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BASF CORPORATION v. LYONDELL CHEMICAL COMPANY, A-1119-07T2. (2010)

Court: Superior Court of New Jersey Number: innjco20101228230 Visitors: 13
Filed: Dec. 28, 2010
Latest Update: Dec. 28, 2010
Summary: NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION PER CURIAM.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, 1 a process known as "tolling." Plaintiff BASF Corporation (BASF) brought suit against defendant Lyondell Chemical Corporation (Lyondell), 2 contending that Lyondell violated a provision of their contract by charging another Lyondell customer
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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

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,1 a process known as "tolling." Plaintiff BASF Corporation (BASF) brought suit against defendant Lyondell Chemical Corporation (Lyondell),2 contending that Lyondell violated a provision of their contract by charging another Lyondell customer a lower fee for tolling without notifying BASF and lowering BASF's tolling fee to a comparable level.

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.

I.

We discern the following facts and procedural history from the record.

A.

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, Lyondell3 and BASF entered into an agreement that required Lyondell to toll propylene supplied by BASF into propylene oxide. They subsequently amended and restated the agreement, effective January 1, 1999 (contract). That contract will continue until December 31, 2011, subject to two consecutive options to extend.

The key contractual provision at issue, which the parties refer to as the most-favored-nation (MFN) clause, provides as follows:

[I]f, during the term of this [contract], [Lyondell] sells or processes [propylene oxide] of similar quality to [propylene oxide] sold hereunder at a price, inclusive of all rebates, discounts or free goods, lower than that provided under this [contract], taking into account the [propylene oxide] Reservation Fee in determining comparable pricing, then [Lyondell] will notify BASF of such price and adjust the price set forth in Section 8(b)(ii) to meet such lower price, also taking into account the Reservation Fee set forth in Section 8(a) above, subject to the following exceptions: (A) [Lyondell]'s sales to its Affiliates' for their own use; (B) [Lyondell]'s sales for delivery outside of the NAFTA Region; (C) [Lyondell]'s sales to industries different than BASF's; and (D) [Lyondell]'s sales to co-producers.

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

applies to a certain quantity of [propylene oxide] that will be delivered by [Lyondell] to BASF during each Calendar Year beginning in 1999 and ending in 2011. For 1999 the quantity is 125 million pounds and for the remaining years it is 135 million pounds.[4]

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.5

B.

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.6 BASF's complaint asserted that Lyondell overcharged it in excess of $102 million, with additional amounts potentially due for periods that had not yet been audited at the time the complaint was filed.

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 Act7 or Lyondell's internal ethics policy. Each of those issues will be discussed at greater length below to the extent necessary for the resolution of this appeal.

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.8

II.

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. N. Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999) ("[T]he procedural law of the forum state applies even when a different state's substantive law must govern."). Before turning to the specific issues raised by Lyondell, we outline our standard of review and the general principles of substantive law governing this appeal.

A.

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 Rule 4:49-1(a) ("The trial judge shall grant the motion if, having given due regard to the opportunity of the jury to pass upon the credibility of the witnesses, it clearly and convincingly appears that there was a miscarriage of justice under the law."). Instead, it argues that the trial judge made erroneous rulings with respect to both pre-trial and trial issues that resulted in the jury being allowed to decide issues that were not properly before it. Lyondell also challenges the judge's decisions admitting or excluding certain evidence.

It is well established that our review of a trial judge's conclusions of law is de novo. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995) ("A trial court's interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference."). Consequently, we review a grant of summary judgment de novo, applying the same standard governing the trial court under Rule 4:46-2(c). Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007); Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995). A similar standard governs our review of a motion for an involuntary dismissal. R. 4:37-2(b) ("such motion shall be denied if the evidence, together with the legitimate inferences therefrom, could sustain a judgment in plaintiff's favor"). See Dolson v. Anastasia, 55 N.J. 2, 5 (1969).

