Bayer Corp. v. Dx Terminals, Ltd.

• Decision Date: 12 December 2006
• Docket Number: No. 14-05-00931-CV.,14-05-00931-CV.
• Parties: BAYER CORPORATION n/k/a Bayer MaterialScience L.L.C., Appellant, v. DX TERMINALS, LTD., Appellee.
• Court: Texas Court of Appeals

214 S.W.3d 586

BAYER CORPORATION n/k/a Bayer MaterialScience L.L.C., Appellant, v. DX TERMINALS, LTD., Appellee.

No. 14-05-00931-CV.

Court of Appeals of Texas, Houston (14th Dist.).

December 12, 2006.

Rehearing Overruled January 25, 2007.

COPYRIGHT MATERIAL OMITTED

Reagan M. Brown, Ira Claborn Rogers and Joy M. Soloway, Houston, for appellants.

Jesse R. Pierce and Sheryl Anne Falk, Houston, for appellees.

Panel consists of Chief Justice HEDGES and Justices YATES and SEYMORE.

OPINION

ADELE HEDGES, Chief Justice.

Bayer Corporation, now known as Bayer MaterialScience L.L.C., appeals from a judgment awarding damages to DX Terminals Ltd. DX sued Bayer for breach of contract, alleging Bayer failed to comply with an agreement for the sale of caustic soda from Bayer to DX. DX also claimed that Bayer intentionally interfered with DX's contractual relationship with one of its customers. In turn, Bayer counterclaimed against DX, also alleging breach of contract. A jury found that each side failed to comply with the agreement, that DX suffered $7.5 million in damages as a result of Bayer's breach, and that Bayer suffered $40,000 as a result of DX's breach. The jury further found that Bayer did not intentionally interfere with DX's contractual relationship. The trial court offset the award to Bayer against DX's recovery and awarded DX $7,460,000 as actual damages, as well as prejudgment interest of $512,273 and post-judgment interest at 6 percent. The court additionally ordered each side to pay its own costs.

On appeal, Bayer contends that the trial court erred in (1) refusing to grant Bayer's motion for a directed verdict when the evidence conclusively established that DX's material breach of the contract substantially impaired the value of the whole contract to Bayer; (2) refusing to disregard as immaterial the jury's finding that Bayer failed to comply with the contract; (3) refusing to grant Bayer's motion to disregard jury findings where the evidence was legally and factually insufficient to support the finding that Bayer failed to comply with the contract; (4) refusing to provide the jury with additional instructions regarding Bayer's right to cancel the contract when the jury sent out a note requesting such instruction; (5) admitting the testimony of DX's damages expert, which was based on improper methodology and improper foundation; (6) awarding DX damages for lost profits when such were precluded by the contract and applicable law; and (7) awarding DX damages and failing to suggest a remittitur when the evidence was legally and factually insufficient to support the jury's damages award. In a cross-appeal, DX contends that the trial court erred in calculating prejudgment interest and in ordering each side to pay its own costs. We affirm.

I. Background¹

In 1998, Bayer and DX entered into a monthly installment contract for the sale of caustic soda from Bayer to DX. Caustic soda is a by-product of chlorine production, and Bayer had begun construction of a "Chlor-Alkali" unit at its Baytown, Texas facility. Bayer needed a buyer for the caustic soda. DX planned to resell the soda to affiliated companies (which used the caustic soda in producing bleach) as well as to outside customers, including principally Davison Petroleum. Under the contract, Bayer agreed to sell and DX agreed to buy between 135,000 and 150,000 dry short tons of caustic soda per year (or 11,250 to 12,500 tons per month) for a five-year period beginning in February 1999. Although the contract called for distribution of the annual amounts in equal monthly volumes, there was evidence at trial that this equality of monthly volumes was "artificial," and that the parties understood that exactly equal amounts would be impossible. The contract also specified that certain volumes would be shipped each month by rail car, by tanker truck, and by barge. Pricing under the contract was to be calculated based on the lowest of three possible measures of price minus $27.50 per ton. The three possible measures were (1) the "contract price" for caustic soda published by Chemical Market Associates, Inc., (2) the "spot price" published by CMAI, and (3) DX's average purchase price for non-Bayer caustic soda for the current month. Thus, DX's price was $27.50 less per ton than the lowest of three market measures.²

Disputes between the parties arose early in the contract period. For example, the parties bickered over who was to set the annual volumes and who was at fault for apparent logistical problems. DX contends that because Bayer's Chlor-Alkali unit was unprofitable and Bayer became convinced that the contract was too advantageous for DX, Bayer engaged in a scheme to restrict the volumes of caustic soda sold to DX. DX supported this assertion at trial with various internal Bayer documents. DX further contended that the restriction of volumes to below the required contract minimums breached the contract.

