USX Corp. v. Union Pacific Resources Co.

Citations: 753 S.W.2d 845; 7 U.C.C. Rep. Serv. 2d (West) 100; 1988 Tex. App. LEXIS 1974; 1988 WL 82597Docket: 2-87-186-CV

Court: Court of Appeals of Texas; July 26, 1988; Texas; State Appellate Court

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Union Pacific Resources Company, previously known as Champlin Petroleum Company, sued USX Corporation for breach of contract, resulting in a jury verdict awarding Union Pacific $9,000,000, along with attorneys' fees and interest. The case was heard by the Court of Appeals of Texas, Fort Worth, which affirmed part of the judgment but reversed and remanded other aspects. USX Corporation, formerly United States Steel Corporation, had a contractual agreement with Champlin for the purchase and delivery of cumene, a chemical compound, starting from a specified commencement date in 1980 and extending until 1984, with provisions for price determination based on prevailing market rates. The contract included a clause for resolving price disputes based on comparable contracts. The excerpt notes the contractual details and parties involved, indicating that Aristech Chemical Corporation assumed USX's liabilities after acquiring its chemical division. The narrative highlights the complexities surrounding the contract and its eventual cancellation by Champlin.

On February 26, 1980, Champlin notified USX of an initial cumene production date of March 15, 1980, and set a net price of .280/lb with a transportation allowance of .005/lb. Following this, USX representatives expressed that the offered price was above the prevailing market rate, as they were purchasing cumene for 26½ cents per pound. Champlin then indicated availability for delivery starting April 1, 1980, but USX failed to perform. On April 22, Champlin urged USX to begin shipments and proposed a conditional billing price of .27/lb. Subsequent discussions led to an agreement for USX to buy 18 million pounds at 26¾ cents per pound, plus an additional 9 million pounds via a processing arrangement, but USX still did not perform.

On June 16, 1980, Champlin requested USX's volume nomination for the second half of 1980, with a follow-up call indicating potential contract cancellation due to USX's continued breach. A meeting on July 3 reinforced Champlin's decision to cancel, leading to a written cancellation sent on July 11, 1980.

The case will address USX's eighteen points of error sequentially, focusing first on whether USX breached the cumene contract and if Champlin proved it was a "lost volume" seller entitled to damages under TEX.BUS. COM.CODE ANN. sec. 2.708(b). USX contends that Champlin did not adequately demonstrate its status as a lost volume seller, challenging the submission of special issues 7 and 7A regarding Champlin’s production capacity and the financial damages resulting from USX's non-performance. The jury found that Champlin was capable of producing more cumene than it sold to other customers and awarded $9 million in damages.

TEX.BUS. COM.CODE ANN. sec. 2.708(b) provides a profit formula for sellers to compute remedial damages, including profit, reasonable overhead, incidental damages, and costs incurred, relevant for sellers experiencing "lost volume" or those who cease or do not start manufacturing due to a buyer's breach. Champlin, identified as an "incomplete goods" seller, stopped manufacturing cumene based on the belief that USX breached their contract, which stipulated minimum and maximum purchase quantities. USX contended that Champlin did not establish itself as a lost volume seller, referencing Malone v. Carl Kisabeth Co. Inc. to argue that Champlin failed to submit necessary issues for this claim. In Malone, the court indicated that special issues should include whether the seller would have solicited a buyer had there been no breach, whether that solicitation would be successful, and whether the seller could meet additional contract requirements. While the issues presented in Champlin's case did not mirror those exactly, they were deemed sufficient to notify USX of Champlin's claim under the incomplete goods seller theory. Special issue 7 asked the jury if Champlin could meet the contract's minimum requirements had it been fully performed, which was affirmed by the jury. Following this, special issue 7A sought to determine the damages necessary to place Champlin in the position it would have been in had USX fully performed. The court instructed that damages should reflect Champlin's potential profit from full performance, including incidental damages, but not any losses that could have been avoided through reasonable efforts to sell surplus cumene.

The instruction's first paragraph included elements of profit and incidental damages from TEX.BUS. COM.CODE ANN. sec. 2.708(b), while the latter addressed mitigation of damages related to resale proceeds. The jury's calculation in special issue 7A implied that Champlin would have pursued G.E. and other buyers for cumene despite USX's breach, indicating Champlin's excess capacity. Although the trial court's special issue phrasing diverged from Malone, it was determined that Champlin adequately demonstrated its status as an incomplete goods seller. Consequently, USX's objections regarding this finding were overruled. USX's points four to nine questioned the justification for Champlin's contract cancellation, specifically addressing the sufficiency of evidence for the jury's response to special issue 4, which asked if USX's refusal to accept deliveries in 1980 substantially impaired the contract's value. The jury affirmed that it did. USX's request for a specific definition of "substantially impairs" was denied by the trial court. When assessing USX's evidence claims, the court noted the need to consider evidence supporting the jury's findings for "no evidence" claims, but all evidence for "insufficient evidence" claims. The contract was confirmed as an installment contract under TEX.BUS. COM.CODE ANN. sec. 2.612(a) and (c), which stipulates that substantial impairment in one or more installments constitutes a breach of the entire contract. Texas law grants trial courts discretion in jury instructions, but legal terms must be defined. The instructions given were deemed sufficiently clear for jurors to understand the terms used.

