126, at *4 (2d Cir. Mar. 19, 2004) (quoting Curly v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998)).
Id.
2. Principles of New York Contract Law
Disputes arising from a contract for the sale of goods are governed by New York's Uniform Commercial Code ("U.C.C."), "as interpreted in light of common law principles to the extent [those principles are] not inconsistent with the U.C.C." As such, a court must consider whether the parties agreed to be contractually bound and if so, which terms govern the resulting contract.
See N.Y. U.C.C. § 2-102; see also id. § 2-105(1) (defining goods as all movable items). The parties do not dispute the applicability of the U.C.C., as adopted in New York, to the instant action.
Phoenix Ancient Art, S.A. v. Kimbell Art Found., No. 03 Civ. 1008, 2003 WL 22705119, at *2 (S.D.N.Y. Nov. 17, 2003).
The touchstone of any valid contract is a meeting of the parties' minds. Absent a "meeting of the minds on all essential terms," there is no contract. The parties must manifest their assent to be bound by the contractual terms, either "by word, act, or conduct which evinces [their intent] to contract."
Opals on Ice Lingerie v. Body Lines Inc., 320 F.3d 362, 372 (2d Cir. 2003) (quoting Schurr v. Austin Galleries of Ill., 719 F.2d 571, 576 (2d Cir. 1983)). Even where interpretation of an agreement is otherwise controlled by the U.C.C., courts use common law principles to "determine whether a meeting of the minds has occurred." AFP Imaging Corp. v. Philips Medizin Systeme Unternehmensbereich Der Philips GmbH, No. 92 Civ. 6211, 1994 WL 652510, at*5 (S.D.N.Y. Nov. 17, 1994), aff'd, 122 F.3d 1055 (2d Cir. 1995) (unpublished decision).
Opals on Ice Lingerie, 320 F.3d at 372 (quotation marks and citation omitted).
Maffea v. Ippolito, 668 N.Y.S.2d 653, 654 (2d Dep't 1998).
Reflecting this principle, section 2-204 of New York's U.C.C. states, in relevant part, that "[a] contract . . . may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." Additionally, sections 2-206(1) and 2-207(3) "expressly allow for the formation of contracts partly or wholly on the basis of such conduct." In other words, where the parties behave as though they have a contract, courts will recognize the existence of that contract, "whether or not the precise moment of agreement may be determined." For instance, in Otis Elevator Co. v. George A. Fuller Co., the court found that an agreement existed between a general contractor and a subcontractor, even though they failed to agree as to when payment would be due to the subcontractor, because both fully performed and their "course of conduct in carrying out performance under those terms upon which they agreed [made] it absolutely clear that each party recognized that a valid and enforceable contract existed, the terms of which consisted of those terms on which the writings of the parties agreed" and U.C.C. gap fillers.
N.Y. U.C.C. § 2-204 (McKinney 2004).
1 James J. White Robert S. Summers, Uniform Commercial Code (4th ed. 1995) § 1-2.
J. Baranello Sons v. Hausmann Indus., Inc., 571 F. Supp. 333, 341 (S.D.N.Y. 1983) (quotation marks and citation omitted).
569 N.Y.S.2d 118 (2d Dep't 1991); see also Hornell Brewing Co., Inc. v. Spry, 664 N.Y.S.2d 698, 701 (Sup.Ct. 1997) (finding that the parties' actions — defendants' procurement of regulatory and importation approval in conformity with Canadian law; defendants' placement of orders for the purchase of plaintiff's products; plaintiff's shipment of its products to defendants; and defendants' remittance of payments — clearly manifested mutual recognition of the existence of a binding obligation).
"[C]onduct by both parties which recognizes that agreement is not yet consummated establishes the non-existence of a contract, . . ." For example, where the parties have engaged in extensive negotiations, but "intended not to be bound until a written agreement was executed, `no amount of negotiation or oral agreement to specific terms will result in the formation of a binding contract.'" In fact, as the court acknowledged in Durable, Inc. v. Twin County Grocers Corp., during the negotiation process, parties routinely conduct business with one another:
Strippit, Inc. v. Household Utilities, Inc., No. 88 Civ. 1173, 1989 WL 103673, at *5 n. 4 (W.D.N.Y. Sept. 1, 1989).
