Case Title: Honeywell International v. Air Products & Chemicals

Citation: 

Docket Number: 400, 2004

State: delaware

Court: Delaware Supreme Court

Date: 2005-03-29T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
HONEYWELL INTERNATIONAL  
§ 
INC. and GEM MICROELECTRONIC § 
MATERIALS, L.L.C., 
 
 
§ 
 
 
 
§ No. 400, 2004      
 
Plaintiffs Below, 
 
§ 
 
Appellants, 
 
§ Court Below: Court of Chancery  
 
 
 
§ of the State of Delaware in and for 
              v. 
 
 
§ New Castle County 
 
 
 
§ 
AIR PRODUCTS & CHEMICALS,   
§ C.A. No. 20434 
INC., 
 
 
§  
 
 
 
§  
 
Defendant Below, 
 
§  
 
Appellee. 
 
§ 
 
 
Submitted: February 16, 2005 
 
Decided: 
March 29, 2005 
 
Before HOLLAND, JACOBS and RIDGELY, Justices. 
 
 
Upon appeal from the Court of Chancery. AFFIRMED IN PART; 
REVERSED IN PART and REMANDED.  
 
 
Martin P. Tully, John E. Abramczyk and Jason A. Cincilla, Esquires, of 
Morris, Nichols, Arsht &Tunnell, Wilmington, Delaware; Of Counsel:  Jonathan F. 
Putnam (argued), Lee Ann Stevenson, Zachary S. Brez and Joshua B. Simon, 
Esquires, of Kirkland & Ellis LLP, New York, New York; for Appellants. 
 
 
James W. Semple, Lewis H. Lazarus (argued), Michael A. Weidinger, 
Matthew F. Lintner and Amy A. Quinlan, Esquires, of Morris, James, Hitchens & 
Williams LLP, Wilmington, Delaware; Of Counsel:  Thomas F. Cullen, Jr., 
Esquire, of Jones Day, Washington, D.C.; Barry R. Satine, Richard H. Sayler and 
Jennifer Seraphine, Esquires, of Jones Day, New York, New York; for Appellee. 
 
 
JACOBS, Justice: 
 
Honeywell International Inc. and GEM Microelectronic Materials, L.L.C. 
(collectively "Honeywell"), the plaintiffs-below, appeal from a judgment of the 
Court of Chancery awarding lost profits damages to Honeywell in this breach of 
contract action against the defendant-below, Air Products & Chemicals, Inc ("Air 
Products").  The Court of Chancery concluded that Air Products had breached the 
parties' Strategic Alliance Agreement ("Alliance Agreement" or "Agreement") but 
found Honeywell entitled only to $8,130,987 of the $99,000,000 in lost profits that 
Honeywell had claimed.  Honeywell argues that it is entitled to additional lost 
profits damages as a matter of law, because the Court of Chancery based its 
damages award upon two erroneous rulings.  Air Products has cross-appealed, 
claiming that the Court of Chancery erred by awarding any damages, because the 
Alliance Agreement was not a legally valid and enforceable contract and the Court 
erred in holding otherwise.   
We affirm the Court of Chancery's determination that the Alliance 
Agreement was valid and enforceable.  We also affirm that Court's determination 
that the calculation of Honeywell's lost profits damages is properly based upon Air 
Products' historic business, rather than upon the expanded business that resulted 
from Air Products' post-Agreement acquisition of a third party firm.  We reverse, 
however, the Court's ruling that Air Products was obligated to pay damages only 
for a two-year period because that determination rests upon Air Products' right to 
 
2
terminate the Alliance Agreement on two years' notice—a right, we conclude, that 
was not triggered in this case.  Accordingly, we remand the case to the Court of 
Chancery for a calculation of Honeywell's lost profits through 2008, the end of the 
Agreement's original term. 
FACTS 
1. Formation and Performance of the Strategic Alliance Agreement 
 
 
In October 1998, Honeywell and Air Products entered into the Strategic 
Alliance Agreement that forms the subject of this lawsuit.1  In that Agreement, the 
parties formed an "Alliance" under which Air Products would market and sell 
certain wet process chemicals that Honeywell manufactured, and the contracting 
parties would share all profits derived from those "Alliance" sales.   
The parties established the scope of their Alliance Agreement by defining 
two critical terms—"Products" and "Customers"—that were to be sold and 
serviced by the Alliance.  Thus, the Agreement recites that "the purpose of the 
strategic alliance is to sell globally the high purity wet process chemicals identified 
in Exhibit A (the 'Products') to the customers identified in Exhibit B (the 
'Customers')."  The parties then agreed that: 
 
 
                                          
 
1 Air Products and Allied Signal, Inc. were the original parties to the Agreement.  In November 
1999, Allied Signal acquired Honeywell, Inc. and changed its name to Honeywell International, 
Inc. 
 
