Opinion ID: 1532378
Heading Depth: 1
Heading Rank: 7

Heading: honeywell's entitlement to profits from the ashland ecd business

Text: 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 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] 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 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 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. 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.