Phoenix Ancient Art, S.A., 2003 WL 22705119, at *2 (quoting Winston v. Mediafare Entm't Corp., 777 F.2d 78, 90 (2d Cir. 1985)). In evaluating "whether the parties so intended, the Court focuses on whether: (1) the parties have expressly reserved the right not to be bound absent a written contract; (2) there has been partial performance; (3) the parties have agreed to all the terms of the alleged contract; and (4) the agreement is of a type that is usually committed to writing." Id.
Parties can and do conduct business relationships . . . during discussion of whether . . . to enter into a more binding or longer-lasting relationship. If this is kept in mind, various subsequent events are as consistent with continuing negotiations, the hope of agreement, or the possibility that some business might be done without a binding umbrella relationship, as with entry into a large-scale long-term contract. . . .
839 F. Supp. 257, 261 (S.D.N.Y. 1993); see also id. ("Nonbinding arrangements based on mutual expectations or common interests are often even more effective in promoting coordination of activity than formal agreements, and indeed have the advantage that either party can terminate such an informal arrangement at will.").
If a contract has been formed, courts must determine the terms of that contract. To that end, section 2-207 addresses the paradigmatic "battle of the forms" situation, implicating "the all too common business practice of blithely drafting, sending, receiving, and filing unread numerous purchase orders, acknowledgments, and other diverse forms containing a myriad of discrepant terms." Section 2-207 states, in relevant part:
See Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 781 (2d Cir. 2003).
CT Chems. (U.S.A.), Inc. v. Vinmar Impex, Inc., 81 N.Y.2d 174, 179 (1993) (quotation marks and citation omitted).
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
N.Y. U.C.C. § 2-207 (McKinney 2004).
Section 2-207 precludes application of common law principles, such as the so-called "mirror image" and "last shot" rules. Under section 2-207, neither party benefits from "the terms it attempted to impose unilaterally on the other. . . . Instead, all of the terms on which the parties' forms do not agree drop out, and the U.C.C. supplies the missing terms."
Lorbrook Corp. v. GT Indus., Inc., 562 N.Y.S.2d 978, 981 (3d Dep't 1990).
B. Discussion
1. Choice of Law
PCS argues that Illinois law applies because the first negotiation between the parties for a 2001 contract took place in PCS's Illinois offices, the parties negotiated by phone between New Jersey and Illinois, the September 11, 2001 meeting took place in Illinois, and payment was to be made from Illinois. Nitrochem counters that New York law applies because in their prior commercial dealings, i.e., the 1998, 1999, and 2000 written contracts, the parties agreed that New York substantive law would govern.
PCS's Pretrial Brief ("Pl. Mem."), Ex. E to JPTO, at 3-4.
See Nitrochem's Initial Pretrial Memorandum of Law ("Def. Mem."), Ex. F to JPTO.
As such, the first question is whether there is a real conflict between the laws of Illinois and New York. As the parties concede, the only difference between the two is that New York requires written notice of contract termination and Illinois does not. But there is no need to decide whether written notice would be required to preclude the automatic renewal of the 2001 contract unless such a contract exists. There is no conflict in the laws of New York and Illinois as to that question. I shall therefore apply New York law in determining whether the parties entered into a valid contract for the sale of ammonia in 2001.
See Pl. Mem. at 3-4.
2. Contract Formation
Nitrochem argues that "the parties unquestionably engaged in conduct that recognized the existence of their contract, in that Nitrochem delivered ammonia and invoiced PCS in the manner set out in the various drafts of the contract exchanged, and PCS accepted the deliveries and duly made payment." Specifically, the following conduct purportedly establishes the existence of a 2001 contract pursuant to the terms in the drafts: (1) Nitrochem's shipment and PCS's acceptance of approximately twenty shiploads of ammonia in deliveries made at regular intervals throughout the year; (2) the parties' calculation of price in accordance with the fallback pricing mechanism from the various drafts of the 2001 contract; (3) PCS's failure to object to the phrase "in accordance with the contract for 2001" printed on the invoices transmitted in connection with the shipments; (4) PCS's apparent adherence to the six-month notification rule contained in the drafts; (5) PCS's occasional references to "contract tons" and the demurrage rate in the "purchase contract"; and (6) the alleged cessation of active negotiations by June 2001,
Nitrochem's Pretrial Reply Memorandum of Law ("Def. Reply"), Ex. G to JPTO, at 2.