With respect to evidentiary issues, "`[t]raditional rules of appellate review require substantial deference to a trial court's evidentiary rulings.'" Benevenga v. Digregorio, 325 N.J.Super. 27, 32 (App. Div. 1999) (quoting State v. Morton, 155 N.J. 383, 453 (1998)), certif. denied, 163 N.J. 79 (2000). "[I]n making relevance and admissibility determinations[,]" the trial judge's exercise of his or her "broad discretion" will not be disturbed, "absent a manifest denial of justice." Lancos v. Silverman, 400 N.J.Super. 258, 275 (App. Div.), certif. denied sub nom., Lydon v. Silverman, 196 N.J. 466 (2008). Nevertheless, we accord no such deference to a ruling that is "inconsistent with applicable law." Pressler & Verniero, Current N.J. Court Rules, comment 4.6 on R. 2:10-2 (2011).

B.

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. See Trizechahn Gateway LLC v. Titus, 976 A.2d 474, 483 (Pa. 2009); Kripp v. Kripp, 849 A.2d 1159, 1163 (Pa. 2004).

In Murphy v. Duquesne University of the Holy Ghost, 777 A.2d 418, 429-30 (Pa. 2001), the Pennsylvania Supreme Court outlined the basic rules for contractual interpretation under Pennsylvania law:

The fundamental rule in interpreting the meaning of a contract is to ascertain and give effect to the intent of the contracting parties. Felte v. White, 451 Pa. 137, 302 A.2d 347, 351 (Pa. 1973). The intent of the parties to a written agreement is to be regarded as being embodied in the writing itself. Steuart v. McChesney, 498 Pa. 45, 444 A.2d 659, 661 (Pa. 1982). The whole instrument must be taken together in arriving at contractual intent. Felte, 302 A.2d at 351. Courts do not assume that a contract's language was chosen carelessly, nor do they assume that the parties were ignorant of the meaning of the language they employed. Steuart, 444 A.2d at 662. "`When a writing is clear and unequivocal, its meaning must be determined by its contents alone.'" Felte, 302 A.2d at 351 (quoting East Crossroads Center Inc. v. Mellon-Stuart Co., 416 Pa. 229, 205 A.2d 865, 866 (Pa. 1965)). Only where a contract's language is ambiguous may extrinsic or parol evidence be considered to determine the intent of the parties. Hutchison v. Sunbeam Coal Co., 513 Pa. 192, 519 A.2d 385, 390 (Pa. 1986). A contract contains an ambiguity "if it is reasonably susceptible of different constructions and capable of being understood in more than one sense." Id. This question, however, is not resolved in a vacuum. Instead, "contractual terms are ambiguous if they are subject to more than one reasonable interpretation when applied to a particular set of facts." Madison Construc. Co. v. Harleysville Mut. Ins. Co., 557 Pa. 595, 735 A.2d 100, 106 (Pa. 1999). In the absence of an ambiguity, the plain meaning of the agreement will be enforced. Gene & Harvey Builders, Inc. v. Pennsylvania Mfrs.' Ass'n Ins. Co., 512 Pa. 420, 517 A.2d 910, 913 (Pa. 1986). The meaning of an unambiguous written instrument presents a question of law for resolution by the court. Community College v. Community College, Society of the Faculty, 473 Pa. 576, 375 A.2d 1267, 1275 (Pa. 1977).

In Steuart v. McChesney, 444 A.2d 659, 661-62 (Pa. 1982), which was cited in Murphy, the Court observed that the analysis with respect to the presence or absence of a contractual ambiguity may require consideration of the context and purpose of the agreement.

