Court Opinion

ID: 15649
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:46:59+00
Date Added: 2024-06-11T16:46:19.888505
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS

                        FOR THE FIFTH CIRCUIT

                            No. 97-20588

GLOBAL OCTANES TEXAS, L P
                               Plaintiff - Appellant-Cross-Appellee,

                                versus

BP EXPLORATION & OIL INC,
formerly known as BP Oil Company
                             Defendant - Appellee-Cross-Appellant

            Appeals from the United States District Court
                  for the Southern District of Texas

                         September 14, 1998

Before REYNALDO G. GARZA, HIGGINBOTHAM, and EMILIO M. GARZA,
Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

     This is a suit on a contract for the sale of a gasoline

additive.    The district court granted summary judgment for the

seller, concluding that the buyer had no contractual right to

terminate and had breached the contract in doing so. It then

applied a provision of the contract to limit damages to $500,000.

BP Exploration, the purchaser, urges that the district court erred

in rejecting its right to terminate the contract.       Global Octanes,

the seller, attacks the limitation of damages and defends the

finding that BP breached the contract.     We affirm.
                                 I

     Environmental regulation created a market for methyl tertiary

butyl ether, MTBE, an additive designed to raise octane levels and

oxygenate gasoline.   On August 26, 1991, Global and BP executed a

Product Supply Agreement obligating Global to sell and BP to buy

minimum quantities for a five-year period.    The contract has a take

or pay feature in that BP was obligated to pay for the minimum

amounts whether purchased or not.      The prices were set by a

formulae and did not fluctuate with the market.     The market price

dropped creating a difference between the market price and the

contract prices of approximately $1,000,000 for each month of

purchases.    Global declined BP’s request to negotiate new price

terms.    The market prices continued at this lower level and over

the three-year period the contract was in force, the difference

between the contract price and the market price summed to over

$40,000,000, or roughly 40,000 each day.     BP, nonetheless, did not

invoke the damage cap of $500,000 it would later rely upon.

Rather, on September 5, 1995, after EPA issued rules in January and

July 1995, BP gave Global written notice of termination.    It relied

upon paragraph 14(b) of the contract, a provision treating changes

in law.   This suit followed.

                                 II

     BP’s claimed right to terminate the five-year contract turns

on the applicability of the agreement regarding changes in law

found in paragraph 14(b) which provides:

                  14(b) Changes in Law. If, during the
             term of this agreement the Clean Air Act, PL

                                  2
              101-549, is amended and becomes effective,
              or any final, non-appealable rules or
              regulations promulgated thereunder become
              effective, so as to no longer require the
              use of reformulated motor gasoline (as
              defined in the Clean Air Act) in an area or
              areas of the United States wherein the Buyer
              markets motor gasolines, thereby eliminating
              the Buyer’s requirements for MTBE Product as
              an oxygenate (the “Amendment”), then either
              party hereto may, upon thirty (30) days
              notice to the other, convene a meeting to
              discuss an equitable resolution of any
              alleged hardship resulting to such party as
              a result of the Amendment; provided,
              however, that if such meeting does not lead
              to a resolution within sixty (60) days from
              the date of commencement, either party may
              terminate this Agreement upon sixty (60)
              days’ written notice to the other party.

       The district court in its carefully crafted order detailed

three required triggers to a right to terminate the agreement under

its change in law provision.     First, changes in the Clean Air Act

or   its   implementing   regulations.   Second,   reformulated   motor

gasoline must no longer be required “in an area or areas of the

United States wherein the Buyer markets motor gasolines.”         Third,

the EPA action must eliminate the buyer’s requirements for MTBE

Product as an oxygenate”.      The first two were ultimately not at

issue and we turn to the third.     It had two aspects.

      The first is a contention that product as used in the change

in law provision means only product from the Deer Park facility.

The changes in EPA rules eliminated the need for MTBE in Western

Pennsylvania, an area where BP sold motor gasolines, and which had

required 80,000 barrels per month of MTBE.         BP points to      the

language, “so as to no longer require the use [RFG]...in an area or

                                   3
areas of the United States wherein [BP] markets motor gasolines,

thereby eliminating [BP’s] requirements for MTBE Product as an

oxygenate....”    The argument continues that the EPA rules thus

ended the use of product in an area in which BP marketed its

gasoline; that this ended a need for MTBE in an amount in excess of

the 75,000 barrels per month required to be purchased by the

agreement.   The argument, more nuanced before the district court,

has   narrowed   to   the   present   contention   that   the   EPA   rules

eliminated BP’s requirements for MTBE Product manufactured at

Global’s Deer Park facility. As the district court pointed out,

this reading of product is in tension with other provisions of the

agreement, such as the provision for “suspension of deliveries”

dealing with replacement product, a term not limited to the Deer

Park facility.

       We need not travel the semantical paths of this aspect, for

BP’s contention suffers a more fundamental flaw in its second

aspect.   As the district court noted, without a qualifying phrase

such as “in such area or areas” following the elimination of

buyer’s requirements language in the agreement, the provision means

that a change in law does not trigger a right to terminate unless

BP’s need for MTBE as an oxygenate is eliminated entirely, not just

in an area in an amount in excess of its required purchase under

the agreement.   BP’s need for MTBE as an oxygenate was reduced, but

it was never eliminated.

