PER CURIAM.
This appeal involves the interpretation and enforcement of certain pricing provisions contained in a long-term contract for the processing of propylene into propylene oxide,
Applying Pennsylvania law as required by the contract, the trial judge concluded that the contractual provision at issue was ambiguous. At trial, she admitted extrinsic evidence concerning the parties understanding of the ambiguous provision. Based upon its interpretation of the contract, the jury returned a verdict of $169.9 million in favor of BASF, to which the trial judge added $36.5 million in prejudgment interest.
Lyondell appeals the resulting judgment, arguing that the trial judge erred in allowing BASF's proposed interpretation to go to the jury because it was unreasonable and not supported by the law or evidence. Lyondell also challenges the methodology used for the calculation of damages, as well as several procedural and evidentiary rulings made by the trial judge.
Because we conclude that the contractual language at issue was not ambiguous as a matter of law and that the jury's consideration of one aspect of BASF's interpretation resulted in a flawed verdict, we reverse and remand for further proceedings consistent with our opinion.
We discern the following facts and procedural history from the record.
Lyondell's business includes the provision of propylene oxide to various customers, which it generally accomplished in one of two ways. Lyondell sometimes acquires propylene, tolls it into propylene oxide, and sells the finished product to its customer. As an alternative, Lyondell receives propylene provided by the customer and tolls it into propylene oxide, charging a fee for its services. The latter procedure was followed in the contract between Lyondell and BASF.
On July 1, 1996, Lyondell
The key contractual provision at issue, which the parties refer to as the most-favored-nation (MFN) clause, provides as follows:
The "reservation fee" referred to in the MFN clause was a payment required by § 8(a) of the contract. Although the reservation fee is stated to be $106.2 million in the contract, the parties stipulated that it was actually lower because part of the stated amount was applicable to a separate and unrelated contract between the parties. According to the contract, the reservation fee
The parties had differing explanations of the effect of the reservation fee on the amount of the tolling fees being charged to BASF, but Lyondell has not pursued that issue on appeal.
After the parties agreed on an initial tolling fee of 26.2 cents per pound of propylene oxide, BASF paid approximately $91 million to Lyondell to satisfy its reservation fee obligation. The tolling fee outlined in the contract was subject to modification on a yearly basis pursuant to the provisions of the contract.
In 2004, BASF conducted an audit of Lyondell's compliance with the MFN clause, during which it reviewed Lyondell sales from 2001 through the first quarter of 2004. Based on the audit, BASF claimed that Lyondell's sales of propylene oxide to Carpenter, another Lyondell customer in the same industry as BASF, were based on a tolling fee lower than BASF's for the applicable year, requiring a downward adjustment to BASF's tolling fee under the MFN clause. Although Lyondell maintains that there was actually no violation of the pricing requirements of the MFN clause, it chose not to contest that issue at trial and, in fact, conceded at trial that BASF was entitled to a refund of $22.5 million.
Unlike BASF, Carpenter did not supply its own propylene to Lyondell. As a consequence, the cost of the propylene had to be backed out of the price paid by Carpenter for the purchase of propylene oxide in order to determine the amount of the tolling component of the transaction between Lyondell and Carpenter. At trial, the parties presented different methods for accomplishing that procedure. Lyondell contends on appeal that BASF's approach, which was apparently adopted by the jury, improperly inflated the amount of the damages.
On April 12, 2005, BASF filed a two-count complaint alleging that Lyondell breached their contract and the implied covenant of good faith and fair dealing.
The parties brought several pretrial motions and cross-motions for partial summary judgment and other relief. In May 2007, the trial judge denied: (1) Lyondell's motion that price comparisons under the MFN clause should be based on the annual weighted-average price Lyondell offered other customers, rather than on individual or "spot" transactions; (2) Lyondell's motion that its acquisition cost for propylene should be used for comparing propylene oxide tolling fees under the MFN clause; (3) Lyondell's motion to dismiss BASF's claims based on the reservation fee; and (4) BASF's motion that the parties had a meeting of the minds that price comparisons should be based on individual spot prices absent exclusions. Prior to trial, the trial judge also denied Lyondell's motion to prohibit BASF from questioning Lyondell witnesses about whether their actions in administrating the BASF contract violated the Sarbanes-Oxley Act
The jury trial commenced on June 26, 2007, and ended on August 13, 2007. The trial judge made several rulings during trial that are also challenged on appeal. They include objections to the testimony of expert witnesses and the denial of Lyondell's motion for an involuntary dismissal.