3
[Air Products] would purchase from [Honeywell] its total 
requirements of the Products to be sold by [Air Products] to 
Customers under any [Air Products] label.  Air Products (i) will 
use reasonable efforts to promote the sale of the Products to the 
Customers, and (ii) will not actively promote the sale to the 
Customers of Products manufactured by [Air Products] or 
purchased from other suppliers.2   
 
 
Thus, Air Products committed to purchase its requirements of "Products" 
from Honeywell.  In exchange, Honeywell committed to not actively promote the 
sale of "Products" under its own labels to the "Customers."  The Agreement 
released Honeywell from that commitment, however, if Air Products failed to meet 
certain sales targets that were specified in the Agreement.3  Thus, in Section 1(c), 
the parties agreed that "if during any two consecutive calendar years beginning on 
or after January 1, 2000, [Alliance sales] are less than 60% of the sales targets set 
forth in Exhibit C," Honeywell was no longer bound by its commitment not to 
actively promote Products under its own labels to Customers.4 
 
The initial term of the Agreement was for ten years, and would expire on 
September 30, 2008.  The Agreement empowered both parties to terminate the 
Agreement earlier, however, but only on certain conditions.  Under Section 2(b), 
Honeywell's power to terminate was triggered: 
                                          
 
2 Strategic Alliance Agreement § 1(b). 
 
3 Exhibit C of the Agreement set out the sales targets:  $25 million for 2000, $50 million for 
2001, and $75 million for 2002.  Targets for later years were to be established by mutual 
agreement after "good faith negotiations." 
 
4 Strategic Alliance Agreement § 1(c). 
 
4
If during any two consecutive years beginning on or after January 
1, 2000, [Alliance sales] fall below 40% of the sales targets set 
forth in Exhibit C . . . [Honeywell] shall have the right to give 
notice of termination of this Agreement to [Air Products] at any 
time during the next calendar year, such termination to be 
effective no sooner than two years after the date such notice is 
given.5 
 
Under Section 2(c), Air Products' power to terminate the Agreement was triggered: 
 
If during any two consecutive calendar years beginning on or 
after January 1, 2000, [Honeywell's] sales to the Customers 
(excluding Customers to which [Honeywell] has sold Products 
prior to this Agreement) of Products under [Honeywell's] own 
labels represents more than 10% of the total [Alliance sales], [Air 
Products] shall have the right to give notice of termination of the 
Agreement to [Honeywell] at any time during the next calendar 
year, such termination to be effective no sooner than two years 
after the date such notice is given.6 
 
 
Because the parties' rights and obligations under the Agreement would 
depend critically upon the "Products" and "Customers" that were listed on Exhibits 
A and B, respectively, the parties agreed that those lists could be modified "from 
time to time by the mutual agreement of the parties."  Specifically, Section 1(a), 
provided that the parties would review and modify Exhibits A and B in good faith 
at least once a year "to reflect the parties' current assessment" of the focus of the 
Alliance. 
                                          
 
5 Id. at § 2(b). 
 
6 Id. at § 2(c) 
 
5
In fact, however, from the very inception of the Alliance the parties never 
strictly observed the modification procedures called for by the Alliance 
Agreement.  After the Agreement became effective, Air Products frequently took 
orders from firms that were not identified as "Customers" in Exhibit B, yet were 
treated by Air Products as Alliance "Customers."  Moreover, until 2003, Air 
Products filled all of its wet process chemical purchase orders through Honeywell, 
even if the chemicals or the purchasers were not listed as "Products" or 
"Customers" in Exhibit A or Exhibit B to the Agreement. 
In 2000 and 2001, the Alliance's sales fell below 60% of the sales targets 
mandated by the Agreement.  As a result, Honeywell regained the right to actively 
promote "Products" under its own labels to "Customers," and it began exercising 
that right in 2002. 
2. Air Product's Purchase of the Ashland Chemicals ECD Division 
In June 2003, Air Products notified Honeywell that it (Air Products) had 
agreed to acquire Ashland Chemical's Electronic Chemicals Division ("Ashland 
ECD"), which was then the largest producer of wet process chemicals in the 
industry. Air Products acquired four of Ashland's business lines, including its wet 
process chemical business.  On July 2, 2003, Air Products notified Honeywell of 
its intent to terminate the Alliance Agreement on two years' notice.  Air Products 
took the position that the termination clause of the Agreement had been triggered, 
 
6
because Honeywell's direct sales of wet process chemicals exceeded the 10% limit 
established by Section 2(c) of the Agreement.   
In response, Honeywell filed in the Court of Chancery an action for breach 
of contract, in which it sought to enjoin Air Products' acquisition of the Ashland 
ECD.  The Court of Chancery denied Honeywell's motion for a preliminary 
injunction, concluding that although Honeywell had shown that it was likely to 
succeed on the merits of its breach of contract claim, Honeywell was not entitled to 
injunctive relief because it had an adequate remedy at law, i.e., monetary damages.  
Thereafter, in September 2003, Honeywell filed an amended complaint for money 
damages, again claiming that Air Products' termination of the Alliance Agreement 
constituted a breach of contract. 
3. The Court of Chancery Opinion 
Air Products defended the lawsuit on the ground (inter alia) that the 
Alliance Agreement was invalid and unenforceable, because the contract provision 
that permitted the parties to modify the lists of "Customers" and "Products" 
rendered the Agreement fatally illusory and indefinite.  Alternatively, Air Products 
contended that even if the Agreement was found to be valid, Honeywell was 
entitled to recover lost profit damages limited to a two-year period, because Air 
Products' right to terminate (under Section 2(c)) required two years' notice. 
 