       BP explains that it intended that the provision allow it to

terminate the contract when a change in law caused it to need less

                                      4
MTBE as an oxygenate than it was obligated to purchase from Global.

BP had a contract with ARCO for MTBE that lacked a change in law

provision.     It insisted upon the change in law provision in the

agreement with Global, anticipating that a loss of a market area

might eliminate its need to purchase MTBE as an oxygenate from a

source other than ARCO.       This is a rational explanation of what BP

wanted in the agreement.           The difficulty is that the contract,

plainly and unambiguously describes an elimination of need for

product, not the elimination of need for a second source of supply.

                                        III

      Paragraph 11 of the agreement provides in relevant part:

      In no event shall the liability of either party under
      this Agreement (other than the obligation to pay for
      delivered   Product   or  provide   timely  credit  for
      replacement    Product,  each    of   which   shall  be
      unconditional) exceed $500,000.

      The district court enforced this provision as a cap on damages

for   breach    of   the   agreement.    Since    any   damages    indisputably

exceeded the cap, the district court entered summary judgement for

Global   in    the   amount   of   $500,000,     together   with   prejudgment

interest.

      Global first urges that the district court failed to give it

adequate opportunity to confront BP’s limitation of remedy defense,

entering summary judgment, sua sponte. Second, paragraph 11 fails

under Tex. Bus. & Com. Code, § 2.719, because it is not an

exclusive remedy, alternatively, it fails of its essential purpose.

The argument continues that it is not exclusive because its text

provides no cap on damages for buyer’s non-payment and BP’s actual

                                         5
performance of the agreement makes plain that Paragraph 11 was not

intended     to    limit     damages    for    wrongful     termination      of    the

agreement. Third, the damages specified are disproportionately and

unreasonably low, this is a liquidated damages clause, and fails

under § 2.718.

      BP     replies   that     the     sua    sponte     summary      judgment    was

appropriate, the limitation on damages enforceable, the exclusive

remedy analysis inapplicable, the purpose did not fail, no penalty

analysis is appropriate and there was no error in not considering

the BP’s asserted “performance” of the agreement.

                                          1

      We turn first to Global’s contention that the district court

failed to give it a fair opportunity to address the cap of damages,

specifically, notice of its intent to grant summary judgment, sua

sponte. Global filed its “final” motion asserting that it was

dispositive on all issues.             It had filed two separate responses

regarding BP’s limitation of damages defense and evidence in

support of its responses.           These filings included oral depositions

in which witnesses from BP and Global testified about the cap.                      We

are persuaded from our review of the record               that Global had a full

and   fair    opportunity      to    develop     the    record   and    marshal    its

arguments. See British Caledonia Airways, Ltd. v. First State Bank,

819 F.2d 593 (5th Cir. 1987).

                                          2

      Global      contends    that     because    the    obligation     to   pay   for

“delivered Product “ is unconditional in the parenthetical in

                                          6
paragraph   11,   the   district     court   erred   in   limiting    Global’s

recovery to $500,000 for its breach. Under Texas law, “contracting

parties can     limit   their   liability     in   damages   to   a   specified

amount,” see Vallance & Co. v. Anda, 595 S.W.2d 587, 590 (Tex. Civ.

App.--San   Antonio     1980,   no   writ)    (non-U.C.C.    case     regarding

services contract); Tex. Bus. & Comm. Code § 2.719(a)(1) (West

1994), and “it is immaterial whether a limitation of liability is

a reasonable estimate of probable damages resulting from a breach.”

Vallance, 595 S.W.2d at 590.          Paragraph 11, by its very terms,

limits the damages that may be collected by both parties to

$500,000.    The parenthetical in paragraph 11 makes clear that BP

must still pay for MTBE that is delivered to it by Global and the

words “other than” in the parenthetical indicate that payment for

delivered product is not to be included in a computation of

damages.

     Global proposes a definition for “delivered Product” that

includes MTBE delivered by Global to third parties on the spot

market.     As we read it, however, the term “delivered Product”

refers to MTBE    delivered to BP.         For example, paragraph 9 of the

Agreement, which governs the risk of loss for MTBE delivered to BP,

states that “the Product shall be delivered FOB the Terminal.”

Global's stretch of the meaning of “delivered Product” to fall

within the exception in the parenthetical in paragraph 11 is

unconvincing.

     Paragraph 4(c) of the Agreement states, in pertinent part:

     It is acknowledged and agreed that, except as otherwise
     expressly   provided  in   this  Agreement,   the  only

                                       7
     obligations of the Buyer are to accept delivery of, and
     pay for, delivered Product.

Under this paragraph, BP has two obligations, to accept delivery of

MTBE and to pay for delivered Product.             The parenthetical in

paragraph 11 refers only to BP's obligation to pay for delivered

Product.   Paragraph 4(c) and 11 are not inconsistent with reading

“delivered Product” to refer to MTBE that is delivered to BP.