The term "substantial impairment of the value" is referenced in comment 3 of TEX.BUS. COM.CODE ANN. sec. 2.610, but the statute itself lacks a definition. The interpretation of whether USX's repeated refusals to accept cumene from Champlin substantially impaired the contract's value is a factual matter for the jury. Champlin's witnesses argued that the contract's value was significantly compromised because they were required to prepare to supply cumene even when USX was not fulfilling its obligations, hindering Champlin's ability to sell to other customers. Champlin's general manager, Click, highlighted that limiting contract cancellation to the months of breach would create an untenable situation due to the substantial cumene inventory required. Additionally, Morrison, Champlin's former in-house counsel, indicated that USX's failure to take cumene during the first pricing period and the notice of continued failure during the second pricing period impaired the contract's overall value. Testimony confirmed USX's repeated failure to honor its commitments, providing evidential support for the jury's finding of substantial impairment. USX's points of error related to the trial proceedings were overruled, including complaints about the trial court's inquiries regarding Champlin's perceived insecurity about future performance and the adequacy of performance assurance definitions. Furthermore, under TEX.BUS. COM.CODE ANN. sec. 2.609, if reasonable grounds for insecurity arise, one party may demand adequate assurance of performance in writing, and failure to provide such assurance within thirty days constitutes a repudiation of the contract.

The jury determined that Champlin had reasonable insecurity regarding United States Steel's contract performance between April and June 1980, based on the understanding that a seller may feel insecure when a buyer’s performance is uncertain or if there have been repeated breaches. Champlin formally demanded in writing that US Steel fulfill its obligations during May and June 1980. The jury was instructed that each party in a sales contract has an obligation to ensure the other's expectation of performance is not undermined, and a party may demand adequate assurance of performance in writing when reasonable grounds for insecurity arise. The jury found that US Steel failed to provide Champlin with adequate assurance within a reasonable timeframe, defined as not exceeding 30 days.

The trial court had broad discretion in defining jury instructions, which aligned with the Texas Business and Commerce Code regarding demands for adequate assurance, indicating that such demands must be in writing. Despite USX's argument claiming Champlin did not make a valid demand, the evidence included several written communications from Champlin to USX requesting performance, including a telex sent on March 24, 1980, outlining delivery availability, and a letter from April 22, 1980, urging US Steel to honor the contract amid ongoing price discussions. The first and second installment periods for performance were identified as March 1 to June 30, 1980, and July 1 to December 31, 1980, respectively.

On June 16, 1980, Schepens requested Haggard to nominate a volume of cumene to be lifted from Champlin for the latter half of the year, emphasizing the urgency with a deadline of June 20, 1980. Champlin simultaneously sent a telex to USX, but USX failed to respond by the deadline. During a meeting on July 3, 1980, USX indicated it would not nominate any volume for the third quarter. Following this, Champlin formally canceled the contract on July 11, 1980. The Uniform Commercial Code (UCC) is to be interpreted liberally, and determining what constitutes a demand for adequate performance is a factual matter without a clear definition in the code or case law. The jury found Champlin’s demand for assurance of performance sufficient. USX raised several points of error regarding Champlin’s alleged breach of contract and the jury's findings on contract performance. USX argued that the issues concerning the existence of a binding contract and its obligations were legal questions for the court, not factual ones for the jury. However, USX’s prior statements indicated a factual dispute regarding the contract's effectiveness and price agreement. The trial court ultimately disagreed with USX's legal claims but noted that its rulings would align with the jury's findings if determined as a matter of law.

USX claims that Champlin breached their contract by failing to determine and present prevailing prices, leading to an error in the trial court's denial of USX's motion to disregard the jury's findings. USX asserts that the contract clearly mandates Champlin to present prevailing prices, which Champlin allegedly did not do. The contract specifies that the "Contract Price" for cumene sold should be the prevailing price, determined by Champlin and presented to USX before each six-month period. If USX disagrees with Champlin's price determination, the price from another contract with a third party selling at least 50 million pounds annually would be binding. Champlin provided prevailing market prices on six occasions between February 26, 1980, and June 17, 1980, supported by expert testimony that these nominations were reasonable and made in good faith. The contract allows for disagreements, stipulating that USX must proceed with deliveries and treat Champlin's price as conditional until retroactive adjustments are made. Consequently, the court found that USX did not prove that Champlin breached the contract. USX also argued that Champlin failed to offer USX the same prevailing price offered to G.E., which should have invoked the price dispute resolution clause. However, Champlin canceled its agreement with USX on July 11, 1980, citing USX's nonperformance, after USX had already expressed disagreement with Champlin's price earlier on February 28, 1980. The parties eventually resolved their price disagreement with a set price for the first installment period, indicating that the initial issue was addressed.