7
In response, Honeywell argued that the parties' course of performance had 
modified the terms of the contract, with the result that Air Products' termination 
right under Section 2(c) had not been triggered.  Honeywell also claimed that it 
was entitled to damages for all profits that it lost, and will continue to lose, as a 
result of Air Products' refusal to fill its wet process chemical purchase orders 
through Honeywell.  Specifically, Honeywell contended that its damages include 
profits derived from all sales of wet process chemicals that Air Products had made 
(and will make) to its customers—including the customers Air Products obtained 
as a result of its Ashland ECD acquisition.   
Rejecting Air Products' contract invalidity defense, the Court of Chancery 
concluded that the Agreement was valid and enforceable and that Air Products had 
breached the Agreement by refusing to fill its wet process chemicals requirements 
through Honeywell during the two year period following Air Products' termination 
of the Agreement.  The Court limited Honeywell's damages in two respects, 
however.   
First, the Court rejected Honeywell's claim that it was entitled to calculate 
lost profits damages based on sales to the customers Air Products had acquired 
through the Ashland ECD business ("Ashland sales").  The Court found that 
Honeywell was not entitled to profits derived from the Ashland sales, because 
Honeywell had not shown that when the Agreement was executed the parties 
 
8
contemplated that the Alliance would cover sales resulting from one party's post-
Agreement acquisition of a third party firm.   
Second, the Court of Chancery limited Honeywell's damage award to a two 
year period beginning from the date Air Products terminated the Agreement.  The 
Court accepted Air Products' claim that Honeywell's direct sales to its customers 
exceeded the 10% limitation found in Section 2(c) of the Agreement.  As a result, 
the Court concluded, Air Products became entitled to terminate the Agreement 
upon two years notice, and therefore, Honeywell's damages would be limited to the 
profits Honeywell lost through August 2005, rather than through the end of the 
original contract term (2008).   
On appeal Honeywell challenges both of those court-imposed limitations 
upon its damages award.  Honeywell claims that (1) under the Agreement it is 
entitled to recover its lost profits calculated from a base that includes the "Ashland 
sales," and (2) the period during which it may recover lost profits extends to 2008, 
not 2005, because Air Products had no contractual right to terminate the Alliance 
Agreement.  In its cross-appeal Air Products reasserts its defense that the Alliance 
Agreement is unenforceable.7 
                                          
 
7 Both parties agree that New York law governs all the issues presented.  Section 21 of the 
Alliance Agreement specifies that it should be governed by and construed in accordance with 
New York law, and the Court of Chancery accordingly based its judgment on the principles of 
New York law.   
 
 
9
ANALYSIS 
 
The parties' contentions raise three separate issues on this appeal, which are: 
(1) whether the Alliance Agreement is enforceable under New York law, (2) if the 
Agreement is enforceable, whether Honeywell is entitled to recover lost profits 
derived from the Ashland sales, and (3) whether Air Products was contractually 
entitled to terminate the Agreement upon two years' notice.  To the extent those 
issues involve the interpretation of contract language, they are questions of law that 
this Court reviews de novo for legal error.8  To the extent the trial court's 
interpretation of the contract rests upon findings extrinsic to the contract, or upon 
inferences drawn from those findings, our review requires us to defer to the trial 
court's findings, unless the findings are not supported by the record or unless the 
inferences drawn from those findings are not the product of an orderly or logical 
deductive reasoning process.9 
We first address Air Product's argument on cross-appeal that the Alliance 
Agreement is unenforceable.  Thereafter, we consider Honeywell's claims relating 
to the scope of the damages to which it is lawfully entitled.   
 
 
                                          
 
8 Klair v. Reese, 531 A.2d 219, 222 (Del. 1987). 
 
9 Klair, 531 A.2d at 222; E.I. du Pont de Nemours v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 
1985). 
 
10
1) ENFORCEABILITY OF THE STRATEGIC 
     ALLIANCE AGREEMENT 
 
Air Products argues that the Strategic Alliance Agreement is unenforceable 
because two material terms, the "Products" and the "Customers" listed in Exhibits 
A and B, were subject to modification at any time.  For that reason, Air Products 
urges, the Agreement is too illusory to be enforceable, as no court could readily 
determine an appropriate remedy for a breach.  Rejecting that argument, the Court 
of Chancery concluded that the Alliance Agreement did not fail for indefiniteness 
under New York law, because the parties intended to be bound by the Agreement 
and because its terms and the parties' actual course of performance provided a 
reasonably certain basis to fashion a remedy.  We agree. 
 A contract does not necessarily become indefinite because it leaves open a 
term for future agreement.10  New York courts will apply the doctrine of 
"indefiniteness" to defeat a contract only as a last resort.  Under New York law, a 
court will not invalidate a contract as indefinite unless it is satisfied that the 
contract cannot be rendered reasonably certain by reference to an extrinsic standard 
that makes its meaning clear.11   
Such an extrinsic standard exists here.  Because the Alliance Agreement is a 
"requirements contract" for the sale of goods, the provisions of the New York 
                                          