While adhering to the plain meaning rule of construction, this Court, too, has cautioned: We are not unmindful of the dangers of focusing only upon the words of the writing in interpreting an agreement. A court must be careful not to "retire into that lawyer's Paradise where all words have a fixed, precisely ascertained meaning; where men may express their purposes, not only with accuracy, but with fullness; and where, if the writer has been careful, a lawyer, having a document referred to him, may sit in his chair inspect the text, and answer all questions without raising his eyes." Thayer, Preliminary Treatise on Evidence 428, quoted in 3 Corbin on Contracts § 535 n.16 (1960). [In re] Estate of Breyer, 475 Pa. [108] at 115 n.5, 379 A.2d [1305] at 1309 n.5 (1977). Indeed, whether the language of an agreement is clear and unambiguous may not be apparent without cognizance of the context in which the agreement arose: The flexibility of or multiplicity in the meaning of words is the principal source of difficulty in the interpretation of language. Words are the conduits by which thoughts are communicated, yet scarcely any of them have such a fixed and single meaning that they are incapable of denoting more than one thought. In addition to the multiplicity in meaning of words set forth in the dictionaries there are the meanings imparted to them by trade customs, local uses, dialects, telegraphic codes, etc. One meaning crowds a word full of significance, while another almost empties the utterance of any import. Hurst v. Lake & Co., Inc., 141 Or. 306, 310, 16 P.2d 627, 629 (1932), quoted in 4 Williston, Contracts § 609 (3d. ed. 1961).

However, the Court in Steuart reaffirmed its adherence to the plain meaning approach.

Nevertheless, the rationale for interpreting contractual terms in accord with the plain meaning of the language expressed is multifarious, resting in part upon what is viewed as the appropriate role of the courts in the interpretive process: "[T]his Court long ago emphasized that `[t]he parties [have] the right to make their own contract, and it is not the function of this Court to re-write it, or to give it a construction in conflict with. . . the accepted and plain meaning of the language used.' Hagarty v. William Akers, Jr. Co., 342 Pa. 236, 20 A.2d 317 (1941)." Felte v. White, 451 Pa. at 144, 302 A.2d at 351. "`It is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves, without regard to its wisdom or folly.' [13 C.J. § 485, p. 524]" Moore v. Stevens Coal Co., 315 Pa. 564, 568, 173 A. 661, 662 (1934). In 17A C.J.S. Contracts § 296(3), appears the following: The court may not rewrite the contract for the purpose of accomplishing that which, in its opinion, may appear proper, or, on general principles of abstract justice . . . make for [the parties] a better contract than they chose, or saw fit, to make for themselves, or remake a contract, under the guise of construction, because it later appears that a different agreement should have been consummated in the first instance . . . . (Footnotes omitted.) In addition to justifications focusing upon the appropriate role of the courts in the interpretive process, the plain meaning approach to construction has been supported as generally best serving the ascertainment of the contracting parties' mutual intent. "When the parties have reduced their agreement to writing, the writing is to be taken to be the final expression of their intention." 17A C.J.S. Contracts § 296(2). "Where the contract evidences care in its preparation, it will be presumed that its words were employed deliberately and with intention." 17A C.J.S. Contracts § 296(2). "In determining what the parties intended by their contract, the law must look to what they clearly expressed. Courts in interpreting a contract do not assume that its language was chosen carelessly." Moore v. Stevens Coal Co., 315 Pa. at 568, 173 A. at 662. Neither can it be assumed that the parties were ignorant of the meaning of the language employed. See Fogel Refrigerator Co. v. Oteri, 391 Pa. 188, 137 A.2d 225, 231 (1958). Accordingly, the plain meaning approach enhances the extent to which contracts may be relied upon by contributing to the security of belief that the final expression of consensus ad idem will not later be construed to import a meaning other than that clearly expressed. Cf. McCormick, The Parol Evidence Rule as a Procedural Device for Control of the Jury, 41 Yale L.J. 365, 365-366 (1932). Likewise, resort to the plain meaning of language hinders parties dissatisfied with their agreement from creating a myth as to the true meaning of the agreement through subsequently exposed extrinsic evidence. Absent the plain meaning rule, nary an agreement could be conceived, which, in the event of a party's later disappointment with his stated bargain, would not be at risk to having its true meaning obfuscated under the guise of examining extrinsic evidence of intent. Even if the dissatisfied party in good faith believed that the agreement, as manifest, did not express the consensus ad idem, his post hoc judgment would be inclined to be colored by belief as to what should have been, rather than what strictly was, intended. Hence, the plain meaning approach to interpretation rests upon policies soundly based, and the judiciousness of that approach warrants reaffirmation. [Steuart, supra, 444 A.2d at 662-63.]