On August 13, 2007, the jury unanimously found that Lyondell had breached the MFN clause of the parties' contract and awarded BASF $169,932,670.17 in damages. Judgment in that amount was entered on August 23, 2007. The judgment was amended on October 3, 2007, to include $36,475,248 in prejudgment interest.
This appeal followed.
Although the contract provides for the application of the substantive law of Pennsylvania, we apply New Jersey law with respect to procedural and evidentiary issues.
Lyondell does not seek to overturn the decisions reached by the jury as being against the weight of the evidence, which argument would be governed by Rule 2:10-1 (requiring that a motion for a new trial have been made in the trial court) and
It is well established that our review of a trial judge's conclusions of law is de novo.
With respect to evidentiary issues, "`[t]raditional rules of appellate review require substantial deference to a trial court's evidentiary rulings.'"
With respect to substantive law, this appeal focuses on issues related to the appropriate interpretation of the propylene oxide contract, and specifically the MFN clause. The appeal further focuses on whether, and to what extent, there are ambiguities in the MFN clause or elsewhere in the contract that would require the jury, as finder of fact, to decide issues of contractual interpretation.
In
In
However, the Court in Steuart reaffirmed its adherence to the plain meaning approach.
In
With respect to damages, Pennsylvania law precludes the recovery of "[p]urely speculative damages or those based upon merely fanciful conceptions."
However, proof of the exact amount of loss sustained by a party is not required for that party to recover damages for breach of contract.
In
In sum, while Pennsylvania law does not allow for recovery of purely speculative damages, recovery of approximate damages is permissible provided the party seeking damages establishes a basis for the reasonable computation of damages suffered.
The first and key issue in this appeal concerns the interpretation of the MFN clause and the nature of BASF's remedy in the event of its breach.
Lyondell, not surprisingly, takes a very narrow view of the requirements of the MFN clause. It argues that the clause required only an annual comparison of the tolling fees offered by Lyondell to its other customers to determine whether, on an annual weighted-average basis, it tolled propylene oxide at a lower fee than BASF's fee under the contract. BASF, again not surprisingly, offered a very broad reading of the MFN clause. According to BASF, any tolling fee to another customer below BASF's yearly fee required a re-calculation of BASF's transactions for the entire year, with all such transactions adjusted to the lower tolling fee.
Reduced to its basics, and omitting language not relevant to the present inquiry, the MFN clause provides:
Under Pennsylvania law, Lyondell and BASF's intent is to be "regarded as being embodied" in that language and, "[i]n the absence of an ambiguity, the plain meaning of [that language] will be enforced."
The quoted language can only be considered ambiguous "if it is
We do not consider ourselves bound by the parties' assertions that there is an ambiguity, just as a court is not necessarily bound by the parties assertions that there are no genuine issues of material fact on cross-motions for summary judgment.
Lyondell's proffered interpretation is that the MFN clause requires an annual comparison of the price for tolling, with the comparison to be based on an annual weighted-average basis. Under Lyondell's proposed interpretation, the fact that a lower tolling fee was charged to a given customer for some tolling during a year would not trigger the MFN clause if, on a weighted-average basis, the customer was not charged a lower fee.
We conclude that the contractual language is not "reasonably susceptible" to that interpretation. Indeed, we see nothing in the language of the MFN clause that even suggests or hints at such an interpretation. There is no reference in the text to an annual comparison of sales or to the use of yearly weighted-average prices, either in those words or in words susceptible of that meaning. Instead, the clause rather simply speaks of processing "at a price . . . lower than that provided under this [contract]." The text speaks of "a price," not "an average price" or "an annual weighted-average price."
Lyondell argues that the trial judge improperly precluded the testimony of Wayne Kuhn, whom Lyondell had offered to give expert testimony on the meaning of MFN clauses and how they are understood in the industry, with specific reference to the use of particular time periods to determine "comparable pricing." Our review of the record convinces us that there was no abuse of the judge's "broad discretion" in the decision to preclude Kuhn's testimony.