 
10 May Metro. Corp. v. May Oil Burner Corp., 49 N.E.2d 13, 15 (N.Y. 1943).  
 
11 Cobble Hill Nursing Home, Inc. v. Henry & Warren Corp., 548 N.E.2d 203, 206 (N.Y. 1989). 
 
11
Uniform Commercial Code ("UCC") control it.12  The UCC expressly recognizes, 
consistent with New York common law, that a contract may be valid and 
enforceable even if some of its terms are left to future negotiation.13  Under the 
UCC, a contract does not fail for indefiniteness if the parties intended to make a 
contract and if a reasonably certain basis exists for crafting an appropriate 
remedy.14 
The Court of Chancery correctly found that the Alliance Agreement satisfies 
that test.  Air Products cannot realistically argue that it did not intend to be bound 
by the Alliance Agreement.  The parties' intent to be bound by the Agreement is 
independently established by the undisputed fact that for five years they performed 
under the terms of the Agreement, without objection by either side.  Moreover, this 
is not a case where the contract is only an "agreement to agree" to a material term 
and where the parties intended for the agreement to be binding only if the parties 
later arrived at a mutually agreeable term.  In such a case, no enforceable contract 
arises unless the parties in fact agree to that term.15  Here, in contrast, the parties 
agreed what specific "Products" and "Customers" would be covered by the 
                                          
 
12 N.Y. U.C.C. Law § 1-201 et. seq (McKinney 2001). 
 
13 Id. at 2-204(3). 
 
14 Id.; Cobble Hill, 548 N.E. 2d at 923. 
 
15 May Metro. Corp., 49 N.E.2d at 15. 
 
 
12
Agreement, and nothing in that Agreement provides that a failure to agree to future 
modifications of the terms "Products" and "Customers" would cause the 
termination.      
The terms of the Agreement and the parties' course of performance also 
provide a reasonably certain basis for the Court to craft a remedy.   In Section 1(a) 
the parties agreed to review Exhibits A and B in "good faith . . . to reflect the 
parties' current assessment as to the focus of the efforts of the alliance."  The 
requirement of a "good faith" modification to reflect the parties' "current 
assessment" of the Alliance, affords a reviewing court sufficient guidance to 
determine how the parties would have modified the Agreement had they done so 
formally.  The Court of Chancery also properly looked to the parties' historical 
course of performance to interpret the Agreement and to devise a remedy.  Section 
2-208(1) of the New York UCC expressly states that "any course of performance 
accepted or acquiesced in without objection shall be relevant to determine the 
meaning of the agreement."16   
The only authority Air Products cites to support its unenforceability 
argument, Joseph Martin, Jr. Delicatessen, Inc. v. Schumacher,17 is distinguishable 
                                          
 
16 N.Y. U.C.C. Law § 2-208(1) (McKinney 2001).  The phrase "course of performance" refers to 
the parties' repeated occasions of performance under an ongoing contract.  See Id. § 2-208(1), § 
1-205, Comment 2.   
 
17 417 N.E.2d 541 (N.Y. 1981). 
 
 
13
on its facts.  There, a lease agreement permitted the tenant to renew the lease for an 
additional five-year period "at annual rents to be agreed upon." 18  The New York 
Court of Appeals found that the renewal clause was unenforceable, because it was 
a mere "agreement to agree" that contained no objective standard or formula to 
enable a court to establish an appropriate rent.  In Joseph Martin, the tenant sought 
specific performance, not damages, and the court noted that it is particularly 
important to have definite contract terms where the extraordinary remedy of 
specific performance is sought.19  Moreover, the court noted that the lease was not 
covered by the UCC because it did not involve a sale of goods.  The court 
acknowledged that open terms in "sale of goods" contracts were more readily 
acceptable than open terms in real estate contracts.20  In this case, the contract is 
one for the sale of goods, not real estate, and the remedy being sought is damages, 
not specific performance. 
Under New York law, those distinctions are important.  In May Metropolitan 
Corp. v. May Oil Burner Corp.,21 the New York Court of Appeals found 
enforceable a contract term that was similar to the term litigated in Joseph Martin, 
                                          
 
18 Id. at 544. 
 
19 Id. 
 
20 Id.  
 
21 49 N.E.2d 13 (N.Y. 1943).  
 