In Trizechahn, supra, 976 A.2d at 483 (quoting Insurance Adjustment Bureau v. Allstate, 905 A.2d 462, 468-69 (2006)), the Court reiterated its holding that "`[a] contract is ambiguous if it is reasonably susceptible of different constructions and capable of being understood in more than one sense.'" The Court pointed out that "[t]he `reasonably' qualifier is important: there is no ambiguity if one of the two proffered meanings is unreasonable." Ibid. (citing Murphy, supra, 777 A.2d at 430). The Court also cautioned: "Furthermore, reviewing courts will not `distort the meaning of the language or resort to a strained contrivance in order to find an ambiguity.'" Ibid. (quoting Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (Pa. 1999)). Similarly, courts should "not modify the plain meaning of the contract under the guise of interpretation." Crawford Cent. Sch. Dist. v. Commonwealth, 888 A.2d 616, 623 (2005) (citing Little v. Little, 657 A.2d 12, 15 (Pa. Super. Ct. 1995)).

With respect to damages, Pennsylvania law precludes the recovery of "[p]urely speculative damages or those based upon merely fanciful conceptions." Weinglass v. Gibson, 155 A. 439, 440 (Pa. 1931). See also Spang & Co. v. United States Steel Corp., 545 A.2d 861, 866 (Pa. 1988) ("As a general rule, damages are not recoverable if they are too speculative, vague or contingent and are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty."); Skurnowicz v. Lucci, 798 A.2d 788, 795 (Pa. Super. Ct. 2002) ("The calculation of damages does not need to be `determined with entire accuracy' or `mathematical precision,' but it must rest on a reasonable factual basis and not conjecture."); Miller Oral Surgery, Inc. v. Dinello, 611 A.2d 232, 236 (Pa. Super. Ct. 1992), appeal denied, 624 A.2d 111 (Pa. 1993) (same).

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. Massachusetts Bonding & Ins. Co. v. Johnston & Harder, Inc., 22 A.2d 709, 714 (Pa. 1941). Instead, "[w]here there is a basis in the evidence for a reasonable computation of the damages suffered considering the nature of the transaction, a verdict may be based thereon, though there may be involved some uncertainty about it . . . ." Weinglass, supra, 155 A. at 440.

In Massachusetts Bonding, the Supreme Court concluded that

compensation for breach of contract cannot be justly refused because proof of the exact amount of loss is not produced, for there is judicial recognition of the difficulty or even impossibility of the production of such proof. What the law does require in cases of this character is that the evidence shall with a fair degree of probability establish a basis for the assessment of damages. [Massachusetts Bonding, supra, 22 A.2d at 714.]

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. Weinglass, supra, 155 A. at 440.

III.

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.9 Both parties contend that the provision is ambiguous and, in response, each offers a significantly different theory to resolve the perceived ambiguity — theories that enhance their respective positions in the litigation.

A.

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:

[I]f, during the term of this [contract], [Lyondell] sells or processes [propylene oxide] of similar quality to [propylene oxide] sold hereunder at a price, . . . lower than that provided under this [contract], . . . then [Lyondell] will notify BASF of such price and adjust the price set forth in Section 8(b)(ii) to meet such lower price, . . . .

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." Murphy, supra, 777 A.2d at 429-30.

The quoted language can only be considered ambiguous "if it is reasonably susceptible of different constructions and capable of being understood in more than one sense." Id. at 430 (emphasis added). In making that analysis, "the `reasonably' qualifier is important," because the courts, and the parties, cannot "`distort the meaning of the language or resort to a strained contrivance in order to find an ambiguity.'" Trizechahn, supra, 976 A.2d at 483 (quoting Madison Constr. Co., supra, 735 A.2d at 106). It is not our role to "`make for [the parties] a better contract than they [made] . . . for themselves'" or to "`remake [the] contract,'" or permit the parties to do so, "`under the guise of construction, because it later appears that a different agreement should have been consummated in the first instance . . . .'" Steuart, supra, 444 A.2d at 662 (quoting 17A C.J.S. Contracts § 296(3)).

