729 F.2d 1530 (5th Cir. 1984), 82-2308, Nissho-Iwai Co., Ltd. v. Occidental Crude Sales

Docket Nº:82-2308, 82-2471.
Citation:729 F.2d 1530
Party Name:NISSHO-IWAI CO., LTD., Plaintiff-Appellee, v. OCCIDENTAL CRUDE SALES, INC., Defendant-Appellant.
Case Date:April 23, 1984
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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729 F.2d 1530 (5th Cir. 1984)

NISSHO-IWAI CO., LTD., Plaintiff-Appellee,

v.

OCCIDENTAL CRUDE SALES, INC., Defendant-Appellant.

Nos. 82-2308, 82-2471.

United States Court of Appeals, Fifth Circuit

April 23, 1984

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Phillips, Nizer, Benjamin, Krim & Ballon, Louis Nizer, Paul Martinson, New York City, for defendant-appellant.

Sewell & Riggs, Gordon A. Holloway, Robert E. Meadows, Wm. B. Allison, Houston, Tex., for plaintiff-appellee.

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

Before CHARLES CLARK, Chief Judge, and GOLDBERG and POLITZ, Circuit Judges.

GOLDBERG, Circuit Judge:

This diversity action involves a contract dispute between the Nissho-Iwai Company, Ltd. ("Nissho") and Occidental Crude Sales, Inc. ("Occidental"). Occidental appeals from a jury verdict awarding Nissho contract damages and fraud damages arising from Occidental's failure to perform a crude oil agreement. We hold that there was no reversible error in the finding that Occidental was liable for breach of contract. We reverse the damage award, however, and remand for a new trial limited to determining contract damages. Finally, we reverse the fraud verdict.

FACTS

Nissho is a Japanese corporation that distributes oil to Japanese buyers. Occidental is an American corporation that explores for and produces oil. In 1965, Occidental obtained a number of "oil concessions" from the High Petroleum Council and the Council of Ministers of Libya. The concessions permitted Occidental to drill for oil in two separate blocks of property ("Concession 102" and "Concession 103"). The producing wells were managed by the Libyan Government, and Occidental was responsible for pipelines that transported oil from the wells to an export terminal in Zueitina. Each concession agreement provided for a royalty payment of 12.5 percent and a tax payment of 50 percent to the Government on each barrel of oil.

On September 1, 1969, a Revolutionary Government under Colonel Moammar Khadafy deposed the King of Libya and assumed control. In January 1970, Colonel Khadafy formed a committee to negotiate higher prices with Libyan oil producers; but the companies were unwilling to comply. Khadafy imposed a series of production restrictions; and in August 1973, he nationalized 51 percent of Occidental's concessions.

THE CONTRACT

Occidental had been under contract since 1971 to provide Nissho with "Zueitina Medium" crude oil produced from Concession 102. Zueitina Medium is a low sulphur oil that is particularly useful to electric utility companies required to meet air pollution standards. After receiving the oil, Nissho would resell it to various Japanese power companies.

In 1973, Occidental, aware of the past difficulties with the Libyan Government, renegotiated its contract with Nissho. On October 4, 1973, Occidental and Nissho signed the new agreement, known as Contract 1038. Nissho agreed to purchase and Occidental agreed to supply 750,000 barrels of oil a month through December 31, 1978. The contract contains a "force majeure" clause excusing nonperformance caused by

executive or administrative orders or acts [of the Libyan Government], ... or by breakdown or injury to ... producing ... or delivering facilities, ... or by any other event, whether or not similar to the causes specified above ..., which shall not reasonably be within the control of the party against whom the claim would otherwise be made [i.e. Occidental in this case].

The contract also provides that it is to be governed by the laws of California.

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EVENTS LEADING UP TO BREACH OF CONTRACT 1038

Underliftings by Nissho

The parties performed their respective duties for several months. Troubles developed, however, in 1974. First, during several months in 1974 and 1975, Nissho failed to "lift" its required allotment of oil. 1 The reasons for these "underliftings" are disputed. There is evidence that Occidental supplied reduced quantities during January and March, 1974, because of the Arab-Israeli War. There is also evidence that some of the underliftings in late 1974 were caused by the Nereus Shipping Company ("Nereus") which "nominated" ships to receive oil at such close intervals that Occidental could not fill them. (Nereus was required to supply tankers pursuant to a contract of affreightment with Nissho.) The parties, however, continued to work under the contract. As one officer of Occidental testified, the company elected not to take legal action against Nissho, preferring to reach a commercial solution. Trial Transcript at 1101.

