Opinion ID: 435249
Heading Depth: 1
Heading Rank: 3

Heading: who breached the contract?

Text: 24 The parties reassert the positions they adopted at trial, but the debate has been significantly refocused by a post-judgment development.A. Interpretation of Terminal--the Varibus Case 25 A key step in identifying the breaching party depends upon whether, under Texas contract law, South Hampton's failure to complete shore tankage facilities by January 1 warranted cancellation of the contract. Resolution of this issue turns on the interpretation of the word Terminal. If that word, as used in the contracts, unambiguously includes within its meaning completed shore tank facilities, then the district court erred in sending to the jury the question whether Stinnes's cancellation was wrongful. This preliminary determination is for the court to make; for, absent latent or patent ambiguity, the meaning of the contract is to be decided by the court. 1 A contract is not ambiguous if it is so worded that a court may properly give it a definite legal meaning. Ambiguity arises when the court is left genuinely uncertain which of the two meanings is the proper one. 2 26 While this suit was pending, a similar suit between other parties was proceeding through the Texas courts; for South Hampton had also negotiated with other oil buyers regarding completion of the terminal. It had entered into a contract with Varibus Corporation that was, in all relevant respects save those mentioned below, identical to the Stinnes and United contracts. Indeed, the Varibus contract had served as a model for the Stinnes contract. Varibus's contract gave it the right of cancellation if the Terminal, the same terminal involved in the South Hampton-Stinnes contract, were not complete on January 1, 1976. Varibus, like Stinnes, had exercised its cancellation right on the basis that the Terminal was not complete; and it also had been sued by South Hampton for breach of contract. 27 While the present case was pending on appeal, the Beaumont Court of Civil Appeals decided the Texas case. Varibus Corporation v. South Hampton, 623 S.W.2d 157 (Ct.Civ.App.1981), writ ref. n.r.e. (1982). It held that there was no ambiguity in the contract, and that South Hampton had not complied with the requirement that it construct a terminal that included storage tanks by the use of which tank strappings and shore tank samples might be taken to determine the quantity and quality of the product delivered to the buyer. Varibus, the Texas court held, was not required by the contract to accept the product from a pipeline, rather than from shore tanks; it was entitled to have the quantity and quality of the product determined before the product was received into its barges. Id. at 160. Thus, the court concluded that Varibus properly exercised its right to cancel the contract by reason of South Hampton's failure to complete the terminal by January 1, 1976. Id. Accordingly, the court reversed the verdict for South Hampton that the trial court had directed and rendered judgment for Varibus. 28 South Hampton advances several reasons why the Varibus decision does not require us to reach a similar conclusion regarding Stinnes's cancellation of the contracts. First, it seeks to distinguish Varibus on a factual basis. 29 There were a few differences between the Varibus contracts and the Stinnes contracts. One lay in the respective versions of the term clause, Sec. 3.01, of each contract. The Varibus contract gave the buyer the right of cancellation as of August 1, 1975, if the seller had failed to complete the terminal. The seller, however, had an option to provide product of equal quantity and quality from an alternative source at a price to be adjusted to account for transportation costs. But if the terminal were not completed by January 1, 1976, the buyer had the right to cancel the contract finally; and there was no provision for an alternative-source option after that date. The Stinnes contract, by contrast, merely set August 1 as the expected date of first delivery, but provided an alternative source option if the terminal were not finished by January 1. South Hampton argues that, because the Stinnes contract contemplated delivery of product for at least six full months before it required the terminal to be completed, the importance of a complete terminal and the meaning of that term are considerably less certain in this case than in Varibus. By this attempt to distinguish Varibus, South Hampton also seeks to resurrect its pre-Varibus argument: that its failure to construct shore tankage facilities by January 1 did not amount to a failure to complete the terminal. South Hampton argues that under the Facilities clause, Sec. 1.04, shore tankage facilities were a separate entity, not an integral part of the terminal envisioned by the parties, because that clause refers to seller's terminal and tankage .... 