See generally 4/8/04 Letter to the Court from John Sullivan, Nitrochem's counsel ("Def. 4/8 Ltr."); Def. Reply; Def. Mem.
Nitrochem's argument lacks merit. Although a court may, under sections 2-204 and 2-207(3), recognize a contract based on conduct, this is only appropriate where the parties' undisputed actions "clearly manifest mutual recognition that a binding obligation was undertaken." Where there is inconsistent behavior that suggests the absence of mutual assent, it is inappropriate to bind the parties to an agreement. In other words, where, as here, the conduct of the parties acknowledges that an agreement has not yet been reached, that conduct is insufficient to establish a contract.
Hornell Brewing Co., Inc., 664 N.Y.S.2d at 701; see also Otis Elevator Co., 569 N.Y.S.2d at 118.
See Strippit, Inc., 1989 WL 103673, at *5 n. 4; Durable, 839 F. Supp. at 261.
See Strippit, Inc., 1989 WL 103673, at *5 n. 4.
The parties clearly did not consider themselves bound by the terms in the 2001 drafts, as evidenced by the fact that they continued actively to negotiate until at least June. Rather than sign the drafts at the end of June, the parties continued to trade drafts, albeit sporadically, until the end of October 2001. According to both Spirytus and Rock, the parties never abandoned the objective of obtaining a written agreement, as they had such an agreement in the three prior years of their business relationship. Thus, the parties' decision to trade drafts throughout 2001 conflicts with Nitrochem's theory that the parties viewed themselves as contractually bound by the terms in the drafts.
See Tr. at 107 (Rock testimony).
See Pl. Exs. 29-32 (e-mail correspondences with attached drafts).
See Tr. at 27-28 (Rock testimony); id. at 235 (Spirytus testimony).
Additionally, Nitrochem's retrieval and countersignature of the March draft in November runs counter to its alleged understanding that the parties had a contract governed by the terms in the drafts. Had Nitrochem believed that it had such a contract based on conduct, it would have been unnecessary to locate and sign an old, long superseded draft. Thus, because the parties' actions unequivocally demonstrate that they did not think they had a binding contractual obligation, this case is distinguishable from those in which the courts recognized the existence of contracts by virtue of the parties' conduct.
Moreover, to the extent that the parties' conduct is consistent with an agreement on certain terms contained in the drafts, this conduct is equally supportive of a finding that they had an interim arrangement. First, Nltrochem's shipment and PCS's acceptance of deliveries of ammonia at regular intervals throughout 2001 reveals that the parties maintained a business relationship in anticipation of a written agreement. This behavior merely continued the parties' practice from prior years of shipping and receiving deliveries of approximately 35,000 metric tons (the amount of ammonia that typically equates to a shipload), evenly spaced throughout the calendar year. There is nothing in this arrangement to demonstrate an understanding that the parties' considered themselves "bound" by the terms in the draft agreements.
See Durable, 839 F. Supp. at 261.
Second, although the price charged for each shipment in 2001 corresponds with the "fallback price" of the drafts, these prices also reflect the pricing methodology from the parties' three prior contracts — i.e., reference to a published index. As such, the pricing mechanism used for the 2001 deliveries does not support a finding that the parties had a contract based on the terms in the drafts.
Third, PCS's failure to object to the words "in accordance with the contract for 2001" on the various commercial invoices is understandable in light of Kirk's testimony that she never notified relevant PCS employees about this language as it had no bearing on the payment of the invoice. As such, PCS's silence regarding this language does not demonstrate the existence of a contract in accordance with the terms in the drafts.
See supra note 21 and accompanying text.