 
14
but where the contract involved the sale of goods.  In May, the parties agreed that 
the plaintiff could renew its franchise of the defendant's oil burner equipment on a 
yearly basis, as long as the parties agreed upon an acceptable quota each year.  The 
Court enforced that renewal provision, finding that the parties' course of dealing 
provided an extrinsic standard upon which the court could give meaning to that 
term.   
When interpreting sale of goods contracts, the New York courts continue to 
follow May,22 which is consistent with the standards established by the UCC.  The 
Court of Chancery correctly applied those standards to the Alliance Agreement.  
Here, the parties intended to be bound by the Alliance Agreement, and the terms of 
that Agreement and the parties' performance thereunder provide a sufficient basis 
for the Court to fashion a remedy.  Therefore, the Court of Chancery correctly 
found the Agreement valid and enforceable under New York law.  It follows that 
because Air Products breached that Agreement by not filling its wet process 
chemical requirements through Honeywell, the Court of Chancery correctly 
determined that Honeywell was entitled to recover money damages for that breach. 
 
 
 
                                          
 
22 The Joseph Martin court explicitly recognized the continuing viability of May, but 
distinguished the case because May involved the sale of goods.  417 N.E.2d at 544. 
 
15
2) HONEYWELL'S ENTITLEMENT TO PROFITS  
      FROM THE ASHLAND ECD BUSINESS 
 
The Court of Chancery awarded Honeywell lost profits damages resulting 
from Air Products' breach of the Alliance Agreement.  Honeywell claims, 
however, that the damages award was legally insufficient, because the damage 
calculation did not include sales that Air Products made (and will continue to 
make) to the customers it acquired through its purchase of the Ashland ECD 
Division, i.e., the "Ashland sales."  Honeywell contends that the Alliance 
Agreement obligated Air Products to fill its "requirements" of "Products" through 
Honeywell, and that those requirements necessarily included all Air Products' 
sales.  Therefore, Honeywell argues, the Court of Chancery erred in excluding the 
sales made to the customers resulting from the Ashland acquisition. 
The Court of Chancery concluded that Honeywell was not entitled to lost 
profits attributable to the Ashland sales, because Honeywell had not shown that 
sales resulting from post-Agreement acquisitions of a third party firm were within 
the reasonable contemplation of the parties at the time they entered into the 
Alliance Agreement.  We agree with that conclusion. 
New York law permits a plaintiff to recover damages for a breach of 
contract in the form of lost profits if:  (1) the damages were caused by the breach, 
(2) the claimed loss can be proved with reasonable certainty, and (3) the particular 
damages were within the contemplation of the parties to the contract at the time it 
 
16
was made.23  It is the plaintiff's (here, Honeywell's) burden to establish all three 
requirements.24  The Court of Chancery concluded that Honeywell had not proved 
that at the time the parties formed the contract they reasonably contemplated that 
the Agreement would cover customers acquired by either party through the 
purchase of a third party firm. 
The requirement that damages be within the reasonable contemplation of the 
parties is one of foreseeability.25  Under that rule, the breaching party is legally 
responsible for the risks it foresaw or reasonably should have foreseen at the time 
the contract was made.  The plaintiff need not show, however, that the breaching 
party foresaw either the specific breach that actually occurred or the specific 
manner in which the loss came about.26  Where the contract does not expressly 
define the scope or extent of lost profit damages recoverable in the event of a 
breach, a court may consider what the parties would have concluded had they 
specifically addressed the issue upon entering into the agreement.27 
                                          
 
23 Kenford Co., Inc. v. County of Erie, 493 N.E.2d 234, 235 (NY 1986). 
 
24 Id.  
 
25 Ashland Mgmt. Inc. v. Janien, 624 N.E.2d 1007, 1010 (N.Y. 1993). 
 
26 Id. 
 
27 Kenford, 493 N.E.2d at 236. 
 
 
17
Honeywell argues that the Court of Chancery misapplied the foreseeability 
test because it required Honeywell to prove that Air Products actually foresaw the 
breach that occurred in this case.  That argument misstates the Court's reasoning.  
Nothing in the Court's opinion suggests that it required Honeywell to prove that the 
parties actually foresaw that Air Products would acquire Ashland, or any other 
particular wet process chemical manufacturer.  What the Court of Chancery did 
find was that when the parties entered into the Agreement, they did not 
contemplate that customers obtained through a contracting party's future 
acquisition of a third party firm would automatically become "Customers" under 
the Alliance Agreement. 
That conclusion is supported by the record and is also in accord with New 
York law.  In Kenford Co., Inc v. County of Erie,28 the New York Court of Appeals 
rejected the plaintiff's argument that it was entitled to recover twenty years of lost 
profits as a result of the County of Erie's failure to construct the stadium that it 
promised to build.  In their contract the parties agreed that the County would build 
a domed stadium and that the parties would enter into a forty-year lease to operate 
that facility.  The contract also provided that if the parties could not agree upon a 
lease, they would execute a separate twenty-year management contract.29  When 
                                          
