Cibro Petroleum Products v. Sohio Alaska Petroleum

• Decision Date: 08 February 1985
• Docket Number: No. 79-CV-446,79-CV-583.,79-CV-446
• Citation: 602 F. Supp. 1520
• Parties: CIBRO PETROLEUM PRODUCTS, INC., Plaintiff, v. SOHIO ALASKA PETROLEUM COMPANY, Defendant.
• Court: U.S. District Court — Northern District of New York

602 F. Supp. 1520

CIBRO PETROLEUM PRODUCTS, INC., Plaintiff, v. SOHIO ALASKA PETROLEUM COMPANY, Defendant.

Nos. 79-CV-446, 79-CV-583.

United States District Court, N.D. New York.

February 8, 1985.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Collier, Shannon, Rill & Scott, Washington, D.C., DeGraff, Foy, Conway, HoltHarris & Mealey, Albany, N.Y., for plaintiff; William W. Scott, John B. Williams, Washington, D.C., David F. Kunz, Albany, N.Y., of counsel.

Hesson, Ford, Sherwood & Whalen, Albany, N.Y., for defendant; Daniel Whalen, H. Neal Conolly, Albany, N.Y., of counsel.

MEMORANDUM-DECISION AND ORDER

MUNSON, Chief Judge.

I

The present litigation arises out of dealings between the plaintiff, Cibro Petroleum Corporation, Inc. Cibro,¹ a New York corporation engaged in the business of refining crude oil, and Sohio Alaska Petroleum Company Sohio,² a Delaware corporation which produces, transports and sells crude oil and petroleum products in the United States and abroad. During the relevant damage period involved in this litigation, Sohio was a wholly-owned subsidiary of the Standard Oil Company of Ohio responsible for the marketing of crude oil produced from its Alaska North Slope Crude Oil fields. Cibro Petroleum Products, Inc. is owned by the Cirillo family and is operated with other family-owned petroleum distribution companies.

Jurisdiction is properly predicated in this action upon 28 U.S.C. ?? 1331 and 1332, and under Section 5(a)(1) of the Emergency Petroleum Allocation Act of 1973 EPAA or Act, as amended, 15 U.S.C. ? 751 et seq., which incorporates by reference the Economic Stabilization Act of 1970, as amended, 12 U.S.C. ? 1904 note. Venue is conferred pursuant to 28 U.S.C. ? 1391(a).

At issue in this litigation is how long defendant Sohio was obligated to supply crude oil to plaintiff Cibro under the terms of their supply agreement. Cibro has pleaded two separate and distinct causes of action. The first cause of action, styled by the parties as the "regulatory cause of action," is based upon the Emergency Petroleum Allocation Act of 1973. Cibro claims that Sohio violated the Mandatory Petroleum Allocation Regulations enacted pursuant to the Act when it ceased supplying crude oil to Cibro in August of 1979. Cibro contends that Sohio was obligated under the existing regulatory scheme to supply crude to Cibro through January 28, 1981, the date controls were lifted on the sale of crude oil under the Mandatory Petroleum Allocation Regulations. Cibro seeks damages in excess of $20.8 million.

Under its regulatory cause of action, Cibro claims that Sohio was compelled as a matter of federal regulatory law to supply crude oil for approximately seventeen months after the date Sohio discontinued supplying crude oil. Cibro maintains that resolution of this cause of action depends upon whether the supply agreement made the subject of this litigation contains a "specific termination date." Cibro contends that, if there is no specific termination date stated in the agreement, a "supplier-purchaser" relationship was created under applicable federal regulations which preempt the contractual provisions in the agreement that waive application of those regulations.

Cibro's second cause of action lies in the realm of contract law. This claim for damages concerns when notice to terminate the supply agreement could effectively have been given. If notice of termination could have been given at any time during the initial term of the contract, then the contract was for a maximum of eleven months expiring on August 31, 1979. If, as Cibro claims, notice of termination could not have been given until the end of the initial eleven month contractual term, the contract was for a minimum of seventeen months, or until February of 1980.

It should be noted that because Cibro's damage claim under the regulatory cause of action is more extensive than under the contract claim, i.e., the contract cause of action seeks damages for six additional months while the regulatory cause of action would extend the contract eight months, if the court concludes that Cibro should prevail under both the regulatory claim and the contract claim, Cibro's contract damages will be subsumed within its regulatory cause of action damages.

One additional collateral issue has been raised by Cibro in this case. Under the contract between the parties, Sohio was entitled to request an increase in the price it charged Cibro for crude oil once every 90 days or in the event of a change in the official selling price of OPEC marker crude oil. Cibro claims that Sohio violated this contractual provision when it increased its price within 90 days of its last increase and not in response to a change in the official OPEC marker price. Cibro claims that the request was based upon a unilateral decision of the Saudi Arabian government to increase production of crude by one million barrels per day which did not constitute an official OPEC marker price change.