During the first installment period, there was no third-party contract to activate the price dispute resolution under the G.E. contract, and no price determination had been made. The situation is more complex for the second installment period (July 1, 1980, to December 31, 1980), with disputed facts regarding whether Champlin set a price with G.E. before USX's contract cancellation. USX raised issues concerning Champlin's refusal to perform the contract in relation to the timing of the G.E. price determination. While USX contended that special issues 10 and 11 inappropriately placed the burden of proof regarding Champlin's breach on USX, the court found that these issues effectively addressed the matter and that USX, having raised the issue, bore the burden of proof. The contract stipulated that Champlin had to determine and present the prevailing price, but this was not deemed a condition precedent for Champlin's recovery. The contract allowed for potential disagreements over the prevailing price and provided for conditional acceptance of prices by USX without interruption of deliveries. Therefore, the court upheld that the burden of proof was rightly placed on USX for issues 10 and 11, overruling points of error ten through fourteen.

In point of error three, USX argued that Champlin's damage award improperly included incidental damages related to a decline in benzene value. Champlin claimed the decline was due to USX's failure to lift cumene, which delayed the use of prepurchased benzene. Champlin asserted this decline constituted recoverable incidental damages under Texas Business and Commerce Code § 2.708(b), which allows sellers to recover incidental damages in addition to profits.

Incidental damages under TEX.BUS. COM.CODE ANN. sec. 2.710 are defined as commercially reasonable charges related to the care, custody, and resale of goods following a buyer's breach. This section specifically applies to expenses incurred by the seller after the breach and does not include losses such as quantity discounts not received due to the buyer's actions. For Champlin to demonstrate lost volume status, it must show that the resale would have occurred regardless of USX's breach; however, Champlin's benzene expenses are classified as variable manufacturing costs rather than incidental damages, thus falling under consequential damages, which are not recoverable by sellers under the Uniform Commercial Code.

The court emphasized broad issue submission and the trial court's discretion in jury charge submissions, noting that any alleged errors must be viewed in the context of the entire evidence presented. The jury charge correctly defined damages, incorporating profits Champlin would have earned from USX's full performance while excluding consequential damages. The benzene transaction was accurately categorized as consequential, and jurors were instructed not to consider such damages. The jury could have awarded damages exceeding $9,000,000 based solely on other evidence. 

Regarding prejudgment interest, USX contends the trial court erred in awarding 10% per annum interest, calculated under TEX.REV.CIV.STAT.ANN. art. 5069-1.05, sec. 2. The judgment also included an alternative interest calculation should the referenced Perry Roofing decision be overturned.

The statutory prejudgment interest rate of 6% per annum under TEX.REV.CIV.STAT. ANN. art. 5069-1.03 applies to contracts that specify a payable sum and to contracts silent on prejudgment interest. The courts have interpreted the requirement for a specified sum liberally, allowing for contracts that outline conditions for liability and provide a reasonable measure for calculating the sum. In Perry Roofing Co. v. 722 S.W.2d at 544, it was established that prejudgment interest can be awarded in contract actions even if the contract does not specify damages, provided the terms allow for damage calculation. In the current case, the cumene contract specifies the price per pound, allowing USX to ascertain damages upon breach notification. Consequently, prejudgment interest is appropriately governed by art. 5069-1.03. 

USX's challenge to the trial court's attorneys' fees award of $3,000,000 for trial and $550,000 for appeal is noted, with the court emphasizing that trial courts have broad discretion in awarding fees. Such assessments are upheld unless there is clear evidence of abuse of discretion. Factors influencing the fee determination include case complexity, financial stakes, attorney responsibilities, client benefits, and time invested. The lawsuit, filed in 1983 against the corporate defendant USX, involved extensive documentation and motions, leading to a trial in 1987.

Both parties invested significant time and effort in trial preparation, and attorneys' fees should reasonably correlate with the amounts involved in the case. Champlin was awarded $15,475,919, which results in attorneys' fees of approximately 19% of that amount. Including the successful defeat of USX's $2,800,000 counterclaim, the total amount in question was $18,275,919. The assessment of reasonable fees does not rely on a strict formula. Munn, Champlin's attorney, took full responsibility for the case despite unproductive settlement negotiations, and USX's original counsel acknowledged Munn's exceptional performance. The assessment of attorneys' fees was upheld, and USX's objections were overruled. However, the trial court's decision regarding a 10% annual prejudgment interest was reversed, and the case was remanded for recalculation at 6% per annum. All other aspects of the trial court's ruling were affirmed. Additional notes clarify definitions related to open price terms, processing agreements, damages, and calculations of lost profits and related damages. The Perry Roofing decision by the supreme court was issued after the parties had filed their briefs.