30 In concluding that the word Terminal was not ambiguous, however, the Varibus court did not look to Sec. 3.01 of the contract but to Sec. 1.04. There were differences between those provisions of the respective contracts too, but not significant ones. 3 Despite South Hampton's efforts to distinguish the terms of the Varibus contract from those of the Stinnes contracts, the key similarities predominate. As the Texas court concluded, shore tankage was a necessary element of a complete terminal for important functional reasons: measurement, quality control, and risk of loss are all better managed from tanks than from pipes or barges. Those considerations are identical in the two seller-buyer relationships. 31 South Hampton next argues that, even if the two sets of contracts are indistinguishable, no binding force attaches to the Varibus court's interpretation of the term Terminal. Because the question of what meaning a court should attribute to the words of a contract is a question of fact, and not one of law, [t]he fact that specific words in a contract, even a standardized contract such as an insurance policy, have once been given a meaning by a court in a litigation between A and B should never be held to be conclusive in subsequent litigation between C and D or between A and C, South Hampton contends, quoting Corbin on Contracts. 4 A later Texas court would not be bound by the Varibus court's interpretation of the word Terminal, nor are we. 5 Nevertheless, as Corbin goes on to note in the same discussion, the prior interpretation is an important factor; but the other relevant factors may be different. We regard the Varibus court's conclusions as persuasive authority, and absent some indication that a later Texas court would do otherwise, we adopt them as our own in this case. 32 There was a single substantive difference between the Varibus contract and the Stinnes contracts: Varibus had an absolute cancellation right if the terminal were not completed by the deadline; under the Stinnes contract, South Hampton had the option of tendering product from an alternative source. This option, however, does not alter the clarity of the termination clause. Neither does the fact that deliveries under the Stinnes contracts began eight months before the estimated date of terminal completion alter the meaning of that clause. What the buyer was willing to accept as a temporary expedient does not alter what it had the contractual right to require for a continuing ten-year relationship. 33 One consideration remains under this issue. The meaning of a contractual term is usually a question of fact, but meaning may be made so clear by the evidence that a jury's verdict to the contrary would be set aside. 6 If a written contract containing an express merger clause is clear and unambiguous and not subject to more than one interpretation it need not be opened to judicial interpretation. 7 In making its determination, the Varibus court of course applied the Texas rules for granting a directed verdict and judgment notwithstanding the verdict. Under these rules, a court asks, in evaluating a motion for a directed verdict, whether there is any evidence of probative force to raise the factual issues presented; 8 to uphold a judgment notwithstanding the verdict, a court must determine that there is no evidence upon which the jury could have made the findings relied upon. 9 The standard for directing a verdict being a procedural matter, we apply federal, not state, rules even in diversity cases; and the applicable standard in this circuit is set forth in Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (5th Cir.1969) (en banc): If, considering all the evidence, the facts and inferences point so strongly and overwhelmingly in one direction that reasonable persons could not arrive at a contrary verdict, the motion should be granted. The Texas Court of Appeals has determined that there is no evidence that the word Terminal is ambiguous in a contract using the word in a context almost identical to that in the Stinnes instruments. Under Texas practice, the state Supreme Court's refusal no reversible error to grant an application for a writ of error signifies that the Supreme Court has considered the substance of the opinion and approves the result although it neither approves nor disapproves the specific language of the Court of Civil Appeals. 10 We are convinced that a Texas court, faced with substantially similar facts as we are in the present case, would reach the same conclusion. Our confidence is bolstered by the fact that federal procedural law requires us to apply a less stringent standard for taking a question from a jury. B. South Hampton's Out-turn Arguments 34 South Hampton contends that, whatever the Stinnes contract may originally have required, the parties reached an understanding in early December that all future deliveries of product would be on an out-turn basis; i.e., that Stinnes would pay only for the amount of product actually delivered to its tanks, instead of the amount pumped out of South Hampton's storage facilities as the contracts required. This argument is advanced as a basis for several different theories in support of the thesis that Stinnes wrongfully cancelled the contracts. 