Finally, we see nothing in Kuhn's position that would persuade us that Lyondell's proposed interpretation of the MFN clause is viable as a matter of law. We understand the term "comparable pricing" in the MFN clause to refer to the need to ensure that price comparisons are comparable in two ways. First, there is the requirement that the reservation fee be considered in making price comparisons. Second, because the clause applies to Lyondell's sales of propylene oxide and its tolling of propylene supplied by its customer, it was necessary to back the propylene component out of the price of propylene oxide in order to determine the tolling fee for purposes of comparing it to BASF's tolling fee.
BASF's proffered interpretation is that any transaction involving a tolling fee below its contractual price for the year at issue requires the adjustment of that price downward to the lower fee. We will consider separately the issue of the nature of the adjustment. We find BASF's interpretation to be both reasonable and consistent with the language used by the parties. In fact, that is what the clause itself says: "[I]f . . . [Lyondell] sells or processes [propylene oxide] . . . at a price, . . . lower than that provided under this [contract],. . . [Lyondell] will notify BASF of such price and adjust the price set forth in [the contract] to meet such lower price. . . ."
Consequently, we find no ambiguity in the MFN clause that would have required the jury to consider Lyondell's unreasonable interpretation concerning a yearly weighted-average price.
The question then becomes whether the required adjustment is to be retroactive for the whole year, as BASF urges, prospective for the remainder of the year, or applicable solely to a similar amount of product, as Lyondell suggests as a fallback position. To answer that question, we must focus on the MFN language "adjust the price set forth in [the contract] to meet such lower price" to determine whether it contains an ambiguity.
We find nothing in the quoted language to support BASF's assertion that the language was intended to require a price adjustment for all propylene oxide tolled for BASF during the applicable year. The phrase at issue contains no language stating that it should be applied retrospectively to past transactions, as was the case in
In addition, the interpretation urged by BASF is unreasonable. A retroactive adjustment for an entire year based on a lower tolling price charged by Lyondell in a single transaction, however small, would be unduly punitive given the extent of the transactions between Lyondell and BASF.
The purpose of the MFN clause was to assure BASF that it would receive Lyondell's lowest tolling price during each year of the contract. The clause was not designed to fix a lower limit to Lyondell's tolling charges during the applicable period. For that reason, the MFN clause does not prohibit Lyondell from charging a lower tolling fee to another customer; and Lyondell did not breach the MFN clause solely by doing so. Instead, the MFN clause prohibits Lyondell from charging a lower fee to another customer without notifying BASF of that lower price and adjusting the contract price for that year to meet it.
Lyondell's violation of the MFN clause in this case is premised on its failure to give the required notice and price adjustment, rather than charging a lower tolling fee to Carpenter. Had Lyondell applied a lower tolling fee to its transaction with Carpenter, given BASF notice of the lower fee, and adjusted the contract price for the rest of that year to meet it, there would have been no breach of the MFN clause.
BASF's implicit argument that, under those circumstances, Lyondell would have been obligated to refund the difference between the old and new tolling fee retroactively for the entire year makes no common or commercial sense, and is not supported by the language of the MFN clause. Lyondell's ability to lower its tolling fee during a given year would be to BASF's advantage, assuming compliance with Lyondell's notice and adjustment requirements.
We also find no support in the language of the MFN clause for Lyondell's fallback position that its obligation to BASF upon charging a lower tolling fee to another customer is limited to offering BASF the opportunity to have a comparable amount of propylene tolled at the lower fee. While such a provision cannot be characterized as commercially unreasonable, it is not supported by the language of the MFN clause and is, consequently, an unreasonable interpretation. The phrase "adjust the price set forth in [the contract] to meet such lower price" simply cannot reasonably be interpreted to mean: "offer BASF the opportunity to toll a comparable amount of propylene at the lower fee."
We conclude that, as a matter of law, the MFN clause is not ambiguous with respect to the nature of the price-adjustment remedy, despite the contrary positions taken by the parties (albeit for different reasons). In our view, the relatively simple language at issue requires that, once Lyondell charges a lower tolling fee during the applicable year, the contract price must be adjusted to "meet" the lower fee for the remainder of the year.