 
28 Id. at 235. 
 
29 Id.  
 
18
the County failed to build the stadium, the plaintiffs sued for the lost profits they 
expected to receive during its anticipated twenty-year management of the stadium.  
The court declined to rule that the contracting parties envisaged that the County 
would incur such significant responsibility at the time they entered into the 
contract.  Nowhere did the contract suggest liability of that magnitude, nor did the 
plaintiffs show through extrinsic evidence that the parties contemplated that a 
breaching party would incur liability for lost profits over the life of the contract.30  
Absent clear proof that both parties contemplated damages of that magnitude at the 
time they entered into the contract,31 the Court was unwilling to allow recovery of 
those damages.  
Here, as in Kenford, Honeywell has not shown that the parties contemplated 
that customers of companies acquired post-Agreement would automatically 
become "Customers" subject to the Alliance Agreement.  Indeed, the 
uncontroverted evidence shows otherwise.  In February 2001, Honeywell and 
Texas Ultra Pure formed a joint venture, GEM Microelectronic Materials, L.L.C. 
("GEM").  Honeywell assigned its interest in the Agreement to GEM.  Air 
Products accepted that assignment, and the parties exchanged letters in which they 
agreed that as for Texas Ultra Pure's preexisting customers, GEM was not bound 
                                          
 
30 Id. at 236. 
 
31 Id. 
 
19
by the provision in Section 1(c) that would have restricted Honeywell (GEM) from 
actively promoting Honeywell "Products" to those customers.  That history 
suggests that the parties intended that if Air Products or Honeywell acquired 
another company, the parties would negotiate which—if any—of the resulting new 
customers would come within the scope of the Alliance.  What it does not show is 
that the parties intended that the new customers would automatically become 
"Customers" subject to the Alliance Agreement. 
The New York UCC is consistent with the Court of Chancery's conclusion.  
Section 2-306(1) instructs that a party's historical business is a proper measure to 
interpret the scope of a "requirements" contract.  Under that provision, "no quantity 
unreasonably disproportionate to any . . . normal or otherwise comparable prior . . . 
requirements may be tendered or demanded."32  Comment 2 specifies that "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 a normal expansion 
undertaken in good faith would be within the scope of this section."  Thus, under 
Section 2-306 and Comment 2, the sudden customer base expansion that occurred 
when Air Products purchased the Ashland ECD division would not automatically 
fall within the scope of the Alliance Agreement. 
                                          
 
32 N.Y. U.C.C. § 2-306(1) (McKinney 2001). 
 
20
 
Because Honeywell offered no persuasive evidence that the profits 
attributable to the Ashland acquisition were within the contemplation of the 
parties, the automatic inclusion of those profits in Honeywell's damages award 
would be contrary to New York law. We agree that the Court of Chancery 
correctly denied Honeywell lost profits damages attributable to the Ashland sales. 
3) AIR PRODUCTS RIGHT TO EARLY TERMINATION  
OF THE ALLIANCE AGREEMENT  
 
Honeywell also challenges the Court of Chancery's determination that Air 
Products was entitled to terminate the Agreement on two years notice, and that as a 
consequence, Honeywell's damages recovery would cover only that two year post-
notice period.  That claim raises an issue of contract interpretation:  whether 
"Products" and "Customers" within the meaning of the termination clause [Section 
2(c)] of the Agreement means the "Products" and "Customers" that were originally 
listed on Exhibits A and B, or the "Products" and "Customers" as modified by the 
parties' conduct under the Agreement.  The Court of Chancery adopted the former 
interpretation.  Because we conclude that New York law required the latter 
interpretation, we must reverse the Court of Chancery's determination of that issue. 
Exhibits A and B of the Agreement defined the "Products" and Customers" 
that the parties initially agreed would be covered by the Alliance.  In the 
Agreement itself, the parties repeatedly used the terms "Products" and "Customers" 
to define the scope of their relationship and the conditional rights of each party 
 
21
under the Agreement.  Thus, Honeywell was contractually prohibited from 
promoting "Products" to "Customers" under its own labels, but if Alliance sales 
fell below 40% of specific sales targets for two consecutive years, Honeywell 
could terminate the agreement upon two years' notice.  Under Section 2(c) Air 
Products was entitled to terminate the Agreement on two years' notice if 
Honeywell's direct sales to Customers for two consecutive years exceeded 10% of 
Alliance sales.  The Agreement also expressly provided that the parties would 
modify Exhibits A and B from time to time to reflect the parties' current 
assessment of the scope of the Alliance. 
 
Honeywell concedes that its direct sales of "Products," as listed on the 
original Exhibit A, to "Customers," as listed on the original Exhibit B, exceeded 
the 10% threshold specified in Section 2(c).  Honeywell argues, however, that 
those defined terms ("Products" and "Customers") were not limited by the contents 
of the original Exhibits A and B, because those terms were continually modified by 
the parties' actual course of performance.  Honeywell also presented uncontested 
evidence that if the parties' modifications to Exhibits A and B are the basis for 
applying Section 2(c), then Honeywell's direct sales did not exceed the 10% 
threshold.   
The issue turns, therefore, upon whether "Products" and "Customers" are to 
be determined from the original or the as-modified Exhibits A and B.  Air Products 
 
22
urges that the parties did not modify Exhibits A or B in a legally effective way.  
Alternatively, Air Products contends that even if the parties did effectively modify 
those Exhibits by their conduct, those modifications should not be accorded legal 
effect for purposes of applying Section 2(c) of the Agreement.   
 