1. Waiver 35 South Hampton's first theory is that this out-turn agreement modified the Terminal requirements of the contract. It contends that the parties intended to substitute measurement at the place of final delivery (out-turn) for preshipment measurement in tanks at the terminal. 36 Standing squarely in the path of this argument is the contract's no-oral-modification clause, which bars proof of any such change. That clause provides that the contract may not be changed or terminated orally and no attempted change, termination or waiver of any of the provisions hereof shall be binding unless it is in writing, signed by the parties hereto .... Under the Texas version of the Uniform Commercial Code, [a] signed agreement which excludes modification or recission except by a signed writing cannot be otherwise modified or rescinded .... Texas Bus. & Comm.Code Ann. Sec. 2.209(b). Hence no-oral-modification clauses are binding in Texas. 11 37 South Hampton attempts to side-step that clause by arguing that the out-turn agreement was a waiver, not a modification, of the contract term. It argues that the provision for measurement of product at storage tanks was for its benefit, not Stinnes's. Out-turn measurement, South Hampton explains, shifts the risk of loss, shrinkage, or contamination in favor of the buyer because measurement is not performed until product reaches the point of final delivery. South Hampton thus attempts to assert waiver as a sword rather than as a shield, contending that it was entitled to waive a contract provision so patently intended to operate for its own benefit. 38 The contract language refutes this argument. Texas law does distinguish between modification and waiver; its commercial code provides that [a]lthough an attempt at modification or recission does not satisfy the requirements of subsection (b) [quoted above] or (c) [applying the statute of frauds to contracts that, as modified, fall within its ambit] it can operate as a waiver. Texas Bus. & Comm.Code Ann. Sec. 2.209(d). A waiver may be express or implied. 12 But recitation of these general principles does not carry the day for South Hampton. First, the no-oral-modification clause itself anticipated the assertion of waiver by expressly including oral waiver among its proscriptions. It does not distinguish between waiver of favorable and burdensome provisions. And the requirement sought to be waived--shore tank facilities--is expressly and, as we have held, unambiguously provided for in the Terminal clause. Further, the contract expressly provided that time was of the essence. Texas courts have held that alleged oral waivers of express contract terms specifying place of payment, in contracts containing no-oral-modification clauses, constitute modifications under Sec. 2.209(b) and are barred by such clauses because not reduced to writing. 13 Moreover, the Varibus court rejected an identical argument for the same reason: This theory, if accepted, would amount to a unilateral modification of the contract in violation of [the no-oral-modification clause] of the contract. 623 S.W.2d at 160. 39 Second, South Hampton's theory reaches too far. Although there is evidence in the record to support its contention that out-turn measurement benefitted Stinnes, there is also evidence to the contrary. Stinnes presented evidence showing that measurement, both for quality and quantity, is more accurately made from shore tank strappings and samples. The detailed provisions contained in clause 1.05 (Measurement, Inspection, and Effect of Acceptance) indicates that this additional precision is more than incremental. South Hampton suggests that these functions could have been performed as well as Stinnes's storage facilities. The contract, however, provided that title to, and risk of loss, and liability for, all Product delivered hereunder passed to Stinnes as the product moved through the flange connecting Buyer's vessel to Seller's Terminal loading line ... or other mutually agreeable place of delivery. South Hampton has not directed our attention to any evidence in the voluminous record showing that it agreed to assume responsibility for all shrinkage, loss, or contamination during product movement. Following the Texas courts' lead in Dave Summers Realtors, Inc. and in Varibus, we regard the alleged waiver in this case as an attempt to modify the contract orally and hold that it is rendered a nullity by the unambiguous terms of the no-oral-modification clause. 