Because there was no ambiguity with respect to the nature of the remedy under the MFN clause, that issue should not have been submitted to the jury for its interpretation with the assistance of extrinsic evidence. The error was not harmless because it allowed (but did not require) the jury to return a verdict based upon BASF's position that the MFN clause required a retroactive adjustment for transactions that preceded Lyondell's charging a lower tolling fee.
We now turn to the issue of damages. Our review of the record demonstrates that it is not possible to determine whether, or to what extent, the jury based its damage award on BASF's theory of retroactive adjustment to include completed transactions. The jury verdict sheet contains a line for total damages and does not distinguish the elements of the damages calculation. The size of the damage award strongly suggests that such retroactive damages were included. For that reason, the issue of damages will have to be retried.
We must, therefore, address the parties' disagreement with respect to the appropriate method for calculation of the tolling fee charged to Carpenter, as well as certain evidentiary rulings made by the trial judge.
The damages issue in this case is complicated by the fact that, while BASF was supplying its own propylene and was only charged a tolling fee, Carpenter purchased propylene oxide, the end product of the tolling process. It appears from the lack of such evidence in the record that Lyondell did not charge Carpenter separately for the propylene and the tolling, and also that there were no internal Lyondell documents reflecting the costs and profit allocated to each.
When damages cannot be calculated exactly, as appears to be the case here, Pennsylvania law requires a plaintiff such as BASF to provide evidence "for a reasonable computation of the damages suffered considering the nature of the transaction . . . though there may be involved some uncertainty about it."
In making the required calculation, there is an inverse relationship between the value assigned to the propylene and the resulting tolling fee. Lyondell argues that the propylene should be valued at its cost, which has the effect of maximizing the tolling fee and minimizing damages.
Lyondell's proposed method of calculation, however, is premised on the theory that Lyondell sells the propylene to Carpenter at its cost, rather than at cost plus a mark up, and that Lyondell charges Carpenter only for the tolling process. Put another way, Lyondell's proposed method assumed that it realized no profit on the propylene aspect of its transactions with Carpenter. That course of conduct appears to make little commercial sense, but we cannot find that it is so unreasonable that it should be excluded at the retrial.
BASF argues that the propylene aspect of the transaction should be valued on the basis of the price for propylene published by the Chemical Market Associates, Inc. (CMAI prices), which reflects a "market price" used for many commercial transactions.
Lyondell contends that CMAI list prices do not represent actual market prices paid by large volume purchasers such as BASF and Lyondell, which receive discounts for large purchases. That assertion is apparently accurate. CMAI President Gary Adams testified that CMAI list prices provide a composite benchmark of the upper bounds of prices during a given time period, but that those prices are often not reflective of the actual price paid by large purchasers. Nevertheless, there was evidence in the record that Lyondell utilized the CMAI price with respect to sales to its own customers, including Carpenter.
Consequently, we see no error in the trial judge's decision to permit the presentation of both theories to the jury, and no bar to their presentation at the retrial on damages.
Lyondell argues that the trial judge erred in permitting BASF's damages expert, Jonathan Arnold, to testify to his calculation of damages based upon the CMAI price of propylene. We address that issue because Arnold, or someone like him, is likely to be a witness at the retrial.
To a large extent, Lyondell's argument is predicated on Lyondell's overarching position that only its cost for propylene, rather than the approximately ten-percent higher CMAI price, should have been used in backing the propylene component out of the price Lyondell charged Carpenter for propylene oxide. Because we have determined that the trial judge did not err in allowing the jury to consider both parties' theories concerning the appropriate methodology for backing the propylene out of the price, we reject Lyondell's argument based on its contrary assertion on that issue.
Arnold was an economist whose testimony was offered to demonstrate how damages could be calculated using the methodology espoused by each side. He did not vouch for BASF's proposed methodology. In addition to making calculations using BASF's theory of damages, Arnold also used alternative assumptions based on Lyondell's interpretation of the MFN clause. Similarly, Lyondell offered a damages expert who offered alternative calculations, including calculations based upon BASF's methodology.
Arnold presented opinions on the amount of damages based on different scenarios, most of which were arguably viable. However, his testimony included BASF's theory, which we have rejected, that the MFN clause required a retroactive adjustment for sales within a given year that were completed prior to Lyondell's act of tolling at a price lower than BASF's tolling fee, the event that triggered application of the MFN clause. That testimony must be excluded at the retrial.