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. See O'Keeffe v. Snyder, 83 N.J. 478, 487 (1980); Great Atl. & Pac. Tea Co. v. Checchio, 335 N.J.Super. 495, 498 (App. Div. 2000). A court's role in the first instance is to determine, as a matter of law, whether the contractual language at issue is ambiguous.

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. Lancos, supra, 400 N.J. Super. at 275. We reach that decision based primarily on Kuhn's lack of contemporary knowledge or experience with respect to the area about which he proposed to testify. N.J.R.E. 701. Kuhn had never seen another MFN clause with the same language as the one at issue, did not produce other contracts with MFN clauses from the same time period, and did not address the specific language of any other MFN clause in his expert report or at his deposition. In addition, he did not distinguish between "custom" and "usage," although Lyondell now seeks to do so on appeal. We conclude that the trial judge did not abuse her discretion in concluding that Kuhn was not qualified. See Agha v. Feiner, 198 N.J. 50, 62 (2009) ("In terms of qualifications, an expert must be suitably qualified and possessed of sufficient specialized knowledge to be able to express [an expert opinion] and to explain the basis of that opinion.") (citation and quotation marks omitted).

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.

B.

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 Carpenter Technology Corp. v. Armco, Inc., 800 F.Supp. 215, 219 (E.D. Pa. 1992) ("`Armco shall promptly notify Carpenter of such lower or more favorable royalty rate . . . and Carpenter shall be entitled to recalculate royalties theretofore paid . . . so as to have the benefit of such lower or more favorable royalty rate . . .'") (emphasis added). Indeed, there is nothing in the contractual language even suggesting a retroactive price adjustment. It merely states that, once Lyondell charges a lower tolling fee, the contract price is to be adjusted to meet the lower fee.

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.10 In addition, it is unreasonable because it would be a significant disincentive for Lyondell to lower its tolling fee to reflect changed competitive circumstances or for other business reasons.11

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.

IV.

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.

V.

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.12

A.

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.13 Consequently, to determine the amount of the tolling fee Lyondell charged to Carpenter, the notional cost of the propylene to Carpenter must be backed out of the price paid by Carpenter for its purchase of propylene oxide.

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." Weinglass, supra, 155 A. at 440. See also Massachusetts Bonding, supra, 22 A.2d at 714 ("[T]he evidence shall with a fair degree of probability establish a basis for the assessment of damages.").14

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.15

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.16 That method has the effect of minimizing the tolling fee and maximizing damages. Nevertheless, it does recognize the commercial likelihood that Lyondell's profit from the transaction did not come solely from the tolling aspect of its sale of propylene oxide to Carpenter, but that there was also a profit component from providing the propylene.

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.

B.

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.

VI.

Because a retrial is required, we briefly address two additional issues raised by Lyondell.

A.

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.17

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 N.J.R.E. 401, N.J.R.E. 403, and N.J.R.E. 404(b).

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." Verdicchio v. Ricca, 179 N.J. 1, 34 (2004). "In determining whether evidence is relevant, the inquiry focuses upon `the logical connection between the proffered evidence and a fact in issue.'" Id. at 33 (quoting State v. Hutchins, 241 N.J.Super. 353, 358 (App. Div. 1990)).

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 N.J.R.E. 403(a).