A trial to the court was held in this matter from March 21, 1984 through April 2, 1984. After considering the record, the testimony and demeanor of the witnesses, the exhibits, the arguments of the parties and the applicable law, the court now enters its Findings of Fact and Conclusions of Law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

II

Commencing in November of 1977 Cibro and Sohio began negotiations for the purchase of crude oil. During this initial period of negotiations Cibro was nearing completion of a refinery in Albany, New York and was seeking a secure long-term source of crude oil from various oil companies. The parties first met in November of 1977 in Houston, Texas at a meeting of the American Petroleum Institute. At that meeting Cibro's representatives expressed a strong interest in obtaining a crude oil supply contract from Sohio, and Sohio's representatives expressed an interest in selling Alaska North Slope Oil ANS to Cibro.

Thereafter, on March 28, 1978, David Snively, a representative of Sohio, sent a written essay to Cibro's Enrique Carrero concerning ANS crude oil. During this period ANS was a relatively new crude oil, having first been produced in early 1977 from the Prudhoe Bay field in the State of Alaska. Sohio proposed to sell ANS crude oil to Cibro for a term of "one year, commencing July 1, 1978 and 90 days thereafter unless cancelled by either party giving 90 days notice." This type of supply agreement is commonly referred to in the oil industry as an "evergreen contract," that is, a contract that will continue ad infinitum until and unless terminated by either party.

On April 21, 1978, Mr. Snively traveled to New York City with Mr. Christopher Hesketh, a crude oil sales representative of Sohio and met with representatives of Cibro, including Christopher Bohlmann, Chief Negotiator for Cibro and Nicholas Cirillo, Vice-President of Supply and Distribution for Cibro. At the meeting Mr. Cirillo indicated that Sohio's proposed 90-day notice of termination provision was not long enough. The parties discussed a possible one-year contract and a one-year notice of cancellation provision. The meeting concluded with Cibro agreeing to provide Sohio with a proposal on the term and notice provisions of the contract.

After the April meeting Christopher Hesketh assumed responsibility for direct contact with Cibro and its Chief Negotiator, Christopher Bohlmann. On May 4, 1978 Mr. Bohlmann sent a telex to David Snively containing certain comments and amendments to the draft contract which Sohio had previously given Cibro. Paragraph 7 of the proposed draft provided as follows:

The contract shall be for a period of one year commencing with the date of the first delivery (estimated to be Sept. 1-15, 1978) and evergreen thereafter subject to one year(s) prior written notice of cancellation.

See Plaintiff's Exhibit No. 14. Thereafter, on June 2, 1978, Mr. Hesketh responded to Mr. Bohlmann's telex stating that:

Regret we are unable to agree to one year's notice of cancellation after the initial year, but would be willing to increase our proposed 90 days notice to 6 months.

See Plaintiff's Exhibit No. 15.

After several revisions of the contract a final draft was sent to Cibro. The final term clause contained in paragraph 7 of the agreement provides as follows:

The term of this agreement shall be for a period of 11 months commencing on October 1, 1978 and ending on August 31, 1979 and continuing thereafter unless terminated by either party providing not less than six (6) months notice of termination in writing.³

See Plaintiff's Exhibit No. 3.

Sohio commenced deliveries pursuant to its agreement with Cibro in September, 1978. Pursuant to that agreement the first month's supply of crude oil was sent to the General Crude Oil Company of Houston, Texas and Sohio began direct deliveries to Cibro in October, 1978. Thereafter, on January 10, 1979, Christopher Hesketh traveled to New York City and met with Nicholas Cirillo and Enrique Carrero. At that meeting Mr. Hesketh advised Cibro that Sohio was not going to continue the contract beyond August 31, 1979. On January 23, 1979, Mr. Hesketh confirmed his oral notice of termination and advised Cibro that the contract would terminate on August 31, 1979. See Plaintiff's Exhibit No. 4. Thereafter the present litigation ensued.

III

A. Statutory and Regulatory Overview

In response to widespread shortages of petroleum and petroleum products caused by the Arab oil embargo of 1973, Congress enacted the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. ? 751, et seq. See generally, Basin Inc. v. Federal Energy Administration, 552 F.2d 931 (Temp.Emer.Ct.App.), cert. denied, 434 U.S. 821, 98 S.Ct. 821, 54 L.Ed.2d 78 (1977). The Act, which became effective November 27, 1973, was based upon a congressional finding that "a national energy crisis" existed and that "the self-regulatory laws of supply and demand...