Fourth, PCS's apparent adherence to the six-month notification rule in the drafts lacks persuasive force. Although PCS did notify Nitrochem in late June of its anticipated requirements for the year 2002, the parties failed to meet within thirty days to discuss quantities for 2002 as the various drafts required. Moreover, when PCS indicated that its fixed requirements for 2002 would be drastically reduced, Nitrochem did not assert that PCS was contractually obligated to accept a fixed number of deliveries in 2002. Fifth, PCS's references to "contract tons" and demurrage rates do not demonstrate the existence of a 2001 contract based on the drafts. Nitrochem first notes that "Mr. Rock was careful to phrase his statements to Mr. Spirytus regarding ammonia for 2002 in terms of `contract' tons," arguing that these statements would be "relevant and necessary only if the parties were acting in 2001 on a contract basis." Specifically, Rock testified, "I also expressed to Alan that I was sure we were buying ammonia for 2002, we would be buying not on a contract basis from them, but we would consider them to be still one of our primary ammonia suppliers. . . . " This statement, made in late November 2001, clearly demonstrates that PCS conveyed to Nitrochem that it was not bound by any contract in 2002.
Def. 4/8 Ltr.
Tr. at 55 (Rock testimony).
Nitrochem further emphasizes Rock's reference to "contract tonnes purchased in 2001," in conjunction with the statement "our requirements for 2001 were substantially less than we had agreed in Dec. 2000 to purchase during 2001. [N]evertheless we honored our commitment and worked hard at finding a home for that volume." Nitrochem contends that by this statement, Rock acknowledged the existence of a 2001 contract on terms in the drafts. But, in light of the parties' history and fast-deteriorating relationship, this statement only demonstrates that PCS agreed to purchase approximately twenty shiploads of ammonia in 2001, pending the outcome of the negotiations.
Def. 4/8 Ltr. at 7 (emphasis added).
Sixth, the alleged cessation of active negotiations by late June 2001 is not an acknowledgment that the parties felt contractually bound by the terms in the draft. The parties did not sign the draft at this point and indeed continued to exchange drafts that fall. It was commercially reasonable for the parties to focus their efforts on negotiating quantities for 2002, as more than six months had passed without a written contract and without incident.
See supra note 32 and accompanying text.
For the foregoing reasons, the parties' conduct does not provide a sufficient basis for recognizing the existence of a contract based on the terms common to the drafts. The evidence suggests that, at most, the parties entered into an oral contract in late 2000 under which Nitrochem would sell to PCS approximately twenty shipments of ammonia, in accordance with the delivery schedule (evenly spaced throughout the year) and pricing mechanism traditionally used by the parties.
See Pl. Exs. 2-4.
Because I conclude that there was no contract, I need not speculate as to the terms that such a contract might have contained. I note, however, that the purpose of an evergreen clause is to impart greater permanence to a contractual arrangement, allowing the contract to govern the relationship between the parties after its expiration without further negotiation. Given the failure of the parties to successfully negotiate and execute a formal contract for 2001, it would be particularly inappropriate for this Court to imply an evergreen term into what is, at best, an interim agreement between the parties to continue to do business in contemplation of reaching a final agreement. To do otherwise would transform an interim arrangement into a final agreement that the parties themselves failed to reach.
III. CONCLUSION
For the foregoing reasons, Nitrochem's motion for judgment as a matter of law is denied, and PCS's application for declaratory judgment is granted. PCS had no contractual obligation to purchase ammonia from Nitrochem in 2002. PCS's application for an award of its costs incurred to bring this action is denied. Nitrochem's counterclaim for breach of contract and request for relief including dismissal of PCS's complaint, damages, and an award of costs, are denied for the reasons set forth above. The Clerk of the Court is directed to close this case.
The general rule is that each party in a federal litigation pays its own attorneys' fees. See Alcatel Space, S.A. v. Loral Space Communications Ltd., 2002 WL 1391819 (S.D.N.Y. June 25, 2002) (citing cases). There are three recognized exceptions to this general rule: (1) where a statute or enforceable contract provides for an award of attorneys' fees; (2) where the prevailing plaintiff confers a common benefit upon a class or fund; and (3) where a party willfully disobeys a court order or "when the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons." Id. at *6 (quoting Alyeska Pipeline Serv. Co., 421 U.S. 240, 257-60 (1975)). None of these exceptions apply here. The first two are clearly inapplicable. Moreover, neither party has willfully disobeyed a court order, and Nitrochem has not acted in bad faith by initially seeking arbitration or defending this lawsuit. As such, there is no basis for awarding costs to either party.
SO ORDERED.