451 F.2d 3 (4th Cir. 1971), 15080, Columbia Nitrogen Corp. v. Royster Co.

Docket Nº:15080.
Citation:451 F.2d 3
Party Name:COLUMBIA NITROGEN CORPORATION, Appellant, v. ROYSTER COMPANY, Appellee.
Case Date:October 26, 1971
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
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451 F.2d 3 (4th Cir. 1971)

COLUMBIA NITROGEN CORPORATION, Appellant,

v.

ROYSTER COMPANY, Appellee.

No. 15080.

United States Court of Appeals, Fourth Circuit.

October 26, 1971

Argued April 6, 1971.

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Cornelius B. Thurmond, Jr., Augusta, Ga., and John C. Scott, Washington, D. C. (Thurmond & McElmurray, Augusta, Ga., David A. Donohoe, New York City, and Rowley & Scott, Washington, D. C., Robert R. MacMillan and Breeden, Howard & MacMillan, Norfolk, Va., on the brief), for appellant.

Richard B. Spindle, III, Norfolk, Va., and Milton Handler, New York City (John M. Hollis, Hugh L. Patterson, Thomas G. Johnson, Jr., Willcox, Savage, Lawrence, Dickson & Spindle, Norfolk, Va., Michael D. Blechman, Kaye, Scholer, Fierman, Hays & Handler, New York City, on the brief), for appellee.

Before HAYNSWORTH, Chief Judge, and WINTER and BUTZNER, Circuit Judges.

BUTZNER, Circuit Judge:

Columbia Nitrogen Corp. appeals a judgment in the amount of $750,000 in favor of F. S. Royster Guano Co. for breach of a contract for the sale of phosphate to Columbia by Royster. Columbia defended on the grounds that the contract, construed in light of the usage of the trade and course of dealing, imposed no duty to accept at the quoted prices the minimum quantities stated in the contract. It also asserted an antitrust defense and counterclaim based on Royster's alleged reciprocal trade practices. 1 The district court excluded the evidence about course of dealing and usage of the trade. It submitted the antitrust issues based on coercive reciprocity to the jury, but refused to submit the alternative theory of non-coercive reciprocity. The jury found for Royster on both the contract claim and the antitrust counterclaim. We hold that Columbia's proffered evidence was improperly excluded and Columbia is entitled to a new trial on the contractual issues. With respect to the antitrust issues, we affirm.

I.

Royster manufactures and markets mixed fertilizers, the principal components of which are nitrogen, phosphate and potash. Columbia is primarily a producer of nitrogen, although it manufactures some mixed fertilizer. For several years Royster had been a major purchaser of Columbia's products, but Columbia had never been a significant customer of Royster. In the fall of 1966, Royster constructed a facility which enabled it to produce more phosphate than it needed in its own operations. After extensive negotiations, the companies executed a contract for Royster's sale of a minimum of 31,000 tons of phosphate each year for three years to Columbia, with an option to extend the term. The contract stated the price per ton, subject to an escalation clause dependent on production costs. 2

Minimum Tonnage

Per Year

"Diammonium Phosphate 18-46-0 15,000

Granular Triple Superphosphate 0-46-0 15,000

Run-of-Pile Triple Superphosphate 0-46-0 1,000

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Phosphate prices soon plunged precipitously. Unable to resell the phosphate at a competitive price, Columbia ordered only part of the scheduled tonnage. At Columbia's request, Royster lowered its price for diammonium phosphate on shipments for three months in 1967, but specified that subsequent shipments would be at the original contract price. Even with this concession, Royster's price was still substantially above the market. As a result, Columbia ordered less than a tenth of the phosphate Royster was to ship in the first contract year. When pressed by Royster, Columbia offered to take the phosphate at the current market price and resell it without brokerage fee. Royster, however, insisted on the contract price. When Columbia refused delivery, Royster sold the unaccepted phosphate for Columbia's account at a price substantially below the contract price.

II.