The critical issue . . . is whether the worth of this evidence for substantive or impeachment purposes carries sufficient weight to overcome its prejudicial impact. The court may exclude relevant evidence if "its probative value is substantially outweighed by the risk of (a) undue prejudice, confusion of issues, or misleading the jury or (b) undue delay, waste of time, or needless presentation of cumulative evidence." [N.J.R.E. 403.] This balancing test applies whether or not the evidence is being admitted as direct evidence in the party's case in chief, or as indirect evidence for impeachment purposes. See N.J.R.E. 607, Comment 1 ("The use of extrinsic evidence to enhance or impair the credibility of a witness may generally be done by the party who called the witness as well as by an adverse party, although . . . [t]he trial court still has discretion under N.J.R.E. 403 to exclude extrinsic evidence if the court finds that the probative value of the evidence is substantially outweighed by any of the counter factors mentioned in that rule."); see also State v. Mance, 300 N.J.Super. 37, 61-62 (App. Div. 1997) (holding that evidence of prison guard's violations of prisoners' civil rights, although relevant to guard's bias and credibility, not admissible due to prejudice concerns). In this weighing process, evidence that has overwhelming probative worth may be admitted even if highly prejudicial. "That evidence is shrouded with unsavory implications is no reason for exclusion when it is a significant part of the proof." State v. Stevens, 115 N.J. 289, 308 (1989) (quoting State v. West, 29 N.J. 327, 335 (1959)); State v. Radziwil, 235 N.J.Super. 557, 566 (App. Div. 1989) (probative value of even highly inflammatory evidence may allow for its admission), aff'd o.b., 121 N.J. 527 (1990). Even given the danger that "the jury might disregard the issues of the case and base their verdict on their reaction to the picture that evidence might portray of the plaintiff's character," Stoelting v. Hauck, 32 N.J. 87, 104 (1960), if that evidence is "central" to the case it should not be excluded "for fear that it might put one of the parties in a bad light." Id. at 104-05. [Green v. N.J. Mfrs. Ins. Co., 160 N.J. 480, 495-96 (1999).]

If the proposed evidence includes "other crimes, wrongs, or acts," the judge will also have to perform a careful analysis under N.J.R.E. 404(b), which is applicable in civil cases. Showalter v. Barilari, Inc., 312 N.J.Super. 494, 511-12 (App. Div. 1998). Such evidence "may not be introduced to show that a person is in general disposed toward criminal or tortious behavior, or to any specific conduct, and therefore guilty of committing the crime, tort or act which is the subject of the action." Biunno, Current N.J. Rules of Evidence, comment 7 on N.J.R.E. 404 (2010).

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. Fitzgerald v. Stanley Roberts, Inc., 186 N.J. 286, 317 (2006) ("When evidence has both an impermissible and a permissible purpose, a jury instruction in respect of the limitations on its use is essential").

B.

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 general assertion that she needed to know who was in the courtroom at all times. Trials are open to the public. R. 1:2-1 ("All trials, hearings of motions and other applications, pretrial conferences, arraignments, sentencing conferences (except with members of the probation department) and appeals shall be conducted in open court unless otherwise provided by rule or statute."). A general requirement that individuals attending a trial identify themselves appears to us to be inconsistent with the spirit of that rule.

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. See Morton Buildings, Inc. v. Rezultz, Inc., 127 N.J. 227, 2353-6 (1992).

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.

VII.

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 . . . ." Weinglass, supra, 155 A. at 440.

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.