Because a retrial is required, we briefly address two additional issues raised by Lyondell.
The first issue relates to the cross-examination of Lyondell witnesses with respect to alleged violations of the Sarbanes-Oxley Act, Lyondell's internal ethics code, and the sale of stock by one of Lyondell's executives.
Lyondell contends that those issues are not relevant to BASF's breach of contract action, that they unduly prejudiced the jury against it, and that the judge should have excluded such questions pursuant to
The trial judge concluded that the evidence was relevant to BASF's separate claim for breach of the covenant of good faith and fair dealing. However, the parties subsequently agreed that Pennsylvania does not recognize such a claim as a separate cause of action.
We have some reservations with respect to the appropriateness of general questions related to the SarbanesO-xley Act and Lyondell's code of ethics, largely because great care needs to be taken to ensure that they are not used simply to paint Lyondell personnel as bad people or rule breakers. Nevertheless, such questions may be appropriate in response to specific actions or statements of Lyondell's witnesses. Because we do not know whether those lines of questioning will be raised on retrial or in what context, we defer to the trial judge to determine admissibility in the specific context in which the questions arise, if at all. We offer, however, the following observations.
The threshold for relevance is very low, and evidence is relevant if it "support[s] the existence of a specific fact, even obliquely."
If the evidence is determined to be relevant but there is concern that it would be unfairly prejudicial, the judge must engage in a careful analysis under
If the proposed evidence includes "other crimes, wrongs, or acts," the judge will also have to perform a careful analysis under
The judge will also have to consider whether and how to instruct the jury if evidence is admitted that is appropriately considered on one issue before the jury but not on others.
The second issue involves a reference to a "shadow jury" during BASF's cross-examination of one of Lyondell's witnesses. Because we are ordering a new trial on damages, we need not reach the issue of whether there should have been a mistrial based on BASF's accusation that Lyondell did not trust the jury because it was using a shadow jury. We note only the following.
We do not agree with the trial judge's
If witnesses have been sequestered, as they were in this trial, a trial judge certainly has the right, and indeed the obligation, to make sure that witnesses are appropriately sequestered by asking, directly or through a court aide, whether someone entering the courtroom is a witness or potential witness. The judge did not need to know that jury consultants or members of a shadow jury were in the courtroom because a judge should also generally instruct members of the jury not to discuss the case with anyone during breaks, including people attending the trial, the parties, counsel, and other members of the jury (except during deliberation). And, the judge can also instruct members of the public to refrain from contact with members of the jury. A judge does not need to know the identity of those sitting in the courtroom to give such instructions.
To the extent there was concern about a breach of witness sequestration based upon a witness's review of reports from observers, jury consultants, or a shadow jury, the issue should have been raised and resolved, at least initially, outside of the presence of the jury. With respect to a corporate party, whether a testifying executive can also be a corporate representative is addressed to the trial judge's discretion.
Finally, we see no general relevance or probative value as to the issue of jury consultants and the issue of whether Lyondell "trusts" the jury. Such questions appear aimed at unfairly prejudicing the jury. We would not expect them to be a basis for cross-examination at the retrial, absent a clearly articulated basis for doing so.
In summary, we conclude that the MFN clause is not ambiguous and that the trial judge erred in submitting the question of its interpretation to the jury. We cannot determine with certainty whether the jury included retroactive damages, although it appears likely that it did so because of the amount of the damages awarded. In any event, we cannot ascertain what amount was attributed to such retroactivity. Consequently, we remand for a new trial on damages.
Because Lyondell did not challenge the jury's determination that there was a breach of the MFN clause, liability will not be an issue on remand. At the new trial, BASF will have the burden to provide evidence "for a reasonable computation of the damages suffered considering the nature of the transaction . . . though there may be involved some uncertainty about it . . . ."
Evidence at the new trial may include evidence with respect to Lyondell's cost for propylene and the CMAI price of propylene. However, because we find that Lyondell's theory that damages are limited to the purchase of a similar amount of product at the lower price to be unsupported by the language of the MFN clause, and thus inadmissible, that argument cannot be renewed. The parties may, at the discretion of the trial judge, make other arguments concerning damages, as long as they are supported by the law and the evidence, and have not been precluded by our opinion.
Reversed and remanded.