Columbia assigns error to the pretrial ruling of the district court excluding all evidence on usage of the trade and course of dealing between the parties. It offered the testimony of witnesses with long experience in the trade that because of uncertain crop and weather conditions, farming practices, and government agricultural programs, express price and quantity terms in contracts for materials in the mixed fertilizer industry are mere projections to be adjusted according to market forces. 3

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Columbia also offered proof of its business dealings with Royster over the six-year period preceding the phosphate contract. Since Columbia had not been a significant purchaser of Royster's products, these dealings were almost exclusively nitrogen sales to Royster or exchanges of stock carried in inventory. The pattern which emerges, Columbia claimed, is one of repeated and substantial deviation from the stated amount or price, including four instances where Royster took none of the goods for which it had contracted. Columbia offered proof that the total variance amounted to more than $500,000 in reduced sales. This experience, a Columbia officer offered to testify, formed the basis of an understanding on which he depended in conducting negotiations with Royster.

The district court held that the evidence should be excluded. It ruled that "custom and usage or course of dealing are not admissible to contradict the express, plain, unambiguous language of a valid written contract, which by virtue of its detail negates the proposition that the contract is open to variances in its terms. * * *"

A number of Virginia cases have held that extrinsic evidence may not be received to explain or supplement a written contract unless the court finds the writing is ambiguous. E. g., Mathieson Alkali Works v. Virginia Banner Coal Corp., 147 Va. 125, 136 S.E. 673 (1927). This rule, however, has been changed by the Uniform Commercial Code which Virginia has adopted. The Code expressly states that it "shall be liberally construed and applied to promote its underlying purposes and policies," which include "the continued expansion of commercial practices through custom, usage and agreement of the parties * * *." Va.Code Ann. § 8.1-102 (1965). The importance of usage of trade and course of dealing between the parties is shown by § 8.2-202, 4 which

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authorizes their use to explain or supplement a contract. The official comment states this section rejects the old rule that evidence of course of dealing or usage of trade can be introduced only when the contract is ambiguous. 5 And the Virginia commentators, noting that "[t]his section reflects a more liberal approach to the introduction of parol evidence * * * than has been followed in Virginia," express the opinion that Mathieson, supra, and similar Virginia cases no longer should be followed. Va. Code Ann. § 8.2-202, Va. Comment. See also Portsmouth Gas Co. v. Shebar, 209 Va. 250, 253 n.1, 163 S.E.2d 205, 208 n.1 (1968) (dictum). We hold, therefore, that a finding of ambiguity is not necessary for the admission of extrinsic evidence about the usage of the trade and the parties' course of dealing.

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We turn next to Royster's claim that Columbia's evidence was properly excluded because it was inconsistent with the express terms of their agreement. There can be no doubt that the Uniform Commercial Code restates the well established rule that evidence of usage of trade and course of dealing should be excluded whenever it cannot be reasonably construed as consistent with the terms of the contract. Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191, 203 (1969), aff'd mem., 311 N.Y.S.2d 961 (1970). Royster argues that the evidence should be excluded as inconsistent because the contract contains detailed provisions regarding the base price, escalation, minimum tonnage, and delivery schedules. The argument is based on the premise that because a contract appears on its face to be complete, evidence of course of dealing and usage of trade should be excluded. We believe, however, that neither the language nor the policy of the Code supports such a broad exclusionary rule. Section 8.2-202 expressly allows evidence of course of dealing or usage of trade to explain or supplement terms intended by the parties as a final expression of their agreement. 6 When this section is read in light of Va. Code Ann. § 8.1-205(4), 7 it is clear that the test of admissibility is not whether the contract appears on its face to be complete in every detail, but whether the proffered evidence of course of dealing and trade usage reasonably can be construed as consistent with the express terms of the agreement.

The proffered testimony sought to establish that because of changing weather conditions, farming practices, and government agricultural programs, dealers adjusted prices, quantities, and delivery schedules to reflect declining market conditions. For the following reasons it is reasonable to construe this evidence as consistent with the express terms of the contract:

The contract does not expressly state that course of dealing and usage of trade cannot be used to explain or supplement the written contract.

The contract is silent about adjusting prices and quantities to reflect a declining market. It neither permits nor prohibits

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adjustment, and this neutrality provides a fitting occasion for recourse to usage of trade and prior dealing to supplement the contract and explain its terms.

Minimum tonnages and additional quantities are expressed in terms of "Products Supplied Under Contract." Significantly, they are not expressed as just "Products" or as "Products Purchased Under Contract." The description used by the parties is consistent with the proffered testimony.

Finally, the default clause of the contract refers only to the failure of the buyer to pay for delivered phosphate. 8 During the contract negotiations, Columbia rejected a Royster proposal for liquidated damages of $10...

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