Paragraph 4(c) does not help Global’s position.

     Nor are paragraphs 4(b)(I) and 4(b)(ii) inconsistent with

reading paragraph   11   to   cap   damages   at   $500,000.        Paragraph

4(b)(I)&(ii)   provide   formulae   for   computing    BP’s    or   Global’s

damages for a breach.    We are not persuaded that reading paragraph

11 to limit the overall damage recovery to $500,000 renders the

damage formulae in paragraph 4(b) superfluous.

                                    3

     Global urges that paragraph 11 is not an exclusive remedy

under the Agreement, pointing to paragraph 14(c) which provides:

     (c) NO REMEDY EXCLUSIVE. No remedy herein conferred upon
     or reserved to [BP] or to [Global] under this Agreement
     is intended to be exclusive of any other available remedy
     or remedies, but each and every such remedy shall be
     cumulative and shall be in addition to every other remedy
     given under this Agreement or now or hereafter existing
     at law or in equity or by statute.

Global notes that U.C.C. § 2.719(a) creates a presumption that

clauses prescribing remedies are cumulative rather than exclusive.

See Tex. Bus. & Comm. Code § 2.719(a) (West 1994). This argument,

however, conflates “remedies” and “damages.”          Paragraph 11 limits

the amount of damages and does not restrict any other remedy, such

as injunctive relief, that Global may be entitled to under the

                                    8
Agreement.1    U.C.C. § 2.719(a)(2) provides that any remedy is not

meant to be exclusive, unless expressly agreed upon by the parties,

and this section does not refer to any limitation on the amount of

damages.      Indeed,   §   2.719(a)(1)   explicitly   provides   that   an

agreement “may limit or alter the measure of damages available

under this chapter . . .”     See Tex. Bus. & Comm. Code § 2.719(a)(1)

(West 1994) (emphasis added).

                                     4

     Global contends that the district court abused its discretion

in excluding testimony in oral depositions that BP officials had

not read paragraph 11 to limit damages for termination; that this

testimony is “course of performance” evidence that should have been

considered by the court.

     In ignoring this testimony, the district court found that the

Agreement was unambiguous and reflected the objective intent of the

parties.   In the district court, Global urged that the testimony

demonstrated the subjective intentions of BP. On appeal it shifts,

recasting this testimony as “course of performance” evidence.

Assuming this testimony is “course of performance” evidence and

the shift in position aside, course of performance can only explain

or supplement terms of a contract.        See Tex. Bus. & Comm. Code §§

2.202 & 2.208(b) (West 1994).      It may not be used to contradict the

express terms of an unambiguous contract. Reading the Agreement as

a whole, paragraph 11 is unambiguous.        The district court did not

     1
        Global has only sought a damage award of $ 28 million and
no other relief.

                                     9
abuse its discretion in not relying on the deposition testimony of

BP employees.

                                     5

            Global argues for the first time on appeal that even if

paragraph 11 of the contract is an exclusive remedy, it “fail[s] of

its essential purpose” under U.C.C. § 2.719(b).

       Where circumstances cause an exclusive or limited remedy
       to fail of its essential purpose, remedy may be had as
       provided in this title. Sec. 2.719(b).

Paragraph 11 does not limit the remedies that Global can seek under

the Agreement.    It limits the amount of damages that either party

can collect. Under Texas law, “contracting parties can limit their

liability in damages to a specified amount” and “it is immaterial

whether a limitation of liability is a reasonable estimate of

probable damages resulting from a breach.” Vallance, 595 S.W.2d at

590.    Moreover, in Texas, an agreement “may limit or alter the

measure of damages available . . .”      See Tex. Bus. & Comm. Code §

2.719(a)(1) (West 1994).

                                     6

       Global urges that in any event the specified damages are

disproportionately and unreasonably low under U.C.C. § 2.718.

       U.C.C. § 2.718(a) provides:

       Damages for breach by either party may be liquidated in
       the agreement but only at an amount which is reasonable
       in the light of the anticipated or actual harm caused by
       the breach, the difficulties of proof of loss, and the
       inconvenience or non-feasibility of otherwise obtaining
       an adequate remedy. A term fixing unreasonably large
       liquidated damages is void as a penalty.

                                 10
This section, by its terms refers to a liquidated damages provision

and not to a limitation on the amount of damages.    As the Eighth

Circuit explained, “[a] liquidated damages provision sets a fixed

amount that can be recovered upon breach without proof of any

damage.   A limitation of damages provision limits the damages that

may be recovered, but proof of damages is still required in order

to recover to the limit.”   Tharalson v. Pfizer Genetics, Inc., 728
F.2d 1108, 1111 (8th Cir. 1984) (citing Western Union Tel. Co. v.

Nester, 309 U.S. 582, 587-88 (1940)). Paragraph 11 is a limitation

on damages and not a liquidated damages provision.       It is not

governed by U.C.C. § 2.718(a).        See id. (concluding that the

reasonableness test in U.C.C. § 2.718(a) is inapplicable to a

limitation of damages provision).

     AFFIRMED.

                                 11