In 2000, Bayer began selling caustic soda directly to Davison, who was DX's largest external customer. In December 2000, DX notified Davison that it was cancelling their contract effective December 31, 2001. Although the precise reasons for this cancellation are unclear, Davison was apparently to some degree dissatisfied with DX's service under the contract, and DX may have believed that it could make more money selling caustic soda to other customers. Davison stopped ordering caustic soda from DX in May 2001, well before the cancellation date. From May through August 2001, DX removed substantially less caustic soda from Bayer's facility than the contract required. Bayer contended at trial that the buildup of caustic soda inventories occasioned by DX's failure to remove contract minimums threatened an inventory emergency that could have caused Bayer to shut down its entire Baytown facility, resulting in millions of dollars in lost profits. On September 11, 2001, Bayer terminated the contract, stating as its reason, "DX's continuing failure to take and pay for at least 135,000 dry short tons per year, in equal monthly volumes."

DX sued Bayer for breach of contract and tortious interference with DX's contractual relationship with Davison. Bayer counterclaimed for breach of contract based on DX's failure to remove the required amounts of caustic soda. At trial, the parties offered competing evidence regarding who was at fault for contract shortfalls and difficulties in processing orders, whether DX's failure to take contract minimums during certain months substantially impaired the value of the whole contract to Bayer, and whether Bayer's alleged impending inventory crisis was real or merely a justification for cancelling the contract. DX's expert witness on damages, Ron Vollmar, calculated that DX suffered pre-cancellation damages of $1.6 million and post-cancellation damages of $13.1 million. Bayer presented evidence that it suffered $40,000 in demurrage charges for caustic soda that was loaded on barges in March 2001 but which DX did not take.

During deliberations, the jury sent out a note asking: "Provided that there is no cancellation clause in the contract, will cancellation in itself constitute a breach of contract?" Although Bayer's counsel argued that the correct answer to the jury's query was "no," and that barring that answer, the court should read several UCC sections to the jury, he further stated that the court had already given the jury a correct charge. The trial judge responded to the jury's query by instructing: "Please answer the question in accordance with the instructions given and the Charge." The next day, Bayer's counsel tendered a proposed written instruction regarding cancellation, which the court denied.

The jury found that both parties breached the agreement but that Bayer did not tortiously interfere with DX's contractual relationship with Davison. The jury awarded DX $7.5 million for Bayer's breach, and it awarded Bayer $40,000 for DX's breach. The trial court entered judgment in accordance with the jury verdict, calculating pre-judgment interest from December 31, 2003, the last day that the contract would have been enforced, and ordered each party to pay its own costs.

II. Substantial Impairment

In its first issue, Bayer contends that the trial court erred in refusing to grant its motion for a directed verdict. It reasons that because the evidence conclusively established that DX's material breach substantially impaired the value of the whole contract, Bayer was justified in cancelling and cannot be held liable for damages. We review this matter-of-law issue under the well-established standards. See City of Keller v. Wilson, 168 S.W.3d 802, 814-816, 823 (Tex.2005).

In the contract, the parties agreed that Pennsylvania law would govern any disputes.³ On appeal, the parties specifically agree that the contract at issue is an installment contract for the sale of goods governed by the Pennsylvania version of the Uniform Commercial Code.⁴ Under the UCC, when one party to an installment contract defaults with respect to one or more installments and thereby substantially impairs the value of the whole contract to the other party, such default constitutes a breach of the whole contract. PA. CONS.STAT. § 2612. When such a breach occurs and the nonbreaching party is the seller (as Bayer was here), the seller has the right, among other options, to cancel the contract. Id. § 2703. Bayer contends that the evidence established, as a matter of law, substantial impairment of the value of the whole contract as a result of DX's breach. Therefore, Bayer argues, it was justified in canceling the contract and is not liable for any damages for post-cancellation nonperformance.

It is possible to conclusively establish substantial impairment of the value of a whole contract. See, e.g., L & M Enters. v. BEI Sensors & Sys. Co., 231 F.3d 1284, 1288 (10th Cir.2000); Design Plus Store Fixtures, Inc. v. Citro Corp., 131 N.C.App. 581, 508 S.E.2d...