FootNotes


1. Propylene is extracted from petroleum. Propylene oxide is an intermediate chemical compound used by both parties to produce a variety of other intermediate compounds and other products.
2. On December 20, 2007, Lyondell merged with Basell AF to form LyondellBasell Industries AF S.C.A.
3. At the time of contracting, BASF entered into an agreement with Arco Chemical Company (ACC), a wholly-owned subsidiary of Lyondell, which was subsequently merged into Lyondell. BASF and Lyondell view the contract as effectively between BASF and Lyondell. For the sake of clarity, we will refer only to Lyondell.
4. BASF purchased over one billion pounds of propylene oxide from Lyondell between 1999 and 2006.
5. The jury verdict sheet contains a lump sum award. It did not require the jury to articulate the basis on which it calculated damages. We assume, from the quantum of damages awarded, that the jury followed BASF's methodology, rather than Lyondell's.
6. Because Pennsylvania does not recognize a separate cause of action for breach of an implied covenant of good faith and fair dealing, Johnson v. State Farm Life Ins. Co., 695 F. Supp 2d 201, 214 (W.D. Pa.), adopted 695 F. Supp 2d 201 (W.D. Pa. 2010), the case ultimately proceeded to trial only on the breach of contract claim.
7. The Sarbanes-Oxley Act, officially known as the Public Company Accounting Reform and Corporate Responsibility Act of 2002, codified as amended at 15 U.S.C.A. §§ 7201-7266 and in scattered sections of 11, 15, 18, 28, and 29 U.S.C.A., requires that all publicly traded companies file financial information with the Securities and Exchange Commission, and that all such information be true and fairly representative of the financial condition of the company. 15 U.S.C.A. § 78(m).
8. On March 4, 2008, we temporarily remanded the case to the Law Division to settle the record. On April 8, 2008, the trial judge approved the corrected record, and Lyondell filed a revised transcript. The appeal was temporarily stayed when Lyondell filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York. The stay was eventually lifted and the appeal proceeded in due course. Following oral argument, the parties submitted two series of letter briefs addressing additional cases and arguments.
9. Because Lyondell chose not to contest the issue of whether there was a breach and has not raised it on appeal, we do not address the issue and assume that the jury correctly determined that there was a breach.
10. Such a result might have been reasonable had the price comparison been based on a weighted-yearly average, but that is not what the MFN clause requires, as BASF has successfully argued.
11. We are cognizant of the fact that §§ 8(b) (iii) and (iv) require price adjustments to reflect certain economic conditions and that such adjustments can be prospective or retroactive, as provided by the specific governing language. Such provisions do not exclude the possibility that Lyondell would make voluntary price adjustments for appropriate business reasons.
12. At trial, the parties presented different positions concerning the treatment of the reservation fee for the purposes of calculating the amount of the tolling fee charged to BASF. The trial judge allowed the jury to determine that issue based upon the arguments and proofs presented by the parties. Because Lyondell does not challenge that decision on appeal, we do not address the issue.
13. In the alternative, the parties may have determined that there was no practical way to calculate the tolling fee on a per transaction basis using the information available.
14. BASF's damage claim is not speculative. Lyondell itself conceded at trial that BASF was entitled to a refund of $22.5 million pursuant to the MFN clause.
15. Lyondell argues that its cost is the "market price" referred to in § 15(e) of the contract. Lyondell's reliance on § 15(e) is not convincing for two reasons. First, that sub-section refers to the contemporaneous "market price of propylene or [propylene oxide]." It does not specify whether that term refers to (1) Lyondell's costs for purchasing propylene for its use or (2) to the price at which it sells propylene to others, either directly or after processing. Second, § 15(e) provides an overall cap on damages, rather than a methodology for calculating damages pursuant to the MFN clause. Lyondell does not argue that the jury's verdict exceeded the overall cap.
16. We find no merit in Lyondell's argument that BASF should have been barred from opposing its position that Lyondell's own cost should be used because that was essentially the position BASF took in its answers to interrogatories and in the deposition testimony of one of its witnesses. While a party can be sanctioned for failing to make timely amendments to interrogatories by having the proffered evidence barred, that is a discretionary decision left to the trial judge. Branch v. Emery Trans. Co., 53 N.J.Super. 367, 374-76 (App. Div. 1958). In determining whether to exercise discretion to suspend that sanction, Branch required a trial judge to consider the three factors outlined in D'Agostino v. Schaffer, 45 N.J.Super. 395, 402 (App. Div. 1957) (absence of design, absence of surprise, and absence of prejudice). Branch, supra, 53 N.J. Super. at 376. None of those factors was present in this case.
17. Because we are not deciding the appeal on the basis of those contentions, we need not address the issue of whether they were properly preserved for appeal. We note that Lyondell did not object at trial to the questions about the sale of stock.
Source:  Leagle

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