Opinion ID: 2275124
Heading Depth: 1
Heading Rank: 7

Heading: The April 25, 1968 Letter (PX-4)

Text: After four months of careful negotiation and drafting and redrafting of contract terms, representatives of Litton and Bethlehem met on April 25, 1968 for the ceremonial exchange of a contract for the immediate construction of Hull 101, the only one thousand foot vessel actually sold by Litton, for the firm fixed price of $17,994,138.00 (Hull 101 Contract). Bethlehem's Board of Directors had insisted upon great precision in every aspect of the sale, especially price. The Hull 101 Contract was fully performed and is not at issue here. During the two to three hours that the parties were together on April 25, 1968, primarily for the exchange of the Hull 101 contract, they jointly drafted a two-page letter (PX-4), extending a last minute sales promotional offer to negotiate a long-term option agreement for up to five additional Hull 101 type vessels. The parties clearly understood that PX-4 was not part of the consideration for the Hull 101 Contract. With one exception, none of the representatives at the April 25 meeting even was aware before that meeting that such an offer was to be made or drafted that day. On its face, PX-4 clearly was not an option agreement; rather, it expressly provided for future negotiations which, if successfully completed, would have resulted in an option agreement which, in turn, if properly exercised, would have resulted in formal execution of a formal written ship construction contract. In hurriedly drafting PX-4 during a part of their short meeting on April 25, the parties explicitly agreed that price escalation would be included in any long-term option agreement and ship construction contract upon which they might subsequently agree. The parties further expressly acknowledged, however, that because escalation was so critical and so complex, they would postpone the negotiations necessary for agreement upon that vital subject. PX-4 thus was jointly drafted during the less than three-hour meeting on April 25 in the form of a two-step offer to enter into a future option agreement in order to provide until the end of the year for the parties to investigate and develop the terms of an appropriate escalation clause and the other important matter intentionally left for future negotiation and agreement. Having taken more than four months to negotiate a contract for a single vessel (Hull 101), on which construction was to begin immediately for a fixed price with no escalation, the parties recognized that negotiation of a long-term option agreement for up to five novel multi-million dollar vessels providing for price escalation would be infinitely more complex and time consuming. On several occasions from May through November of 1968, Litton sought to negotiate the terms of an option agreement. On each occasion, Bethlehem replied that it was not yet willing to spend the time and effort required for such negotiations, since it would not even consider additional 1000 foot ore vessels until the revolutionary Hull 101 had been successfully operated for at least one season. By December of 1968, aware that the PX-4 offer was about to lapse, but still unwilling to devote the time necessary to negotiate the terms essential for a definitive option agreement and ship construction contract, Bethlehem sought to preserve the status quo. Between April 25 and December 31, 1968, there were no discussions, negotiations or agreements between the parties with respect to any of the terms, including escalation, expressly left for future negotiation and mutual agreement under PX-4. In short, whatever the parties had intended by drafting PX-4 was unchanged by PX-1. In PX-4 the parties had explicitly contemplated negotiations and agreements necessary to create a binding option contract. PX-1 did not resolve any of the substantive terms left open for negotiation in PX-4; as the record clearly reveals, it was adopted as an accommodation to Bethlehem's request for a holding pattern. From 1968 through 1973, Litton attracted no other customers to its Erie shipyard. Indeed, by early 1973, Litton officials warned Bethlehem that the Erie yard would be closed unless Bethlehem ordered additional ships. Bethlehem officials had previously stated, however, that they were disgusted by the slow construction of Hull 101, and by 1973, rather than express any objection to the closing of the Erie yard, repeatedly insisted that they would never order any additional ships from Litton. Thus, without any hope of future business from Bethlehem, Litton mothballed its Erie yard. Thereafter, in full knowledge of the fact that the Erie Shipyard had dismissed most of its labor force for lack of business, Bethlehem notified Litton by letter that it was planning to exercise its options for ore vessels. Significantly, however, Bethlehem expressly acknowledged that the terms of an option agreement had to be negotiated before Bethlehem could exercise any option. At subsequent meetings, Litton advised Bethlehem that although it had closed down its shipyard in reliance upon Bethlehem's representations, it was willing to build vessels if the parties could reach agreement on a ship construction contract (Ad-9), which Litton was at all times willing to negotiate. The parties, however, never agreed on any of the material terms left open in PX-4 and PX-1, including escalation  found by the trial judge to be one of the most critical provisions of a ship construction contract (Ad-26). Nor would Bethlehem accept any of Litton's alternative proposals. Judge Louik carefully considered all the relevant factors under the common law and under the Uniform Commercial Code  the letters themselves, the discussions at the time of the exchange of the letters, the surrounding circumstances, subsequent conduct, the nature of the contemplated construction contract, and the parties' prior dealings  and found that the parties did not intend to enter a binding agreement until they mutually agreed on the critical terms intentionally deferred, including the terms of a price escalation clause, and reduced those terms to a formal ship construction contract. The Court alternatively found that under Section 2-204(3) of the UCC, no contract had been formed  because the Court simply could not, on a reasonably certain basis, fill in the price escalation terms and other missing contract provisions in order to provide for an appropriate remedy.