Although the Alliance Agreement required all modifications to be in writing, 
the Court of Chancery found, nonetheless, that Honeywell and Air Products had 
modified Exhibits A and B by their course of performance.  That conclusion is 
consistent with New York law, which gives effect to oral modifications to a written 
contract (even where that contract prohibits such modification), if the parties' 
partial performance of the contract is "unequivocally referable" to the oral 
modification.33  Partial performance is "unequivocally referable" to a modification 
if it "will admit of no other possible explanation except one pointing directly to the  
existence of the oral agreement claimed."34  In other words, if the performance can 
be viewed as consistent with the terms of the agreement as written, then that 
                                          
 
33 Rose v. Spa Realty Assoc., 366 N.E.2d 1279, 1283 (N.Y. 1977); O'Reilly v. Nynex Corp., 693 
N.Y.S.2d 13, 14 (N.Y. App. Div. 1999). 
 
34 Bright Radio Labs., Inc. v. Coastal Commercial Corp., 166 N.Y.S.2d 906, 910 (N.Y. App. 
Div. 1957).  See, e.g., O'Reilly, 397 N.Y.S.2d at 928 (partial performance unequivocally 
referable to oral modification because performance was not compatible with any option in the 
written agreement.) 
 
 
23
performance is not unequivocally referable to the oral modification, and will not be 
treated as a contract modification35 
 
In this case, the Court of Chancery found that under New York law 
Honeywell and Air Products had modified the original Exhibit A and Exhibit B 
definitions of "Products" and "Customers," and that the modification was entitled 
to be accorded legal effect.  The parties' actual, historical treatment of what and 
who would constitute "Products" and "Customers" far exceeded what had been 
initially listed as "Products" and "Customers" in the original Exhibits A and B.  It 
was undisputed that Air Products always filled its wet process chemical orders 
from a manufacturer through Honeywell, even if the manufacturer was not listed as 
a "Customer."  Air Products' employees admitted that they did not consult Exhibits 
A or B when deciding how to fill a purchase order.  The uncontroverted evidence 
establishes that through 2001, over 75% of Air Products' sales of Honeywell 
products were made to customers that were not listed as "Customers" on Exhibit B.  
And, with one exception, the profits from a Honeywell chemical sold by Air 
Products were split according to the Agreement's profit sharing formula, even 
though that chemical was not listed as a "Product" on Exhibit A.   
We find that the Court of Chancery correctly concluded that the definition of 
"Products" and "Customers" had been modified by the performance of the parties 
                                          
 
35 Id. 
 
24
under the Agreement.  That Court also concluded, however, that the parties had 
modified Exhibits A and B only for one purpose—to define the scope of  the 
parties' obligation to share profits—but not for the purpose of determining whether 
either party was entitled to terminate the agreement.  We conclude that that 
specific ruling was legally erroneous, because under New York law the undisputed 
facts compel the conclusion that the contract definitions of "Products" and 
"Customers" were modified for termination clause [Section 2(c)] purposes as well. 
 
In effect, the Court of Chancery ascribed two different meanings to the 
parties' use of "Products" and "Customers"—one for purposes of profit sharing, 
and another for purposes of contract termination.  But the record contains no 
persuasive evidence that the parties intended that identical terms in their contract 
would be given disparate meanings.  Generally, and absent evidence calling for a 
different result, all parts of a contract must be read in harmony to determine the 
contract's meaning, with one portion of a contract not being read to negate a 
different portion.36  The New York law of contracts prefers consistency in 
contractual interpretation:  where parties attach a particular meaning to a term, that 
                                          
 
36 Bombay Realty Corp. v. Magna Carta, Inc., 790 N.E.2d 1163, 1165 (N.Y. 2003). 
 
25
meaning should be given effect,37 and wherever possible, courts should strive to 
read an agreement consistently with the parties' manifest intentions.38 
The Court of Chancery relied upon the New York case of All-Year Golf, Inc. 
v. Products. Investors Corp.39  That case, however, actually supports Honeywell's 
position that modifications to technical terms should normally be applied 
consistently throughout a contract.  In All-Year Golf, the parties executed two 
integrated agreements:  a sales contract wherein All-Year Golf agreed to purchase 
20 Golfomat units from the defendant, and a dealership agreement wherein All-
Year Golf agreed to be the defendant's exclusive dealer in western New York.  
Both agreements contained a clause providing that the agreements would be 
contingent upon All-Year Golf obtaining a suitable lease in Camillus, New York.40  
When All-Year Golf was unable to find a lease in Camillus, the parties looked for 
a location outside Camillus.41  The New York Supreme Court, Appellate Division, 
found that the parties had modified the lease condition through their course of 
performance, such that the site was no longer geographically limited to Camillus.  
                                          
 
37 Restatement (Second) Contracts § 202(3)(b) (1981). 
 
38 Id. at § 202(5). 
 
39 310 N.Y.S.2d 881 (N.Y. App. Div 1970).  
 