Actions of the Libyan Government

During this period, actions of the Libyan Government affected Occidental's production. On February 7, 1974, the Government and Occidental entered into an Exploration and Production Sharing Agreement under which the Government received 81 percent of oil production. In the following months, the Government ordered increases or decreases in production from various wells. Occidental objected to some of the charges and negotiated remedial production quotas.

The parties reached an impasse in the summer of 1975, however. On July 31, the Government announced that Occidental's production exceeded the limits set in Petroleum Regulation Number 8 2 and that the wells in Concession 103 would be closed temporarily for testing. Then, on August 28, 1975, the Government issued a cutback order to become effective September 1, 1975. Occidental objected to the cutback, arguing that it violated the concession agreements and that Occidental would have "a right to look to the Government for reimbursement of all direct and consequential damages." Plaintiff's Exhibit 11. In a separate letter, Occidental objected to the Government's failure to pay for certain oil exploration (as required by the Exploration and Production Sharing Agreement).

When the Government failed to restore production within seven days, Occidental sought arbitration of the claims. In addition, on September 30, Occidental withheld $117 million that it owed the Government: including $40 million for oil purchased from the Government, and $77 million in back taxes and royalties.

The Government notified Occidental that if the payments were not made, the Government would prevent Occidental from exporting oil after October 1, 1975. Occidental refused to pay and the government placed an embargo on exports. Thus, Occidental was unable to perform its contract with Nissho that month.

The embargo on exports lasted until Occidental and the Government settled their disputes on December 3, 1975. Pursuant to the settlement agreement, the embargo order was lifted, the pending arbitrations were withdrawn, and the production of Occidental was restored to 300,000 barrels per day.

Pipeline Breakdowns

Breakdowns in the oil pipeline leading from Concession 102 to Zueitina also affected Occidental's ability to perform the contract with Nissho. Leaks appeared in early 1975; and Occidental shut down the pipeline for repairs from June 20 to July 10. The leaks persisted, however; and in October, Occidental began major repairs: the pipeline was pressure tested, holes

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were dug, and a section of the pipeline was removed.

After the oil embargo ended in December, 1975, Occidental attempted to reconnect the pipeline and repair any remaining leaks. Yet, when the pipeline was reattached, Occidental discovered sand in the line. To correct that problem, Occidental again had to remove a section of the line. Consequently, the pipeline was shut down from October, 1975, through May 10, 1976, and no oil was produced from Concession 102 during that period.

Breach by Occidental

In sum, Occidental failed to supply Nissho with any oil during the last four months of 1975 and the first four months of 1976. The oil embargo prevented performance between October and December, 1975. Then, pipeline problems stopped the flow of oil until May, 1976. The reason for the breach in September, 1975, is unclear. 3 However, Occidental wrote Nissho on more than one occasion in August and early September, stating that the September cargo would not be available because of production restrictions. That representation was untrue. 4

EFFECTS OF THE BREACH ON NISSHO

The Kansai Contract

In 1969, representatives of Nissho approached the Kansai Electric Power Company ("Kansai") offering to sell them crude oil. Kansai was in the market for low sulphur crude; and by the end of 1971, Kansai made a commitment to purchase oil from Nissho. Kansai and Nissho signed a written contract for the sale of Zueitina Medium between October 1, 1972 and March 31, 1976. Testimony at trial also showed that Nissho was prepared to extend the contract and that such extensions were fairly automatic. Nissho could expect to earn regular profits on sales to Kansai until December 31, 1978. Such profits were dependent, of course, on the regular availability of Zueitina Medium--i.e. on consistent performance by Occidental of its contract with Nissho.

Kansai became concerned in early 1976 that Nissho could not provide oil consistently. Occidental had not supplied Nissho with Zueitina Medium since September, 1975. Kansai contacted Nissho seeking assurances that future supplies would be consistent. Because Occidental's pipeline was still damaged and Occidental could not assure a regular supply, Nissho in turn could not give adequate assurances to Kansai. Kansai "found no alternative but to cancel" its contract with Nissho in January, 1976. Trial Transcript at 600. Negotiations for extension of the contract broke down before May, 1976.

At trial, Nissho introduced evidence that the loss of commission profits through 1978 resulting from the cancellation of the Kansai contract amounted to at least $1,769,950. In addition, it introduced testimony that it lost $3,246,905 in interest that...

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