14 2. Alternative Source 40 As mentioned above, South Hampton had the option to cure its nonperformance of the Stinnes contracts' Terminal provisions by offering an alternative source of supply. This option was not available when Varibus cancelled its contracts. South Hampton argues that this difference requires a different result in the present case. Because we have concluded that the word Terminal is unambiguous, and its requirements have not been waived, South Hampton may prevail only if it satisfied the alternative source provisions of the contracts. 41 South Hampton contends, somewhat inconsistently with its waiver theory, that the out-turn agreement satisfied the alternative-source option. 15 We conclude that South Hampton failed properly to exercise its option, both in form and substance. 42 Stinnes urges that [t]he acceptance of an option, to be effectual, must be unqualified, absolute, unconditional, unequivocal, unambiguous, positive, without reservation, and according to the terms and conditions of the option, quoting Vratis v. Baxter, 315 S.W.2d 331, 337 (Tex.Civ.App.1958), writ ref. n.r.e. (quoting 91 C.J.S. Vendor and Purchaser Sec. 10, p. 853). We do not agree that the Vratis standard applies to this case. Vratis concerned the sale of a radio station, not a contract for sale of goods under the U.C.C., as does the present case. 43 An option is a contract in which the offeror is bound to hold open an offer for a specified period of time. Smith & Robertson, et al., Business Law: Uniform Commercial Code 136 (5th ed. 1982). Accordingly, we turn to the U.C.C. provision on offer and acceptance, which provides: Unless otherwise unambiguously indicated by the language or circumstances (1) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances. Texas Bus. & Comm.Code Ann. Sec. 2.206(a)(1). The contracts do not provide for any particular manner of acceptance or exercise of the option. South Hampton did not articulate its intention to exercise the option, but it contends that its conduct manifested such an intention. Although the Code implicitly permits acceptance by performance, 16 South Hampton made neither proffer of performance nor exercise of its option in a manner reasonable in the circumstances. Stinnes had substantial cause to question whether South Hampton intended the post-January 1 deliveries to invoke the alternative-source option. 17 Stinnes therefore took the most sensible course: it asked South Hampton. When confronted directly with the simple question whether it was exercising its option, however, South Hampton refused to reply. Silence in response to a direct inquiry, made necessary by doubtful circumstances that South Hampton itself created, hardly comports with even a generous reading of the word reasonable. 44 Even had South Hampton communicated its intentions in a reasonable manner, the source it offered would not measure up to contractual standards. The only alternatives it offered were the barges at the Neches River slip or the incomplete terminal. The option clause did not specify criteria for the alternative source. Section 1.01, however, mandated that Buyer and Seller were to perform their respective obligations at Seller's Terminal, or elsewhere, in accordance with the terms of the contract. Reading the contract as a whole, 18 we conclude that it unambiguously required South Hampton substantially to meet the measurement and inspection obligations, even if it were to deliver product from an alternative source. The parties made completion of a terminal that allowed satisfaction of those obligations, by January 1, 1976, so critical that its failure--for any reason whatsoever, including force majeure--authorized cancellation of the contracts. Although a provision plainly intended to preserve the deal in the face of adversity might reasonably be expected to comtemplate less-than-perfect performance, it is not a carte blanche to ignore major contractual obligations. Under South Hampton's argument, it might continue to supply produce from barges floating in the Neches River for the entire ten-year term of the contract. 45 The contractual terms expressly required tankage, with facilities for accurate measurement of product. A facility that itself did not satisfy the contract could not either in common sense or law be considered an adequate alternative. 46 South Hampton argues that its volume of out-turn deliveries evidence the commercial reasonableness of that practice. South Hampton did deliver 700,000 barrels of oil to purchasers from the incomplete terminal, approximately 80,000 to Stinnes. These deliveries demonstrate that the pipeline functioned to deliver oil; they do not demonstrate that the terminal was complete or that this method of delivery satisfied the contract requirements. The terms under which the buyers of the other 620,000 barrels chose to accept delivery are irrelevant to interpretation of the Stinnes contracts. And, as South Hampton concedes, the 80,000-barrel transaction with Stinnes was not a sale covered by the contract. It was instead a spot sale, at a reduced price, made for the sole benefit of United, with Stinnes waiving its 42cents per barrel profit margin. 19