40 Id. at 883. 
 
41 Id. at 883-84. 
 
 
26
The Court then applied the same modification to both the sales agreement and the 
dealership agreement—the very approach that Honeywell contends should have 
been employed here.42 
The only case Air Products cites to support its position is Time Assoc., Inc. 
v. Blake Realty, Inc.43  In Time, the parties entered into an agreement wherein 
Blake purchased certain assets of Time's real estate business, and Time agreed not 
to compete in the local real estate market.  The Agreement contained two clauses 
that were at issue in the litigation:  one that required Time to formally change its 
corporate name, and a second clause that prohibited Time from using the name 
"Time Associates" in the local real estate market.  At the closing, the parties orally 
agreed that Time would not be required to formally change its name.  The court 
concluded that although the parties had waived the contractual requirement that 
Time Associates formally change its corporate name, they had not waived the term 
that restricted Time from actually using that name in the real estate business.  The 
Court specifically found that those two contractual provisions were not 
interdependent,44 and that a waiver of one provision did not establish a waiver of 
the other, because the two conditions had different implications and importance in 
                                          
 
42 Id. at 885-86. 
 
43 622 N.Y.S.2d 816 (N.Y. App. Div. 1995). 
 
44 Id. at 817. 
 
 
27
the agreement.  Time Associates is inapposite to this case, however, because here 
the parties intended for both their profit sharing agreement and their termination 
rights to be dependent upon the same "Products" and "Customers" that were being 
sold and serviced by the Alliance. 
New York courts strive to read interdependent terms of a contract 
consistently.45  In this case, the parties purposefully made both their profit sharing 
and their termination rights dependent upon the "Products" and "Customers" as 
defined in the Agreement.  It is logical to conclude that when the parties expanded 
the scope of their profit sharing rights, they intended their termination rights to 
change as well.   
There is no evidence that the parties intended to modify Exhibits A and B 
for purposes of one section of the agreement, but not for purposes of other sections  
                                          
 
45 See, Bombay Realty, 790 N.E.2d at 1165 ("All parts of a contract must be read in harmony to 
determine its meaning"); Peltz v. Kelley, C.A. No. 99-9155, 2000 WL 1185956 (2nd Cir. Aug. 21, 
2000) (Modification agreement gave new "Effective Period" but did not restate the time 
limitation contained in the Consent Decree it modified.  Because Modification agreement 
continued other duties of original Consent Decree and did not restate a new time limitation, 
Second Circuit Court concluded that there was no evidence that the parties intended a different 
time limitation to apply.  The Consent Decree and Modification were interdependent and the 
court read the terms consistently.) 
 
 
28
whose operative terms also were made dependent upon Exhibits A and B.46  
Absent such evidence of intent, New York law encourages the consistent 
interpretation of contractual terms.  Accordingly we are constrained to conclude 
that the Court of Chancery erred in holding that the parties, by their conduct, had 
not modified Exhibits A and B for purposes of Section 2(c).  The Court of 
Chancery did correctly conclude that the parties had modified Exhibits A and B by 
their course of conduct.  But, because those modified definitions of Products and 
Customers should have been applied consistently within Section 2(c), Air Products' 
right to terminate the Agreement was not triggered, and the Court of Chancery 
erred in holding otherwise.  Therefore, Honeywell is entitled to recover lost profits 
damages through the end of the Agreement's original term, i.e. 2008.  Accordingly, 
we reverse the Court of Chancery's limitation of the period for which Honeywell's 
                                          
 
46 The one item of evidence that the Court of Chancery relied upon does not show 
otherwise.  The Court of Chancery noted that when Honeywell and Texas Ultra Pure formed 
GEM, Air Products agreed that with regard to Texas Ultra Pure's preexisting customers, 
GEM/Honeywell was not bound by the term in Section 1(c) obligating it not to "actively 
promote" Honeywell products to those customers.  The Court concluded that the ancillary 
agreement regarding Texas Ultra Pure's preexisting customers evidenced the parties' intent to use 
different interpretations of "Products" and "Customers" in different provisions in the Agreement.  
But the ancillary agreement contains no statement that GEM/Honeywell's direct sales to their 
preexisting customers would apply to Section 2(c) for purposes of determining Air Product's 
termination rights, and other evidence supports the opposite conclusion.  If GEM/Honeywell 
could actively promote its products to their preexisting customers, and those sales could be used 
to trigger Air Products termination right, then GEM/Honeywell was faced with either forfeiting 
those preexisting customers or continuing to sell to them and risking early termination of the 
Agreement.  Given the purpose of the Alliance Agreement, GEM/Honeywell would not have 
contracted for that result. 
 
 
29
damages are to be calculated, and remand the case to that Court for a determination 
of those damages. 
CONCLUSION 
For the foregoing reasons, the judgment of the Court of Chancery is 
AFFIRMED in part and REVERSED in part, and the case is REMANDED to the 
Court of Chancery for proceedings consistent with this Opinion.